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ModusLink Global Solutions, Inc. (NASDAQ:MLNK)

F1Q10 Earnings Call

December 7, 2009 5:00 pm ET

Executives

Joseph C. Lawler - Chairman of the Board, President, Chief Executive Officer, Director

Steven G. Crane - Chief Financial Officer

Analysts

David Cameron - Tesacura

Matt Bryson - Avion Securities

Larry Smith - Private Investor

Operator

Hello and welcome to the ModusLink Global Solutions first quarter 2010 operating results conference call. (Operator Instructions) Now I would like to turn the call over to Mr. Steven Crane, Chief Financial Officer. Please go ahead, Mr. Crane.

Steven G. Crane

Thanks, Shayna. Good afternoon, everyone and thank you for joining us for ModusLink Global Solutions fiscal 2010 first quarter conference call. I am Steve Crane, CFO and I am joined today by Joe Lawler, Chairman, President and CEO. In just a few moments, Joe will share his thoughts on the company’s financial performance and the market environment over the past quarter and provide an update on our strategic initiatives. He will also talk about ModusLink's acquisition of Tech For Less, which we announced earlier today. After Joe’s comments, I will review in more detail our fiscal 2010 first quarter results, which we released earlier today.

Before we start, I want to remind you that this call is being broadcast as a live webcast from our website at www.moduslink.com.

Please also note that the information we are about to discuss includes forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties. The company’s actual results could differ materially from those discussed herein. Factors that could contribute to such differences include, but are not limited to, those items noted and included in the company’s SEC filings, including our annual report on Form 10-K and quarterly reports on Form 10-Q. The forward-looking information that is provided by the company in this call represents the company’s outlook as of today and we do not undertake any obligation to update forward-looking statements made by us. Subsequent events and developments may cause the company’s outlook to change.

During this call, we will be referring to non-GAAP measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measure can be found in our earnings release issued earlier today, a copy of which is posted in the investors section of our website.

I would now like to turn this call over to Joe Lawler. After our formal remarks, we will be happy to take your questions. Joe.

Joseph C. Lawler

Thank you, Steve and good afternoon. We entered the new fiscal year reporting a good first quarter in the context of a very difficult global economic environment. Before we review the performance of the quarter and our financial results, I would like to highlight three important takeaways from our call today.

First, as expected, volumes moving through the supply chain are lower than at this time last year and therefore our revenues are lower than last year. However, sequentially we saw a good seasonal up-tick in revenues which were 10% higher than the fourth quarter of 2009 and therefore we continue to be guardedly optimistic that we are seeing an easing of downward pressure.

Second, we are pleased with the overall financial performance and revenue mix that included new engagements utilizing our after-market and e-business solutions, which are typically higher margin services with strong prospects for growth. Work mix and our cost reduction initiative are having a very positive impact on our business, contributing to gross margin increasing 500 basis points to 14.6% compared to last year. In addition, total operating expenses were down 37%, also supported by our cost reduction strategies resulting in a 4.7% operating income margin.

As we've talked about in the past, our cost reduction strategies and focus on higher quality revenue opportunities have positioned the company for significantly better profitability in fiscal 2010 and we are optimistic about the long-term prospects for ModusLink.

And third, we made progress with the acquisition component of our growth strategy with the acquisition of Tech For Less, which we announced earlier today. Before I talk about this most recent acquisition, I'll share a few observations regarding our financial results for the first quarter and Steve will follow with a more detailed review.

As expected, revenue from our base business is lower compared with the first quarter of last year because reductions in consumer spending have a direct impact on our clients' product volumes and the supply chain services we execute for them. However, our total revenues increased 10% sequential which is in line with our past few years sequential results.

Seasonality was a significant contributor to the sequential up-tick in base business revenue, which provides us some optimism that global economies are beginning to stabilize. Revenues from new engagements were lower than both the first and fourth quarters of fiscal 2009. I'll take a moment to explain what is driving that.

New engagements are typically secured several months in advance of actually generating revenues. For example, new engagements secured before the economy sharply declined in the fall of calendar 2008 and the beginning of 2009 contributed to our strong results for new business in the second half of fiscal 2009.

This past spring you heard us talk about delayed decisions from some clients which were therefore -- which therefore delayed the start-up of new business revenues. However, we feel very good about the size and quality of the opportunities recently closed as well as those in our pipeline and expect new business will make a far greater contribution to our revenue performance in the second half of the fiscal year.

