Liquidity Services Inc (LQDT) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2008 Liquidity Services Inc Earnings Conference Call. My name is Latrice, I will be your coordinator for today's conference. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this call. (Operator Instructions) At this time, I would like to hand the presentation over to your host for today's call, Miss Julie Davis, Director of Investor Relations. Please proceed, ma'am.

Thank you. Good afternoon and welcome to Liquidity Services Inc's Earnings Release Conference Call for the fiscal year 2008 and the three months ending September 30, 2008. During this call, we will refer to Liquidity Services Inc as LSI. Presenting today are Bill Angrick, our Chairman and Chief Executive Officer, and Jim 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 Liquidity Services Inc's website.

Before we begin, I would 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 could cause actual results to differ materially from those anticipated by these forward-looking statements. These risks and uncertainties include a variety of factors, some of which are beyond our control.

These forward-looking statements speak as of today and you should not rely on them as representing our views in the future and we undertake no obligation to update these statements after this call. Please refer to our SEC filings as well as our current earnings release posted a few minutes ago on our website for a more detailed description of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website.

To supplement the Company's consolidated financial statements presented in accordance with GAAP, we use certain non-GAAP measures. These non-GAAP measures include EBITDA, adjusted EBITDA, adjusted net income and adjusted EPS. We believe these non-GAAP measures provide useful information to both management and investors. These measures, however, should not be considered a substitute for or superior to GAAP results.

A reconciliation of all non-GAAP measures included in this conference call to the nearest GAAP measures 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 would like to turn the presentation over to our CEO, Bill Angrick.

Thanks, Julie. Good afternoon and welcome to our Q4 earnings call. I will begin this session by reviewing our Q4 financial performance and then provide an overview of our business. Next, I will outline our major initiatives for the new fiscal year. Finally, I will offer a perspective regarding the current economic environment as it relates to our business outlook and then turn it over to Jim for more details on the quarter and an outlook for the upcoming fiscal year. Our Q4 results were ahead of guidance for both GMV and adjusted EBITDA. Adjusted EPS was $0.01 lower than guidance, principally due to a higher effective tax rate and lower interest income. Specifically, Q4 GMV was $99.7 million, up 72% over last year and excluding our required GovDeals and Geneva Group businesses, GMV was up 29% over last year.

Q4 adjusted EBITDA was $7.1 million, up 22% over last year and Q4 adjusted EPS was $0.12. We continue to demonstrate financial strength by generating cash from operating activities of approximately $29 million doting the year and $12.4 million during Q4 against Q4 capital expenditures of only $400,000. We ended the quarter with $63 million in cash and zero long-term debt. Overall, LSI delivered strong results during Q4, capping another record year for LSI as we grew GMV in all major areas of our business and continued to scale our buyer base nicely.

The following are highlights from Q4. Our surplus business GMV was up 31% over last year. Our scrap business GMV was up 48% over last year. Our commercial business GMV was up 27% over last year, driven by strong GMV growth and the consignment model, which was up approximately 80% in Q4 over last year. Our GovDeals GMV was up 37% over the last year as we continued to expand our presence in the state and local government sector. Our buyer marketplace continues to deliver strong results for our sellers as we needed the year with over 999,000 registered buyers, which is up approximately 46% over the prior year, including the addition of 51,000 new registered buyers in the fourth quarter.

As we reflect on where we stand entering the new fiscal year, it is important to recognize the significant progress we have made. We have greatly scaled our business and strengthened the value of our marketplace for both buyers and sellers. Since our IPO in February of 2006, we have more than tripled our annual GMV to approximately $360 million and doubled the size of our buyer base, number of transactions and auction participants. We have a growing, well-diversified business with leading market positions in the retail reverse supply chain, local, state and federal government sectors, and a platform to expand our business in Europe with major US and European retailers. We anticipate that our increased diversification and financial strength will enable us to take advantage of opportunities created by the current economic recession and emerge as an even stronger player in the reverse supply chain market.

This conviction is based on the following points. First, we offer a great value proposition to buyers. As consumers trade down and seek greater value, we anticipate stronger buyer demand for the surplus merchandise sold in our marketplace. Given that the bulk of our buyers are small businesses and entrepreneurs, our marketplace offers an efficient way to start and grow a business by sourcing and reselling surplus goods that are in high demand.

Second, we offer a great value proposition to sellers. As corporations and public sector agencies focus on reducing costs and improving working capital flows by outsourcing reverse supply chain activities, we expect to grow our seller base.

