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Bidz.com, Inc. (NASDAQ:BIDZ)

Q4 2008 Earnings Call

February 23, 2009 4:30 pm ET

Executives

Andrew Greenebaum - ICR

David Zinberg - Chairman of the Board, Chief Executive Officer, Secretary

Leon Kuperman - President, Chief Technology Officer

Lawrence Y. Kong - Chief Financial Officer

Analysts

Elizabeth Pierce - Roth Capital Partners LLC

Eric Wold – Merriman, Curhan, Ford & Co.

[Graham Rhyne – Merrus Capital]

Mark Argento - Craig-Hallum Capital

Operator

Welcome to the Bidz.com fourth quarter 2008 earnings conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) I would now like to turn the conference over to Mr. Andrew Greenebaum.

Andrew Greenebaum

Good afternoon everyone. Thank you for joining us today to discuss Bidz.com’s fourth quarter and full year 2008 financial results. With us on the call today are David Zinberg, Chairman and Chief Executive Officer; Leon Kuperman, President and Chief Technology Officer and Lawrence Kong, Chief Financial Officer.

By now everyone should have had access to the press release which went out at 4:00 today Eastern Time. If you’ve not received it, it’s available on the Investor Relations portion of Bidz.com’s website.

Before we begin today we’d like to remind everyone of the Safe Harbor statements under the Private Securities Litigation Reform Act of 1995. The following prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them.

For a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements, we refer you to Bidz.com filings with the Securities and Exchange Commission including the most recent annual report filed on Form 10K, quarterly reports filed on Form 10Q, as well as current reports filed on Form 8K.

With that I’d like to turn the call over to Leon Kuperman.

Leon Kuperman

Thank you Andrew and welcome to our fourth quarter conference call. I will provide some highlights of our fourth quarter and then give a brief overview of our business strategy and how we plan to operate in the current environment and then discuss a couple of key initiatives for 2009. Then Lawrence Kong, our Chief Financial Officer, will provide more detail on the fourth quarter financial results and provide some general guidance for 2009 and how we see the first quarter.

Let’s begin with a brief overview of our financial highlights and operating metrics. Clearly we have been operating in an unprecedented economic environment but we are confident we are taking the necessary steps to make ourselves a stronger company that will ultimately benefit from the current disruption in the marketplace. We had some real challenges to face during the fourth quarter especially during the extremely weak holiday season where consumer spending dropped dramatically.

However, we chose to focus on preserving and enhancing our gross profit margins which were 34.4% compared to 31.2% a year ago and compared to 24% on a sequential basis. We believe our ability to deliver these results in this environment reflects the strength of our business model and reputation for offering real value on quality jewelry. While most competitors promoted heavily with heavy discounting and spent heavily on marketing to drive modestly better total sales volume we did not. In fact, we reduced our marketing spend from the previous year. As a result we significantly improved our gross margins and reduced our variable expense structure.

Even with the weakness in the overall economy we were able to meet our fourth quarter earnings per share guidance of $0.13 for the eighth quarter in a row and fall within our 2008 earnings per share guidance range of $0.56 to $0.59. We believe this is very significant as earnings and profitability are the primary metric we focus on. In fact, in 2008 both our pre-tax and net income levels surpassed those of Blue Nile.

Our Board of Directors recently authorized a significant increase in our share buyback program of $13.5 million to $33.5 million. To date we have repurchased approximately 1.9 million shares for a total of $13.5 million leaving $20 million of authorized capacity available for repurchase at our discretion. We believe our stock to be a strong investment opportunity and a good use of our cash resources.

Turning to operating metrics, the impact of the economy on our business was evident this quarter in our performance metrics and we started to see signs of weakening as we are seeing more uncertainty and hesitation from customers to make purchases. Our average selling price per order in the fourth quarter was flat at $169 and we had approximately 59,500 new buyers versus approximately 110,000 new buyers a year ago.

