{"id":91092,"date":"2024-05-31T00:26:40","date_gmt":"2024-05-31T04:26:40","guid":{"rendered":"https:\/\/ifintechworld.com\/?p=91092"},"modified":"2024-05-31T00:26:43","modified_gmt":"2024-05-31T04:26:43","slug":"liquidity-services-stock-moving-in-the-right-direction-nasdaqlqdt","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=91092","title":{"rendered":"Liquidity Services Stock: Moving In The Right Direction (NASDAQ:LQDT)"},"content":{"rendered":"
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Introduction<\/h2>\n

Liquidity Services\u2019s (NASDAQ:LQDT<\/span>) stock is up ~13% year-to-date and ~14% since the middle of April specifically. As a result, the market price is starting to approach what I deem as a more appropriately priced stock. Fundamentally-speaking, however, I continue to think that LQDT can grow into a bigger business over time, particularly as they continue to improve their value proposition and their internal initiatives play out. But between the implicit growth, management and related margin risk, the stock doesn\u2019t scream to me as an obvious buy today.<\/span><\/p>\n

GovDeals: Overall Solid Results<\/h2>\n

GovDeals (GD) posted GMV of $186.2M in Q2, up ~$19M or ~11% from $167.9M posted in Q2 2023, although down ~$4M or ~3% from the ~$190M posted in Q1 2024. On a revenue basis, they reported sales of $18.4M in Q2, up ~$3M or ~22% from $15.1M posted in Q2 2023, and up $2.5M or ~16% from the ~$15.9M posted in Q1 2024. Correspondingly, their \u201csegment direct profit\u201d – which you can think of as gross profit – was $17.2M, up ~20% from $14.3M posted last year, and up ~14% from the $15.05M posted in Q1.<\/span><\/p>\n

Let\u2019s talk GMV. During the quarter, there was some inorganic contribution from their acquisition of Sierra Auctions on January 1st, so they contributed a full quarter. Total GMV or revenue from the acquisition wasn\u2019t disclosed, so we don\u2019t know precisely how much they contributed. ZoomInfo listed Sierra\u2019s annual revenue at ~$15M or ~$3.5M quarterly, which seems at least roughly accurate to me per what they paid for them. Given their consignment nature, that implies GMV of ~$4M thereabouts given the mid-90% margins. Maybe GMV is closer to $3M or maybe it\u2019s closer to $5M, but I think a low-to-mid-single-digit million dollar figure is reasonable. Assuming it\u2019s $4M, that would imply a GMV growth rate of 8% on a year-over-year basis excluding Sierra, and down ~4% on a sequential basis. And indeed, they confirm that the year-over-year comparison saw organic growth.<\/p>\n

Sequentially-speaking, the organic GMV decline is largely seasonally-driven as they confirm on prior calls. Although, in FY23, GMV went from ~$161M in Q1 to ~$168M in Q2, or growth of $7M, and then in FY22, they went from $157M to $180M, although 2022 benefitted from the acquisition of Bid4Assets, so that\u2019s not comparable. But more consistent with their comments, in FY19, GD GMV went from ~$77M in Q1 2019 to ~$77M in Q2, or roughly flat sequentially. And in FY18, they went from ~$71M to ~$69M. So, while there is some merit to the seasonality argument, a mid-single-digit decline is still seemingly more than just seasonality, so I do think there was a step down in demand.<\/p>\n

To this end, if we go back to Q1, for instance, GMV was up 18% versus the prior year (end of 2022) with the delta consisting of \u201cincreased personal property sales, including improved availability of used vehicles and increased take-rate pricing, and an increase in volume in our real estate category.\u201d However, in Q2, they noted \u201cincreased availability of vehicles paired with a higher blended revenue take rate due to expansion of service offerings into new markets, while experiencing slower-than-anticipated real estate auction volume despite continued inroads in various jurisdictions.\u201d Thus, it\u2019s seemingly a reasonable explanation for one to conclude that Bid4Assets had a particularly weak quarter while the rest of their segment produced stable-to-improving GMV.<\/p>\n