Third, we have the credibility and the financial flexibility to invest in growth and deliver on our commitments during the current economic downturn, as corporations and public sector agencies increasingly prefer service providers with a proven track record and demonstrated financial strength, we expect our competitive position to strengthen.

This issue has become more pronounced as we continue to observe a shake-out among smaller, less well-capitalized players in the liquidation marketplace. Therefore, we plan to take the following key actions during fiscal 2009, which we believe will build long-term value for our stockholders. One, we will launch our new DOD surplus contract in January. While we will incur startup costs this year related to opening two new distribution centers and hiring staff, we believe the new contract will provide favorable economics over time as we introduce intelligent merchandising strategies to maximize the yield on goods sold through our online marketplace, govliquidation.com. This new contract award is an important milestone as we have locked in a valuable, up-to-five-year ongoing supply of goods that will further enhance the demand side of our business.

Second, we will improve operations and service levels in our commercial business, both in the United States and the UK. We believe our growth and profitability in fiscal year 2008 was negatively impacted by constraints in these areas. This initiative will focus on improving the throughput and quality of our online marketplace and nine commercial distribution centers by introducing new information reporting tools and lean supply chain disciplines across our operations, account management, marketing and customer service teams.

In addition, we plan to improve the transparency of both the sellers and the goods we sell in our online marketplace. Together, these steps will improve customer retention and enable us to scale more efficiently with expanded margins in our commercial business over time. Third, we will make our marketplaces more flexible and easier to use for sellers and buyers. As an innovative market leader, we plan to continue to introduce new features and functionality that will make it easier for sellers to list and sell goods through our platform and make our marketplace more convenient for buyers to find and purchase goods. Our continued investments in technology, research and development will yield positive results in these areas during fiscal year 2009 and beyond.

Fourth, we will expand and further segment our seller and buyer base to increase their participation in our marketplace. With less than 1% penetration of the $100 billion reverse supply chain marketplace, we expect to continue to grow our base of sellers by offering tailored service offerings for online retailers, traditional retailers, manufacturers and third party service providers in the supply chain. With over 1 million buyers in our international distribution center network and financial strength, we believe LSI will be of great interest to prospective sellers in the current economic environment.

With nearly 1.8 million annual auction participants and growing, we have a tremendous opportunity to further segment and serve our existing buyers. We will focus on providing buyers the appropriate type, quantity, assortment and condition of merchandise based on their stated needs in an automated and intuitive manner by connecting existing and new buyers. With the appropriate products, information and support services, we believe we can improve buyer retention and ultimately, the recovery rates realized on the goods we sell.

We also believe there was a large, untapped base of buyers both domestically and internationally. Our marketplace enables small businesses and entrepreneurs to source and resell goods efficiently to sustain their own business. In these uncertain economic times, we believe the number of people starting and growing businesses will expand and the use of the Internet will increase. Both of these trends are favorable for LSI.

With regard to our business outlook, we do anticipate a challenging December quarter, based on the sharp decline in commodity prices, which is impacting our scrap business, and a pause in the supply of goods within our commercial marketplace during the month of October, as retailers responded to the global financial crisis. However, trends in our commercial business have improved during the month of November, as we experienced significant growth in the number of auctions completed in our liquidation.com marketplace through the Thanksgiving Day holiday weekend as compared to last year.

In summary, these are uniquely challenging times for everyone. Yet our team embraces these challenges as an opportunity for LSI to significantly expand its market share and position the Company as the global market leader in the reverse supply chain. We have a strong diversified overall business that continues to generate top line growth, positive cash flows and excellent returns on invested capital. We have leading e-commerce marketplaces addressing multiple large market opportunities and we have the financial strength and operating discipline to invest in future growth to create long-term value for our stockholders. The bottom line is that we have a very strong competitive position that we expect to further strengthen during the new year. Now let me turn it over to Jim for a more detailed review of our financial results and outlook.

Thanks, Bill. The company continues to experience strong top line growth as the amount of gross merchandise volume or GMV increased $41.6 million or 71.7% to $99.7 million for the three months ended September 30, 2008, from $58.1 million for the three months ended September 30, 2007, primarily due to one -- our investment in the sales and marketing organization, which resulted in a 27.2% growth in our commercial marketplace and generated 26.4% of our revenue and 32.1% of our GMV for the three months ended September 30, 2008.

