Liquidity Services, Inc. F1Q09 (Qtr End 12/31/08) Earnings Call Transcript

| About: Liquidity Services, (LQDT)

Liquidity Services, Inc. (NASDAQ:LQDT)

F1Q09 Earnings Call

February 5, 2009 5:00 pm ET


Julie Davis – Director of Investor Relations

William P. Angrick, III - Chairman of the Board, Chief Executive Officer

James M. Rallo - Chief Financial Officer, Treasurer


Colin Sebastian – Lazard Capital Markets

Shawn Milne - Janney Montgomery Scott LLC

Stephen Ju – RBC Capital Markets


Good day ladies and gentlemen and welcome to the fiscal first quarter 2009 Liquidity Services, Inc. earnings conference call. My name is Tonya and I will be your coordinator for today. At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Ms. Julie Davis, Director of Investor Relations.

Julie Davis

Good afternoon and welcome to Liquidity Services, Inc.’s earnings release conference call for the fiscal first quarter 2009 and the three months ending December 31, 2008. During this call we will refer to Liquidity Services, Inc. as LSI.

Presenting today are Bill Angrick, our Chairman and Chief Executive Officer, and Jim Rollo, our Treasurer and Chief Financial Officer.

This conference call is also being broadcast through the internet and is available through the Investor Relation section of the Liquidity Services Inc. website.

Before we begin, I’d like to remind you that matters discussed on this call contain forward looking statements that involve risks and uncertainties concerning LSI’s expected financial performance as well as LSI’s strategic and operational plan. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements.

These risks and uncertainties include a variety of factors, some of which are beyond our control. These forward-looking statements speak as of today and you should not rely on them as representing our views in the future and we undertake no obligation to update these statements after this call.

Please refer to our SEC filings as well as our current earnings release posted a few minutes ago on our website for a more detailed description of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website.

To supplement the company’s consolidated financial statements presented in accordance with GAAP, we use certain non-GAAP measures. These non-GAAP measures include EBITDA, adjusted EBITDA, adjusted net income, and adjusted EPS. We believe these non-GAAP measures provide useful information to both management and investors.

These measures, however, should not be considered a substitute for or superior to GAAP results. A reconciliation of all non-GAAP measures included in this conference call to the nearest GAAP measure can be found in the financial tables included in the press release.

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 GMV 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.

William P. Angrick

Good afternoon and welcome to our Q1 earnings call. I’ll begin this session by reviewing our Q1 financial performance and then outline our progress against the major initiatives we established for the current fiscal year. Finally I will offer a perspective on our business outlook and then turn it over to Jim for more details on the quarter and on our outlook for the year.

Q1 GMV was $82 million, up 21% over last year’s results and at the mid point of our guidance. Q1 adjusted EBITDA and adjusted EPS were $2.1 million and $0.03 respectively and were below guidance due to three factors.

First, the economic downturn has caused a sharp reduction in scrap metal prices which severely impacted our scrap business during Q1. While scrap metal prices have stabilized, the drop during Q1 was greater than expected.

Second, in an effort to salvage a dismal holiday season, retailers uncharacteristically held on to slow moving inventory and slashed the price of first quality goods in their primary channel by as much as 80%. This behavior temporarily reduced the flow of goods into our marketplace during the months of October and November and reset the price for goods in the secondary market. This resulted in lower than anticipated volumes and margins in our commercial business during Q1.

Third, in order to ramp up new programs with commercial clients and close our Las Vegas facility due to overlap with our California distribution centers, our remaining aged inventory was cleared out. In January these last two factors ceased to impact us resulting in improved margins in our commercial business, but together these factors resulted in lower than anticipated profitability and the earnings versus guidance.

Despite the challenging economic environment, LSI continued to grow and diversify its business. During Q1 we grew GMV in all major areas of our business aside from scrap and continued to scale our business base and transaction volume nicely. Our surplus business GMV was up 17% over last year.

Despite the slowdown in October and November our commercial business GMV was up 5% over last year, driven by strong GMV growth in the consignment model which is up approximately [inaudible] in Q1 over last year. Transaction volume in our commercial business was up 38% over the prior year, illustrating that our marketplace is increasingly attractive to buyers in a down economy. Our GovDeals business GMV was up 22% versus the prior year and added 151 new municipal government sellers during the quarter.

