Liquidity Services Inc (LQDT) 2007 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the fourth quarter and fiscal 2007 Liquidity Services, Inc., earnings conference call. My name is Akea, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of the conference. If at any time during the call you require assistance, please press star followed by zero and an operator will be happy to assist you. This call is being recorded for replay purposes.

I would now like to turn the presentation over to your host, Julie Davis, Director of Investor Relations. Please proceed, ma'am.

Thank you. Good afternoon and welcome to Liquidity Services, Inc., earnings release and conference call for the fiscal year 2007 and the three months ended December 30th, 2007. 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 being broadcasted over the internet and is available in the investor relations section of the 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 strategic and operational plans. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements.

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

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

To supplement the company's consolidated financial statement, presented in accordance with GAAP, we use certain non-GAAP measures. These non-GAAP measures include EBITDA, adjusted EBITDA, adjusted net income and adjusted EPS. We believe these non-GAAP measures provide useful information to both management and investors. These measures, however, should not be considered a substitute for, or superior to, GAAP results. A reconciliation of all non-GAAP measures included in this conference call to the nearest GAAP measure can be found in the financial tables included in the press release.

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

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

Thanks and good afternoon. As detailed in our earnings press release, LSI had a strong finish to fiscal 2007, as we continue to execute our strategy to further develop the leading E-commerce marketplace for wholesale, surplus and salvage assets.

LSI strong results are due to the tremendous efforts of our dedicated employees, our continued focus on delivering value to our customers, and our shared passion for continuous improvement in our business. LSI has made great strides this past year towards meeting all of our long-term strategic objectives, including expanding our reputation as a best in class solution for the reverse supply chain, building a critical mass of supply and demand within our E-commerce marketplace, continuing to diversify our business, and enhancing our organization and processes to support a much larger enterprise.

We're very proud of our many accomplishments during fiscal 2007. Highlights include fiscal '07 GMV grew 35% year-over-year, and is approaching a $250 million annualized run rate. More impressive is our achievement of these results, despite a 20% year-over-year decline in GMV from our DoD surplus business, due to a re-engineering of this contract, which I'll comment on later.

GMV, associated with our commercial business, grew 137% year-over-year in fiscal '07. Our commercial division has now completed eight consecutive quarters of over 100% growth, and we now possess the broadest and deepest portfolio of large fortune 500 sellers in the history of the company.

GMV associated with our DoD scrap business grew 40% year-over-year in fiscal '07. Our innovative online marketplace now supports the sale of over 271 million pounds of scrap metal per year, and it is the leading online marketplace in this vertical.

GMV, associated with our DoD surplus business, grew sequentially for the second consecutive quarter during Q4, and property flow trends continue to improve. Moreover during fiscal '07, LSI further integrated with the DoD to support our clients' important mission through the development and implementation of our inventory assurance program. Our ability to successfully deliver this strategic and innovative solution, resulted in LSI receiving an incentive payment, under our modified DoD surplus contract, during Q4.

Our buyer marketplace continued to deliver strong results for our sellers, as we averaged over five auction participants per completed transaction during fiscal '07. We now enjoy over 1.1 million annual auction participants in our online marketplaces. And in Q4, the number of auction participants increased 19% year-over-year to 293,000, an all time quarterly record for LSI.

In summary, during this past year our team did a terrific job leveraging our knowledge and domain expertise, to strengthen our position and plant the seeds for future growth.

At this time I will turn over the presentation to Jim Rallo, our CFO and Treasurer, to further summarize our recent financial performance and results.

Thanks, Bill. We're pleased with adjusted EBITDA and adjusted diluted earnings per share for the fourth quarter and the year we're ahead of the high end of our guidance. As a result of the incentive features in our surplus contract, that allows to earn 30.5% of the profit-sharing distribution.

For the fiscal year 2007 measurement period, we received a performance payment of approximately 1.5 million in the fourth quarter. This incentive will be measured quarterly beginning in fiscal year 2008.

I will now discuss in more detail our results for the quarter and then the fiscal year. The company continues to experience strong topline growth, as the amount of gross merchandise volume, or GMV, transacted through our marketplaces, increased $12.2 million or 26.6%, to 58.1 million for the three months ended September 30, 2007, from 45.9 million for the three months ended September 30, 2006. We believe this increase is attributive to our investment and 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, which resulted in 115.7% growth in our commercial marketplace over the same period last year.

Revenue increased 11.9 million or 30% to 51.7 million for the three months ended September 30, 2007, from 39.8 million for the three months ended September 30, 2006. This increase is primarily due to the items driving GMV growth.

Cost of goods sold, excluding amortization, increased 10 million or 266.6% to 13.8 million for the three months ended September 30, 2007, and 3.8 million for the 3 months ended September 30, 2006. As a percentage of revenue, costs of goods sold, excluding amortization, increased to 26.6%, for the three months ended September 30, 2007, from 9.4% in the three months ended September 30, 2006.

These increases are primarily due to an increase in revenue, as well as an increase in the number of goods sold in our marketplace from sellers utilizing our purchase model.