In addition, we are encouraged with the quality of the new engagements. This reference to quality is meant to underscore our focus on gross profit margins in this tough economic climate.

As we've discussed in the past, an important step we took last year was to simplify our go-to-market approach by narrowing our solutions from 18 to 4. This change is enabling us to focus our entire organization on opportunities with the greatest potential for revenue and profit growth and accelerate the selling and on-boarding process. In addition, it is enabling us to eliminate low value-add activities that drive costs in our operations that do not contribute good profit margins. Gross margin of 14.6% exceeded our expectations and was driven by favourable seasonal work mix, as well as our cost reduction actions taken in fiscal 2009. However, we continue to regard 12% to 14% on a full-year basis as a prudent range when our business is running optimally.

Before I make a few final comments on our acquisition of Tech For Less and our ongoing strategy, I'll turn it over to Steve for a more complete financial overview.

Steven G. Crane

Thanks, Joe. For the first quarter of fiscal 2010, ModusLink Global Solutions reported net revenue of $246.7 million, a decrease of 15.4% compared to net revenue of $291.4 million for the same period one year ago.

Compared to the first quarter of last year, base business revenue declined $18.1 million, or 7.4% primarily due to lower volumes related to lower consumer spending. Revenue from new engagements declined by $26.6 million, or 58.9% when compared to the first quarter of last year. However, as Joe noted, this decline is primarily the result of delayed client decisions. Overall, our pipeline is healthy and based on what we are seeing and the timing of it, we expect new business will make a far greater contribution to our revenue performance in the second half of the fiscal year.

Reviewing our results geographically, each of our regions were impacted by the lower volumes related to the global economic recession. In the Americas, revenues decreased to $85.1 million from $93 million in the first quarter of fiscal 2009. Revenue from Asia decreased to $75.6 million from $83.9 million in the prior year period, primarily due to lower volumes related to the global economic recession.

Europe was particularly affected by the economic slowdown with lower volumes of consumer products moving through our facilities. As a result, revenue in Europe decreased 24.9% from $110.7 million in the first quarter last year to $83.1 million in the first quarter this year. Despite the lower revenue levels, profitability increased in each of our primary regions due to the positive effects of our cost reduction initiatives and favourable work mix.

The company's gross margin increased 28.3% in dollar terms to $36 million in the first quarter of fiscal 2010 from $28.1 million in the first quarter of fiscal 2009. As a percentage of revenue, gross margin increased 500 basis points to 14.6% in the first quarter of fiscal 2010 from 9.6% in the first quarter of fiscal 2009. Gross margin percentage for the quarter exceeded our expectations and was primarily driven by favourable seasonal work mix and benefits from our cost reduction initiatives.

Operating expenses decreased to $24.5 million in the first quarter of fiscal 2010 from $38.9 million a year ago, an improvement of 37.1%. The lower operating expenses reflect an $8.1 million or 26.1% reduction in selling, general, and administrative costs. This significant reduction is primarily due to our ongoing cost reduction initiatives. In addition, our restructuring expense was reduced by $6.3 million, or 98%, when compared to the same period last year. As a percentage of revenue, total operating expenses were 9.9% in the first quarter compared to 13.3% in the same period last year. As we've discussed in the past, we expect that restructuring costs will be substantially lower in fiscal 2010. In a more normalized environment, our expectation is that annual restructuring expenses would be in the range of $2 million to $4 million. Accordingly, we will include ongoing restructuring in our SG&A line but continue to break it out when reconciling our non-GAAP operating income.

For the first quarter of fiscal 2010, and as a result of all of what I discussed, the company recorded operating income of $11.6 million, a significant improvement compared to an operating loss of $10.8 million in the first quarter of fiscal 2009. Other income improved by $2.7 million to a loss of $1.2 million in the first quarter of fiscal 2010 from a loss of $3.9 million in the first quarter of fiscal 2009. This improvement was primarily due to lower foreign exchange related losses this year versus last year.

As a result of the items I just reviewed, the company's pretax income from continuing operations for the first quarter of fiscal year 2010 was $10.4 million versus a pretax loss of $14.7 million in the first quarter of fiscal year 2009.