Our DOD scrap business, which generated 29.6% of our revenue and 20.9% of our GMV for the three months ended September 30, 2008, grew 52.2%. Our DOD surplus business, which generated 32.2% of our revenue and 22.8% of our GMV for the three months ended September 30, 2008, grew 30.6%. The acquisition of GovDeals completed on January 1, 2008, which generated 2% of our revenue and 17.9% of our GMV for the three months ended September 30, 2008, and lastly, the acquisition of Geneva completed on May 1, 2008, which generated 6% of our revenue and 4.2% of our GMV for the three months ended September 30, 2008. Revenue increased $18.7 million or 36.2% to $70.4 million for the three months ended September 30, 2008, from $51.7 million for the three months ended September 30, 2007, primarily due to the items driving GMV growth.

The cost of goods sold excluding amortization increased $6.4 million or 46.8% to $20.2 million for the three months need September 30, 2008, from $13.8 million for the three months ended September 30, 2007. As a percentage of revenue, cost of goods sold excluding amortization increased to 28.7% from 26.6%. These increases are primarily due to one, our products mix shift, which resulted in lower margins during the three months ended September 30, 2008, and two, the acquisition of Geneva, which was completed on May 1, 2008 and utilizes the purchase model. Profit sharing distribution has increased $8 million or 51.8% to $23.5 million for the three months ended September 30, 2008, from $15.5 million for the three months ended September 30, 2007. As a percentage of revenue, profit sharing distribution increased to 33.4% from 29.9%. These increases are primarily due to 30.6% growth in our DOD surplus business and 52.2% growth in our DOD scrap business.

Technology and operations expenses increased $1.8 million or 19.6% to $10.8 million for the three months ended September 30, 2008, from $9 million for the three months ended September 30, 2007, primarily due to one, the addition of 50 technology and operations personnel, the majority of whom were needed to support the increased volume of transactions and merchandise discussed above, two, the acquisition of GovDeals, which was completed on January 1, 2008, and three, the acquisition of Geneva, which was completed on May 1, 2008. As a percentage of revenue, these expenses decreased to 15.4% from 17.5%, primarily due to our growth in revenue while leveraging our fixed expenses such as programming personnel.

Sales and marketing expenses increased 1 million or 29.5% to $4.5 million for the three months ended September 30, 2008, from $3.5 million for the three months ended September 30, 2007, primarily due to one, our hiring of 29 additional sales and marketing personnel, two, $300,000 in increased expenditures on marketing and promotional activities across our marketplaces, and three, the acquisition of GovDeals, which was completed on January 1, 2008. As a percentage of revenue, these expenses decreased to 6.4% from 6.7%, primarily due to our growth in revenue while leveraging our fixed expenses such as marketing and personnel.

General and administrative expenses increased 900,000 or 18.5% to $5.6 million for the three months ended September 30, 2008, from $4.7 million for the three months ended September 30, 2007, primarily due to one, expenses of 100,000 related to the adoption of Statement 123R, two, expenses of $300,000 associated with GovDeals, which was acquired on January 1, 2008, and three, the expenses of $500,000 associated with Geneva, which was acquired on May 1, 2008. As a percentage of revenue, these expenses decreased to 7.9% from 9.1%, primarily due to our growth in revenue while leveraging our fixed costs such as corporate staff.

The Company continues to have strong cash flow generation and growth. LSI generated $12.4 million of operating cash flow during the three months ended September 30, 2008, an increase of $7.2 million or 137% over the $5.2 million of operating cash flow during the three months ended September 30, 2007. Adjusted earnings before interest, taxes and depreciation and amortization or adjusted EBITDA increased $1.3 million or 22.3% to $7.1 million for the three months ended September 30, 2008, from $5.8 million for the three months ended September 30, 2007.

Adjusted net income decreased 100,000 or 4.1% to $3.4 million for the three months ended September 30, 2008 from $3.5 million for the three months ended September 30, 2007 as a result of a significant increase in the company's effective tax rate for the year to 42.5% from an expected 41%. This impacted the tax provision for the fourth quarter, resulting in an effective tax rate for the quarter of 46.8%. The increase in the company's effective tax rate was the result of an increase in the blended effective tax rate for the states in which the Company operates. As a result, management expects the company to have a future effective tax rate of approximately 43%.

