Liquidity Services Inc (LQDT) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 Liquidity Services, Inc. earnings conference call. May name is Melanie, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session at the end of this conference.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Ms. Julie Davis, Director of Investor Relations. Please go ahead, Ms. Davis.

Thank you. Good afternoon, and welcome to Liquidity Services, Inc.'s earnings release conference call for the fiscal first quarter 2007 for the three months ending December 31, 2006. 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 Rallo, our treasurer and chief financial officer. This conference call is also being broadcast through the Internet and is available through the Investor Relations 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 plans. These forward-looking statements involve a number of risks and uncertainties that can 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. This 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.

Good afternoon. As detailed in our earnings press release, the first quarter of fiscal '07 was another strong quarter for Liquidity Services. Overall GMV grew 45% year-over-year, adjusted EBITDA grew 29% year-over-year, and adjusted diluted earnings per share increased 50% year-over-year. I am particularly pleased with these results as the company cycles through both the roll-out of new inventory assurance procedures under our DOD surplus contract and the heavy investment phase in new personnel, facilities, and value-added services to sustain a much larger commercial business.

As we have discussed with you on many occasions, our strategic objective is to develop the largest and most efficient online marketplace for reverse supply chain merchandise. During the past quarter, we made important strides to achieve this objective.

GMV associated with our commercial business grew by 72% sequentially during the first quarter, and 156% year-over-year. Consequently, our commercial business, for the first time in LSI's history, represents the largest segment of our business at approximately 38% of total company GMV. The acceleration in the growth of our commercial business is being driven by increased penetration of existing client relationships and the addition of new accounts due to increasing acceptance of our e-commerce platform as an industry best practice by large corporations.

Note that our growing portfolio of commercial accounts provides LSI flexibility to test to confirm the benefits of serving individual commercial sellers. Therefore, we're very pleased that we have multiple opportunities with Fortune 500 accounts to expand our overall business. We believe, as our online marketplace continues to scale, we're able to deliver increasing value to both sellers and buyers, which further strengthens our competitive position in the marketplace.

We remain very excited by the fact that we have a large untapped market opportunity in the commercial marketplace. We have identified approximately 300 U.S. companies that represent 5 to $10 billion of potential GMV opportunity for our platform providing LSI with very strong growth potential.

During the first quarter, GMV associated with our DOD surplus business declined sequentially as a result of new procedures being implemented under this modified contract. As staffing and processes mature in newly opened, controlled property center, or CPC hubs, we expect this trend to reverse itself as we move through the second half of fiscal year 2007.

Finally, during the first quarter, our scrap business continued to perform well. Given our success in improving sales value realization for this property category, we are currently exploring ways to leverage our e-commerce model and liquid buyer base with other customers to grow this area of our business.

During the quarter, we also continued to demonstrate our marketing effectiveness by growing our buyer base. During the quarter, we grew our registered buyer base by 41,000 or 36% year-over-year, to a total of approximately 565,000. We believe there are millions of potential small business buyers in the U.S. and abroad that can leverage our online marketplace to efficiently find and buy wholesale, surplus and salvage assets. We continue to enhance the buyer experience by adding functionality to our online marketplace platform.

For example, buyers are now able to obtain real-time quotes with improved accuracy on less than truckload shipments of merchandise purchased through our marketplace. This enables buyers to more quickly price and book shipments to our marketplace while completing transactions resulting in improved cycle times.

The liquidity and competition in our marketplace remains very strong. During the quarter, we averaged approximately five auction participants per completed transaction. This ensures sellers are able to achieve strong competition and true market pricing for offered assets.

I will now turn the presentation over to Jim Rallo, our chief financial officer and treasurer.

Thanks, Bill. The amount of our gross merchandise volume, or GMV, transacted through our marketplaces increased $16.5 million or 45% to $53.2 million for the three months ended December 31, 2006, from $36.7 million for the three months ended December 31, 2005. We believe this increase is attributable to our investment in our sales and marketing organization, the acquisition of STR on October 16, 2006, as well as increased market acceptance by corporate sellers and professional buyers of our online marketplaces as an efficient channel to auction and purchase wholesale, surplus and salvage assets resulting in 155.9% growth in our commercial marketplace over the same period last year.

