What's happening: Shares of Liquidity Services (NASDAQ:LQDT) gained as much as 11% on Friday, boosted by solid earnings in the third quarter. The stock has whipsawed between $7.44 and $11 per share in 2015, and Friday's surge placed share prices near the midpoint of that range.
Why it's happening: The auction service for salvage and surplus goods saw third-quarter sales swooning 29% year over year, landing at $89.7 million. Adjusted earnings fell 55% to $0.14 per diluted share. Analysts were looking for earnings of $0.10 per share on roughly $90 million in sales, which makes the reported results a mixed bag.
Revenues were always expected to drop, since Liquidity Services recently lost large contracts with a major retail chain and the U.S. Department of Defense. Management is currently focused on replacing these lost sales with a substantial search for new clients and larger contracts. As a result, sales and marketing expenses held steady year over year while other operating expenses decreased in concert with the top-line revenue drop.
Looking ahead, Liquidity Services' management acknowledged that it's difficult to provide firm forecasts when the business model and customer mix are undergoing rapid changes.
That being said, the company set fourth-quarter earnings guidance at roughly $0.01 per share. That's far below the current analyst view, which calls for a far larger $0.07 net profit per share.
GMV, a measure of the sales volume handled by the company's services, should land somewhere between $150 million and $175 million. GMV shows much larger figures than the collected revenue line. These two metrics tend to move in the same direction, at roughly equal velocities, which makes GMV a rough but useful proxy for sales trends.
At the midpoint of Liquidity Services' fourth-quarter guidance range, GMV should decrease by approximately 16% from third-quarter levels, setting the stage for revenues somewhere around $75 million -- with a wide margin of error. Here, analysts are hoping for $90 million in fourth-quarter sales.
So Liquidity Revenues reported more gloom than glam this time, but the market had baked even worse expectations into share prices. That, plus a modest earnings surprise, was enough to lift share prices as much as 11% overnight.