Next I would like to update you on our progress relative to the key initiatives we outlined for fiscal year 2009. I am pleased to report that during Q1 we made significant progress against each of these objectives, which we believe will build long term value for our stockholders.

Our first initiative is the successful launch of our new DoD surplus contract. On February 4 we entered into a modification of our new surplus contract with the DRMS which resolved certain open business issues to the mutual satisfaction of the parties. Selected changes will have the following economic impact for the ongoing contract.

One, a 45% reduction in the inventory cost paid by LSI under the new surplus contract from 3.26% of acquisition costs for 1.80% of acquisition costs.

Two, the reimbursement of LSI costs related to additional software enhancements to inventory assurance tools that may be requested by the DoD to support the new contract.

Three, a five month extension of the contract compensating for the delayed start of property flow. The full terms of the contract modification are included in an 8-K released today. This modification will result in superior risk-adjusted returns in our DoD surplus business going forward with improved margins. We expect to be fully ramped up under the new contract in April due to government delays. The favorable cash flow dynamics and improved margin outlook under this program are very attractive for LSI. Under the terms of the contract approximately 56% of our inventory payment is made 120 days after we receive the property which results in a favorable working capital position once we are fully ramped up.

Our second initiative for fiscal year 2009 is to improve operations and service levels in our commercial business. Specifically we have emphasized improving our operational throughput, quality, and customer service. Inventory turnover during Q1 was an average of 63 days which is down from 98 days in the March 2008 quarter representing a 36% improvement achieved in six months.

Consequently, we have created the capacity to further scale the business in our warehouse distribution centers by another 60% with marginal additional fixed costs. We have continued to improve the number of auctions closed on a daily basis recording consecutive record weeks of closed auctions in January with fewer defects.

We have established stricter service level requirements and removed sellers from our marketplace who are not able to comply. This has increased the level of trust with our buyers and meaningfully reduced the number of buyer disputes. These improvements are enabling us to scale more rapidly and with improved margins by reducing the cost of rework and increasing buyer retention in our marketplace. All these actions serve to reinforce the virtuous cycle of attracting more demand and supply to our marketplace.

Our third initiative is to make our marketplaces more flexible and easier to use for sellers and buyers. We currently have several technology projects underway that will make it easier for sellers to list and sell goods through our platform and make our marketplace more convenient for buyers to find and purchase goods, both in the US and overseas. These initiatives are being driven by what customers are asking us for and we expect this to increase business.

For example, one project involved the introduction of online payment and collection services within our GovDeals marketplace. Currently the bulk of sellers on our GovDeals marketplace only allow buyers to pay through a check or money order. By introducing online payment functionality, our GovDeals marketplace will be more convenient for buyers and sellers will get paid more quickly. [Ellis] will earn incremental fees for providing this service which will improve our margins.

Our fourth initiative is to expand and further segment our seller and buyer base to increase their participation in our marketplace. We continue to expand our relationships with existing sellers and have added new product categories like store fixtures and equipment, non perishable foods, smart phones, and iPods. The greater breadth and depth of product in our marketplace reinforces buyer participation and in turn seller participation as they can access greater liquidity and efficient market pricing of goods.

With respect to business development, we are seeing increased interest in our service in all segments of the supply chain including retailers, manufacturers, and reverse logistics service providers. As a result, we have recently hired two additional enterprise sales directors who will be coming on board this quarter to capitalize on the fertile environment for selling our services.

We have also recently signed multiple Fortune 500 sellers to our capital assets program which positions us to handle an increasing volume of consignment sales of store fixtures and equipment. As large organizations streamline corporate and back office functions to save costs, we believe they are more receptive to LSI solutions.

With 1.9 million annual auction participants and growing, we are the largest and most transparent marketplace for surplus and salvage goods and thus have a tremendous opportunity to further expand our base of sellers.

With regard to buyers, despite the economic downturn we continue to see robust growth in buyer participation in our marketplace. During Q1 the number of registered buyers and auction participants in our marketplace grew 22% over the prior year period excluding the effect of recent acquisitions. We believe this reflects the fact that our marketplace is a unique and highly attractive venue to source quality merchandise at below wholesale prices. This combination of strong buyer demand and increased supply will continue to boost LSI’s growth.

