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Edited Transcript of LQDT earnings conference call or presentation 10-Dec-19 3:30pm GMT

Q4 2019 Liquidity Services Inc Earnings Call

WASHINGTON Jan 16, 2020 (Thomson StreetEvents) -- Edited Transcript of Liquidity Services Inc earnings conference call or presentation Tuesday, December 10, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jorge A. Celaya

Liquidity Services, Inc. - Executive VP & CFO

* Julie Davis

Liquidity Services, Inc. - Senior Director of IR

* William P. Angrick

Liquidity Services, Inc. - Co-founder, Chairman of the Board of Directors & CEO

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Conference Call Participants

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* Gary Frank Prestopino

Barrington Research Associates, Inc., Research Division - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2019 Liquidity Services Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

Now I would like to hand the conference over to your speaker today, Ms. Julie Davis, Senior Director of Investor Relations.

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Julie Davis, Liquidity Services, Inc. - Senior Director of IR [2]

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Thank you, Carmen. Hello, and welcome to our fourth quarter and fiscal year 2019 financial results conference call. Joining us today are Bill Angrick, our Chairman and Chief Executive Officer; and Jorge Celaya, our Executive Vice President and Chief Financial Officer. We will be available for questions after our prepared remarks.

The following discussion or responses to your questions reflect management's views as of today, December 10, 2019, and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and in our filings with the SEC, including our most recent annual report on Form 10-K. As you listen to today's call, we encourage you to have our press release in front of you, which includes our financial results as well as metrics and commentary on the quarter.

During this call, we will discuss certain non-GAAP financial measures. In our press release and our filings with the SEC, each of which is posted on our website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.

We also use certain supplemental operating data as a measure of certain components of operating performance, which we also believe is useful for management and investors. The supplemental operating data includes gross merchandise volume and should not be considered a substitute for or superior to GAAP results.

At this time, I'd like to turn the presentation over to our CEO, Bill Angrick.

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William P. Angrick, Liquidity Services, Inc. - Co-founder, Chairman of the Board of Directors & CEO [3]

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Thank you, Julie. Good morning, and welcome to our Q4 earnings call. I'll review our Q4 performance and provide an update on key strategic initiatives. Next, Jorge Celaya will provide more details on the quarter and our outlook for Q1 fiscal '20.

Our Q4 results reflect continued execution of our RISE growth strategy with solid results, including our sixth consecutive quarter of organic GMV growth, our second consecutive quarter of GAAP revenue growth and our eighth consecutive quarter of non-GAAP adjusted EBITDA improvement. Our strategy continues to deliver more efficient operations, more effective asset promotion which drives higher recovery, a broader choice of seller services and an increased flow of assets from sellers in our Retail Supply Chain and GovDeals segments.

Our adjusted EBITDA improved 60% over the prior year in Q4 fiscal '19, and we had positive operating cash flow in Q4 fiscal '19, reflecting top line growth and continued benefits from operational efficiencies, enhanced marketing and organizational realignment efforts. Further, our fiscal 2019 bottom line results marked a $20.3 million improvement in adjusted EBITDA over the past 2 years.

Stepping back and looking at the full year fiscal '19, our objective was to resume organic growth while investing in our product, services and people to sustain market leadership. We accomplished these objectives. For the full year of fiscal 2019, we grew GMV by $14 million to $640 million, despite the loss of the DoD scrap contract and the full unwind of our DoD programs.

Of note, fiscal 2019 was the first year of consolidated GMV and GAAP revenue growth in 6 years. For the full year 2019, we increased adjusted EBITDA by $6.1 million driven by top line growth in all segments and lower sales and operations expenses, partly offset by the wind down of our DoD contracts.

Our cash position has been relatively stable at $66 million at fiscal year-end 2019 compared to $69 million at the end of Q1 fiscal '19. We continue to have 0 long-term debt. We are encouraged by this positive trajectory and remain committed to continuous improvement in our product offering and our operations.

Next, we'll take a look at highlights of our business segments. GMV grew 18% year-over-year in our Retail Supply Chain Group segment driven by higher volumes within existing and new accounts in both the U.S. and Canada and strong buyer participation in our retail online marketplace. We continue to expand our business with retailers and manufacturers by helping them reduce supply chain costs and drive maximum financial recovery with our core marketplace services and Returns Management offerings. We also continue to expand our self-directed and Scan. N.$ell apps to more customers who leverage our data and software to make smart decisions to quickly dispose of returned goods for maximum value. GMV in these areas grew over 40% year-over-year in Q4. We've also launched new capabilities to manage and sell mobile devices for OEMs, retailers and service providers and are excited about this new category.