However, it is important to note in 2007 we spent nearly 83% more on marketing than in 2008. In this highly uncertain economic environment we decided to market less and focus more on preserving our margins and profits. Our average items sold per day decreased 35% to approximately 8,300 items in Q4 2008 from 12,700 in Q4 2007.

The number of items sold per order increased over 17% to 3.4 items from 2.9 items in the previous year. We believe this metric is very important and indicates customers are loyal to Bidz and see the value in purchasing their jewelry from us. The average number of orders per day decreased 45% to 2,462.

Additionally in the fourth quarter of 2008 we implemented some significant cost reduction measures designed to further strengthen our operational and financial position in 2009. In anticipation of a continuingly difficult economic environment in 2009 we reduced our full-time employee staff in 2008 by 31% to 165 people from 240 people in 2007. Tightly managing our headcount and expenses will put Bidz in a stronger position to weather the continuing challenges in the macro economic environment while enabling us to continue moving forward with key strategic initiatives we have underway.

We have been closely monitoring our sales trends and the response to changes in consumer demand in order to determine the future needs of our inventory levels and product assortment and in the fourth quarter we reduced our inventory levels accordingly. One of our continued key initiatives for 2009 is to even more closely manage and monitor our inventory levels and to achieve the optimal balance of both product price points and assortment of both branded and non-branded products as we focus on maximizing profitability.

While our purchasing power gives us great access to reasonably priced inventory, we have decided to take a far more conservative approach to our inventory levels than in the past and we will evaluate each lot on a case-by-case basis in order to preserve our gross margin. Furthermore, we will only focus on the business to consumer, online business at this time. We feel these are all prudent decisions for the company and our investors given the pressure being felt in the jewelry business and the downward pricing pressure we have seen.

It is our clear intention to stay narrowly focused in the near-term on what we can control and maintain both liquidity and profitability while continuing to grow our brand. Both management and the board feel this is the best strategy to employ in these uncertain times to enable us to eventually emerge as a bigger and stronger player in the global jewelry market.

In addition, while we do expect to see many interesting and potentially lucrative opportunities in the jewelry business as weaker players exit their business, locations close and excess inventory becomes available we will proceed carefully in this regard. It is our expectation that many opportunities will become available to strengthen our business and we fully intend to take advantage of them if appropriate for Bidz.com.

Now I’d like to discuss some of our developments since our last conference call and update you on some new initiatives we mentioned. We believe that our third foreign language translation into German will prove to be a growth opportunity for the company in addition to Spanish and Arabic sites. These foreign translations are very important as it diversifies our revenue stream across various geographic regions and allows us to begin to builds the Bidz and Buys brands on a global basis.

We are also continuing to plan and implement a standard ERP solution, Microsoft Dynamics AX that will integrate financial functions along with company operations including inventory and warehouse management, order processing, customer relationship management along with reporting and analytics functions. This will enable us to streamline the integration between financial reporting, auditing and our daily operating procedures. We anticipate the successful implementation of this system will further increase efficiencies and decrease costs.

The implementation of Dynamics AX will also, for the first time, open our system directly to the supply chain giving our suppliers visibility into sales, margins and inventory levels. More importantly, we will be able to implement just in time ordering for non-closeout inventory and create drop ship relationships with our suppliers where appropriate.

As of December 31, 2008 we had a technology and development staff of 20 people and we anticipate we will continue to devote significant resources to product development in the future. Over the last several years Bidz.com has become a recognizable brand and is one of the leading online jewelry sites in the large global jewelry market. We believe we are the best place for consumers to buy jewelry. It is fun, exciting and consumers set the price they are willing to pay.

We have a compelling and scalable business model. We have both near and long-term growth initiatives in place to continue our growth when the economy recovers. Now I’d like to hand the call over to Lawrence who will go over the specifics of our fourth quarter financial results and guidance.

Lawrence Kong

Thank you Leon. First, I will review our fourth quarter results and full year 2008 results in some detail and then I will discuss guidance for the first quarter 2009.