Next I would like to address our business outlook for the next quarter and remainder of fiscal year 2009. First let me say that the current economic environment and volatility make it difficult for any business to forecast results. That said, I would like to review our current sentiments on the outlook for both our top and bottom line.

We believe it is prudent to downwardly revise our GMV outlook to reflect the following assumptions:

One, continued weakness and no improvement in our scrap business. Consequently our guidance reflects an approximately 50% year-over-year GMV decline in our scrap business for fiscal year 2009 solely as a result of lower commodity prices.

Two, we continue to be very pleased with the increase in our market share of our GovDeals business. Both the number of active sellers and transaction volume continue to grow in line with our targets. However, there has been a material reduction in the average sales prices realized with an asset category such as used vehicles and heavy equipment sold by municipalities in our GovDeals marketplace and we do not expect this to improve during the remainder of fiscal year 2009 resulting in a reduced GMV outlook for this business. Therefore, our guidance reflects an approximately 10% year-over-year GMV growth versus our original 25% target for our GovDeals business.

Third, on a brighter note, although we expect reduced average sales prices to impact our commercial business, we are experiencing a steady improvement in business trends. We recorded our second highest GMV month ever in January which is typically a seasonally slow period. To provide you a sense of the strengthening of the commercial business, our January GMV was approximately 33% higher than November. Our auction listings continue to reach record levels and we exited January with a very strong business development pipeline. Therefore, we anticipate 15% to 25% year-over-year GMV growth in our commercial business for the remainder of fiscal year 2009.

Fourth, our DoD surplus business GMV is expected to be roughly flat on a year-over-year basis owing to reduced average sales prices and the removal of selected items from our product pool. We have historically handled and due to the additional one month delay in the start up of our new surplus contract from January to February.

With respect to EBITDA, our guidance reflects the following. One, the reduced GMV outlook as we just discussed. Two, the new economic terms of our DoD surplus contract which includes a 45% reduction in our cost of goods sold, and third, improved margins in our commercial business as a result of improved operations and service levels that are visible in our current business trends.

As a result of the improvements occurring in our DoD surplus and commercial businesses, we expect the overall margin of our business going forward to be sharply improved and to offset our slow start to the year in Q1, resulting in no material change to our annual adjusted EBITDA outlook of $22.5 million to $26.5 million for fiscal year 2009.

In summary, while these are certainly uniquely challenging times for everyone, we are a stronger business as a result of the recent actions we have taken in support of our strategic initiives for fiscal year 2009. We have a more diversified higher margin overall business that with the exception of our reset year on our DoD businesses continues to generate top line growth with favorable cash flow dynamics with negative working capital requirements and excellent returns on invested capital.

We have built the leading e-commerce marketplaces with the largest buyer base addressing multiple large market opportunities and we have the financial strength and operating discipline to invest in future growth to create long term value for our stockholders.

The bottom line is that we have a very strong competitive position that we expect us to further strengthen during the balance of fiscal year 2009.

Now let me turn it over to Jim for a more detailed review of our financial results and outlook.

James M. Rallo

Thanks, Bill. The company continues to experience strong top line growth as the amount of gross merchandise volume or GMV increased $14.5 million to 21.5 % to $82.1 million for the three months ended December 31, 2008 from $67.6 million for the three months ended December 31, 2007, primarily due to one, an increase in the number of completed transactions, which increased from $63,000 to $108,000 or 70.5%. Two, our surplus business, which grew 16.5% and generated 36.7% of our revenue, and 24.9% of our GMV for the three months ended December 31, 2008 as compared to 29.6% and 25.9% respectively for the three months ended December 31, 2007.

Three, the acquisition of GovDeals as completed on January 1, 2008 which generated 2.1% of our revenue and 19% of our GMV for the three months ended December 31, 2008, and four, the acquisition of Geneva completed on May 1, 2008 which generated 7.1% of our revenue and 4.8% of our GMV for the three months ended December 31, 2008.

Revenues decreased $3.7 million or 6.1% to $55.6 million for the three months ended December 31, 2008 from $59.3 million for the three months ended December 31, 2007. This was primarily due to a 44.9% decrease in our scrap business which utilizes the profit sharing model as a result of a decrease in commodity pricing.