The Bid4Assets situation and trend is interesting – clearly, from the end of 2022 and into late 2023, GMV – most likely transaction count – grew, while now coming into Q1, the incremental trend was a decline. On the one hand, there is an argument to be made that one shouldn\u2019t overweight quarterly results given the lumpy nature here. As one might expect, real estate (property sales) experiences more lumpiness given its high-dollar nature versus a used vehicle or versus smaller-dollar office equipment. And as such, one deferred (or accelerated) auction sale can have a relatively material impact on GMV\/sales. On the other hand, however, the softness was seemingly fairly large and also, reported foreclosures increased in Q1 per this report.<\/p>\n

Now, that\u2019s very broad and partly non-representative data of Bid4Assets, so it\u2019s not a perfect read-through. But zooming out, it\u2019s worth pondering whether the imminent stabilization in macroeconomic conditions more broadly will lead to softness in Bid4Assets compared to the growth trend from 2022 to 2023. That is, we can see that in 2023, property foreclosures in the U.S. were higher than 2022 which were higher than 2021. This is something we\u2019d largely expect too given the trends in macro conditions more broadly. Thus, consistent with the decline in foreclosures from 2010 to 2019, I think it\u2019s reasonable to expect Bid4Assets, which lists foreclosed\/government repossessed property for sale, could see a decline in supply. I.e., It\u2019s very possible that Q2 reflects some of these dynamics, and that 12 months from now, we could see a headwind for this business.<\/p>\n

On the other hand, it\u2019s worth recalling the broader context for Bid4Assets. As I noted last time, one of the things that has happened post-COVID was that municipalities increased credit extensions which management discussed, allowing what would\u2019ve been a foreclosure to be deferred. This thus reduced supply for Bid4Assets and thus, GMV. While I don\u2019t see it happening today, there is a possibility that supply is \u201cunlocked\u201d from less debt-favorable policies that potentially offsets the aforementioned headwinds.<\/p>\n

As for the rest of the segment, it\u2019s obviously a good sign to see the growing GMV – or at least stable GMV on a seasonally-adjusted basis – which is also evident on a year-over-year basis. Vehicles are a sizable part of GMV, so the growth in supply here is clearly a positive, but there is a growth limit. Per what I think is happening which is that new vehicle supply is allowing municipalities to replace their current fleets by purchasing new vehicles which is thus resulting in more auction supply, this growth won\u2019t continue forever – it\u2019ll slow when new vehicle supply slows. Auto inventory in the U.S. still remains well below 2019 levels, and indeed, days inventory is lower too, so there is still some potential for growth here from today.<\/p>\n

All in all, this is a business with a strong competitive position that should grow from overall supply growth – macro-adjusted – and new customers as more volumes and municipalities convert to online auctions – e.g., they just won a contract in New York. And this is going to be further complemented by the recent Sierra acquisition too. In the meantime though, Bid4Asset volume declines could pressure GMV, but adjusted for this, I\u2019m comfortable assuming GovDeals grows.<\/p>\n

Modeling-wise, Q3 is a seasonally high quarter, but they\u2019re still guiding for year-over-year growth in Q3 from the \u201cexpansion of more full-service consignment offerings since the acquisition of Sierra\u201d. Q2 GMV of ~$186M converts into full year GMV of ~$790M per 2019 seasonality (23.5% of full-year GMV). Segment direct profit margins ran at ~9.2% of GMV in Q2, which should remain largely consistent going forward given that Q2 included a full quarter of Sierra and they\u2019ll remain consignment-focused. Should GMV grow mid-single-digits over time – below historical rates – that would translate into GMV of ~$870M by the end of 2026, and direct profit of ~$83M at 9.5% margins (assuming some marginal leverage). Macro impacts – e.g., Bid4Assets softening – could defer this, but structurally speaking, that growth rate is reasonably conservative to me given their history.<\/p>\n