Given the overall weakness in U.S. consumer spending and confidence which has a more significant impact on the overall jewelry market, we reported net revenue for the fourth quarter 2008 of approximately $35.1 million compared with $63.2 million in the fourth quarter 2007 with domestic and international sales representing 72.1% and 27.9% of sales respectively.

The decline compared to the year-ago quarter is due to the challenging economic environment, reduced consumer spending in the face of rising unemployment, rapidly declining housing markets and other factors which all had a significant impact on consumer confidence.

Gross profit in the fourth quarter of 2008 was $12.1 million compared to $19.8 million in the prior year. Our gross margin percentage in the fourth quarter was 34.4% compared to 31.2% a year ago and compares to 24% on a sequential basis. Total operating expenses in the fourth quarter 2008 were $7.6 million compared with $11.4 million reported in the same period of 2007, a decrease of nearly $4 million or over 33%. This significant decrease was mainly due to our aggressive and responsive restructuring initiatives that allowed us to downsize our number of employees to 165 at year end 2008 from 240 in 2007.

We have always maintained a flexible business model focused on maintaining profitability and this is proof of that. Operating expenses as a percentage of sales was 21.6% compared to 18% in the same period of 2007. General and administrative expenses decreased 33.4% to $4.4 million in the fourth quarter of 2008 from $5.7 million in the same period of 2007. The decrease was mainly due to the downsizing of our full-time employees as just mentioned. We were very disappointed to announce the workforce reduction but believe we must be prudent in managing our costs and further strengthening our balance sheet and liquidity as we face the current unprecedented economic conditions.

General and administrative expenses as a percentage of net revenue was 12.4% in the fourth quarter 2008 compared to 9% in the same period 2007. Sales and marketing expenses were $3 million in the fourth quarter 2008 compared to $5.6 million in the same period last year. The decrease was due to less spending on marketing campaigns resulting from the rapidly weakening economy worldwide which resulted in sales declines and our strategic position to pull back our marketing expenditures.

Sales and marketing expenses as a percentage of net revenue was relatively flat at 8.7% in the fourth quarter 2008 compared to 8.8% in the same period 2007. For the fourth quarter 2008 income tax expense increased to $1.6 million with an effective tax rate of 35.1% compared to $32,000 with an effective tax rate of 0.4% in the year ago period. It is important to note we became fully taxed in 2008 since all of our operating loss carry forwards were equalized in 2007. Comparisons to prior year are not apples-to-apples on an after-tax basis.

Pre-tax income in the fourth quarter was $4.5 million compared to $8.4 million a year ago. We are especially proud of this number as pre-tax income only declined $3.9 million on a sales decline of $28.1 million. This speaks to the company’s ability to protect its profit margin in a very significant downturn.

Net income for the fourth quarter 2008 was $2.9 million or $0.13 per fully diluted share on 23.3 million weighted average shares outstanding. We are very pleased that we were able to complete the range of our EPS guidance for both the quarter and the year. This is compared to $8.2 million or $0.29 per fully diluted share on 28.5 million weighted average shares outstanding in the same period of 2007 when we were still utilizing our NOL’s.

On a fully taxable equivalent basis, 2007 fourth quarter pro forma EPS would have been $0.19 per fully diluted share. Our sufficient taxability and control over variable costs and our operating structure allowed us to meet our EPS guidance.

For the 12 months ended December 31, 2008 revenues were $207.4 million, a 10.8% increase compared with $187.1 million reported for the year ending 2007. Gross profit increased 7.9% to $58.7 million from $54.4 million in the same period of 2007. Gross profit margins in 2008 were 28.3% compared with 29.1%. Operating expenses for 2008 were $34.6 million or 16.7% of sales compared to $33.5 million or 17.9% of sales in the same period a year ago.

For the 12 months ended December 31, 2008 income from operations was $24.1 million or 11.6% of sales as compared to $20.9 million or 11.2% of sales in the same period a year ago.