Adjusted diluted earnings per share was unchanged at $0.12 for the three months ended September 30, 2008, compared to the three months ended September 30, 2007 as a result of the effect of the increase in tax rate under the three months ended September 30, 2008 I just discussed. Both periods' adjusted diluted earnings per share were based on $28 million diluted weighted average shares outstanding.

I will now discuss the fiscal year 2008 and will not provide explanations of changes from fiscal year 2007 when those explanations are similar to the ones just previously discussed. The amount of GMV transacted through our marketplace has increased $126.1 million or 54% to $59.7 million for the year ended September 30, 2008, from $233.6 million for the year ended September 30, 2007. Revenue increased $65.3 million or 32.9% to $263.9 million for the year ended September 30, 2008 from $198.6 million for the year ended September 30, 2007. The cost of goods sold excluding amortization increased $24.3 million or 51.6% to $71.3 million for the year ended September 30, 2008 from $47 million for the year ended September 30, 2007. As a percentage of revenue, cost of goods sold excluding amortization increased to 27% in fiscal 2008 compared to 23.7% in fiscal 2007.

Profit sharing distributions increased $21.5 million or 30.8% to $91.1 million for the year ended September 30, 2008, from $69.6 million for the year ended September 30, 2007. As a percentage of revenue, profit sharing distributions decreased to 34.5% in fiscal 2008 from 35.1% in fiscal 2007, primarily due to an decrease in the amount of profits we're required to pay the DOD under our surplus contract, which was modified on September 12, 2006 and May 13, 2008, as well as the scrap contract, which was modified on June 1, 2007. Technology and operations expenses increased $8.1 million or 24.2% to $41.5 million for the year ended September 30, 2008, from $33.4 million for the year ended September 30, 2007. Sales and marketing expenses increased $3.8 million or 28.7% to $17 million for the year ended September 30, 2008, from $13.2 million for the year ended September 30, 2007. As a percentage of revenue, these expenses were consistent at 6.5% in fiscal 2008 and 6.6% in fiscal 2007.

General and administrative expenses increased $4.6 million or 27.3% to $21.5 million for the year ended September 30, 2008, from $16.9 million for the year ended September 30, 2007, primarily due to one, a cost of $800,000 related to additional accounting, legal, insurance, compliance and other expenses needed to support our growth, two, expenses of $900,000 related to Statement 123R, three, costs of $200,000 for travel and related expenses associated with business development efforts, four, expenses of $700,000 associated with GovDeals, which was acquired on January 1, 2008, and five, expenses of $800,000 associated with Geneva, which was acquired on May 1, 2008. As a percentage of revenue, these expenses decreased to 8.2% in fiscal 2008 from 8.5% in fiscal 2007, primarily due to our growth in revenue while leveraging our fixed expenses such as corporate staff.

The company had record cash flow generation and growth for the year ended September 30, 2008. LSI generated $29 million of operating cash flow during the year ended September 30, 2008, an increase of $24.5 million or 548% over the $4.5 million of operating cash flow during the year ended September 30, 2008. Adjusted EBITDA increased $5.8 million or 28.5% to $26.2 million for the year ended September 30, 2008, from $20.4 million for the year ended September 30, 2007. Adjusted net income increased to $2 million or 16.9% to 14.2% for the year ended September 30, 2008, from $12.2 million for the year ended September 30, 2007. Growth in adjusted net income was affected significantly as a result of an increase in the Company's effective tax rate for the year to 42.5% from 40.4% for fiscal year 2007.

Adjusted diluted earnings per share increased $0.08 or 18.6% to $0.51 for the year ended September 30, 2008, based on $28.2 million diluted weighted average shares outstanding, from $0.43 and $28.1 million diluted weighted average shares outstanding for the year ended September 20, 2007. Growth in adjusted diluted earnings per share was also significantly affected by the increase in tax rate.

I will now discuss the Company's other operating metrics as I have already touched on GMV, which management believes allows us to monitor the successes of our marketing programs as well as our merchandising strategies. During the last 12 months, we also benefited from our ability to more effectively market assets to potential buyers. Our marketing efforts along with the acquisition of GovDeals and Geneva resulted in a 46% increase in registered buyers to approximately 999,000 at September 30, 2008, from approximately 685,000 at September 30, 2007.