Costs of goods sold excluding amortization increased $3.2 million or 20.7% to $18.6 million for the three months ended December 31, 2008 from $15.4 million for the three months ended December 31, 2007.

As a percentage of revenue cost of goods sold excluding amortization increased to 33.4% from 26%. These increases are primarily due to one, the acquisition of Geneva which was completed on May 1, 2008 and utilizes the purchase model which is a higher cost of goods sold then the profit sharing model. Two, the decrease in our scrap business revenue which utilizes the profit sharing model.

The profit sharing distribution has decreased $6.5 million or 31.1% to $14.3 million for the three months ended December 31, 2008 and $20.8 million for the three months ended December 31, 2007. As a percentage of revenue, profit sharing distribution has decreased to 25.8% from 35.1%. These decreases are primarily due to a 44.9% decrease in our scrap business.

Technology and operation expenses increased $1.9 million or 19.5% to 11.9 million for the three months ended December 31, 2008 from $10 million for the three months ended December 21, 2007. As a percentage of revenue due to the expenses increased to 21.4% from 16.8%. These increases are primarily due to one, the decrease of 44.9% revenue from our scrap business while incurring similar operational costs as pounds of scrap sold during the two periods were not materially different.

Two, the addition of 19 technology and operations personnel, the majority of whom are needed to support the increased volume of transactions and merchandise discussed above. Three, the [inaudible] of operations associated with our new surplus contract. Four, the acquisition of GovDeals which was completed on January 1, 2008, and five, the acquisition of Geneva which was completed on May 1, 2008.

Sales and marketing spend has increased $300,000 or 7.2% to $4.4 million for the three months ended December 31.2008 from $4.1 million for the three months ended December 31, 2007. As a percentage of revenue, these expenses increased to 8% from 7%. These increases are primarily due to one, our hiring of 41 additional sales and marketing sales personnel, and two, the acquisition of GovDeals which was completed on January 1, 2008.

General and administrative expenses increased $900,000 or 18.7% to $5.7 million for the three months ended December 21, 2008 for $4.8 million for the three months ended December 31, 2007. As a percentage of revenue, these expenses increased to 10.3% from 8.2%. These increases are primarily due to one, expenses of $0.2 million related to stock based compensation expense; two, expenses of $300,000 associated with GovDeals which was acquired on January 1, 2008, and three, expenses of $400,000 associated with Geneva which was acquired on May 1, 2008.

Adjusted earnings before interest, taxes, depreciation, and amortization or adjusted EBITDA decreased $3.1 million or $59.9% to $2.1 million for the three months ended December 31, 2008 from $5.2 million for the three months ended December 31, 2007. Adjusted net income decreased $2.2 million or 71.9% to $800,000 for the three months ended December 31, 2008 from $3 million for the three months ended December 31, 2007.

We estimate that our fiscal year 2009 effective income tax rate will be approximately 46%, an increase from the expected 43% as a result of non-deductible stock based compensation costs, increasing in proportion to our US based taxable income. We expect this trend to reverse when our [poise] are able to exercise out of the money incentive stock options.

Adjusted diluted earnings per share decreased $0.08 or 72.7% to $0.03 for the three months ended December 31, 2008 from $0.11 for the three months ended December 31, 2007. For both periods adjusted diluted earnings per share were based on approximately 28 million diluted weighted average shares outstanding.

I will now discuss the company’s other key operating metrics as I’ve already touched on GMV which management believes allows us to monitor the success of our marketing programs as well as our [lotting] and merchandising strategies. During the last 12 months we also benefited from our abilities to more effectively market assets to potential buyers. Our marketing efforts along with the acquisition of GovDeals and Geneva resulted in a 44.5% increase and registered buyers to approximately $1,045,000 at December 31, 2008 and $724,000 at December 31, 2007.

Auction participants increased to $492,000 including GovDeals and Geneva for the three months ended December 31, 2008, representing an increase of $169,000 or 52.6% over the 323,000 auction participants for the three months ended December 31, 200.

Completed transactions, including GovDeals and Geneva, increased $45,000 or 70.5% to approximately $108,000 for the three months ended December 31, 2008 from approximately $63,000 for the three months ended December 31, 2007.