Profit-sharing distribution is decreased 5.4 million or 25.8%, to 15.4 million for the three months ended September 30, 2007, from 24.8 million for the three months ended September 30, 2006. As a percentage of revenue, profit sharing distributions decreased to 29.9%, for the three months ended September 30, 2007, from 52.4% for the three months ended September 30, 2006. These decreases are a result of faster growth in our commercial business, for most of our sellers do not use the profit-sharing models, as well as a decrease in the amount of profits we're required to pay the DoD, under our surplus and scrap contracts, which were modified on September 12, 2006, and May 21, 2007, respectively.

Technology and operation expenses increased 3.1 million or 51.7%, to 9.1 million for the three months ended September 30, 2007, from 6 million for the three months ended September 30, 2006. As a percentage of revenue, these expenses increased to 17.5% for the three months ended September 30, 2007, from 15% for the three months ended September 30, 2006.

These increases were primarily due to the addition of 81 technology and operations personnel. The majority of whom were needed to support the increase volume of transactions and merchandise discussed above for our commercial business, and an additional 49 operating personnel, who were needed to support our inventory assurance program. We also experienced less than optimal utilization of our distribution center network, where we have invested over the last 12 months to support continued growth in our commercial business.

Sales and marketing expenses increased 900,000 or 36.4% to 3.4 million for the three months ended September 30, 2007, from 2.5 million for the three months ended September 30, 2006. As a percentage of revenue, these expenses increased to 6.7% for the three months ended September 30, 2007, from 6.4% for the three months ended September 30, 2006. These increases were primarily due to the hiring of 20 additional sales and marketing personnel, and 300,000 in increased expenditures on marketing promotional activities.

General administrative expenses increased 1.8 million, or 61.4%, to 4.7 million for the three months ended September 30, 2007, from 2.9 million for the three months ended September 30, 2006. As a percentage of revenue, these expenses increased to 9.1% for the three months ended September 30, 2007, from 7.3% for the three months ended September 30, 2006.

These increases were primarily due to one, cost of million dollars related to additional accounting, legal insurance, compliance and other expenses needed to support our growth and the requirements of being a public company.

Two, expenses of 300,000 weighted to the adoption of statement 123R.

And three, cost of 200,000 for expenses associated with business development efforts.

The company continues to have strong cash flow, adjusted earnings before interest, taxes and depreciation, in amortization or adjusted EBITDA, increased 1.8 million or 42.6% to 5.8 million for the three months ended September 30, 2007, from 4 million for the three months ended September 30, 2006. The three months ended September 30, 2007, represents the company's continued achievement of better than 30% bottom line growth, adjusted net income increased 1.1 million or 45.3%, to 3.5 million for the three months ended September 30, 2007, from 2.4 million for the three months ended September 30, 2006.

Adjusted diluted earnings per share increased $0.03 or 33.3% to $0.12 for the three months ended September 30, 2007, based on 28 million diluted weighted average shares outstanding, from $0.09 and 28.2 million diluted weighted average shares outstanding for the three months ended September 30, 2006.

I will now discuss the fiscal year 2007 results and will not provide explanations for changes from fiscal year 2006, when those explanations are similar to the ones previously discussed. The amount of gross merchandise volume transacted through our marketplaces increased 60.5 million, or 34.9% to 233.6 million for the year ended September 30, 2007, from 173.1 million for the year ended September 30, 2006.

We believe this increase is attributed to our investment and our sales and marketing organization, and the acquisition of STR October 16, 2006, as well as increased market acceptance by corporate sellers and professional buyers of our online auction marketplaces, as an efficient channel to purchase wholesale, surplus and salvage assets, which resulted in 137.5% growth in our commercial marketplace over the same period last year.

In addition, our scrap business, which generated 27.6% of our revenue, and 23.5% of our gross merchandise volume for the fiscal year ended September 30, 2007, grew 40% from fiscal year ended September 30, 2006. The growth of our commercial and scrap businesses is partially offset by 19.6% decrease in our surplus business for fiscal year ended September 30, 2007, compared to fiscal year ended September 30, 2006.

Revenue increased 50.8 million or 34.4% to 198.6 million for the year ended September, 2007, from 147.8 million for the year ended September 30, 2006.

Cost of goods sold, excluding amortization, increased 34.9 million, or 286.9% to 47.1 million for the year ended September 30, 2007, from 12.2 million for the year ended September 30, 2006. As a percentage of revenue, costs of goods sold, excluding amortization, increased to 23.7% in fiscal 2007, compared to 8.2% in fiscal 2006.

Profit-sharing distributions decreased 10.6 million or 13.2% to 69.6 million for the year ended September 30, 2007, from 80.2 million for the year ended September 30, 2006. As a percentage of revenue, profit-sharing distributions decreased to 35.1% in fiscal 2007, from 54.3% in fiscal 2006.

Technology and operation expenses increase 13.3 million, or 66.4%, to 33.4 million for the year ended September 30, 2007, from 20.1 million for the year ended September 30, 2006. As a percentage of revenue, these expenses increased to 16.8% in fiscal 2007, from 13.6% in fiscal 2006.