Our GovDeals segment GMV grew 4% year-over-year in the quarter despite a strong comparative period in Q4 fiscal '18, which includes some very large individual asset sales. However, we continued to expand our market share and signed over 300 new agencies this quarter, including wins in Oakland, California, Corpus Christi, Texas and the Phoenix-Mesa Gateway Airport Authority. Our consistent growth in the government markets reflects the value, service and convenience that our GovDeals solution provides government agency sellers across a wide variety of assets.

Our CAG segment GMV declined 15% from the prior year period due to the wind down of our scrap contract with the U.S. Department of Defense and our softness in international and energy vertical markets. This was offset by strength in the Americas across our biopharma and industrial machinery verticals.

Our e-commerce solution continues to resonate with industrial sellers, and we are gaining adoption in our clients' use of our self-directed solutions, which leverage our technology platform, growing buyer base and data analytics. We also continue to advance our product road map during Q4.

Based on customer feedback, we launched our MachineryHost storefront product, which provides SMB customers a modern, mobile-first storefront to market their used equipment with seamless integration with our online classifieds offering and our online sales marketplaces. We also launched the beta testing version of our new aggregated marketplace, and we'll be deploying new features continuously during fiscal year '20 as we test and prioritize functionality based on customer feedback. Our new unified marketplace will make it easy for buyers to find and buy every asset available for sale using a powerful marketing technology stack. Fiscal year '20 will be a year of continued innovation and growth as we put more services and power into the hands of our sellers and buyers to create value.

Moving forward in fiscal '20, we have prioritized continued investment in our marketing tech stack and sales organization to meet our RISE objectives at the expense of maximizing short-term profitability, in order to enhance our competitive position and growth over time.

While our Q1 guidance reflects general softness in our CAG international and energy vertical versus the prior year period, we expect to continue our growth trend for the full year fiscal 2020 due to the market's response to our RISE strategy and offerings. Our focus and investments during fiscal year 2020 will be guided by the following strategic objectives: one, driving higher net recovery through technology and innovation that improves the buyer experience; two, increasing volume by delivering flexible service offerings and pricing models and asset categories with attractive addressable markets; three, growing services with recurring revenue characteristics that leverage our technology platform, domain expertise, data and marketplace channels; and finally, four, improving operating expense leverage by controlling costs and through technology and innovation that increases productivity.

In closing, Liquidity Services remains committed to driving innovation and significant value creation for our customers and our shareholders as we execute on our long-term RISE strategy.

I'll now turn it over to Jorge for more details on the quarter.

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Jorge A. Celaya, Liquidity Services, Inc. - Executive VP & CFO [4]

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Thank you, Bill. Good morning. First, I will comment on select fourth quarter and fiscal year 2019 results. We finished the quarter of fiscal year 2019 within guidance range of GMV, adjusted EBITDA and adjusted EPS. GAAP net loss and GAAP EPS were below the range, reflecting the earn-out from Machinio based on their solid business performance.

Our fourth quarter results reflected the ongoing execution of our RISE growth strategy. As compared to the fourth quarter of 2018, GMV and adjusted EBITDA were up and continued to reflect positive trends in our RSCG and GovDeals segments, offset by the wind down period of the DoD scrap contract within the quarter and the lumpiness in our commercial business within the CAG segments.

Comparing to the fourth quarter of 2018, GMV improved 2% and revenue was up 12%. The fourth quarter GAAP net loss was higher reflecting onetime expenses, while non-GAAP adjusted EBITDA results improved year-over-year for the eighth consecutive quarter. Non-GAAP adjusted net loss improved $2.1 million in the fourth quarter over the prior year.

In the fourth quarter, we reported GMV of $157.8 million. GovDeals' GMV was up 4% from the fourth quarter of fiscal year 2018 driven by the additional sales volume from existing and new sellers.