Auction participants, which consist of registered buyers who have bid in an auction during the period and are counted more than once if they bid in more than one auction, increased to 467,000 including GovDeals and Geneva for the three months ended September 30, 2008, representing an increase of 174,000 or 59.1% over the 293,000 auction participants for the three months ended September 30, 2007. For the year ended September 30, 2008, auction participants increased to 1,751,000, including GovDeals and Geneva, representing an increase of 636,000 or 57.1% over the 1,115,000 auction participants for the year ended September 30, 2007.

Completed transactions, including GovDeals and Geneva, increased $53,000 or 95% to approximately $109,000 for the three months ended September 30, 2008, from approximately $56,000 for the three months ended September 30, 2007. For the year ended September 30, 2008, completed transactions including GovDeals and Geneva increased $160,000 or 75.8% to approximately $372,000 from approximately $212,000 for the year ended September 30, 2007. The company continues to have a strong balance sheet. At September 30, 2008, LSI had $63.2 million of cash, current assets of $88 million and total assets of $137.2 million. The company continues to be debt-free with current liabilities of $37.8 million and long-term liabilities of $3 million for total liabilities of 40.8 million at September 30, 2008. The stockholders' equity totaled $96.4 million at September 30, 2008. Capital expenditures during the three months ended September 30, 2008 were $400,000 and $1.7 million for the year ended September 30, 2008. We expect capital expenditures to be between $2 million to $2.5 million for the fiscal year ended September 30, 2009.

The management team is providing the following guidance for the next quarter and fiscal year 2009. We are in the period of economic uncertainty and unprecedented market volatility, which makes it difficult for us to forecast business trends resulting in a wider than usual guidance range. In the short-term, we believe changes in consumer spending patterns may impact the overall supply of goods in the reverse supply chain and the volume of goods sold in our commercial marketplace.

In the longer term, we expect our business to benefit from the following trends. One, as consumers trade down and seek greater value, we anticipate stronger buyer demand for the surplus merchandise sold in our marketplace. Two, as corporations and public sector agencies are focused on reducing cost and improving working capital flows by outsourcing reverse supply chain activities, we expect our seller base to increase. And three, as corporations and public sector agencies increasingly prefer service providers with a proven track record and demonstrated financial strength, we expect our competitive position to strengthen.

The following forward-looking statements reflect the following trends and assumptions for fiscal year 2009, one, lower commodity prices, which will reduce the GMV and profit realized in our scrap business, two, new business rules under our new DOD surplus contract which will remove selected items from the product pool that we historically handled and sold, resulting in lower GMV in our surplus business, three, upfront costs associated with launching our new DOD surplus contract, including the hiring of new staff and the opening of two new warehouses totaling 665,000 square feet in Columbus, Ohio, and Oklahoma City, Oklahoma, the continued sale throughout fiscal 2009 of property received prior to December 18, 2008 under our current surplus contract, and five, improved operations and service levels in our commercial business, which will improve margins during fiscal year 2009.

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 23% up to 25%. Payments under this incentive feature are based on the amount of scrap we sell for the DOD to small businesses during the preceding 12 months as of June 30 of each year. We are eligible to receive this incentive in each year of the term of the scrap contract and have assumed for purposes of providing guidance regarding our projected financial results for fiscal year 2009, that we will again receive this incentive.

Our guidance adjusts EBITDA and diluted EPS for the effects of FAS-123R, which we estimate to be approximately $1.6 million to $1.8 million per quarter for fiscal year 2009. We expect GMV for fiscal year 2009 to range from $400 million to $420 million. We expect GMV for the next quarter to range from $80 million to $84 million. We expect adjusted EBITDA for fiscal year 2009 to range from $22 million to $26 million. We expect adjusted EBITDA for the next quarter to range from $3 million to $4 million. We estimate adjusted earnings per diluted share for fiscal year 2009 to range from $0.45 to $0.47. For the next quarter, we estimate adjusted earnings per diluted share to be $0.06 to $0.07.

This guidance does not reflect the impact of the stock repurchase program, which on December 2, 2008, LSI's board of directors approved. Under the program, the company is authorized to repurchase up to $10 million of the issued and outstanding shares of its common stock. Share repurchases may be made through open market purchases, privately negotiated transactions or otherwise, at times and in such amounts as management deems appropriate. We expect to commence the repurchase program during calendar year 2009.

The timing and actual number of shares repurchased will depend on a variety of factors, including price, corporate and regulatory requirements and other market conditions. The repurchase program may be discounted or suspended at any time and will be funded using the Company's available cash. Bill and I will now be happy to answer any questions you may have.