The company reported a tax expense of $1.9 million for the quarter compared to a tax expense of $4 million in the first quarter of fiscal 2009. We continue to evolve and drive our tax strategy to both support our business strategy and to maximize the use of our U.S. NOLs.

With all of the above factors for the first quarter of fiscal 2010, ModusLink Global Solutions recorded net income of $8.6 million, or $0.19 per share, compared to a net loss of $18.6 million, or $0.41 per share in the first quarter of fiscal 2009.

Non-GAAP operating income represents total operating income excluding net charges relating to depreciation, restructuring, and amortization of intangibles, stock-based compensation, and non-cash charges. ModusLink's non-GAAP operating income for the first quarter of fiscal 2010 was $18.4 million versus non-GAAP operating income of $3.3 million for the same period in fiscal 2009.

The company believes that non-GAAP operating income or loss provides investors with a useful supplemental measure of the company's operating performance by excluding the impact of non-cash charges and restructuring activities. Each of the excluded items was excluded because they may be considered to be of a non-operational or non-cash nature. Historically the company has recorded significant impairment and restructuring charges. Non-GAAP operating income or loss does not have any standardized definition and therefore is unlikely to be comparable to similar measures presented by other reporting companies. Non-GAAP operating income and loss should not be evaluated in isolation of or as a substitute for the company's financial results prepared in accordance with generally accepted accounting principles of the United States.

We remain supported by a strong balance. At October 31, 2009, we had working capital of approximately $248.9 million compared with $237 million at July 31, 2009 and $216.3 million at October 31, 2008. Included in working capital as of October 31, 2009 were cash, cash equivalents, short-term investments, and marketable securities totalling $174.7 million compared to $179.2 million at July 31, 2009 and $121.3 million at October 31, 2008.

The company concluded the quarter with no outstanding bank debt.

Turning to cash flow, for the first quarter of fiscal 2010, net cash used for operating activities was $1.3 million compared to a use of $21.8 million in the same quarter of last year. Cash used for operating activities in the first quarter of fiscal 2010 was affected by seasonal working capital needs. As investors who have been following us know, in our fiscal first quarter we increased inventories as ModusLink and its clients prepare for the seasonally higher demand around the holidays.

As a result of this seasonal increase, we use a commensurate amount of cash. Given the normal seasonality in our business, we encourage our investors to look at our cash flow on an annual basis. Given the progress we have made to reduce our costs and an increased focus on improving our working capital metrics, we expect to generate positive free cash flow from operations for the second quarter and for the full 2010 fiscal year.

Also during the first quarter, we repurchased $2.5 million worth of shares of ModusLink common stock. Our repurchase authorization is for up to $15 million and through the first quarter, we have spent a total of $6.3 million.

Looking forward, unit volumes in the technology sectors we serve are tied to consumer spending and as it improves, we expect our volumes to improve as well. We are seeing bright spots in our business with improved volumes from certain clients and clients introducing new market changing products. However, we are not yet seeing the positive signs across our entire client base or sustained over time and therefore we remain cautious in the near-term.

Based on volumes we see and forecasts from our clients, we expect revenue for the second quarter of fiscal 2010 to be similar to revenue for the first quarter of 2010 and we expect a gradual sequential improvement in revenues during the second half of our fiscal year.

In addition, as I mentioned, as we conclude a period of seasonally high working capital needs, we expect to generate free cash flow from operations in the second quarter of fiscal 2010 and for the full fiscal year.

Thank you and I'll now turn it back to Joe.

Joseph C. Lawler

Thanks, Steve. I'll take a few minutes to talk about our go-forward strategy but first I'd like to comment on our acquisition of Tech For Less, which we are very excited about. Tech For Less is aligned with our long-term strategy and our acquisition criteria which we use to screen companies that fit our business model, have strong growth potential, have a financial profile in line with or better than our target operating model, which includes gross margin of between 12% and 14%, and an operating income margin of between 5% and 7%. They must meet a minimum internal rate of return of 15%. We put a higher priority on opportunities that enable us to utilize our sizable NOL, and finally they have at least a neutral impact to ModusLink's earnings in the first year. Tech For Less met these criteria and we are excited about the business and the fit with ModusLink.