Retail Supply Chain Group GMV was up 18% from a year ago, on an increase in product flows from existing client accounts, new business development efforts and adoption of seller solutions and new service offerings. Results were partly offset by a 15% year-over-year decrease in our CAG segment on the decline in the DoD scrap contract activities and lower CAG consignment activity in the energy vertical pipe market.

We reported fourth quarter of fiscal year 2019 revenue of $58.8 million. GovDeals revenue increased 8%, RSCG increased 15% and our CAG segment increased 2% compared to the fourth quarter of fiscal year 2018. Excluding the DoD contracts, CAG segment revenue was up 21% compared to the same quarter last year.

Our fiscal year 2019 GAAP net loss was $5.2 million compared to a loss of $1 million in the fourth quarter of fiscal year '18, impacted by business restructuring expenses, changes in the fair value adjustment in fiscal year 2019 through the acquisition earn-out and the benefits from the new Tax Act in fiscal year 2018. Adjusted net loss was $2.5 million, an improvement from a loss of $4.6 million last year.

And finally, our fourth quarter adjusted EBITDA was negative $800,000, a $1.1 million improvement from a loss of $1.9 million in the prior year fourth quarter. This improvement was driven by top line growth in our RSCG and GovDeals segments, restructuring of the corporate functions during 2019, lower expenses due to the closure of our indirect business and were offset by a 12% increase in sales and marketing expenses.

Turning to the fiscal year 2019 full year results. Our performance reflected solid GMV growth in our GovDeals and RSCG segments, and modest GMV growth in our CAG business when excluding the DoD surplus and scrap contracts and reflecting the trend in the energy sector. Our fiscal year 2019 GMV was $639.9 million, up $13.5 million or 2% compared to fiscal year 2018, as growth in our GovDeals and RSCG segments, up 7% and 19%, respectively, was mostly offset by the impact from the wind down of our DoD surplus and scrap contracts and higher activity from CAG consignment deals last year.

We reported fiscal year 2019 revenue of $226.5 million, up $2 million or 1% from the prior year, despite wind down periods in both our DoD surplus and scrap contracts in our CAG segment last year. Excluding the DoD contracts, total fiscal year 2019 GMV was up 8% and revenue was up 23% compared to the prior year. For the fiscal year 2019, GAAP net loss was $19.3 million versus a loss of $11.6 million in the prior year, adjusted EBITDA improved $6.1 million to a negative $1.2 million and adjusted net loss improved $8.7 million over the prior year to a negative $7.4 million.

We continue to have a debt-free balance sheet. At September 30, 2019, we had a cash and short-term investment balance of $66.5 million.

Looking ahead to fiscal year 2020, we will continue to focus on growing our commercial and municipal government marketplaces, growing and expanding our self-service offerings for commercial sellers and incremental enhancements and buyer adoption of our new aggregated marketplace. We remain focused on executing our RISE strategy, which we believe will position us to better serve our sellers and buyers through flexible service offerings and enhance buyer experience and new seller solutions.

Our Q1 fiscal year 2020 comparative results will be impacted by the episodic nature in our CAG segment, as reflected in the strong first quarter of fiscal year 2019 comparison period. We expect an improved trend in fiscal year 2020 based on the pipeline activity we see and have seen during the quarter.

Year-over-year, our first quarter outlook comparison reflects continued growth in our municipal government business. We expect to see improvements in seller and buyer participation in our RSCG segment as we enhance our new service offerings, such as Scan. N.$ell app and new mobility service offerings. While we are making overall progress in our CAG segment with a refined go-to-market sales strategy, adding on our new self-service offering, we expect lumpiness from potential one-off sales that have hard to predict time lines.

Management's guidance for the next fiscal quarter is as follows: We expect GMV for fiscal year first quarter of 2020 to range from $145 million to $155 million. The GAAP net loss is expected for fiscal year 2020 first quarter in the range of negative $5.5 million to negative $2.9 million, with a corresponding GAAP loss per share for Q1 of 2020 ranging from negative $0.16 to a negative $0.08 per share.

We estimate non-GAAP adjusted EBITDA for Q1 of 2020 to range from a negative $2.5 million to a negative $500,000. A non-GAAP adjusted loss per share is estimated for Q1 of 2020 in the range of negative $0.14 to negative $0.06 per share. This guidance assumes that we have diluted weighted average shares outstanding for the quarter of approximately 33.9 million shares.