Retail Supply Chain Group: Outperforming<\/h2>\n

Retail Supply Chain Group (RSCG) posted GMV of $79.6M, up from $73.3M in the prior year or 8.6% higher, and up from $66.6M in Q4 or 19.5% higher. On a revenue basis, sales were $56.8M in Q2, up ~$3M or ~6% from $53.7M posted in Q2 2023, and up ~$13M or ~30% from the ~$43.7M posted in Q1 2024. Their segment direct profit was $17M, up ~2% from $16.7M posted last year, and up ~21% from the $14.1M posted in Q1.<\/p>\n

There\u2019s positive seasonality driving a lot of the sequential growth for RSCG, who for context, is used as an online platform for retailers and manufacturers – via category contracts – to liquidate excess consumer items to either other resellers or customers themselves, either listing and shipping the item themselves, or having LQDT do all of the transactional work. Q2 is the seasonal high point, evident in prior years too. E.g., In Q1 2023 to Q2 2023, GMV went from ~$65M to ~$73M, and during FY22, went from $53M to $59M. So, sequential growth of ~$13M in GMV isn\u2019t terribly abnormal, but unlike GovDeals, RSCG is seemingly outperforming seasonally-adjusted sales growth, consistent with the high-single-digit year-over-year growth.<\/p>\n

This conclusion would be consistent with their positive commentary on the call too. When referencing the year-over-year results, they noted that RSCG was driven by \u201can increase in low-touch consignment solutions and high volumes from purchase programs while continuing to experience a lower value product mix in certain full-service consignment and purchase programs.\u201d They further expanded by saying, \u201cRSCG has seen adoption from retail clients to sell from fulfillment centers, individual store locations, or individual warehouses.\u201d<\/p>\n

Unpacking this, I don\u2019t get the sense that it\u2019s macro-driven change. Perhaps I\u2019m wrong, but I tend to contextualize the RSCG segment neither pro- nor counter-cyclical in any material way. When times are good, while more consumers buy more new items from the influx of cash, they also buy more items in general, both new and used. And conversely, when times are bad, consumers spend less money in total on both new and used items, but there\u2019s an incremental trade-down to used goods to save money. The macro can impact them when it shifts the value proposition of new versus used goods in favor of one or the other, or when inventory grows as was the case in early 2023 when retailers broadly experienced excess inventory. While that\u2019s behind us, perhaps there\u2019s some general inventory excess by some of their clients resulting in slightly stronger growth, but I deem it unlikely.<\/p>\n

What\u2019s additionally favorable from a market perspective is that the value proposition here, a la that offered by GovDeals, is secularly attractive. Frankly, there\u2019s not too many secular trends as durable as e-commerce as evidenced by the past few decades. But correspondingly, RSCG has benefitted from this trend, and I see no fundamental reason LQDT\u2019s online marketplaces for used goods would not participate in that trend going forward. Indeed, if we look at their GMV history over time, or at least pre-COVID to get a better macro-adjusted read, it\u2019s been up-and-to-the-right at a double-digit pace.<\/p>\n

Contributing to this growth, however, has not just been a natural shift in shopping preferences, but value proposition improvements on their end to capture more buyers and more sellers, which is what we\u2019re witnessing today per the earlier comments. The team is adding new capabilities like self-service (sell-in-place) options for sellers, which of course naturally improves their offering for sellers to get more out of their excess inventory, so I\u2019m not surprised to see some growth here (although some of it is macro-driven as broader conditions stabilize and retailers decide to use fewer of LQDT\u2019s footprint). They\u2019ve made similar improvements in the past, like for instance, their initiative to expand their DTC offering by designing AllSurplus Deals. Offering improvements like this will continue going forward, which should support further growth over time.<\/p>\n

The only angle about RSCG that concerns me more than GovDeals is competitive risk, although it\u2019s clear they\u2019re not losing market share today per the aforementioned comments about their offering improvements. In fact, management\u2019s seeing more consolidation today – per the call:<\/p>\n