In addition, our scrap contract, which generated 27.7% of our revenue and 23.5% of our GMV for the three months ended December 31, 2006, grew 79.5% from the three months ended December 31, 2005. Revenue increased $13 million or 40.2% to $45.2 million for the three months ended December 31, 2006, from $32.2 million for the three months ended December 31, 2005. This increase was primarily due to the items driving GMV growth.

Cost of goods sold, excluding amortization, increased $6.1 million or 257.4% to $8.5 million for the three months ended December 31, 2006, from $2.4 million for the three months ended December 31, 2005. As a percentage of revenue, cost of goods sold excluding amortization increased to 18.7% for the three months ended December 31, 2006, from 7.4% for the three months ended December 31, 2005. This increase was primarily due to an increase in merchandise we purchased for our own account as a result of the acquisition of STR on October 16, 2006.

Profit sharing distributions increased $500,000 or 3.1% to $18.7 million for the three months ended December 31, 2006, from $18.2 million for the three months ended December 31, 2005; which was primarily due to an increase in revenue from sellers such as the DOD utilizing our profit-sharing model. As a percentage of revenue, profit sharing distributions decreased to 41.5% for the three months ended December 31, 2006, from 56.4% for the three months ended December 31, 2005. This decrease is a result of faster growth in our commercial business where most of our sellers have adopted our consignment model as well as a decrease in the amount of profits we're required to pay the DOD under our surplus contract, which was modified on September 12, 2006.

Technology and operations expenses increased $3.8 million or 93.4% to $7.8 million for the three months ended December 31, 2006, from $4 million for the three months ended December 31, 2005. As a percentage of revenue, these expenses increased to 17.4% for the three months ended December 31, 2006, from 12.6% for the three months ended December 31, 2005. The increase was primarily due to the addition of 115 technology and operations personnel needed to support the increased volume in merchandise transacting in our marketplaces. The increase as a percentage of revenue is primarily the result of 31 of the 115 additional operating personnel, which were needed to support our inventory assurance program under the surplus contract in conjunction with the contract modification on September 12, 2006.

Sales and marketing expenses increased $1.2 million or 63.2% to $3 million for the three months ended December 31, 2006, from $1.8 million for the three months ended December 31, 2005. As a percentage of revenue, these expenses increased to 6.6% for the three months ended December 31, 2006, from 5.6% for the three months ended December 31, 2005. This increase was primarily due to our hiring 19 additional sales and marketing personnel and $400,000 in increased expenditures on marketing and promotional activities across our marketplaces.

General and administrative expenses increased $800,000 or 30.5% to $3.4 million for the three months ended December 31, 2006, from $2.6 million for the three months ended December 31, 2005. The increase is primarily due to one, cost of $200,000 related to additional accounting, legal, insurance, compliance and other expenses relates to being a public company; two, stock option compensation expense of $400,000 related to the adoption of Statement 123(R); and three, cost of $100,000 for executive and administrative staff to support our growth and the requirements of being a public company. As a percentage of revenue, these expenses decreased to 7.6% for the three months ended December 31, 2006, from 8.2% for the three months ended December 31, 2005, as a result of operating efficiencies gained from fixed costs such as corporate staff which were spread over a larger revenue base.

Adjusted net income increased $1 million to $2.5 million for the three months ended December 31, 2006, from $1.5 million for the three months ended December 31, 2005. As a percentage of revenue, adjusted net income increased to 5.6% for the three months ended December 31, 2006, from 4.6% for the three months ended December 31, 2005. The increase was due to the result of our growth in GMV while leveraging our fixed expenses.

Adjusted earnings before interest, taxes, depreciation and amortization or adjusted EBITDA increased $900,000 or 29% to $4.1 million for the three months ended December 31, 2006, from $3.2 million for the three months ended December 31, 2005. Adjusted diluted earnings per share increased $0.03 or 50% to $0.09 for the three months ended December 31, 2006 based on 28.4 million diluted weighted average shares outstanding from $0.06 and 22.8 million diluted weighted average shares outstanding for the three months ended December 31, 2005.