So now let me tell you a little bit about Tech For Less -- Tech For Less acquires returned and excess consumer electronics and business technology products from retailers, e-tailers, distributors and manufacturers. They test and repair the merchandise and re-market it to consumers through their highly trafficked website, Techforless.com, and other direct channels. Realizing the value of excess inventory accumulated each year is a significant challenge for technology companies focused on gaining supply chain efficiencies. Based on Accenture data, we estimate the consumer electronics manufacturers, communication carriers, and electronics retailers spend $13.8 billion in the United States assessing, repairing, reboxing, restocking, reselling returned merchandise.

We view the after-market services space as a source for revenue and earnings growth in the future. Our previous acquisition of PTS was also in the after-market services space and significantly enhanced our testing and repair capabilities. Tech For Less strengthens ModusLink's business to consumer channel for re-marketing returned and repaired technology products. Through organic development, then the acquisition of PTS and now the addition of Tech For Less, ModusLink is one of the strongest providers of integrated returns processing, technical repair, and value recovery in the consumer electronics and technology markets.

The acquisition will also contribute to our profitability. The transaction is expected to be accretive to ModusLink's cash flow and neutral to earnings in fiscal 2010 and accretive to cash flow and earnings in fiscal 2011.

Tech For Less has a very talented and innovative team and ModusLink looks forward to working with them.

Investors that have been following us have heard us talk about putting our cash to work. Our stock repurchase programs and strategic acquisitions are key parts of those efforts.

So moving forward, we continue to expect the very difficult economic environment to persist for at least several more quarters. However, we remain confident that we have the right long-term strategy in place to grow shareholder value and we are focused on the primary levers that will enable us to grow revenues and improve profitability as the environment improves.

I'll take you through three of these levers, specifically base business, new engagements, and acquisitions.

First, ModusLink has established a market-leading position in global supply chain management services by offering a compelling value proposition centered on helping clients get to market fast and reduce costs.

We manage the supply chain for more than 500 products with most of our revenues coming from Fortune 500 companies. The strength of our client base and their products positions us well for long-term growth as consumer spending improves in the future.

In order to grow our base business, we focus on delivering outstanding service. We measure client satisfaction and our 2009 results have never been better. Lowering our clients' costs, shortening the time to market and executing reliably continues to set us apart from competitors.

As we talked about last quarter, many of our clients have been recognized as having the top-performing high-tech supply chains and ModusLink plays an important role helping them drive supply chain efficiencies.

Second, we see significant opportunity to increase revenue and market share by winning new engagements in our targeted vertical markets with a targeted sales and marketing approach. In addition, we are focusing on managing elements of our existing and new clients supply chain that are currently in-sourced. Industry estimates suggest that more than 70% of the supply chain costs are not yet outsourced.

And third, solutions such as e-business, entitlement management, and after market services represent particularly strong opportunities for growth and improved margins. We are developing these solutions both organically and through acquisitions.

So in summary, we continue to operate in a very difficult economic environment. However, we saw a good, seasonal up-tick in revenues in our first quarter, albeit at lower levels than last year. We benefited from improved work mix and in the quantity and quality of our new business pipeline that is contributing to the improved financial performance. We are very pleased that our cost reduction strategies are taking hold and contributing to improved margins. We are confident we have the right strategy in place for revenue growth in the longer term and look forward to the strategic and financial contributions of our newest acquisition, Tech For Less. And importantly, we continue to maintain a strong balance sheet, providing a solid foundation for our business model.

With that said, I look forward to speaking with you again on our next earnings call. Now, Steve and I are happy to answer any questions you may have, so Shayna, let me ask you to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of David Cameron with Tesacura.

David Cameron - Tesacura

I have a couple of questions -- the first regarding the concentration of sales among your top 10 clients. What are you going to do about diversifying your client base and reducing client concentration? And do you consider that risk, why or why not?

Joseph C. Lawler

In response to that first question there, we continue to focus on diversification of our client base. I think in fiscal 2010, we will add more new logos than we have in any other single year, which I think reflects on the momentum that the brand is building in the marketplace and the reputation that we are gaining there, and although some of those are modest levels of new business start-up, they are with sizable companies, oftentimes with global footprints and it gives us an opportunity to execute on those up-sell and cross-sell opportunities that I was talking about before, so we are -- we are very focused on organic growth with our base clients and when we talked about targeted sales and marketing opportunities, that's what we are referring to.