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\u201cAnd the other thing I would just add, and we’ve talked about in the past, there’s been a period of less attractive product mix in retail in 2024 versus the prior year period. There are lots of reasons for that. But I would tell you that we’re seeing signs of consolidation in the retail industry as it relates to in the liquidation category. A number of new entrants that came in to try to buy and resell retail goods during 2021, 2022, have encountered operational and financial difficulties resulting in nonperformance and even closures of these players, which has been a sort of recalibration for these top 50 retailers and who they want to interact with.\u201d<\/p>\n<\/blockquote>\n

Still, versus GovDeals, the field is more fragmented with quality competitors such as B-Stock. But there are some soft advantages as I do think scale begets more scale. For one, larger marketplaces like LQDT have better recovery rates given their larger buyer base. And then for two, larger distribution\/facility footprints like LQDT\u2019s offer national retailers a singular liquidation outlet for their national flow of goods. I.e., If I have locations in multiple states, instead of contracting with multiple vendors for each territory, I can go through one with LQDT. So, there\u2019s a logical argument to some scale advantages.<\/p>\n

Switching gears, what you\u2019ll notice is that their gross margins have declined. In Q2, they posted segment gross profit-to-GMV of 21.3%, down from 22.8% in last year\u2019s Q2, but up marginally from the 21.1% posted in Q1. I\u2019m actually a little bit surprised by the sequential growth considering the strength in self-service (low-touch consignment) sales. On a year-over-year basis, the decline makes sense – as more customers use their self-service capabilities by selling more of their goods from their own locations, LQDT naturally charges less – i.e., captures a lower take rate – since there\u2019s less service involved on their end, thus earning fewer revenue dollars per dollar of GMV. Furthermore, they\u2019re still battling the headwind of lower-value mix – i.e., selling 10 $2 goods instead of 2 $10 goods – which also reduces margins. So, perhaps the growth was just seasonally-driven, but either way, it\u2019s a good sign.<\/p>\n

All in all, they\u2019re guiding for Q3 \u201cvolumes similar to this past fiscal second quarter’s record retail GMV,\u201d and AllSurplus Deals \u201cto sustain a strong year-over-year growth rate in this coming quarter.\u201d Furthermore, they\u2019re take is that margins could improve sequentially as they continue \u201cto improve, selling through the backlog of lower-value product with improved operational efficiency and buyer demand generation.\u201d<\/p>\n

So, these are good signs. Generally, there\u2019s a seasonal step down for RSCG from the highs of Q2 as evidenced by the 2019 period and management commentary, suggesting that their internal initiatives called out earlier are continuing to contribute, but inconsistent with the sequential trend, they\u2019re expecting the low-value mix shift headwinds to abate.<\/p>\n

Over time, I see RSCG growing at what I believe could be mid-to-high-single-digit GMV growth. As the low-value product mix shift headwinds shift – although the mix shift to low-touch self-service will continue – segment gross profit margins shouldn\u2019t decline at a rapid pace, and may actually improve versus Q2. Assuming 6% GMV growth, today\u2019s GMV of ~$80M, which translates into an annual GMV of ~$310M, would amount to ~$348M by the end of 2026. Should the mix of goods remain relatively steady, we should see segment gross profit margins around 20-21% – call it, 20.5% – implying a segment gross profit of ~$71M.<\/p>\n

Capital Assets Group & Machinio: Performing Well<\/h2>\n

Capital Assets Group (CAG) posted GMV of $53.5M, up from $41.5M in the prior year or 29% higher, and up from $48.9M in Q4 or 9.4% higher. On a revenue basis, sales were $12.3M in Q2, up ~$3M or ~31% from $9.4M posted in Q2 2023, and up $4.5M or ~58% from the ~$7.8M posted in Q1 2024. Their segment direct profit was $9.2M, up ~31% from $7M posted last year, and up ~33% from the $6.9M posted in Q1.<\/p>\n