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 allotting and merchandising strategies. Registered buyers totaled approximately 565,000 at December 31, 2006, representing an increase of 150,000 or 36% over the approximately 415,000 registered buyers at December 31, 2005.

Auction participants, which consist of registered buyers who have bid in an auction during the period and are counted more than once that they've bid in more than one auction increased to 247,000 for the three months ended December 31, 2006 representing an increase of 22,000 or approximately 10% over the 225,000 auction participants for the three months ended December 31, 2005.

Completed transactions increased 4% to approximately 49,000 for the three months ended December 31, 2006, from approximately 47,000 for the three months ended December 31, 2005. In addition, the company has seen a significant increase in the average transaction value to $1,085 for the three months ended December 31, 2006, from approximately $775 for the three months ended December 31, 2005. This 40% increase is being driven by our buyers who are looking for larger merchandise lots, especially in our scrap business.

The company continues to have a strong balance sheet. At December 31, 2006, LSI had $58.7 million of cash, current assets of $72.1 million and total assets of $93.8 million. The company continues to be debt-free with current liabilities at $23.7 million and long-term liabilities of $1.3 million for total liabilities of $25 million at December 31, 2006. Stockholders' equity totaled $68.8 million at December 31, 2006.

Gross merchandise volume and revenue continued to diversify, with the commercial sector growing approximately 156% and our scrap business up approximately 80% for the three months ended December 31, 2006. As a result, our surplus contract with the Department of Defense has decreased to 34.7% of our GMV and 40.9% of our revenue for the three months ended December 31, 2006, compared to 56.4% and 64.3% respectively for the three months ended December 31, 2005. Ashcraft contract accounted for 23.5% of GMV and 27.7% of revenue for the three months ended December 31, 2006.

The company has two primary pricing models, the profit-sharing model and the consignment model. The amount of business coming from sellers utilizing our consignment model has increased significantly, as this pricing model is primarily used by our commercial clients. The consignment model now represents 23.5% of GMV and 8.2% of revenue for the three months ended December 31, 2006, compared to 19.3% and 5.7% respectively for the three months ended December 31, 2005.

In addition, merchandise repurchase and sell through our marketplaces has increased with the addition of the STR business. For the three months ended December 31, 2006, merchandise we purchased represented 14.3% of GMV and 16.9% of revenue, compared to 2.1% and 2.4%, respectively, for the three months ended December 31, 2005. Thus our total commercial business now represents 37.8% of GMV and 25.1% of revenue for the three months ended December 31, 2006, compared to 21.4% and 8.1% respectively for the three months ended December 31, 2005.

Therefore, the profit-sharing model, which is currently represented by the company's two significant contracts with the DoD, who are our surplus and scrap contracts, now represents 58.2% of GMV and 68.6% of revenue for the three months ended December 31, 2006, compared to 75.4% and 85.9%, respectively for the three months ended December 31, 2005.

The management team is providing the following guidance for the next quarter of fiscal year 2007, which reflects current business trends and our current operating environment including: one, the re-engineering of certain business and inventory processes in our surplus business with the Department of Defense; two, the fact that we have yet to realize the full potential of our new distribution center operations, where we have made significant up-front investments in personnel, processes, equipment and new value-added services to support a much larger commercial business in the future; and three, the acquisition of STR, which closed on October 16, 2006.

Our results may be materially affected by changes in business trends and our operating environment, as well as by other factors including investments we expect to make in our infrastructure and value-added services to support new business in both commercial and public sector markets.

Our scrap contract with the DoD includes an incentive feature which can increase the amount of profit-sharing distribution we receive from 20% up to 22%. 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. Therefore, we will record this benefit to the extent achieved for the 12 months ended June 30, 2007 in the quarter ended June 30, 2007. We are eligible to receive this incentive in each year of the term of the scrap contract. For the purposes of providing guidance regarding our projected financial results for fiscal year 2007, we have assumed that we will receive this incentive in the quarter ended June 30, 2007.