In 2008 our pre-tax income increased 16.1% to $24 million compared to $20.7 million in the prior period 2007. Fully taxed net income for the year was $14.4 million compared to $18.1 million in 2007. 2008 EPS was $0.57 per fully diluted share on 25.1 million weighted average shares outstanding compared to pro forma fully-taxed 2007 EPS of approximately $0.47 on 26.3 million weighted average shares outstanding.

For the year ended December 31, 2008 income tax expense was $9.6 million with an effective tax rate of 40% compared to $2.5 million with an effective tax rate of 12.3% in the prior year period. Since we recognized both of our loss carry forwards in 2007 which decreased our effective tax rate, pre-tax income is a better profitability measure to look at for year-over-year comparisons as I just mentioned.

As of December 31, 2008 we had $4.5 million in cash and no long-term debt after spending approximately $1.4 million to buy back 476,000 shares in the fourth quarter. Additionally, we had zero outstanding on our $25 million line of credit and our positive cash flow and revolving line of credit remains one of our core financial strengths. We are continuing to improve our financial position and have the balance sheet strength, liquidity and free cash flow we need to make progress on our core strategies as we carefully work our way through this economic downturn.

We had positive working capital of $32.8 million and the significant components of our working capital are inventory and liquid assets such as cash and accounts receivable reduced by accounts payable, accrued expenses and deferred revenue. Subsequent to year-end we have continued to see a slight increase in our cash balances given our favorable working capital characteristics.

Net cash provided by operating activities was $18.6 million in 2008 compared with net cash use for operating activities of $2 million in 2007. As a reminder, our business model contains beneficial working capital characteristics while we collect cash from sales to customers within several business days of the related sale we typically have extended payment terms with our suppliers.

Now turning to another topic I would like to discuss. We were recently notified by the SEC of a formal investigation about certain aspects of our inventory accounting practices. These questions are not new and we have addressed them before and we are confident our inventory accounting is correct and in full accordance with GAAP.

We openly welcome the opportunity to finally put this issue behind us. We think it is important to note that when we first received questions on this subject from the SEC both I and our outside counselors proactively and voluntarily met with the SEC staff. We believe the SEC now seeks to confirm by reviewing the documents that our inventory accounting policies and methodologies are indeed conservative and sound.

We welcome the investigation so we can in a clear, open and transparent manner discuss our business and accounting methodology and provide further clarity to our investors. We have also repeatedly had our independent public accounting firm, Stonefield Josephson, look into these matters. We have proactively and transparently responded to all inquiries into any specific business practices that have been questioned.

In each and every case there were no incidents of wrongdoing. While we are disappointed these accusations continue we also understand that as a small company that did not undergo a traditional IPO we will be subjected to additional scrutiny. We expect this investigation to take time to resolve itself as is usual in these cases. We will keep you apprised of any updates. Although this is a distraction from allowing us to focus 100% of our energy on our business in these difficult times we welcome the opportunity to provide additional assurances to our investors that we are an open, ethical and well run company with a strong and profitable operating model.

Now turning to guidance. As mentioned earlier, the global economic conditions deteriorated during the fourth quarter and we are cautious about providing detailed guidance given the lack of visibility for 2009. We will continue to remain extremely focused on meeting and exceeding both investor expectations as well as our own profit goals.

We are introducing guidance for the first quarter of 2009 and expect sales to be in the range of $30-32 million and gross profit margin of approximately 30%. With the uncertainty in the overall economy we expect online growth to decrease approximately 25% during 2009 and believe seasonality in the overall jewelry business will be more pronounced.

We will expect Q1 2009 sales to be approximately 10-15% lower than Q4 2008. This compares to decreases in excess of 30% for traditional jewelry retailers. We expect pre-tax income of approximately $1.8-2 million and fully taxed GAAP EPS of $0.45.

We will continue to carefully invest in new initiatives for growth and expect to emerge stronger whenever the economy eventually recovers. As always we remain both highly focused on our strategy to manage expenses and are continually making adjustments to our business and product offerings that will enhance both our short and long-term initiatives.