Considering the seasonality of their CAG segment, this is a notably strong performance as Q2 is generally a seasonally low quarter for them. For instance, in FY23 Q1 to Q2, they went from ~$45M to ~$42M; in FY22, they went from $50M to $37.5M; and in FY19, they went from ~$46M to ~$36M. So, for them to organically post nearly 10% sequential growth is saying something. Indeed, from the call, it\u2019s sounding like they scooped up some sizable deals:<\/p>\n

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\u201cOur CAG segment continues to grow its recurring heavy equipment seller base at a record pace and [ Greets ] heavy equipment fleet GMV and by over 30% year-over-year during the quarter. CAG’s all surplus online marketplace is the global market maker of choice for industrial sellers in all regions of the world and in all industry verticals.<\/p>\n

For example, during the quarter, our CAG segment completed several high-value transactions in our automotive and energy categories, reflecting how corporate clients are using our marketplace to monetize assets amidst a changing dynamic growth in many sectors of the economy.\u201d<\/p>\n<\/blockquote>\n

However, as was appropriately noted on the call too, there were some transaction deferrals from Q1 to Q2, so Q2 is slightly elevated versus a normalized quarter. But I wouldn\u2019t go so far as to say that if one excluded the transactions from Q2, that GMV would be lower on a seasonally-adjusted basis. Indeed, if we look at Q1, which was implicitly suppressed from the aforementioned deferrals, they still posted 9% year-over-year GMV growth.<\/p>\n

Unpacking this, similar to RSCG, I can\u2019t quite tell if the macro is a headwind or tailwind on a net basis. Again, on the one hand, when times are tougher, more business will be selling equipment, so supply increases and improves the value proposition. But on the other hand, when times are good, LQDT should see more buyers enter the marketplace to buy equipment – e.g., small mom-and-pop construction companies.<\/p>\n

My sense, however, is that there are some macro-tailwinds because I can\u2019t really justify backwards. For instance, there\u2019s nothing really changing in the value proposition to drive material incremental growth. And while we could potentially argue that their CAG segment is taking some market share – which they could – we can also see that RB Global (RBA) posted 20% year-over-year GTV growth – equivalent to GMV – in their \u201cCommercial construction and transportation\u201d category (adjusted for the IAA acquisition). So, perhaps there are some macro tailwinds today that won\u2019t continue.<\/p>\n

Now, Machinio is probably taking some share. Machinio\u2019s sales of ~$4M in the quarter were up 21% versus the $3.3M posted in Q2 last year, and up ~3% from the ~$3.9M posted in Q1. Perhaps there are some market-related tailwinds a la what CAG is seeing, but we also know management has recently (later 2023) opened a regional sales office in China for Machinio, which we see is naturally driving incremental business – from the Q1 call:<\/p>\n

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\u201cSo what we did is we took advantage of our physical presence there, and added a regional sales organization to extend the Machinio platform into those markets, and we sell direct. \u2026<\/p>\n

The reality is that there is a big interest in being able to move equipment — used equipment outside of the region, and that’s tapping into Machinio’s presence throughout the U.S., North America, Europe, a lot of buyers. And we’re seeing good adoption of the solution, albeit it’s a small base that we’re starting with. But we had some revenue already on Machinio platform with subscribers before we opened up a sales presence there.\u201d<\/p>\n<\/blockquote>\n

Over time, similar to the other 2 segments, I don\u2019t really see where either of these offerings go backwards, structurally speaking, from a market perspective. Perhaps a positively turning macro environment does slow GMV growth or result in a modest pullback of supply and spend, but as evidenced by RB Global\u2019s and Machinio\u2019s history, and Machinio\u2019s expansion in Asia, there\u2019s room to grow holding aside general GDP growth over time. Consistent with this, per their guide for CAG and Machinio, they\u2019re not expecting any noticeable slowdown in Q3.<\/p>\n