(Operator Instructions) And our first question comes from the line of Jason Brenner with RBC Capital Markets. Please proceed, sir.

Thanks so much. Two quick questions. First, what are you assuming in your guidance for commodities prices in 2009? Is it just flat from these lower levels that we have seen? And second, can you talk a little bit more about what products exactly are coming out of the new surplus contract, and can you quantify this at all? What was this contribution last year? Thanks.

Sure, Jason, it is Jim. I will take the first question, which is on the scrap contract, yes, we have basically assumed flat commodity pricing from where we are today. So, again, remember our scrap business is a 100% delivery business, meaning we don't have speculators in our marketplace. So, our prices have seen a significant drop not in line with, I would say, the overall commodities drop, but certainly a significant percentage and so we are basing our assumptions on really what we are seeing in recent months. As far as your second question, I am going to turn that over to Bill.

Yes, with regard to the new surplus contract, the policy position for some time now has been to review carefully property that moves through the supply chain. To the degree that items have a dual use application to support certain military equipment, whether or not that military equipment is somewhat innocuous such as a truck or marine equipment, even material handling equipment, that dual use application would be deemed a characteristic to remove the item. This would represent about 20% of the volume that we have historically sold. Having said that, it is important for us to recognize that under the new terms of this contract, we, LSI, bear the cost of receiving, transporting and storing items as they are brought to the public marketplace. So, in some cases, the items that are removed relieve us of certain processing, handling and storage costs which we have also factored into our guidance.

Thank you.

And our next question comes from the line of Colin Sebastian. Please proceed.

Thanks for taking my questions. I guess the first one would be, perhaps you can quantify the incremental costs of making the upgrades and changes to the commercial marketplace and for 2009, and whether this is the primary change from your prior guidance? And then secondly on the commercial side, I was wondering if you could clarify a bit what the trends are in the marketplace? You mentioned obviously a little bit of a headwind right now, but given the retail environment, maybe how that plays out over the course of the year in the March quarter as retailers sort through excess merchandise? And then I have a follow-up question. Thanks.

Okay, Colin, it is Jim. I will take your first question as far as the commercial marketplace cost. So, we have built those costs into our guidance for next year. We do expect to see actually increasing margin improvement in our commercial business over the next year. So, as far as the specific amount of the cost, I mean, we are not really prepared to discuss those in detail. I think the biggest part of your question was around what has changed in our guidance from August 1. And really, the only changes in our guidance from August 1 are around the scrap business.

So, if you go back several months, the commodities marketplace had not tanked the way it had in the last couple of months and what we are seeing again in our marketplace is a significant drop. That drop is not in line with, I will say, the commodity marketplace's drop because as I was answering Jason's question earlier, our market as I have said is correlated to commodity pricing, but we don't see the same level of volatility. That being said, we expect the scrap business to be at least 30% lower next year than it is this year and that decrease is solely related to pricing in the marketplace.

I think the second question related to what are we seeing in terms of trends in the broader retail supply chain marketplace, and I think it is fair to say that there are cross currents in that marketplace. Clearly in October there was a sort of state of shock I think by a lot of folks trying to assess how will this global financial liquidity crisis impact their business. I think retailers in some cases just simply put as much product as they could on the store floor, even deeply discounting product that was sort of aberrational to prior behavior. What we have seen is more of a return to normal trends in November in terms of sort of the inflow of product among our key accounts. So, that was sort of a one-time set of behavior.

Broadly, we believe that we have a really compelling business and value proposition for retailers. It's ironic, but the National Retail Federation actually said the volume of returns in this year's holiday season and for the full year will be higher, meaningfully higher than the prior year and that is for a couple reasons.

I think as people are really focused on value, to the degree something that was purchased doesn't meet 100% satisfaction rating, they are going to be returning those times and putting that money back in their pocket. I think we have also seen that certain buyers, I think there was an article recently by the NRF that talked about how buyers will take items home and wear them and return them later for a refund.

That is wardrobing activity. And so when people are hit hard by the economics or are saving money, frankly, the volume of returns is expected to increase. That is certainly breaking in our favor. I think what is uncertain and why it is harder to provide forward-looking guidance is well, the retail supply chain and the GDP of the United States is stagnant, if not sharply declining.

