Riding High on the Disposal of other Companies Surplus Fixed Assets

Governments and corporations sometimes need to have yard sales, but taking over the staff parking lot with aircraft parts and steam turbines, or truckloads of fashionable footwear, is not a good look. Enter Liquidity Services Inc (ticker symbol LQDT), the eBay for big players and their high-volume, or bulky, surplus assets. In its 12-year history the company has sold over $2.2 billion worth of its clients’ used and salvaged assets, overstocked items and customer returns. It services 116 countries through its base of 1.6 million unique registered buyers, and its vendor clients include more than 3,800 government agencies and over 430 major commercial sellers, including seven of the top ten retailers. It is also one of the leading scrap metal buyers  and sellers in the US.

Liquidity Services has acquired and developed five main online marketplaces. They are Liquidation.com, Government Liquidation, GovDeals, the utility-focused Network International,and commercial transportation equipment specialist TruckCenter.com. An additional website, Secondipity, offers consumer electronics at a discounted fixed price, backed up by a pre-loved electronics buyer, TradeUps. The company adds further value for vendors with marketing campaigns, shipping and logistics, transaction settlements, taxation payments and legal documentation. Liquidity Services website

The company’s headquarters are in Washington DC, and it has approximately 700 employees. Its client list is an extensive star-studded catalog of major corporations such as Shell (RDS.A) and BP (BP), Entergy (ETR) and Chesapeake Energy (CHK). The ‘seven of the top ten retailers’ referred to in Liquidity Services’ online profile are not named, but would presumably include such giants as Wal-Mart (WMT), Target (TGT), Sears (SHLD) and Macy’s (M).

Liquidity Services says that its revenue has grown at an annual compound growth rate of 32% since 2002. On November 8 2011 the company announced that it had been named to the Forbes List of 100 Best Small Companies in America for the fourth consecutive year. Company news release Its fiscal year ends on September 30, so latest available annual results are for the year 2010. Total revenue for the year was $287 million, an increase of 21% on 2009. Net income of $12 million ($0.44 per share) was up 110% on 2009. Revenues are generated in a combination of profit-sharing, consignment and outright purchase deals, as well as through client transaction fees, online advertising fees and value-added service charges. Sales and marketing expenses, together with general and administrative expenses, decreased as a percentage of revenue when compared with 2009.

Competitors include other auction websites such as eBay (EBAY), traditional liquidators and fixed-site auctioneers, and government agencies that have created websites to sell their own surplus and salvage assets. Now that increasing numbers of traditional auctioneers have begun to develop online services, competition, from the likes of Overstock.com (OSTK), Bidz.com (BIDZ) and Latin America’s MercadoLibre (MELI), promises to become even more fierce.

The company has an exclusive contract to sell the scrap assets of the US Department of Defense, and this accounted for about 55% of its revenue in 2010. Some of this contract revenue is subject to a profit-sharing arrangement with the government, which has the right to audit Liquidity Services’ contract  performance. The high level of dependence on a single customer, and the necessity of performing accurately, efficiently and transparently in order to retain the contract, are major risk factors. However, the proportion of Department of Defense revenue (down from over 62% in 2008) appears to be declining as other sales channels expand. Form 10-K 2010

Latest quarterly filings include results for the nine months ending June 30 2011. Revenue for this period was $257 million, up 20% on comparable 2010 figures. However, net income declined sharply to $5.4 million, down 43% as a result of a $22 million (pre-tax) write-off of acquisition costs and goodwill impairment associated with the closure of unsustainable UK operations. The third quarter standing alone actually returned a net loss, but the long-term operating model remained profitable. Form 10-Q, 3rd quarter FY 2011 Company guidance issued during the third quarter earnings conference call placed estimated earnings per diluted share for fiscal 2011 in the range $1.10 to $1.12, but these are adjusted figures with the effect of acquisition and goodwill losses removed. 3rd quarter earnings conference call transcript

Despite this short-term loss from a failed investment, the company continues to have faith in its business model. It creates an expanding and self-reinforcing cycle of users, generating a continuous flow of goods from corporate and government sources. This in turn attracts an increasing number of professional buyers who sell their purchases through channels such as eBay. The well-established supply chain for the procurement of assets is not mirrored by an efficient reverse supply chain for their disposal, and Liquidity Services fills this gap in the market. The timing is good, tapping into the growing pace of product innovation and obsolescence, increasingly liberal return policies on the part of retailers, and  a greater demand for environmentally-friendly solutions for surplus assets in both the government and corporate sectors. Other drivers of Liquidity Services’ business – such as inaccurate forecasting of demand by manufacturers and resellers, cancelled orders, packaging changes, bankruptcies, and fluctuations in government spending – are constant factors which are unlikely to disappear.