The company continues to have a strong balance sheet. At December 31, 2008, LSI had $53.3 million of cash, current assets of $77.1 million, and total assets of $122.5 million. The company continues to be debt free with current liabilities of $24.9 million and long term liabilities of $3.2 million, for total liabilities of $28.1 million at December 31, 2008.

Stockholders’ equity totaled $94.4 million at December 31, 2008. Capital expenditures during the three months ended December 31, 2008 were $600,000. We expect capital expenditures to be about $2 million to $2.5 million for the fiscal year ended September 30, 2009.

As Bill noted, there were many business and economic factors affecting our business outlook. I will now provide our resulting guidance for the next quarter in fiscal year 2009. As a reminder, our scrap contract with the DoD includes an incentive feature which can increase the amount of profit sharing distributions we received from 22% up to 25%. Payments under this incentive feature are based on the amount of scrap we sell for the DoD to small businesses during the preceding 12 months.

As of June 30 of each year, we are eligible to receive this incentive in each year of the term of the scrap contract and have assumed for purposes of providing guidance regarding our projected financial results for fiscal year 2009 that we will again receive this incentive payment.

In addition, our guidance adjusts EBITDA and diluted EPS for the effects of stock based compensation, which we estimate to be approximately $1.5 million to $1.6 million per quarter for the remaining three quarters of fiscal year 2009.

We expect GMV for fiscal year 2009 to range from $355 million to $370 million. This is a decrease from our prior guidance of $400 million to $420 million, primarily due to an expected 50% decline in our scrap business compared to 2008 as a result of decreased commodity prices and reduced outlook in our GovDeals and commercial businesses due to expected lower average sale prices realized in our commercial and local and government marketplaces.

We expect GMV for the second quarter to range from $84 million to $88 million. We expect adjusted EBITDA for fiscal year 2009 to range from $22.5 million to $26.5 million. Our adjusted EBITDA guidance has not materially changed despite our reduce GMV guidance due to expected improvements in margins within our DoD surplus business and in accordance with the revised terms of our new surplus contract and improved margins in our commercial business to the operational and scale efficiencies visible in our surplus business trends.

We expect adjusted EBITDA for the second quarter to range from $4.4 million to $5.1 million. We estimate adjusted earnings per diluted share for fiscal year 2009 to range from $0.45 to $0.47. This guidance is unchanged. In the second quarter we estimated adjusted earnings per diluted share to be $0.08 to $0.09. This guidance does not reflect the impact of our stock repurchase program under which we may repurchase up to $10 million of our outstanding shares of common stock.

We will now be happy to answer any questions you may have.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Colin Sebastian with Lazard Capital Markets.

Colin Sebastian – Lazard Capital Markets

I guess first of all, wondered if you could provide a little background on the renegotiation of the surplus contract. At what point did you realize that the original terms needed to be changed? Then secondly, I think Bill you mentioned in April ramp in the surplus. Does that mean that you’re still operating under the interim contract terms in the meantime?

William P. Angrick

Yes, with regard to the resolution of open business issues on the surplus contract, it became apparent over the course of December that the government would require a change in the scope of work under that contract and had other additional enhancements that they felt would serve the interest of the agency and therefore there was a discussion and a resolution of those issues that ultimately was manifested in the contract modification that was disclosed today in an 8-K and which we’ve discussed during the call, so there are a few other issues that were noted in that 8-K that we didn’t discuss. I think the principal economic terms resulting from that were outlined principally a change in the inventory price. That’s prospective as we will expect to begin receiving property under the new surplus contract in the next week or so and operationally we’ll begin to ramp up under that new contract over the course of March and then as we’ve mentioned fully ramped up in April.

In the interim, we will continue to operate under sort of a hybrid situation. I mean technically the new contract was [inaudible], we just hadn’t had any property flow and we had the issuance of a large volume of property under the old contract in mid-December and are still working through the sale of that inventory, so business continues to pace although we sort of have one foot in the new contract and one foot in the old. That will switch the bulk of which to the new contract as we get into April, May, June.

Colin Sebastian – Lazard Capital Markets

On the commercial side, first on the lower ASPs, are you seeing a change in the mix of products or are we talking about roughly the same base of products, just lower average auction values?