We will now take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we have a question from the line of Gary Prestopino with Barrington Research.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [2]

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Could you maybe -- are you seeing anything competitively in GovDeals in the market in terms of -- that could be stymieing your growth a little bit there? I think this is the second consecutive quarter where we haven't had that kind of teens growth that we had had in the first -- or the last couple of quarters.

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William P. Angrick, Liquidity Services, Inc. - Co-founder, Chairman of the Board of Directors & CEO [3]

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No, I think the competitive landscape continues to offer the various in-house solutions. Certainly, there's different types and varieties of marketplace solutions for companies. I think one of the fundamental things we did, Gary, in fiscal '19 is we realigned our organization. And you may recall that previously in fiscal '19, our acting CIO was also the President of the GovDeals segment. We brought on a new CTO, a gentlemen named Steve Weiskircher, we're very excited about. He came over from GameStop and assumed that role effectively in the September time frame, so really, at the tail end of fiscal '19.

Additionally, we organized our sales and go-to-market organization around the Chief Commercial Officer role, and that role occupied by JD Daunt, is undoubtedly going to make a huge difference, not just for GovDeals, but for everything that we're doing. And I think that organizational realignment would be one factor in GovDeals' performance during fiscal '19.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [4]

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So with this new individual coming in, what did he change that -- besides the fact that you had a tough comparison, what has changed in the go-to-market strategy that would cause the GMV to not emulate that growth that we had at the store...

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William P. Angrick, Liquidity Services, Inc. - Co-founder, Chairman of the Board of Directors & CEO [5]

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Well, what I said is that during fiscal '19, you had the person overseeing effectively the sales organization also occupying the CIO role. So that diffusion of focus and attention, important for continuity at the time. It is not ideal for driving maximum year-over-year growth in the sales function. And what I'm saying is that the new role created is fully dedicated to managing the sales organization, the sales process. We had a number of open positions that were unfilled in the GovDeals segment actually that are now filled. And I think when you look at the growth opportunity, we continue to be very optimistic. Both the U.S. and Canada are very receptive to what we're doing. And we're seeing that growth is picking up as we move into fiscal '20.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [6]

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Okay. And then could you -- would you categorize fiscal '20 as another year of investment in what you're doing in the sales side and the marketing side? And then maybe -- obviously, if you're investing in sales, you're adding to your sales force, is that correct? But what are you also doing on the marketing side that -- where we're looking at a higher level of investment in those categories versus where we had been?

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William P. Angrick, Liquidity Services, Inc. - Co-founder, Chairman of the Board of Directors & CEO [7]

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Well, a couple of things. Clearly, product and the platform are the focus of our investment efforts and we will continue to make aggressive investments in those areas because we feel like there's the market demand for the service offering. We've taken many Fortune 500 accounts, where we were getting a sliver of their volume and expanding the volume we can manage and sell because we're offering them technology-enabled self-directed tools and analytics tools, allowing their organizations to be more in control of the process. So we're very excited by that.

In terms of the sales organization, yes, we will be adding head count to both the commercial and the government verticals. These could be offering both fully managed support for clients that ask us to be involved in the asset management and project management functions, but also inside sales teams that will be enabling sellers to access the tools and will help set them up and train them. It will be a lighter touch. And we believe that these lighter-touch, lower-fee offerings have a role in the marketplace, that people are hungry for those types of options and are excited to have a sales organization that's geared to providing that type of support.

In terms of the marketing tech stack, I think there are 2 aspects to that: One is the buyer-facing side, creating more automated algorithmic tools to match product with buyers based on their observed behavior. That sort of machine-driven approach to asset promotion and asset marketing is a best practice and one that will increase our recovery rates. We'll do so leveraging the large store of data that we have on our own transactions and third-party data sets, and our marketing team has continued to build that capability. Heading into the new year, we're testing that capability in a variety of customer beta sites and are encouraged by the progress we're making. Over time, this learning machine that becomes more and more specific to how buyers click and view and bid and buy will enable higher recovery for our sellers, enabling us to support further volume from our sellers.

Those 2 areas, sales and the marketing tech stack do require support from our tech team. And there is a group of development roles that will fill those things out. And we're -- we've moved, Gary, from more of a waterfall deployment methodology to agile deployment methodology. So we're now at a cadence of releasing features every 2 weeks, and that allows us to be much more acutely aligned with what we're hearing from our customers and in prioritization of those features. And tying those to where we can make the most progress with customers and winning business is a key part of the 2020 strategy.