With that we would like to turn the call over to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Elizabeth Pierce - Roth Capital Partners LLC.

Elizabeth Pierce - Roth Capital Partners LLC

A couple of things I wanted to clarify while they are on my mind, did you say you are not pursuing B2B for the foreseeable future?

Lawrence Kong

Yes. At this time they do not really exist.

Elizabeth Pierce - Roth Capital Partners LLC

They don’t exist. I presume that is given the state of what is going on in the economy. Maybe talk a little bit about some of the marketing initiatives you engaged in the fourth quarter in terms of the coupons you sent to things for Buyz.com and maybe give us an update on Buyz.com?

David Zinberg

We are not disclosing the Buyz numbers separately from Bidz but we can certainly give you an update from the marketing initiatives. As you know with Buyz this is the first time we were really able to do discretionary discounting and we found that worked really well to bring loyal customers back to the site. We are currently engaging in our in package promotion where we are giving customers who purchase something some incentive in each package. So those programs are working really well. The discounting is not affecting our margins in any way as you can see.

Elizabeth Pierce - Roth Capital Partners LLC

In terms of the guidance, it is obviously a lot worse than I think people were expecting. Not necessarily unforeseen given the environment and I realize there is not a lot of visibility but looking at the numbers and thinking about a year from now any kind of guidance on how we should be thinking about fourth quarter next year?

Lawrence Kong

If you can tell us when the economy is going to recover we could give you more visibility. I think the numbers we expect some kind of recovery compared to a year ago and the fourth quarter of this year.

Elizabeth Pierce - Roth Capital Partners LLC

Is it safe to look at this as three quarters of significantly down earnings and then a little bit of a rebound in the fourth quarter?

Lawrence Kong

Yes because we had such a low Q4 in 2008 I think going forward if the economy recovers or stabilizes by then I think you can expect a modest recovery happening in Q4 of this year.

Elizabeth Pierce - Roth Capital Partners LLC

Why was the tax rate in the fourth quarter lower than the kind of run rate for the first nine months?

Lawrence Kong

Because there were some tax benefits that were taken in the fourth quarter that reduced the tax rate slightly from 40% to 35% but the overall for the year is still around 40%.

Elizabeth Pierce - Roth Capital Partners LLC

I was just curious because I was modeling 40%.

Lawrence Kong

Which is the right number for the year.

Elizabeth Pierce - Roth Capital Partners LLC

That is what we should be using going forward correct?

Lawrence Kong

Yes.

Elizabeth Pierce - Roth Capital Partners LLC

On the share count given where the stock is I haven’t gone through the schedule and the last Q but I assume should we be using something like 23 million for earnings purposes and for modeling purposes?

Lawrence Kong

Right. The average option price is around $6.20. If the share price exceeds that there will be no dilution from options.

Elizabeth Pierce - Roth Capital Partners LLC

That is kind of what I remembered. Although it seems like months ago can you share with us how your cyber Monday was? You felt like this year with the static website with Buyz.com that this would be the first time you could really have I guess drive business on site for Monday.

David Zinberg

We certainly worked towards that date and promoted it as heavily as we could. Unfortunately with the drag on the holiday season we didn’t see as much of a bump as we normally would have seen in traditional holiday seasons.

Elizabeth Pierce - Roth Capital Partners LLC

In the metrics that you gave, just one more question, I just want to make sure since you didn’t include them and I couldn’t write fast enough the average orders were 2,462; new buyers were 59,500?

David Zinberg

Correct.

Elizabeth Pierce - Roth Capital Partners LLC

Previously you had given an acquisition cost. I guess I can take the marketing and divide but I was just wondering if you had that?

Lawrence Kong

Acquisition cost on marketing is $51…the same as Q4 2007.

Operator

The next question comes from Eric Wold – Merriman, Curhan, Ford & Co.

Eric Wold – Merriman, Curhan, Ford & Co.