William P. Angrick

I think this is a broad-based change in retail pricing and behavior in the primary retail channel. I think no one could deny the fact that whether you went to a better department store, a mainstream community shopping center, or online, that you saw a dramatic reduction in pricing during the holiday, so when first quality merchandise is discounted heavily, that resets the price in the secondary market as well which is no surprise so we have observed an average decline in the range of 10% to 15% for average sale prices and a range of categories. We’re okay working through that environment I think. No one would have expected the precipitous to climb like we saw in November but most of our discussions with suppliers are based on what street retail prices are and so we continually monitor what street retail prices are which do reflect the sort of discounting activity.

The last point I would make is that the current cycle of discounting among retailers is not sustainable. At some point they will correct their business and try to restore pricing levels for first quality merchandise. When that happens we don’t know precisely but that’s the rationale come here.

Colin Sebastian – Lazard Capital Markets

My last question then also on the commercial side, are you factoring into your guidance that as we move through the year that many retailers have been moving to leaner inventory levels and maybe after an initial post-holiday surge of inventory, excess inventory and returns, that it might drop back down as the supply/demand balance is fixed?

William P. Angrick

I think we factor that in. I believe that we have a good sense of what the rebalancing effects are among our existing clients and what the seasonal holiday returns are with our existing clients, but we’re also very much in an attractive position to talk about our solution with new clients and new prospects and in this environment it comes as no surprise that you’re reducing costs, improving cash flow, working capital positions for retailers, this top of mind, and so that’s an ideal environment for us to be out and sharing a terrific [story and] solution.


Your next question comes from Shawn Milne with Janney Montgomery Scott.

Shawn Milne - Janney Montgomery Scott LLC

Just a few questions. Bill, we had talked last time in late or mid-December. I’m trying to reconcile the GMV was roughly in line but the $0.03 miss on the bottom line. What changed there towards the end? Was it the scrap got incrementally worse towards the end of the quarter, was it retail pricing that got worse, or is there some transition costs in the commercial warehouse business embedded in these first quarter numbers?

Secondly, in terms of looking at the commercial business in January, we’ve been looking at our listing the data, it certainly shows a big uptick. You talked about the level over November. Can you give me a sense for what the revenue or what the volume growth is January over January and I think I just want to clarify your comment. Do you expect the commercial business to be up 15% to 25% for the remainder of ’09 or does that include the 5% gross in the current quarter?

William P. Angrick

First, with regard to the December quarter and looking in the rear view mirror, that miss really came from three areas approximately one-third due to lower scrap pricing than expected, one-third due to lower average sale prices and to some degree volume shift in November because of the very abrupt and really unprecedented behavior by a number of retailers reacting to the slowdown in consumer spending, and a one-third due to the one-time clean up of warehouses and the closing of our Las Vegas facility which really was at the expiration of an existing lease and given the success we’ve had serving clients out of Sacramento and Fullerton, didn’t feel we needed to continue that Las Vegas facility, so we had to clear it out and close it so that’s with regard to the last quarter.

On the January business trends, while we’ve seen December improve over November and January over December, I’d say in the range of 10% sequential growth January versus December. On a year-over-year basis in the range of 15% to 20% improvement and if you look at the full year, we are giving wider ranges than normal because of the volatility in the business environments so for the balance of the year, we’re seeing 15% to 25% year-over-year growth. Again, that’s wider than one normally would be but that’s I think prudent in the current environment.

Shawn Milne - Janney Montgomery Scott LLC

If I could just follow up on that. The 15% and 25% is below what you had said prior, in the previous call, I think it was 25%. Was that because the transaction volume is offset by lower prices so if we were to see ASP move up you’d be toward the higher end of that range?

James M. Rallo

I did a couple things. One, the 25% we were referring to on our last call really wasn’t about year-over-year growth and so one, we’re off to a tough start obviously in the commercial business for all the points Bill mentioned in his remarks, and two, yes, it does take into account what we expect to see throughout the year which is a continued reduction in ASPs in that marketplace which our estimation is somewhere between 10% and 15%.

Shawn Milne - Janney Montgomery Scott LLC

Just lastly, I have to look at the 8-K but it just seems that Bill I haven’t seen the whole filing but there has to be an offset for the surplus contract. I mean, you’re getting much better inventory pricing. What brought them back to the table to give you that kind of better margin opportunity?