Sales and marketing expenses increased 4.3 million or 49% to 13.2 million for the year ended September 30, 2007, from 8.9 million for the year ended September 30, 2006. As percentage of revenue, these expenses increased to 6.6% in fiscal 2007, from 6% in fiscal 2006.

Total administrative expenses increased 4.8 million, or 40%, to 16.9 million for the year ended September 30, 2007, from 12.1 million, for the year ended September 30, 2006. As a percentage of revenue, these expenses increased to 8.5% in fiscal 2007, from 8.2% in fiscal 2006.

Adjusted EBITDA increased 5.4 million or 35.7%, to 20.4 million for the year ended September 30, 2007, from 15 million for the year ended September 30, 2006. As a percentage of revenue, adjusted EBITDA increased to 10.3% in fiscal 2007, from 10.2%, in fiscal 2006.

Adjusted net income increased 3.8 million or 45.7%, to 12.2 million for the year ended September 30, 2007, from 8.4 million for the year ended September 30, 2006. As a percentage of revenue, adjusted net income increased to 6.1% in fiscal 2007, from 5%--sorry, 5.7% in fiscal 2006.

Adjusted diluted earnings per share increased $0.11 or 34.4%, to $0.43 for the year ended September 30, 2007, based on 28.1 million diluted weighted average shares outstanding, from $0.32 and 26.1 million diluted weighted average shares outstanding for the year ending September 30, 2006.

I will now discuss the company's other key operating metrics, as I've already touched on GMV, which management believes allows us to monitor the success of our marketing programs, as well as our lotting and merchandising strategies. Registered buyers totaled 685,000 at September 30, 2007, representing an increase of 161,000, or 31%, over the approximate 524,000 registered buyers at September 30, 2006.

Auction participants, which consist of a registered buyer who had bid in an auction during the period, and are counted more than once if they bid in more than one auction, increased to approximately 1,115,000, in fiscal year 2007, an approximately 12% increase over the approximately 993,000 auction participants for fiscal year 2006. Auction participants increased to approximately 293,000 for the quarter ended September 30, 2007, representing an increase of 47,000 or approximately 19%, over the 246,000 auction participants for the quarter ended September 30, 2006.

Completed transactions increased to approximately 212,000 an approximate 9% increase for fiscal year 2007, and approximately 194,000 completed transactions for fiscal year 2006. In addition, we experienced a 24% increase in the average value of our transactions, during fiscal year 2007, resulting from product mix, lotting and merchandising strategies, as well as buyer demand.

Completed transactions increased to approximately 56,000, an approximate 17% increase for the quarter ended September 30, 2007, from the approximately 48,000 completed transactions for the quarter ended September 30, 2006. In addition, we experienced a 9% increase in the average value of our transactions over the same time period, to over $1,034 for the quarter ended September 30, 2007, from approximately $953 for the quarter ended September 30, 2006. This 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 September 30, 2007, LSI had 61.6 million of cash, current assets of 88.7 million, and total assets of 111.1 million. The company continues to be debt-free, with current liabilities of 26.9 million and long term liabilities of 2.2 million, for total liabilities of 29.1 million at September 30, 2007. Stockholders equity totaled 82 million at September 30, 2007.

Gross merchandise volume and revenue continued to diversify, with the commercial sector growing approximately 137%, and the scrap business growing approximately 40% during fiscal year 2007. As a result, our surplus business with the DoD has decreased to 30.6% of GMV, and 34.4% of revenue for the quarter ended September 30, 2007, compared to 40.1% and 46.3% respectively, for the quarter ended September 30, 2006. For fiscal year 2007, the surplus business decreased to 28.8% of GMV, and 33.9% of revenue, compared to 48.3% and 56.6% respectively for fiscal year 2006.

Our scrap business accounted for 22.8% of GMV, and 25.7% of revenue for the quarter ended September 30, 2007, compared to 30.1% and 34.7% respectively, for the quarter ended September 30, 2006. For fiscal year 2007, the scrap business accounted for 23.5% of GMV, and 27.6% of revenue, compared to 22.6 and 26.5% respectively, for fiscal year 2006.

The company has three primary pricing models, the profit-sharing, consignment and purchase models. The profit-sharing model, which is currently represented by the company's two significant contracts with the Department of Defense, or our surplus in scrap contracts, now represents 53.4% of GMV, and 60.1% of revenue for the quarter ended September 30, 2007, compared to 70.2% and 81% respectively, for the quarter ending September 30, 2006. For fiscal year 2007, the profit-sharing model represented 52.3% of GMV, and 61.5% of revenue, compared to 70.9% and 83.1% respectively, for fiscal year 2006.

The consignment model, which is primarily used by our commercial clients, now represents 17.2% of GMV, and 5.3% of revenue for the quarter ended September 30, 2007, compared to 21.3% and 7.5% respectively, for the quarter ended September 30, 2006. For fiscal year 2007, the consignment model mix was consistent, at 22.4% of GMV, and 7.3% of revenue, compared to 22.4% and 7.2% respectively, for fiscal year 2006.

