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LQDT Update.

|Includes:Liquidity Services, Inc. (LQDT)

seekingalpha.com/article/2142233-liquidi...

After the above article I have got quite a few questions about the future of the company in light of the recent quarterly results and drop in share price. I feel obligated to update on my analysis. I would like to update specifically on the recent conference call and stock compensation issue.

Q2 2014 results compared to Q2 2013:

Revenue: $128M (down 1.5%).

COGS+Profit sharing: 48.7% (3% higher)

SG&A + Tech = 40.4% (6.5% higher)

There is no argument that the quarterly results are bad. In particular I am concerned about the increase in COGS. Historically LQDT has been able to increase revenue organically and through acquisitions while maintaining the COGS. LQDT's USP has always been leader in reverse-supply chain industry with first mover advantage in consolidating the industry. I hope this increment in COGS is a glitch in the long-run.

Incremental investment in technology/Operations ($29M vs $22M) is the major contributor for decline in EBITDA and Net Income. Now investors may have different opinion on whether this is a good investment ie., will bring more revenue in future or a maintenance cost ie., minimum investment required to maintain the current revenue. Based on the management discussion they are investing heavily for the future incremental revenue, time will tell.

Based on their FY 2014 projections of $1.1 - $1.27/share = ~$37M in net income for FY 2014 and CapEx of $8 gives around $30 - $35M FCF. My guess is $30M FCF will be LQDT's lowest FCF increasing from here.

At $13.9/share = $450M - $102 (cash) = $350M it is a very good investment for the current price. I agree that from the time I wrote article costs have increased, but I believe over the long run of 2 - 3 years LQDT will be a good investment even at $19/share.

2013 Executive's compensation:

Base Salary: $1.8M

Bonus: $0.76M

Restricted Stock: $6.4M

Options: $1.6M

Total: $10.5M

 

CEO

CFO

CIO

COO

EVP

 
           

Total

Base Salary

600,000

321,000

271,000

306,000

301,000

1,799,000

Bonus

256,000

108,000

180,000

131,000

84,000

759,000

Restricted Stock

720,000

1,581,000

3,254,000

623,500

243,000

6,421,500

Options

433,000

1,031,000

0

135,500

60,361

1,659,861

Total

2,009,000

3,041,000

3,705,000

1,196,000

688,361

 
Click to enlarge

Restricted stock and option values are fair values calculated based on RFR, volatility and exercise timeline. As you can see from the above table half of $8M from stock-based compensation in 2013 was deemed useless at the current stock price. Most of the options are underwater and fair value of restricted stock is ~$3M.

Still, stock-based compensation of ~$3.5M/quarter is high and the question of how to look at $3.5M/quarter is up for an argument. Since it is the fair value and not the current value depending on the stock price movement, it becomes close to $0 as stock price go down and moves higher on the other side. In any which way the number is quite high and I am hoping there would be no bonus and ratification of stock-based compensation for FY 2015.

Disclosure: I am long LQDT.

Stocks: LQDT