William P. Angrick

I think from the DoD perspective they understood the contract scope of work had changed and the integration of our marketplace for example with the GSA’s federalized sales program was removed with the exception of something called “Exchange Sales” which was a material change to the contract. They also asked for some additional value-added services and some value engineering, if you will, around software enhancement to the quarantine tool which we noted some flexibility about access to our new storage facilities and some integration work with the government and so the only way that you can adapt a contract that’s already been awarded and one which is a sales contract is to look to the bid price and so when you factor all those issues in, ultimately it comes out as a change to the bid price.

Shawn Milne - Janney Montgomery Scott LLC

I can see the change to the bid price but you are doing more work yet you’re saying margins are going to improve and it looks like pretty significantly so...

William P. Angrick

The point to note, there is a cost reimbursement clause with regard to the additional work, software development work, so we feel like on the cost side we’re protected there.


Your next question comes from Steven Ju with RBC Capital Market.

Stephen Ju – RBC Capital Markets

Kind of circling back to the full year guidance here, so given your prior commentary about the continued weakness in scrap and GovDeals and what are the levels for the other segments, looking at a trend for the balance of the year. It seems like to me that you need the commercial segment run rate from the front half of the year to the back half of the year. It’s wrapped pretty heavily here. Can you help us out in terms of how we get there in order to make your full year numbers?

William P. Angrick

It is indeed the case that we’ve looked at the GovDeals business and taken a more tempered outlook because of where we think asset sales, pricing will remain throughout the year. In terms of our view of the commercial business, well, we really are in the same place we’ve been on any particular call. We look at our current business trends, we look at our business development pipeline, we look at the size of the business relative to fixed costs, and in all three respects, the commercial business is performing better than it ever has in the past.

The operational throughput that we’re able to achieve now is at an all time high. We’ve had consecutive record weeks in January at the number of auctions posted. We have about 52% utilization in our warehouse distribution centers which is an operational target. We had coming out of the December quarter because we knew that there would be an influx of product in the post-holiday returns season and in addition because we are not able to serve the amount of inquiries on the business development front, we’ve hired two additional enterprise sales directors to keep up with the demand there.

So we will have a record March quarter in the commercial business and we think we’re going to get incremental improvement in margins as we move through the year so we’re really, the guidance is really just mapping to where we’ve been with this business. Some of the activities and actions have been over many months.

I’d also say that we actually trimmed or outlook for commercial a bit and if you look at the business on an overall basis, it’s a little bit more tempered than where we were last quarter.

Stephen Ju – RBC Capital Markets

Also the purchase model GMV seems to be accounting for a smaller percentage of the total commercial GMV. Should we expect this mix shift to continue?

William P. Angrick

That’s a good point. I think we were at 15% of over on mix coming out of the December quarter. As we said in the past, when you’re sitting down with large companies and doing enterprise sales, you want to have multiple pricing models to adapt to whatever their unique needs or constraints are. We've seen just an embrace of consignment on a more consistent basis. Part of that is due to the maturity of our marketplace, the size of our buyer base. I think that gives people more and more comfort.

Secondly, some of the new verticals that we’re serving such as capital assets historically has been more of a consignment auction model than the inventory side.

Third I think in some of our existing relationships we just had more experience with those companies and in some cases we’ve opened up newer facilities that they are co-located or near where their distribution center hub, so there’s sort of a level of comfort and a level of transparency that we’ve provided over multiple years of doing business that some of their purchase model business is going to consignment or they’re adding to the mix with consignment business instead of the original purchase model business.

So all of that has resulted in more growth in the consignment model than the purchase model. That’s the current trend whether it continues will remain to be seen but certainly we’ve got a stronger value proposition for sellers to access the market if sellers are taking less risk and listing assets on our marketplace because of the robust activity with our buyer base continues to grow. The fact that we’ve got more depth in all of the categories that we sell in.


There are no further questions at this time. This concludes the question and answer session. I would now like to turn the call over to Miss Julie Davis for closing remarks.

Julie Davis

Thank you. This concludes our fiscal first quarter 2009 earnings conference call. If you have any further questions please contact me or Jim Rallo. Thank you.


Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect.

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