In addition, there are incentive features in our surplus contract that allow us to earn up to an additional 5.5% of the profit-sharing distribution above our new base rate of 25%, which began on December 1, 2006. For the purpose of providing guidance regarding our projected financial results for fiscal year 2007, we have assumed that we will not receive any of the surplus contract incentives, as the period we would be eligible to record such incentive may not occur until the fourth quarter of fiscal year 2007 or the first quarter of fiscal year 2008.

Our fiscal year 2007 guidance is unchanged from that given in our prior call. Our guidance adjusted EBITDA and diluted EPS for the effects of the adoption of FAS 123(R), which we estimate to be approximately $525,000 to $575,000 for each of the remaining quarters in fiscal year 2007. We expect GMV for fiscal year 2007 to range from $220 million to $225 million. We expect GMV for Q2 of 2007 to range from $50 million to $52 million. We expect adjusted EBITDA for fiscal 2007 to range from $19 million to $20 million. And we expect adjusted EBITDA for Q2 of 2007 to range from $4 million to $4.2 million.

We estimate adjusted earnings per diluted share for fiscal year 2007 to range from $0.40 to $0.42. And in Q2 of 2007, we estimate adjusted earnings per diluted share to be approximately $0.09. Lastly, we expect our effective income tax rate to increase to 41% over the historical 40%, as we are now a full federal taxpayer at the highest level of 35% versus 34% historically.

I'll now turn our discussion back over to Bill.

Thanks everyone. That concludes our opening remarks. We'll open up the call to questions.

[OPERATOR INSTRUCTIONS]

And our first question comes from the line of Shawn Milne with Oppenheimer. Go ahead.

Thank you. And Bill and Jim, good quarter. I just have a couple questions. First of all, can you talk about the split between profit-sharing distributions and COGs on a go-forward basis? I believe you're going to move the FTR business to the consignment business. So are we going to have it shift back in subsequent quarters?

And secondly, you know, you put up a very good GMV number in the first quarter. Can you talk a little bit about why it may decline sequentially, especially when you have a full quarter of STR? Thank you.

Shawn, I'll address commentary on GMV. And I'll let Jim address the question with respect to COGs and the STR business transition. I just came back from a conference where I spoke to many commercial customers. And there's increasing pressure in these Fortune 500 organizations to get, you know, more transparency, financial controls over managing asset recovery and reverse supply chain. So we have continued to see very strong demand in our commercial business on the use of our service and platform. And it's reflected in the numbers.

I think what you're seeing in terms of forward guidance is the fact that we are rolling out a new process in the DoD surplus contract involving staffing personnel at four controlled property centers and undertaking new procedures. There is not a precise handbook to work from in rolling out these new procedures. And we do expect a learning curve to exist in the current March quarter. We do also expect that this learning curve and situation will improve as existing personnel move up the level of comfort and familiarity with this new operation.

And so I think our guidance really is reflecting the nature of rolling out a new procedure and the lack of visibility one gets from, you know, how fast up the learning curve our folks -- both at our government client and even in our own organization -- how well they're able to gel and move through these new procedures; because these procedures have not been implemented in the past.

Can I ask a follow-up to that? I mean, you know, we're tracking it in January. Is it fair to say -- I mean, would you subscribe that January is generally a seasonally slower month for the government anyway because of holidays?

Yes. Clearly, historically that's been the case. Perhaps in the staffing bodies in these locations, you're backed up a week or two, because people are coming back from the calendar year end. So, January historically has been a seasonally light month in the government business.

Okay.

Shawn, let me address the question you have versus the mix in cost of goods sold and the profit-sharing distribution. I actually expect the trend to be similar to what we saw this quarter for the rest of the year. I don't think you're going to see significant changes to that mix, with the exception of the June quarter, where -- assuming we record the incentive payment on the scrap contracts -- you'll see the profit-sharing distribution percentage drop down even more as we get that one-time pickup annually in that quarter.

Am I right to comment that STR is -- are you trying to move it to the consignment model?

We are, yes. But I think as far as the time that it takes to convert some of those bigger sellers to that model versus the total contribution from that business to the total GMV, Shawn, it's not going to make that much of a material effect as you move throughout the year.

Okay. Thank you very much.

Next question, operator.

Ladies and gentlemen, please stand by for your next question. Our next question comes from the line of Paul Keung with CIBC World Markets. Please go ahead.