So, how will that structurally impact the retail business? We think we are well positioned for at least three reasons. One, existing companies are really focused on getting out of anything that is non-core. Reverse supply chain is non-core. We can save retailers cost for managing retail distribution center space, freeing up resources that could be dedicated to the core business and getting the more money for these products and more expediently, so that is helping their working capital flows.

I think also there is an appetite for retailers to look at this time to consolidate retail store departments and the retail -- number of retail stores which is resulting in an influx of store fixtures and equipment into our marketplace. If you look at the liquidation.com marketplace, you will see a new channel called store fixtures and equipment that is showing a lot of capital goods that are coming out of the retail supply chain. It is another add-on opportunity for our Company and we like the economics there. It is primarily a consignment business and a business that as we noted in the overview comments, has grown 80% year-over-year.

And I also think there is a trade-down in what consumers are looking for, and that's increasing demand for less than wholesale priced merchandise, which is our core focus. So, as buyers have an increasing appetite for those goods, the folks in the market that we serve really would like to identify and buy that merchandise to resell to consumers and so that's something we have seen a marketplace that has been very firm if not increasing demand, which is very favorable.

So, what we believe will be the case is, the strong will get stronger. If you have financial strength, if you have scale, which we believe we have, we can grow organically by increasing our business development efforts and adding a number of sellers to our marketplace. We believe we can acquire talent in the marketplace. There is a lot of the type of talent that would support key growth leverage for us in operations and enterprise sales and technology and we are certainly going to be looking to add that to the team and there is also an M&A opportunity. I think we have successfully integrated two companies in this last fiscal year and I believe that if you are patient and disciplined, you will find opportunities to grow externally as well. So, that is how we see this environment.

That is helpful. Are you factoring in any M&A activity in your guidance at this point?

No.

And in terms of the purchase model, obviously that has not or is not a big driver of growth. But are you being shown a lot of deals? And if you are buying inventory, maybe you could describe the type of merchandise that it is, and what safeguards you have in place to ensure a more profitable disposition of those goods.

Sure, well, a couple concepts to understand. One, 80% of our business today is consignment or profit sharing where we are not taking title, we are substantively taking title of the goods. About 20% is purchase. So, with regard to market trends, it seems that more of our business is growing on the consignment side and I think folks have looked at this over 1 million buyers that we have and are very comfortable with efficient market pricing and perhaps more receptive than a year or two ago to selling goods on a consignment basis. So, that is reflected in the mix of our pricing models.

In terms of what is helping our commercial business and our margin opportunity in fiscal '09 versus last year, I mean, we said openly we weren't satisfied with our profitability levels in commercial and we have seen at least two things that have radically improved the opportunity on the commercial side. One is that we have had an operational focus and program that we mentioned in the opening remarks, lean supply chain. That is helping us improve the velocity and turnover of inventory and that is now down to about 60 days in the commercial business. That is down by almost 50% over a year ago. So, as we are selling goods rapidly and getting real-time pricing information, it is very efficient for us to respond to any price fluctuation and go back to vendors and adjust rates.

I think also upfront, we have introduced market rate adjustments in our purchase model relationships and contracts that help inflate us from a wide fluctuation in the marketplace. Coming out of last year, we discussed some apparel issues. We went back and renegotiated rates with certain purchase model clients. And so structurally, we are on much better footing in terms of the underlying rate cards used and this operational improvement exercise that will continue to increase our leverage as we move through the year, which will help margins.

Thank you.

And our next question comes from the line of Sri Anantha with Oppenheimer. Please proceed, sir.

Yes, thank you. Two questions. It looks like based on your comments, the commercial seems to be a big option for you guys there. Can you talk about some of the specific initiatives that have been taken, especially are you guys looking to partner with some of the national retailers out there? And secondarily on margins, I know you guys talked about improving margins on the commercial side. Could you just give us an idea where the margins are today in the commercial segment and what does your guidance imply for 2009 for that particular segment? Thank you.

Okay, this is Bill. Let me give you a couple ideas on the national retailer front. We have geared the entire business to be a best practice for Fortune 500 retailers. We have invested considerably over the last two to three years to develop a national distribution center network and more recently, expanded that to be an international distribution network when you include the United Kingdom. So, in this environment, we believe that national network which helps address logistics issues for national retailers is a very important competitive advantage.