David Cameron - Tesacura

Okay, and are any of these top let's say three or top 10 clients, locked in in any way? And how difficult is it for them or if not, how difficult is it for them to cancel their service agreements?

Joseph C. Lawler

It varies from client to client. Some instances we would have contracts that might extend a year or two or three. In a lot of instances, these are evergreen contracts where we have been working with clients for many years and have enjoyed longstanding relationships. We have strategic account people that work on their business every day and oftentimes we are directed or new business is directed our way without going through some sort of a bidding process. We tend not to turnover clients. Programs may come and go but we tend to not turn over clients because of the way we execute for them.

David Cameron - Tesacura

If you had to rank your competitors in terms of business that you have lost, let's say in your base business and in new business, including in-sourcing, who would you say your competitors are, in the majority of the -- you know, the leading competitors?

Joseph C. Lawler

There are several folks we look at. The contract manufacturers will from time to time be a competitor. There's a division of Bertelsmann that is a competitor and there are select other regional competitors. If you followed us for a while, David, you know that one of the things we think is a strong point of differentiation that is unmatched by those folks that I am referring to is a global footprint, integrated processes, and a lot of local know-how with global standards. But those would be the kinds of folks that we would run into.

David Cameron - Tesacura

A quick question -- do you ever see an Accenture or an IBM, major outsourcers, competing with you or have they started to enter your space?

Joseph C. Lawler

No. No, they will provide consulting services to a client who is evaluating an outsourcing opportunity. They might come in and provide some knowledge of how the process works but they do not do supply chain execution.

David Cameron - Tesacura

Okay, and do you consider that concentration that you have outlined, the [inaudible] and your reports and everything about your top three clients specifically and even top 10 being 70%, do you consider that to be a risk internally? Do you model that? Is that a top concern for your management team?

Joseph C. Lawler

It's something we pay a lot of attention to. You know, it's actually probably the opposite -- we consider it a real strength. The fact that we have these relationships have -- do the kind of business for these large global businesses is a strength to us. It provides real credibility to others who are looking at our business model and yet we continue to look for other logos and other new business opportunities to continue to grow the business in other directions as well, but I view it more as a strength.

David Cameron - Tesacura

And I am looking for some details on an item that was written about in your annual report -- specifically details about the $600 million in business that [decided] regarding procurement of goods and resale on behalf of your clients -- what is that about? What are the margins on that business?

Steven G. Crane

I'd have to go and look at that. That could be the materials that we are buying on behalf of our clients and --

David Cameron - Tesacura

Yeah, I --

Steven G. Crane

-- through the P&L, so --

David Cameron - Tesacura

Yeah, I can quote from the report -- it's approximately $600 million in net revenues for FY09 related to the procurement and resale of materials on behalf of your clients, as compared to $630 million the year before. Is that a low -- is that a value-add business on your part? That's a significant part of your revenue, $600 million -- can you just describe that for me a bit? Thanks.

Steven G. Crane

Yeah, so that's the materials that we are buying on behalf of our clients and flowing through our P&L.

David Cameron - Tesacura

It's a flow-through, okay.

Steven G. Crane

Yeah.

David Cameron - Tesacura

So is that a lower -- do you mark that up significantly? Is that your sales people get compensated for that?

Joseph C. Lawler

It comes in two fashions. Typically our sales people do not get compensated for that, David, and it comes in two fashions. Sometimes we are authorized by our clients to procure packaging materials, components, that go into a packaged product on their behalf and other times there are directed purchases that we are buying for them but they are directed by them. Both go into our business model but the sales people are typically not compensated on it.

David Cameron - Tesacura

Okay, thank you. And do you have any plans to significantly transform your organization into something else, let's say just as a common example, like Apple Computers moving to the iPod or something like that? Are there any transformational events on the horizon that you are planning like similar to that?

Joseph C. Lawler

I think what you need to do, David, is just watch our progress as we have talked about the solutions and the growth opportunities, we put a lot of emphasis on e-business, a lot of emphasis on after-market services because of the growth trajectory and the margins that we like in those spaces. At the same time, a key enabling part of our business is the supply chain work that we do on a global basis -- that's what enables us to have the kind of relationships and opportunities that we've got on a global basis. So it is -- we are shifting the business to more attractive margins, to higher growth opportunities, got a little sidetracked in fiscal 2009 with a pretty tough headwind from the economy but keep track of those couple things I mentioned and then you will see us continue to move in those directions.