Very simply, taking CAG\u2019s $53.5M GMV in Q2 and applying 2019 seasonality (23.5% of sales), that implies an annualized GMV of ~$228M. Should that grow at, say, 5% over time, that gives me ~$251M in GMV by 2026. For Machinio, seasonality is de minimis per my understanding, so we can think about the $4M translating into ~$16M in annual sales. Assuming 10% growth – given their size and aforementioned initiative – that amounts to ~$20M in FY26 sales.<\/p>\n

Margin-wise, CAG\u2019s gross margins (to GMV) went from 17% last year to 17.3% this year, and saw growth from 14.2% posted in Q1. Sequentially speaking, maybe there\u2019s some fixed cost leverage per what they expense in their segment COGS, but we know this isn\u2019t huge. What drove the bulk of the growth were the aforementioned large transactions as these are more profitable than smaller ones. Incidentally, this was why Q1\u2019s margins were below the prior year\u2019s Q1 as that period included larger, higher-margin transactions as well.<\/p>\n

Given Q2\u2019s mix abnormality and the implicit fluctuations in margins quarter-to-quarter as a result, based on their history of posting 14-17% margins, I tend to think 15.5% margins are reasonable, to split it down the middle. So, as CAG (assumptively) scales to ~$228M in annual GMV, segment gross profit of ~$35M is reasonable to me. For Machinio, we can think about them posting 95% segment gross profit margins given the de minimis variability they experience, implying $19M in segment gross profit for them.<\/p>\n

OpEx (Margins): Should See Modest Leverage<\/h2>\n

The aforementioned segment analysis bridges our understanding down to the gross profit level. And for context, gross margin (to GMV) at a consolidated level came in at 14.8% in Q2, up from 14.5% posted in Q2 2023, and up from 13% posted in Q1 2024. At the operating level, EBITDA margins (as a percentage of GMV) were 3.8% in Q2, up from 3.5% in Q2 last year, and up from 2.4% in Q1.<\/p>\n

Breaking this out then, sequential gross margin growth of 180 bps and EBITDA margin growth of 140 bps implies some opex deleverage since last quarter, which consists of Tech & Ops, S&M, and G&A spend. On a dollar-basis, adjusted opex – for which I\u2019m just taking gross profit minus adjusted EBITDA – increased ~$4M year-over-year from $31M last year to ~$35M today, and ~$2.5M sequentially from the $32.5M posted in Q1.<\/p>\n

Per the 10-Q, considering that both GAAP G&A and T&O were both up just marginally year-over-year with G&A relatively flat while T&O grew a little more sequentially, we can more or less clearly see that the bulk of the opex growth – and respective opex margin deleverage – in both comparisons came from their S&M category.<\/p>\n

Sequentially speaking, this makes sense. For one, the Sierra Auction acquisition clearly increases the sequential opex changes, and was likely dilutive from an EBITDA margin perspective. While I\u2019d assume the take rates are similar to legacy GovDeals, with materially less scale, there should be inherently less opex leverage. Then for two, particularly for the year-over-year change and partly for the sequential change, some of this cost growth stems from their growth initiatives and related investments. From the Q1 2024 call, they talked about adding staff over the prior 2 quarters from their Asia-based office for Machinio, while also making investments into their tech stack across different segments of the business:<\/p>\n

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\u201cSo we’re growing that business really well and adding some capacity, Gary, that will provide leverage in the second half there. We spent a decent amount of money in time preparing GovDeals deals to be upgraded after essentially 2 decades and have some now AI-driven marketing capabilities within GovDeals, which is a $700 million GMV marketplace. So if we can just bump recovery by 10%, very high payoff in the second half of the year. So we did step up a little bit there.\u201d<\/p>\n<\/blockquote>\n

And they further confirmed these investments – and respective costs – on the Q2 call:<\/p>\n

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\u201cAnd we’ve got a great CTO and product team, and we’ve identified and made some unbudgeted IT hires to pull forward some key projects that are going to help this business and meet current demand for many of our clients. For example, in the GovDeals marketplace, we’re rolling out 4-level taxonomy in key categories such as transportation assets.\u201d<\/p>\n<\/blockquote>\n