The purchase model, which is also primarily used by our commercial clients, now represents 26.3% of GMV and 29.5% of revenue for the quarter ended September 30, 2007, compared to 4.2% and 4.9% respectively, for the quarter ended September 30, 2006. For fiscal year 2007, the purchase model represented 21.6% of GMV and 25.4% of revenue, compared to 2.6% and 3% respectively for fiscal year 2006.

The management team is providing the following guidance for the next quarter and fiscal year 2008, which reflects current business trends in our current operating environment, including one, the reengineering of certain business and inventory processes in our surplus business for the DoD, which has resulted in a slow down of property received by us from the DoD, and our expectations that there will be a modest increase in the fall of goods received by us, from the DoD over the next quarter and fiscal year.

And two, our belief that we have yet to realize the full potential of our distribution center network, personnel and value added services, necessary to support a much larger commercial business in the future, which has resulted in less than our target profitability. Our results may be materially effected 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 businesses 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 23% up to 25%. Payments under this incentive feature are based on the amount of scrap we sell for the DoD to small business, during the preceding 12 months, as of June 30 of each year. We are eligible to receive this incentive in each year of the term of the scrap contract, and have assumed for purposes of providing guidance regarding our projected financial results, for fiscal year 2008, that we will again receive this incentive payment.

Under our surplus contract, there are incentive features that allow us to earn up to an additional 4.5% of the profit-sharing distribution, above our new base rate of 26%, which began on June 1, 2007. This incentive will be measured quarterly beginning fiscal year 2008, for the purposes of providing guidance regarding our projected financial results. For the first quarter and fiscal year 2008, we have assumed that we will receive a portion of the surplus contract incentive payments.

Our guidance adjust EBITDA and diluted EPS for the effects of the adoption of FAS 123(R), which we estimate to be approximately 1.2 million to 1.4 million per quarter for fiscal year 2008. We expect GMV for fiscal year 2008 to range from 285 to 295 million. We expect GMV for the next quarter to range from 61 to 63 million.

We estimate adjusted earnings per diluted share for fiscal year 2008, to range from $0.53 to $0.55, in the next quarter, and we estimate adjusted earnings per diluted share to be $0.11.

We also estimate adjusted EBITDA to be between 25.5 million and 26.5 million for fiscal year 2008. And adjusted EBITDA for Q1 of 2008, to range from 5.2 million to 5.4 million.

I will now turn our discussion back over to Bill.

Thanks, Jim. Looking ahead to fiscal 2008, we are a much stronger company and better positioned to take advantage of market opportunities today versus one year ago.

First, we're better equipped to serve the needs of large volume commercial clients, the growing size and liquidity of our online marketplace and integrated value added services, represents an increasingly attractive solution for large retailers and manufacturers, particularly in a slowing economy. As a result, business development activity within our commercial business remains strong.

Second, we are well positioned to achieve attractive gross margins, whether under consignment, profit-sharing or purchase arrangements with sellers. As one of the largest marketplaces for the pricing and sale of goods in the reverse supply chain, we are able to establish strike prices for the goods that flow through our marketplace, that deliver positive economic returns to LSI. As such, we are comfortable working under any of these pricing models, including taking title to inventory, when a client deems this a requirement to conduct business with LSI.

Third, we have positioned our services to play a more strategic role in supporting our DoD clients' mission. We believe we have delivered outcomes and results that enhance our credibility and value to this important client. We also believe our past performance record is a strong competitive advantage in the public sector marketplace. We are very proud of our strong results to date, and remain very excited about the long-term prospects for building our business.

Our growth strategy during fiscal 2008 will continue to emphasize the following elements. First, we will grow our transaction volume with existing commercial and government sellers, by leveraging our growing network of buyers, merchandising expertise, and marketing programs.

Second, we will continue to add sellers, in both the commercial and public sector marketplace, based on our strong value proposition and growing scaled benefits.

Third, based on the insights gained from serving the reverse supply chain, we will bundle the appropriate value-added services with our online marketplace, to uniquely serve the needs of sellers and buyers in this sector of the economy.

Fourth, we will continue to invest in the branding and promotion of our marketplace with buyers, as we believe we have only modestly penetrated the addressable buyer marketplace in the U.S. and abroad. Finally, we will consolidate our position in the fragmented and large reverse supply chain marketplace via acquisition. In closing, LSI is executing, in line with our stated objectives, through operational and financial discipline.

We thank you for your time and attention today, and look forward to addressing any questions you may have at this time.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Jordan Rohan of RBC Capital Markets. Please proceed.

Hi, this is Stephen Ju from RBC actually. Your consignment model GMV in the commercial marketplace is down sequentially quarter on quarter. Is there any commentary around that? Do you have some legacy consignment clients switching over to the purchase model? What is going on over there?

First, I think we like all of our pricing models as we generate positive returns under the purchase, consignment and profit-sharing models. We're comfortable working with them. We've worked under all of these scenarios for many years. Our job is to address the needs of our clients in the marketplace, and these pricing models may fluctuate over time depending upon the companies we serve. We haven't seen, what you're suggesting, a changeover.