David Cameron - Tesacura

Thank you. And my last question is do you still have any focus, or how much energy is spent on the -- I don’t know if you can call it legacy business but the venture capital stuff?

Joseph C. Lawler

Very little, David. We do need to move on to another question but very little. It is -- you know, it's been a treasury function for us. You can see the value on our Q and it's -- the company is ModusLink Global Solutions. We focus on global supply chain management services and we do have some legacy investments in venture capital.

David Cameron - Tesacura

Okay, great. Thank you very much.

Operator

Your next question comes from the line of Matt [Bryson] with [Avion] Securities.

Matt Bryson - Avion Securities

Great job growing the top line while controlling costs -- I guess talking about GM a little bit, you guys saw a pretty significant improvement in your gross margin line above your targeted model -- is there any chance you are able to sustain these levels or do you view it as something of an anomaly?

Joseph C. Lawler

You know, as we said, it exceeded our expectations and there will be some bounce, as we've talked about in the past, from a quarter to quarter because of mix coming through our operation. We are certainly focused on continuing to push the edges of gross margin but we wanted to be very careful and did so in the script here that 12% to 14% is still a really good target range for you to be working -- for you to be using from a modeling standpoint but certainly rest assured we're looking for ways to improve our mix to operate at the high ends of that over time. But I'd be careful about using any one quarter as a predictor.

Matt Bryson - Avion Securities

Okay, and then if I look at the Tech For Less acquisition, is there any meaningful impact on the current quarter at all?

Joseph C. Lawler

No, it's no meaningful impact on the current quarters. I think it's more about the opportunities going forward. Steve, anything to --

Steven G. Crane

Yeah, just to reiterate what we said in the release, and I think what Joe said in the script, was we look at it to be cash flow accretive in fiscal year 10 and EPS neutral in fiscal year 10, so in terms of the cash flow, it's not huge, Matt. This is a reasonably small acquisition doing about $40 million in revenues but it will be accretive nonetheless to cash flow.

Matt Bryson - Avion Securities

But I don’t have to worry about a bonus expense say typically paid to Tech For Less employees in the December timeframe impacting this quarter or something like that?

Steven G. Crane

Correct -- no, you do not.

Matt Bryson - Avion Securities

Okay. Can you remind me in terms of seasonality, what you typically see in the December quarter? Is it typically flat or is it typically up a little bit? Where is your guidance in terms of normal seasonality?

Steven G. Crane

You know, Matt, it's funny -- when we look at the quarters, we almost start to look at this as a first half, second half story. Q2 and Q1 typically are in the low 50% of the revenues and then the balance of the year would be in the second half. I think as we move into this year, we are giving you some steerage with the revenue from the new engagements that we expect to see, probably a little bit of a shift into the second half versus the first half of the year.

Joseph C. Lawler

I'll add another comment, just for a little more clarity for you -- last year, Matt, from Q1 to Q2 we saw a significant decline in revenues for pretty obvious reasons. If you went back to the year before in 2008 you saw pretty much flat revenues from Q1 to Q2 and if you went back to quarters before that, which probably goes back too far, you would have seen an increase but that had to do with some work mix, some seasonal work mix of some products that we know -- and programs that we no longer execute, so that's why we are saying we are sort of guiding you to similar revenues in Q2 over Q1 but Steve makes I think a more important point, which is if you looked at the first half just because there can be a little movement from an October into a November, first half, second half and frankly because of the new business that we will see start-up more in the second half of this fiscal year than last year, we'll probably see what has traditionally been a sort of a 52%, 53%, 48%, 47% -- and by that I mean percentages, 52% or 53% in the first half, 48%, 47% in the second half , we'll probably see that almost reverse itself this year just because new business was started later in fiscal '09, it will impact us more in the second half of this year, and that's what we are seeing.

Matt Bryson - Avion Securities

Okay, and I guess my last question and I'll let you guys go, is typically when I think about new business for ModusLink, it tends to have a slightly lower gross margin profile until you get things running like you like them -- is that the same way I should think about the new business coming on in the second half?

Joseph C. Lawler

I think that's a reasonable way for you to think about it, Matt. We -- that's consistent with what we've talked about in the past. At the same time, we continue to focus on a higher quality pipeline, higher quality mix of new business coming in but there's just no question that when we are starting up new business, it just takes a couple of months to get that business operating at more normal levels.