A couple of questions. Give a sense of kind of the underlying trends you saw with the consumers that were coming to the site. Obviously a lot more lookie-lou’s that would look and not bid but for the stuff that was getting bid on, the auctions you were closing, did you tend to see a lot less activity or a lot less number of people involved than you would during the more active times during the first part of the year?

Leon Kuperman

No, the number of people involved on a per auction basis was about steady and that is what leads us to our gross margin number we presented. We put up fewer auctions per day as a result of our inventory position that was conservative and that all stemmed from divestment in marketing that we consciously made starting back in October. Things went to plan as much as we could predict based on a lower level we started from.

Eric Wold – Merriman, Curhan, Ford & Co.

With the stuff you did put in to auction was there more kind of a cautious handle on the stuff you actually did put up? Was it items you knew would get historically better items or other items or was the mix of items about the same?

Leon Kuperman

No absolutely we were very cautious about what we were auctioning, obviously what we were supplying through the channel and then there was a concerted effort to make sure we had the right brands and the right mix of product in front of customers as well.

Eric Wold – Merriman, Curhan, Ford & Co.

On that note could you give us a sense on the inventory that stands at the end of the quarter in terms of the mix of products that is in there if you are putting the better products out there in the channel is the inventory maybe kind of not likely to sell well?

Leon Kuperman

No we have a lower and more conservative inventory position than we would normally have after the typical holiday season. We are very happy with the mix we have. In fact we have seen some great purchases that have happened this quarter that have strengthened our inventory position in terms of quality.

Operator

The next question comes from [Graham Rhyne – Merrus Capital].

[Graham Rhyne – Merrus Capital]

Internationally is there any reasonable break out you can make in terms of any pockets of strength in terms of geography or any certain products that are selling well? Can you just maybe highlight any strengths you saw?

Leon Kuperman

We actually saw some strength reversed in the fourth quarter from trends that were building up over our early experience in international. For example we saw the Arabic countries put a kind of brake on in terms of purchasing capability. In general every geography has its own niche and product they enjoy. There are certain brand names that are more popular in various geographies so we are tuning our offering and our marketing to those geographies. The other slight downturn we saw was in the Spanish market with South America currency weakening. We also saw that implicitly in our business as well.

[Graham Rhyne – Merrus Capital]

Are there any plans to roll out another language or are you kind of set on that front for right now?

Leon Kuperman

At this time we are going to work on the three languages other than English that we have. We have a lot of customer experience improvement we want to do whether it is with payment methodology or courier and delivery. We want to focus on these three and make sure we get them right.

[Graham Rhyne – Merrus Capital]

In terms of getting Buyz set up is it completely implemented in terms of leading into all the search shopping sites that are out there in terms of getting your inventory in front of Shopzilla and all those other sites?

Leon Kuperman

All of the shopping channels are implemented as we wanted to see them implemented and they are all working on various models. Some are working on cost per click, the mercury, some work on a cost per acquisition but they are all set up right now.

[Graham Rhyne – Merrus Capital]

Do you have the current share count in front of you? Is it 23 million or have you bought back since the end of the year?

Lawrence Kong

It is around 23 million at this time. We have been buying back and we will continue to buy back. As you can see from the press release we have increased the authorized buyback limit.

[Graham Rhyne – Merrus Capital]

Can you use your credit facility to buy back shares or is there a covenant preventing you from doing that?

Lawrence Kong

Yes we can use the credit facility to buyback shares and we had meetings with Bank of America in the past about this.

Operator

The next question is a follow-up from Elizabeth Pierce - Roth Capital Partners LLC.

Elizabeth Pierce - Roth Capital Partners LLC

I wondered if David you want to talk any about what products did consumers gravitate towards? Two parts really to this question for holiday and then what about Valentines Day?

David Zinberg

Consumers always tend to gravitate towards the best possible deal they can make and we have had good opportunities in purchasing additional brand names at tremendous discounts and that is what seems to be more desirable jewelry we have in stock.