We have noted a tranche of fortune 500 commercial sellers, newer to our business over the last 12 to 18 months, who have adopted the purchase model initially with our marketplace, others have actually transitioned to the consignment model, and we believe that we're well suited to address any of these models with our clients, and would rather have our marketplace adapt the fortune 500 sellers, rather than having their finance and operational departments adapt to us.

Thank you.

And your next question comes from the line of Shawn Milne of Oppenheimer. Please, proceed.

Good afternoon, it is Shawn Milne, thanks for taking my questions. I have a couple of questions, first, Jim, you booked about 1.5 million in surplus incentive in the quarter. Can you just give us a little more color on how you expect that to lay out as we go through '08? I know you talked about it being quarterly, but should we think about that as 1.5 million spread through four quarters, or if you can add some more color there?

Secondly, in terms of guidance, GMV guidance in the December quarter, certainly you've got some tough compares in the surplus business and the commercial business, can you give me a sense for, if you're taking a pretty conservative assumption on your scrap business in the December quarter? Because we've seen that actually be pretty strong quarter to date?

And then lastly, Bill, maybe you could step back and provide a--a bigger picture overview in your commercial business. We've seen that business ramp pretty significantly over the last couple of years. You had guided it down into September, of course, already. But we're seeing it pick up now.

Can you give us a sense for what your pipeline looks like in terms of the number of sellers, and what your new executive has added in terms of process to the commercial business that would give the marketplace a little bit more comfort that this business is going to continue to grow at a healthy rate? So that is a mouthful, but if you can answer those, that would be great. Thanks.

Shawn, I'll take it-- the first one, it's Jim. As far as the surplus incentive goes, in measuring over next year, we do expect to receive that quarterly. I would expect the amount to be 1.5 million over next year, or potentially slightly greater. As you know, if the surplus business is stronger because it effects our profit-sharing distribution percentage, that number could be slightly more than that next year. But I think as of now, 1.5 million split over four quarters is a fine way to look at it.

Okay.

This is Bill. Let me just interject relative to our financial targets. We have, on a consistent basis, if you've listened to us over the last two years, indicated our target growth is 25% year-over-year GMV, and we really do focus on growing the business over the long term as opposed to meeting individual quarterly targets and in some cases individual quarters can be higher or lower than that overall target. That's not a big concern to us.

We would say that specifically relative to the Q1 '08 guidance, that the year-over-year comparison for DoD surplus is difficult since this was the last quarter Q1 '07 before the rollout of our new inventory assurance procedures. The DoD growth trajectory is healthy. And as we move through the current year, fiscal '08, we will benefit from higher growth rates on a year-over-year comparable basis, versus that experienced in the first quarter of fiscal '08.

In addition, the growth trajectory in our commercial business is very healthy for the quarter, and as this segment continues to become a larger proportion of our overall business, our overall growth rate will be higher for the full year than in the first quarter.

And I think as we have discussed during the course of fiscal '07, we have continued to prepare our organization to support the needs of large commercial customers and public sector agencies, the new organization that we continue to refine around commercial has added management capacity and talent in every area, from operational fulfillment support, as you know, we now have six distribution center hubs and we've added an individual to manage that nationally, and in addition folks in each individual distribution center reporting to that national individual to refine and further improve our productivity and our throughput.

We think that productivity and leverage is important to our growth and our value proposition to clients. We've added senior management capacity in our marketing area that will help us continue to brand and promote our marketplace to buyers, both online and offline, both U.S. and internationally. That is very important to continuing the robust liquidity that we deliver to our sellers. We have also added senior management capacity in the account management function, which manages the metrics on an account by account basis, with existing sellers. And that's very important to continuing to execute on this growth.

As you know, we hired a new Chief Information Officer within the last six weeks, Eric Dean is an industry veteran who served as the CIO of the predecessor to Accenture, which was Andersen Worldwide at the time. He also served in a similar role as CIO for United Airlines, the parent UAL corporation, clearly an individual that's able to gear operations and infrastructure, along with actual application development to support significant sized organizations and growth organizations. So we feel we have prepared the ground to support a significant enterprise over the many coming years, and we, as I've said, are entering the year much more formidable in terms of operational processes and management depth than at any time in our history.

Thank you very much.

And your next question comes from the line of Colin Sebastian of Lazard Capital Markets. Please proceed.

Good afternoon, and thanks for taking my questions. I guess the first one, I wanted to follow up a little bit on the prior question on the mixed shift in the commercial business, and I guess, first of all, how are you feeling about the inventory balance, specifically your comfort level and protection for any aging of merchandise? And then secondly, on a relative basis, how do you expect those different models to grow next year?

Sure, well, this is Bill. Let me just comment on how we have looked at our business and growth. You know, as we've continued to move to serve larger customers, we continue to experience the need to have clients begin their work with us at larger volumes, and using a purchase model with some of these newer accounts, has increased our inventory balance.

However, equally the volume of goods moving in our marketplace is growing, and that has been evidenced by strong business trends going into fiscal 2008. And I think it's important to understand that whether purchase or consignment, these are profitable arrangements for our business. And that as these individual sellers increase the volume of goods moving our marketplace, they become more reliant on our marketplace. Our inventory turnover actually is running quite well. It's 30 to 45 days, which is very strong.