Consistent with their comments, it makes logical sense to me that a lot of these are pull-forward costs – i.e., costs that really haven’t been leveraged yet. For instance, most clearly, the Asia-based office that they\u2019re building for Machinio requires a good amount of upfront staffing and productivity\/workflow efficiencies to be worked out before reaching normalized efficiency. Considering that they just ramped this office 1-2 quarters ago, it\u2019s hard to think there\u2019s not a good amount of untapped productivity to capture here, and indeed, they think there\u2019ll be a lot of leverage in the back half of FY24.<\/p>\n

Zooming out for a second, one constant concern is that at some point down the line, management wrecks profitability via large near-term investments a la Liquidity One in 2016, and of course, that could happen. But more broadly, I do think there\u2019s a natural level of \u201caccelerated investment\u201d that will always more or less be in the model. As evidenced by today\u2019s and historical investments, there\u2019s likely a long list of projects they haven\u2019t addressed yet to improve the platform, and over the coming years, my belief is that profitability will continually be suppressed by these projects\/investments, which I think are rational to pursue, by the way, for competitive reasons.<\/p>\n

With that in mind, someone could take today\u2019s adjusted opex profile of ~$14oM on an annualized basis – and the respective EBITDA-to-GMV margins of 3.8% – and think they should grow as LQDT adds GMV going forward with necessarily needing more costs given the upfront investment in today\u2019s opex. I do think that\u2019s partly true, and am indeed modeling some opex leverage from this. But while I do also think there\u2019s inherent operating leverage such that as GMV grows, centralized opex like G&A and T&O don\u2019t have to scale hugely, considering the GMV growth I\u2019m modeling, I think it\u2019s appropriate to assume some structural level of ongoing, upfront investment remains in the cost profile as they move forward.<\/p>\n

Simplistically, on 2026 numbers, should consolidated GMV reach $1.466B, that\u2019s ~$367M of GMV per quarter, which compares to the ~$319M posted in Q2 when they posted an opex margin of ~11%. I do think that on a normalized basis, minus any new growth initiatives or projects, today\u2019s opex margin could be something like 10.5% once we account for the inherent leverage that should be captured on today\u2019s opex profile per the aforementioned investments. But I\u2019m not modeling too much beyond that over time as I think there\u2019ll continuously be a structural level of investment driving a higher opex-to-GMV margin – I\u2019m assuming 10.5%. I could be entirely wrong and too conservative here, but I find it reasonable to assume some structural level of continuous investment.<\/p>\n

Valuation: Reasonably Priced<\/h2>\n

As noted earlier, they acquired Sierra Auctions for ~$13.8M in Q2 (January 1st). Sierra was a competitor to their GovDeals business, operating as a government-focused online auction in the Arizona region, allowing municipalities (and other organizations) to auction off vehicles, equipment, and other items. Strategically then, it makes sense for LQDT – it grows their base on municipal customers which strengthens their network effect by increasing supply which thus boosts the value to buyers. Financially, though, they won\u2019t disclose any metrics around the business, so it\u2019s hard to know precisely what was contributed or the multiple paid – all they note was that Sierra\u2019s \u201caccretive\u201d, but I\u2019m not sure what they mean by that.<\/p>\n

CapEx remains consistent with my expectations of running around ~$2M per quarter YTD. Interestingly, management decided to repurchase quite a bit of stock in Q2, spending ~$8M during the quarter repurchasing ~750K shares total. For a business producing around ~$20-30M in free-cash-flow annually, this is a good amount of money spent, although they do have a very large cash balance to use. Either way, though, this too is consistent with my expectation for them to reallocate money to buybacks over time.<\/p>\n

At today\u2019s price of $19.3\/share with 30.482M basic S\/O, that\u2019s a ~$588M market cap. Net of $117M of cash (including $8.4M of short-term investments) and $0 of total debt, that\u2019s an EV of ~$471M. Per what I\u2019ve been discussed earlier, think the following FY26 modeling inputs are reasonable across the segments:<\/p>\n