Good afternoon, Bill and Jim.

Hi Paul. How are you?

Good. So, you mentioned -- just coming back from an event where you had a chance to talk to a lot of these potential commercial customers. So, trying to get a handle -- how many RFPs or potential leads are you tracking down now, given the success last year on the commercial side versus, let's say, where you were six months ago? And what's your experience in terms of lead times when you actually sign these up to them actually becoming customers.

And while you're answering that question, I guess you've had a number of commercial wins and new customers in the back half of last year, of the calendar '06. I'm just curious whether -- are you seeing any increase in allocations from those customers?

Sure. Well, we have defined the addressable market at roughly 300 companies that either manufacture, distribute or retail finished goods. And I think we're 10% or less penetrated in any level of relationship with that broader group. What we find is that if you're able to validate this e-commerce platform with a big-box retailer, or an e-commerce online retailer, or a manufacturer, you have a very high degree of relevance for, sort of, the next set of customers.

And when I had mentioned this conference, I think what's helpful is that we have been able to raise the awareness of this reverse supply chain discipline and have made it a potential center of excellence in the way these large companies think about managing supply chain. And so people are excited by the use of technology. They're excited by the way we describe tracking the flow of goods in one control panel across their entire organization, across 10, 20, 30 distribution centers or hundreds of retail store locations.

As I mentioned, companies do feel pressure to be compliant -- compliant with not only SEC regulations, but environmental regulations. That all speaks to our solution. And with these, say, 20 to 30 large accounts, where we've had various activity, absolutely, we're able to grow our GMV at a high rate, because we're able to move more merchandise for these sellers and add SKU categories or condition categories or geographic locations.

I think STR has been very helpful and useful, because of their location and presence on the West Coast. With the population in California the way it is, there's a lot of retail done there. So there's a lot of reverse supply chain activity there. And I think over time, that will prove to be a very strategic add-on to our business.

As far as the cycle time, I can recall explaining what an online auction was to a business manager across the table five or six years ago and getting, sort of, puzzled looks. Well, today everyone understands what an online auction is. We've got more data to share with about 800,000 completed B2B auctions. So the cycle times are compressing. I wouldn't say it's a situation where you can make a one-call sale. But you certainly have a body of knowledge and a data warehouse to have very useful conversations early on.

And I think the investments that we're making give the folks on the other side of the table confidence that we can take on their business on an end-to-end basis nationally, not just on a local basis. And so that's the vision and that's the effort that we'll be undertaking as we move through the year.

Last time we were on the call, we were talking about how our commercial business is going to trend to, say, 40% of GMV. Well, we're frankly ahead of plan. And so that's the opportunity over the long haul.

Okay. And then I guess a question on STR -- how much GMV did it generate this quarter? And does that -- I was trying to read through the answer to the earlier questions. Does that mean that cost of revenues impacted that will stabilize next quarter?

I think, Paul, the first thing is we're not breaking out STR separately. It frankly is not material. But I would tell you that we gave guidance of $18 million for fiscal year 2007 when we originally did that acquisition. And we are well ahead of plan.

Okay. Okay. I'll get out of queue and wait and ask later. Thanks.

Our next question comes from the line of Colin Sebastian with Lazard Capital Markets. Please go ahead.

Good afternoon, and thanks for taking my questions. I guess the first one, as you are rolling out the new process with the DoD, I wonder if you're gaining any more visibility into the potential for achieving some of those incentives for the inventory assurance. That's the first one.

Colin, I think we certainly are sharing information. And, you know, it makes all the sense in the world for parties to measure as best we can how we're doing and use that data to take corrective actions, improve procedures on both sides. There has not been a catalyst thus far for us trying to accelerate measurement of the performance which relates to milestones in that contract mod, which unlocks financial incentives.

You know, I think first order of business is to get things right, get people working in a coherent fashion to manage the business. I think over time, there will be a need for more oversight and administration around these performance measurements.

For the purposes of guidance, we've excluded that entirely. If you read the contract mod, you'll note that the parties can mutually agree on the use of independent audit firms to come in and do testing and to validate performance for the purposes of recognizing financial incentives. So that does exist in terms of the framework of the mod. And yet at this time we're really still in roll-out mode and not as much focused on that.