Second, understand that our marketplace is a marketplace for surplus and salvage goods, so our carrying cost is quite low relative to retail or wholesale costs, which reduces the risk of a diminution in value.

I think, third, many of our categories are not subject to big swings in value or product obsolescence, because they're staple items, such as apparel, building tools and general merchandise. So we feel very good about our ability to grow our business, whether under consignment or purchase. As I mentioned in my opening comments, we have the biggest marketplace to price these goods, and we are able to control and set strike prices that allow us to drive positive economic returns for our business, and that's how we've managed to successfully, not just this last year, but for many years.

Okay. I guess the follow-up, I was wondering if you could talk a little bit also about the progress you're making with some of these larger sellers. It looks like, from the website, that there is some pretty healthy volumes from a few high-profile retailers. I just wanted to get your perspective on that.

I have to say this is continued execution of our value proposition. We believe that as we are able to offer an end to end solution nationally, that handles the pricing and sale of goods, but also the pre- and post-sale value added services to ship merchandise, sell, collect the funds, and deliver attractive value back to the client, that we are a best-in-class marketplace. And that's reflected in the fact that many of our sellers, existing sellers are increasing the number of product categories through our marketplace. You'll see categories that you've not seen in the past moving to our marketplace. That is an important development. We understand that on both sides we get leverage and efficiencies by growing volume.

We get leverage in logistics and that is very important, with energy costs where they are, if we can save our clients shipping costs, by increasing the scale of our programs, by leveraging more of our distribution center hubs, or putting our personnel in their distribution centers, and that is very important. I think clients, frankly, in slower-growth economies are more apt to want to implement solutions like ours, to make sure that they're able to continue to recover working capital in their own business. And in our experience during 2000, 2001, 2002, those were very good years for this business. I think that's also helping increase the demand for our service in the marketplace.

Okay. Thank you very much.

And your next question comes from the line of Malindi Davies, please proceed.

First, my question is, what kind of progress are you making with growing the buyer activity in the marketplace? Do you have a long-term goal for total auction participants, for example? And is this a metric by which the sales and marketing people are incented. And second, can you talk about what you might be looking for as you assess potential M&A targets.

Sure. First let me just comment on our approach to marketing. We are a marketplace of individual product marketplaces and we do target market each and every auction. And each and every auction has activity that we're able to measure and manage. Our marketing team has a dashboard of performance metrics at the vertical level that they are managed to and they are heavily incented to, both grow the buyer base and retain the buyer base.

We have consistently tracked the number of auction participants, which we believe is a very transparent and useful metric to demonstrate the number of buyers that will be available to bid against one another in an individual auction. And we're quite pleased that we've continued to grow the aggregate number of auction participants, the year-over-year growth of the auction participants actually increased in this most recent quarter, jumped to 19% over a 12% year-over-year, versus the annual growth weight.

So we're finding ways to continue to grow the activity with our buyers, have we scratched the surface of the potential? I don't think so. I think there is millions of small-business buyers who are interested in spending $1,000 to a few thousand dollars on merchandise, if they knew about our marketplace. Our average sales price continues to grow. Jim noted those figures in his remarks.

We believe that we continue to attract a wide range of buyers within each of these product verticals, which typically are consumer electronics, technology hardware, building tools, apparel. There is a significant depth of the market we haven't even touched. That's why we're going to continue to brand and promote in the U.S., obviously with the exchange rates the way they are, we're in an increasingly attractive marketplace to folks outside of the U.S. And I think that will be an opportunity for us in fiscal '08 and beyond. And so we feel that that's a great opportunity for us.

I think you had another question on acquisitions. We have been very consistent in indicating that the foundation of our growth is a classic organic growth strategy. We do believe that we are in a unique place to consolidate our market position, and given a lot of the experience we have, both technology experience, operational experience, we can integrate acquisitions very effectively.

We are looking at opportunities to grow our network of buyers and sellers in the commercial marketplace, in the public sector marketplace. Sometimes it is just a simple decision, do you buy or build. We will see opportunities to buy. We do believe that the themes will be consistent with what we've done in the past, most recently with STR. We'll find situations where we can grow our buyer base, our seller audience, and in some cases, value-added services that help us integrate further with sellers and buyers. And those themes will likely play out as we move through time.

And your next question comes from the line of Bruce Simpson of William Blair. Please proceed.

Hi guys, a few questions for you. Can you comment on where we are on the communication with the DoD about renewing the surplus contract?

Well, just as a matter of, the way the public sector works, we're in the same boat as anyone else on this call. We have not been in receipt of any solicitation or RFP for recompete. We're very focussed on executing under our current contract, and when any official notice is issued, we'll be receiving it in the public domain like others and reviewing it.

But as I said earlier, we do believe our ability to not only have expanded our role by providing a range of high-quality solutions involving the checking of inventory has strengthened our credibility, we actually delivered on that valued proposition. We have actually implemented and achieved results that in the end--at the end of the day I think create competitive barriers for us. But more importantly serve the needs of that client.