Matt Bryson - Avion Securities

Okay. Thank you again.

Operator

(Operator Instructions) Your next question comes from the line of Larry Smith, a private investor.

Larry Smith - Private Investor

Once again, I think you put out a fantastic quarter. You guys are turning. I've been listening to you for about 10 years. The non-GAAP operating income is one of the highest I've seen, and Joe, I wanted to ask you, I think you answered the question about the sequential downturn -- that's not a big drop if you are looking around $250 million for this quarter because you had noticed from last year, you fell a good bit there, so really while it looks like a guide down, it's really not that much -- it's probably coming in a little flat there.

Joseph C. Lawler

As I say, you know, everybody uses funny words to explain this, Larry -- you know, guarded, cautiously optimistic, all these things -- we are simply trying to find terms that say we saw some quarter over quarter declines from Q1 to Q2 last year, Q2 to Q3 last year, Q3 to Q4 -- there were steady declines for about four quarters in a row. That reversed itself in Q1 and we are kind of feeling as though the bottom has started to stabilize but a way to think about it is clients are being absolutely aggressive about making sure there's not excess inventory in the channels, and they don’t want to come out of this holiday season with inventory that's got to be marked down, that's got to be returned to them, that's got to be discounted or liquidated in some way, and so they are being really judicious about it and we sit right in the middle of that process trying to help them do that pretty well. So our feeling is that yes, if we see similar revenues quarter over quarter, that's a second good sign for us.

Larry Smith - Private Investor

Joe, a couple of quick things and I'll let you go -- the Tech For Less acquisition, is that similar to the auction house that we used to own about five to seven years ago?

Joseph C. Lawler

Interesting question -- you're talking about You Bid?

Larry Smith - Private Investor

Yes.

Joseph C. Lawler

Yeah, really very different. I encourage you to go on the site. This is not a bidding on auction type house. They actually buy product by going through an auction process but they bring product in that they procure in the marketplace, they refurbish that product, which is an area where we believe we can help them, and then they resell that product at a discount both to retail and typically a discount to what is available through the Internet as well. You'll see some fantastic values for this -- for excess and merchandise that has been -- they refer to it as open box, product that has been purchased by a consumer but oftentimes not used, and there are just some terrific values there. We think they are involved in a segment of the market that has some terrific upside in this economy.

Larry Smith - Private Investor

Similar to Amazon [junior], that sounds good. Is that $4 million or $40 million in revenue?

Joseph C. Lawler

About $40 million.

Larry Smith - Private Investor

Forty- million in revenue -- wonderful. One more thing and I'll let you go -- Advent Solar, I saw a web piece that it was either sold or liquidated but I didn’t see it in the news piece, so I guess it was a non-event to us?

Joseph C. Lawler

Exactly right -- we did make a decision that as you know, Larry, because you have followed us for so long, a lot of these very early stage companies require ongoing infusions of capital. We made -- we along with the rest of the board, because we are always a minority holder in these investments, we made a decision not to continue our investments in this, opted to sell our position and did so. It will be announced in Q2 but there was an announcement.

Larry Smith - Private Investor

And Joe, do we need to pull for the dollar to go up or down with this dollar moving up so wildly every day? Are we in favour of a lower dollar or a higher dollar?

Joseph C. Lawler

There's a great question.

Steven G. Crane

You know, we are actually in favour of a higher dollar. It actually helps us on our operating income line, Larry.

Larry Smith - Private Investor

And you have such a wonderful story to tell, I'll leave you with this thought -- I would think an analyst should be starting to look at us. Any comment?

Joseph C. Lawler

Well, we do have one -- you heard him earlier, Matt Bryson from Avion Securities, and Larry, we are always looking for others and doing an outreach program to get them interested in our story because we think we've got a great story and we do think that we continue to be under-followed.

Larry Smith - Private Investor

I'll look forward to the next quarter, Joe and Steven -- this is a wonderful quarter. Take care.

Operator

There are no further questions at this time. I now would like to turn the call over to management.

Joseph C. Lawler

Thanks very much, Shayna. Thank you all for your questions, comments today. We look forward to talking to you on the next call.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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Source: ModusLink Global Solutions F1Q10 (Qtr End 10/31/09) Earnings Call Transcript
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