Okay. And if I understood the comments from the script earlier on the technology spending, the number in the December quarter, that would be appropriate to grow the technology line on the expense line throughout the course of the year. Or were there any one-time startup expenses or any other such expenses in the quarter?

Well Colin, that's a good question. I mean, I don't think we would expect a whole lot more growth in that line other than to support the continued growth of the business. We had a lot of pickup in that line with the roll-out of the four CPCs for the assurance part of our modification of the contract. And although there are still some additional folks to add, I don't think you're going to see the step-function growth in that line that you saw this quarter. I think it'll be more in line with how it has grown historically throughout fiscal year '06 with the top line of the business.

Okay. Thank you very much.

Our next question comes from the line of Chris Penny with FBR. Please go ahead.

Thank you. Good evening Jim and Bill.

Chris, how are you?

Good. Kind of a big-picture question -- looking over the last six quarters, obviously the primary growth in the GMV has come from the average value per transaction. A lot of that's a function of the scrap and some other things. You registered buyers. The completed transactions have been 49,000 plus or minus about 1,000. The registered buyers have grown by about 50%. And the participants per auction have been relatively flat.

When you think about growth in the next year -- within this year you look at your GMV -- of those things, what is that growth a function of? Are we going to start to see an increase in completed transactions? I can't believe the size is going to change that much -- the value per transaction.

Yes, I think as we've discussed these metrics over the last year or so, completed transactions truly is an output of the composition of the seller; in some cases the categories you're working in, such as scrap. But if you just think of the marketplace as being a function of both the amount of property available, and the more lots of property available, the more auction participants you have, the more people tuning into that medium and participating.

I think as we've added business and particularly in our liquidation.com marketplace -- you would note the number of auctions has grown. And the more product that's available to be bid on, that stimulates buyer demand. And we're happy to continue to be able to track the right buyers to each of these individual auctions. We're handling almost 500 different categories of product. So it's a pretty diverse marketplace.

But the completed transaction number really is an output. We would expect both the number of auction participants to grow, the number of registered buyers to grow. We're really focused on providing this end-to-end solution to acquire the supply. And then using both these online marketing techniques that we think we've perfected over the years, combined with traditional offline marketing and business development, that's how we're balancing supply and demand over time.

And the ability for us to sustain a level of three to five auction participants per lot is a very useful thing to watch, because ultimately the sellers realize value based on the fact that that item has one or more people willing to buy it. And if you have two people competing, great -- three or four or five, even better.

So, you've talked a little bit about one of the recent conferences you went to in terms of the supply side. How do you increase the number of registered buyers or auction participants? What does it take for you guys to continue to ratchet that up?

Well, there is a sort of a self-fulfilling model. In many respects, the product ultimately has to be available. And you also have to have the services that will attract small business buyers -- buyers who are in the business of purchasing this inventory and then adding value and remarketing it to sustain a profit on their business. So we've worked very hard to have value-added services prior to the purchase and following the purchase to allow these mid-sized and small companies to feel like this is an efficient way to source inventory ultimately.

And we have, in the last couple quarters, made a lot of investment in personnel that interact with our buying customers. We have a facility in Dallas, Texas that is taking in-bound e-mail and phone to support the buyer. We've worked very hard on integrating transportation and logistics support. We have a direct integration with UPS and some terrific pricing that our buyers, in general, would not be able to obtain on their own. So, lower shipping costs mean they can spend more money on the product, which is good for our sellers.

We talked about the fact we now have real-time less than truckload shipping availability for our buyers -- very convenient for our buyers. The less than truckload shipping industry is extremely fragmented. It takes a lot of time for a buyer to understand what it's going to cost to buy the merchandise and then have to go in another direction entirely to find how they're going to transport it to their place of business.

So having a one-stop shop, if you will, for the buyers, very important to retaining buyer loyalty. You save the buyer time or you create convenience. That's something that attracts these millions of entrepreneurs and small businesses that are increasingly sourcing information and products over the Internet.