Then is your guidance implicit in 2008 that it just gets extended without a further RFP?

Correct. We will operate under that business in any event through the full year of fiscal 2008, merely as a function of, we have an inventory pipeline that you would not turn off, and in those contracts, if you're familiar, there is always a wind-down period anyway. But, yes, that is our assumption.

Okay. And then, Jim, did I misunderstand the extent of the change in 123R expense? Did that--what is that '08 relative to '07?

Sure, that's basically a doubling every quarter of '08 versus '07, Bruce. That represents, we do annual grants of options, usually at the beginning of the year. We did an annual grant to several hundred employees this October. That will be out, when you look at the Q, actually which we'll file in February, but that did result in significant stock-based compensation expense, mostly driven by the volatility index in our stock, as you can imagine.

Okay. So it sounds like maybe it goes from a penny or so a quarter, to perhaps 1.5 to $0.02 per quarter on a GAAP basis-- its impact. Is that right?

I would say at least $0.02, yes.

And then can you talk a little bit about the--was the pilot program that rolled off, did that already roll off, and if so, can you quantify how much of the sequential drop in the consignment model GMV that accounted for?

Absolutely, Bruce. So, as we said on our call last quarter, that pilot program did drop off at the very beginning of the quarter. That resulted in approximately $1 million of loss this quarter, the fourth quarter, that is.

I would say, also, we saw some more seasonality in our consignment model than we did in the purchase model, primarily because in the purchase model we had inventory already in the warehouse, set up and ready to go, versus some of our consignment sellers, where there is slightly a longer, what I would say lead time, before you receive that product from them. You did see sort of that effect this quarter, on both the consignment and purchase models, as far as that mix change.

Okay. And my last question has to do with the number of accounts. I know that--I think that you guys had talked in the past about having identified 300 major sellers and targeting 30 of them, and so forth. Can you give us some sense of the actual number of commercial sellers that you're servicing, how that changed, either in the quarter or the end of fiscal '07, versus end of fiscal '06?

Sure, we disclosed that number every quarter, Bruce. I would say that number is somewhere between 360 and 370 sellers, which we consider to be significant. Most of those sellers, as you know, are middle-market type sellers. We continue at this point to have around 35--what we consider to be large retail sellers in our marketplace, that are driving up significant volume of business.

And how does that--how do you feel about the pipeline of that particular set of sellers?

We feel very good about that pipeline. And we have, throughout the year, observed that serving-- first introducing these retailers, in some cases manufacturers to our marketplace, is important, and then you have plenty of growth opportunity by serving the needs of that existing portfolio well.

And I think what gives us great comfort going into fiscal '08 is that we understand the needs of these large organizations selling with us today. There's lots of additional volume with these existing sellers, and so we're just blocking and tackling, and that will allow us to grow our business significantly over the long term.

Okay. Thanks.

(OPERATOR INSTRUCTIONS) And your next question comes from the line of Steve Weinstein of PacificCrest. Please proceed.

Great. Thank you. I just have two questions for you. On your last conference call, you indicated that you were not necessarily expecting to receive the incentive payment from the surplus contract and that could slip into 2008. I'm wondering what metrics did you achieve to be able to recognize it in the quarter.

And then, second, and looking at your GMV guidance for '08, talking about basically 16.5% growth, if I use the midpoint, the current quarter, to achieve the midpoint for your full year, it would require some acceleration, probably like 26% or 27% for the remaining three quarters. So I'm wondering, if there's something you're looking at that would accelerate the growth, like a customer coming down the pipe, something you might win. Something you know you're going to turn on? Or is it just, you are relying on easier comps or some seasonality to get you there?

Well, let me--let me--this is Bill--address the question regarding the Q1, and I think I had related on an earlier question, several of the points that are effecting our overall view of 2008. One is that indeed, when you look at Q1 '08 versus Q1 '07, for DoD surplus business, that is a difficult comparison, because in Q1 fiscal '07, we were not operating for that full quarter under the inventory assurance program. So it clearly is a different environment relative to this current quarter versus prior quarter.

That said, the DoD business as you can imagine, with the fact that we have successfully implemented this inventory assurance program, that is very helpful around the table, both for the rank and file of managers who handle property flow at the DoD, as well as up to the leadership of DoD, to understand that we're doing a great job there and will continue to make every effort to sustain that performance. So the property flow we expect to be healthy and continue to grow during the course of the year, and as you can imagine, if we can continue to grow property flow and performance during the course of fiscal '08, and you look at the year-over-year comparison, well naturally the growth rate is going to be higher, Steve, during the course of fiscal '08.

I think equally on the commercial side, we've worked very hard over the last 18 to 24 months to introduce our service to a wide range of clients that each bring needs to the table, and I think we're in a much more formidable position to decide what are the right programs to grow and accelerate the growth of those programs, than we were a year ago. And so we see the growth trajectory in the commercial business for Q1 is quite good, and we expect that to continue to grow based on existing programs. And that that fact will result in better growth for the overall company, because commercial, as a percentage of the whole, will grow during the course of fiscal '08.