So we'll be simplifying our tech stack, enhancing our marketing technologies and capabilities and then growing the number of people delivering the message to the clients and to the prospects. And we have a great story to tell, and we're excited to add that capacity.

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Operator [8]

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(Operator Instructions) All right. We have a question from Gary Prestopino, Barrington Research.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [9]

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Okay. I just had 2 more follow-ups, and then I'll jump off. In terms of the scrap contract, has that been totally wound down, and that's not going to be -- is not going to have any GMV effect in fiscal '20?

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William P. Angrick, Liquidity Services, Inc. - Co-founder, Chairman of the Board of Directors & CEO [10]

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That is right, that the fiscal wind down -- the wind down of the scrap contract will not impact fiscal '20. There'll be a year-over-year drag on a comparative basis, but we are out of that contract and fully removed from the legacy DoD business.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [11]

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Okay. When you're saying a drag, is there -- there's a drag on GMV, but is it a big drag on profitability, Bill?

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William P. Angrick, Liquidity Services, Inc. - Co-founder, Chairman of the Board of Directors & CEO [12]

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No. We've realigned to remove costs as -- direct costs associated with that contract.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [13]

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Okay. And then also on -- Jorge, I think on the -- you were going through your narrative, you said the self-directed business was up 40%. Was that just in the retail category? Is that across the board for the whole company?

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Jorge A. Celaya, Liquidity Services, Inc. - Executive VP & CFO [14]

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That was -- that's across the board.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [15]

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Okay. Can you maybe share with us what percentage of your business is now self-directed versus where it was last year?

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William P. Angrick, Liquidity Services, Inc. - Co-founder, Chairman of the Board of Directors & CEO [16]

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We haven't disclosed or broken that out. It's not a business segment per se. But what it means is that in every conversation, we're now able to offer a continuum of solutions that helps us capture volumes that would be circumventing what we do. I believe in our investor deck, Jorge and the team have added some deltas on GMV mix by consignment versus purchase and then within consignment, the portion that is self-directed. And again, where the world is going, we believe, is clients want to have control over various aspects of the service. And I would tell you, more than half of our overall GMV is now in a self-directed business model for us.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [17]

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Okay. That's very helpful. I mean if you look at the metrics that you're generating, if you look at -- if you put gross profit to -- revenue to GMV, gross profit to revenue, gross profit to GMV, in Q4, most of those metrics are up pretty dramatically on a ...

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William P. Angrick, Liquidity Services, Inc. - Co-founder, Chairman of the Board of Directors & CEO [18]

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Yes. Exactly. When you look at our business, you're going to see higher-margin business over time as a percent of gross profit measurements.

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Jorge A. Celaya, Liquidity Services, Inc. - Executive VP & CFO [19]

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And Gary...

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [20]

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Yes. I'm sorry, Jorge, go ahead.

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Jorge A. Celaya, Liquidity Services, Inc. - Executive VP & CFO [21]

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Yes. And one of the things that -- 2 things to keep in mind: One is, on one hand, I've tried to indicate that it's a bit lumpy. So if we have a particular principal deal or purchase deal in the CAG segment, then you get a bit of a mix issue. But generally speaking, the trend as we expand our self-directed solutions within the consignment business, that will -- we create that volume and that leverage that is a higher gross profit margin, a higher overall margin business, yet it -- for every dollar of GMV, it generates, obviously, less revenue.

So it's important, as you have noted there that we need to keep a very close eye on not just revenue but GMV and the margins and see the relationship as they go over time. Any one quarter is a little hard to gauge, but -- unless you get into the weeds. But generally speaking, the trend is, we may have a little tempered growth on the revenue as we scale up more and more self-directed solutions, but the margin more than offsets that situation, right.

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Operator [22]

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And I'm not showing any further questions in the queue. I would like to turn the call back to Julie Davis for any final remarks.

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Julie Davis, Liquidity Services, Inc. - Senior Director of IR [23]

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Thank you. Thanks to everyone for your participation in today's call. If you have additional follow-up questions, please reach out to me. This now concludes our call. Thank you, and have a nice afternoon.

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Operator [24]

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Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.