Okay. One question just regarding a comment I think from the last call about the 40% of -- I thought you said some of it is consignment. When you were quoting those numbers by the end of the year, was that the consignment plus the commercial purchase business that's coming from STR? Or was that solely consignment?

It's commercial. We think of it as a segment of business commercial. Now the pricing model, whether it's consignment or purchase is less useful in the way we think about growing and diversifying our business. In some cases, we've inherited relationships through STR that have preferred to use a purchase model. And it can be, for many reasons, form over substance.

You know, there's an accounting department that wants to have an invoice in place before a product is shipped. Well, we're not going to upset that accounting request right out of the box with a new relationship. So over time we think clients will migrate to consignment, because they have upside sharing. And that's consistent with the way we market and approach the commercial marketplace.

So, that 40% is basically -- you're saying that that's the 37.8% that was this quarter.

Correct.

Okay.

Correct, which is up meaningfully from previous quarters.

But how much of the function is that is from STR?

Well, I think we talked about -- again, we expect about $18 million, Chris, for 2007. So, you're going to have at least $18 million or around there for purchase for 2007.

And one other point, Chris, I'd like to make -- when you mentioned completed transactions and average transaction size. The one thing that I want to make clear is that that is, sort of, a product mix issue as well. So, we have recently -- as you know, a lot of the surplus supply is stuck in these four CPCs. And those transactions tend to be of smaller size. And so there's, what I'd say, is more smaller transactions, which would obviously have a higher completed transaction number, but it would lower the average transaction size. So, there's a lot of dynamics that affect both those output metrics.

Sure. No, I'm just trying to get a sense of the direction of each of those. I mean, clearly that's increased year-over-year because of the scrap, and we should expect, obviously, that size to keep increasing.

Well actually, it's not just because of the scrap. We've seen an increase really over all our marketplaces. So it's not just being driven by the scrap buyers. And in fact, average transaction size for scrap in this quarter dropped significantly. It's really been across all the marketplaces to be honest.

Okay. Okay. Thank you very much.

[OPERATOR INSTRUCTIONS]

And our next question comes from the line of [Stephen Jew] with RBC Capital Markets. Go ahead.

Good evening, guys. At last -- I know you guys would rather focus on GMV as a better metric over revenue. But it looks like the purchase model on the commercial marketplace is being a bit of a distortionary effect on the revenue versus everybody's expectations. So, is there any way you can project for us how much of the non-STR GMV will be booked as a gross as opposed to net? And also when is the stuff in the batch boxes going to be turned loose?

Let me take the first question, Stephen, you had, which is when you look at the business models, what do we expect going forward? And I think that, again, all of the business from the DoD gross and net are the same. The STR business, again the gross and net is the same, because that's mostly purchase. And we would expect the same trends that you saw last year. So, the consignment will continue to grow at a fairly rapid pace.

And the purchase, you know, if that does grow rapidly, that's great, because that just means there's more business being generated, both from legacy STR clients as well as potentially new LSI clients. But we wouldn't necessarily expect that to grow as quickly as consignment as you move forward.

Okay.

On batch boxes, I think as we outlined in the opening comments, we see batch box visibility in the second half of fiscal '07.

Understood, okay. What was cash flow from operations and CapEx this quarter; I'm not sure if your CapEx outlook for '07 changed at all?

Sure. Yes, our CapEx for '07 has increased a little bit. So, I think we're looking around $1.5 million for this year, which is about in line with what it was last year. We had about $800,000 in this quarter alone. That was primarily related to roll-out of inventory assurance as well as some new office space where we're increasing our D.C. location.

So, I wouldn't expect to see $800,000 a quarter in the next couple quarters, Stephen. But I think we're going to be at the high end of the range of what we thought for the year of $1.5 million.

Understood. And the cash flow from operations?

Sure. Just give me one second, sorry. Cash flow from operations was $2.7 million this quarter.

Great. Thank you very much.

Ladies and gentlemen, that does conclude the time that we have today for question and answer. I would now like to turn the call back over to Mr. Angrick for any closing remarks. Please proceed, sir.

Thanks, everyone, for participating on our first quarter conference call. And we will be available for any follow-up questions as necessary. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the presentation. You may now disconnect.