Okay. That explains it. Thank you. And my first question?

I think that is just, the parties are able to audit and review the performance of our work there, and it was very helpful to the DoD that the GAO issued a favorable report, had done independent work on evaluating our performance. There was also a press release actually issued by the director of the DLA praising the significant progress made. I think just the results over the course of the last year or so were quite evident to that client and they elected to reward LSI for service rendered.

Okay. Great. Thank you.

Your next question comes from the line of J.D. Padgett of the Boston Company. Please proceed.

Hi, guys, nice set of results. One question just on surplus. It was up nicely sequentially. Is that potentially reflective of the log jam breaking there, in terms of flow of goods?

I have to say I think there is an operational bottleneck question, but also sort of an organizational behavior aspect to seeing improved property flow. I think on the former, yes, incrementally we would see property stored and not sold, until there's joint confidence or mutual confidence that you have a program that will properly screen. As you build that confidence, that operational bottleneck subsides and you see increased flow.

I think second, just organizationally, everyone feels better about our program when you have the ability to look back at the last 12 months and demonstrate tangible progress, and at the front end of the program you have uncertainty, a year into the program, you have much greater understanding of the roles of all of the parties and the actual effectiveness of the solution that we've developed, so I think that sort of intangible is very important to, I think, sustaining growth and the GMV of the surplus business with the DoD.

Is there goods that are building up, either in your warehouses or at government sites, as you kind of gone through this operational bottleneck?

There have been some centers with goods that have accumulated, yes, that's correct.

And then hopefully once everybody gets comfortable, the flow of goods starts to accelerate but I know you want to kind of manage that carefully to preserve good pricing and so forth.

Absolutely. And I think we've been able to deal with the good and the bad of surges historically, so we're prepared for any scenario.

JD, it's Jim, just to clarify a point, we do not have surplus or scrap products moving through our distribution centers. Those all move through facilities on bases around the country.

Okay. I'm somewhat trying to reconcile the commentary in the press release about the outlook continues to build in pretty modest expected increases in surplus, but it looks like the trajectory is finally starting to go up and to the right. What's the right way to be thinking about the prospects for surplus in fiscal '08? Something where it could get back up to past peak levels where you're doing whatever, 80 or 85 million GMV?

I think if you've known us as a management team, we try to give you the best information we have at the time that we do our updates, with owners and analysts. And I think we have mentioned, we expect sequential growth-- it is a quarter by quarter sort of review of all facts around our inventory assurance services and the logistics issues. So we haven't been willing to be very aggressive on DoD surplus, just based on how much change there has been over the last year.

We are very encouraged by the fact that we now have two consecutive quarters of sequential growth. We are very encouraged by the fact that the amount of property flowing to us, at which we can see ahead of the sale, 45, 60 days, is improving, so incremental improvement is our view, and that's reflected in our guidance.

Kind of thinking about growing quarter-over-quarter for many quarters to come?

At this juncture that is our view of the business trend.

Okay. I guess just one other question in terms of all of the operational refinements that you have put in have inflated the cost structure, is any of that expense that we see in there now, does it fall off at some point, once you kind of have everything set in place? Or have we kind of built up to this level and we should think about this as the new baseline?

I'll take that question, J.D., it's Jim. You're not going to see expenses fall off. There is certainly a component of those expenses which are fixed and a component that is variable. When you look at the work under the inventory assurance program that we're doing for the DoD, obviously those processes that we put in place, those are permanent, they're a part of the contract.

On the commercial side of the business there is a lot more variable costs than the DoD side, however, as that business continues to grow, we're obviously going to continue to invest, albeit not at the same rate, but so I don't think you are going to see those expenses in an absolute basis start to drop off.

So on the government side there is not really any excessive costs to get all of the consultants or whatever one-time factors would be in there weighing in on how you are going to implement the inventory assurance.

No, we didn't use any consultant side, J.D. Actually, there is about 50 employees and they are actually our employees that operate these four centers for us, and they are permanent members of the team.

Okay. So the key take-away is just you have all of that in place now so any growth should leverage well off of that.

That is a good point. Additionally when you add in the incentive payment that we just received, that helps obviously offset the margin decline, which we saw throughout early fiscal year 2007. We actually ended up in a margin basis a little bit stronger than 2006, given the fact we did roll out inventory assurance the whole year and were public for a full year of '07, we feel pretty good about those final results.

Okay, great. Thank you.

We have a follow-up question from the line of Jordan Rohan of RBC Capital Markets. Please proceed.

Hi, it's Steven Ju, again. What is your CapEx outlook for fiscal '08?

Good question, Steve. That is frankly unchanged. We'd expect to be somewhere around 2.5 million for next year. I think we ended at like 2.5 or 2.6 for this year.

Okay. Thank you.

That is all the time we have for questions today. Jim Rallo will be happy to take any follow up questions at 202-558-6207. I would like to turn the call back over for closing remarks.

Thank you for joining us today and again if you have any follow-up questions, please contact Jim Rallo or myself. My direct line is 202-558-6234. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.