Elizabeth Pierce - Roth Capital Partners LLC

Even in just rings and necklaces, typically a lot of that stuff doesn’t have brand names. I guess I’m trying to reconcile what I’ve seen on the web site with your comments about brand names.

David Zinberg

We have a lot of new brand names that we already had and more coming in as we speak. We purchased a lot of brand name inventory. That is what we are concentrating on right now mostly.

Elizabeth Pierce - Roth Capital Partners LLC

How much did L.A. Jewelers account for during the quarter?

Lawrence Kong

I think they account for maybe over 20% but we will be filing the K pretty soon in the next few days so all that will be in there.

Elizabeth Pierce - Roth Capital Partners LLC

What about co-op marketing? How much did that account help you on your cost of goods in the quarter?

Lawrence Kong

It is still the same level significant compared to Q3.

Elizabeth Pierce - Roth Capital Partners LLC

Which I think was what, $300,000?

Lawrence Kong

In relation to?

Elizabeth Pierce - Roth Capital Partners LLC

I thought that was the dollar amount. I can’t remember. I don’t have the Q. It is somewhere in my desk. So you are saying it is similar to Q3?

Lawrence Kong

Marketing contribution if you look at the numbers tend to contribute 5% of the gross margin.

Elizabeth Pierce - Roth Capital Partners LLC

Lawrence, a question I am trying to reconcile on the press release it gives a wholesale number 29.886 and yet I am short $4.3 million. It says there was no wholesale for the quarter and yet the Q from the respective second and third quarter list $8.4 and $17.2. Was there a little bit in the first quarter? Is that where that 4.286 is?

Lawrence Kong

Right. There was some in the first quarter and I’m pretty sure it is included in the Q.

Elizabeth Pierce - Roth Capital Partners LLC

Okay. I’ll have to go back. I didn’t have the Q1 handy. Then, in terms of back on inventory so you feel comfortable with the mix right now?

Leon Kuperman

Yes we are.

Elizabeth Pierce - Roth Capital Partners LLC

With the quality of the merchandise? Your plans it sounds like is to keep that inventory, should we think about it as keeping it down as a percent like greater than what you think will be the sales volume? How are you going to drive the business? It seems like it is getting to a level where it will be harder and harder or as you said you were doing less auctions per day?

Leon Kuperman

Our goal is to basically model the inventory we have on hand with what our current sales velocity is. As we see sales velocity pick up we will reset the inventory level to the appropriate dollar value.

Elizabeth Pierce - Roth Capital Partners LLC

I presume there is plenty of inventory out there?

Leon Kuperman

Yes. A lot of inventory out there. As we said in the prepared comments we are being very selective about the deals we are choosing because we think there are more deals to come and we really haven’t seen the full fall out of this environment.

Elizabeth Pierce - Roth Capital Partners LLC

It seems to be that if you think about the next big buying time you have time on your side at this point.

Leon Kuperman

Absolutely.

Operator

The next question comes from Mark Argento - Craig-Hallum Capital.

Mark Argento - Craig-Hallum Capital

Sorry I just got on the call here a little late. I apologize if the question has been asked but in terms of the price of gold does that impact how you mark your inventory in terms of valuation at all?

Lawrence Kong

The price of gold has fluctuated quite a bit in the last year or two and if we track that against our gross profit margins there is very little correlation. As you can see in the fourth quarter of 2008 we achieved a record high in terms of gross margin.

Mark Argento - Craig-Hallum Capital

In terms of valuation though on the balance sheet and what your inventory is carried at does that fluctuate with gold prices? Do you have to value that and bring an appraiser in on a quarterly basis and does the price of gold influence how you mark that inventory value?

Leon Kuperman

We based our inventory valuation based on our cost not on what current metal prices are.

Mark Argento - Craig-Hallum Capital

So it is what you bought the product for?

Leon Kuperman

Correct.

Operator

I show no further questions in the queue. Ladies and gentlemen this concludes the Bidz.com fourth quarter 2008 earnings conference call. We thank you for your participation and you may disconnect.

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