I think the other thing we mentioned, since the time of our IPO and a little over two years, we have tripled the GMV flowing through our marketplace. So, national retailers feel comfortable that their incremental volume can be absorbed given the aggregate buyer base we have and the amount of liquidity we now have. So, that is a very strong competitive advantage. And I think also qualitatively, we have a transparent balance sheet that these large public clients of ours can see and feel comfortable knowing that we are financially strong, viable, that we can invest together for multi-year long-term programs and have a partnership business attitude.

So, all those things play very well for us in terms of continuing to grow within the Fortune 500 retailer space. And the type of product that you see moving through the marketplace, liquidation.com is a good reflection of that, we are targeting consumer electronics, apparel and accessories, do-it-yourself home improvement items, hand tools, lawn and garden items.

We have had a growth opportunity in housewares and we talked about capital assets coming out of the retail supply chain as well, because these retailers are all looking at the next couple of years and resizing their infrastructure and in many cases, looking to us on the capital assets side to help them remove things that would be in deli departments or material handling equipment if they close or consolidate retail stores. I think there is a stat out that says there will be 2,400 retail stores closed in calendar '09 from Fortune 500 national retailers. So, that is playing to our strength.

In terms of operating leverage, well, we know that we opened in the last two years in the range of four new distribution centers. So, in those -- in that time frame, you are bearing the upfront cost of materially handling equipment, general management and staff that are new to the company, new to those facilities. So, we are not getting the leverage that one would have at scale. In terms of the opportunity, we feel like it's several points, percentage points on the GMV -- flowing through the GMV and commercial marketplace.

Got it. Thank you. And Jim, just clarify, did you say the tax rate for next year was 43%?

That's correct, yes, Sri.

Okay, thank you.

(Operator Instructions) And our next question comes from the line of Derek Brown with Cantor and Fitzgerald. Please proceed, sir.

Thanks. I would like to peel back the onion a little bit on your GMP guidance for fiscal '09. The midpoint of that guidance implies a $50 million year-over-year up tick from what you generated in fiscal '08. And if I heard correctly, you talked about scrap being down in '09 roughly 30%. And if you sort of layer on top of that supply constraints in the surplus business, question is, what gives you so much confidence that the other segments of business will be able to generate, call it $75 million to roughly $100 million of incremental GMV from what they did in fiscal '08?

Sure, I will start and let Bill wrap up that question, Derek. So, I think the first off is a good question. You have to look at it business by business. We feel confident that other than the DOD business, we expect 20 to 30% growth depending on the geography or business unit that over fiscal year 2009. Now, you are right, we do expect scrap to be down about 30%. Scrap represented about 20 to 22% of our business for fiscal year 2008. So, that is a significant hit. But again, we are talking about a fifth of the business.

On the surplus side of the business, we do expect that to be down, but not significantly and the reason for that is because we have got a continuation of property that will be sold under that contract that was given to us just recently. That is a little bit of a change from our expectation in August. We did expect the CV -- well, what we refer to as CV2 or the original surplus contract, we expected the property flow from that to really dry up in about January or the February time frame. What happened was at the end of that contract, there was a significant amount of property that came due and again, was sort of delivered to us just recently. So, that opportunity for us has really staved off what I would say is the decline of the surplus business for next year, although again, we will see a small, a decrease in that business. So, you are really looking at positive growth everywhere else.

Now particularly your commercial question, I want to put kind of the facts and context that you put there, which are that we do not expect to see a decrease in supply next year from our sellers. In fact, we see good opportunities for an increase in supply. The reference that Bill made in his comments really is a reflection of what I would say is almost a supply pause during this quarter that we are in, in the month of October.

And to be frank, I would say several of our clients almost had a shock to their system around the global financial crisis and many of their normal processes and procedures were halted as they tried to figure out how they were going to deal with the situation as far as consumer credit, holiday spending and so forth. So, we saw a delay in the receiving of property which affected our October numbers.

I believe, I don't know if it was you, Derek, but one of the analysts that covers us actually mentioned that in their report and we have seen an up tick in November and December. Those two months obviously of the quarter have a fair amount of holidays in them. So, when you get off to a bad start in October, that is going to make this quarter pretty tough. So, when you look at the guidance, you will see a particularly tough quarter here in December. We expect that to pick up significantly in the March quarter and throughout the rest of the year.

Derek, the only thing I would add is, you have to take into account two acquisitions. GovDeals showed a nine month result in '08 and Europe, Geneva acquisition was a May acquisition. So, if you take the effect of those two acquisitions, you have got another $40 million of GMV that was purely due to partial year.

Got it. Thank you.

And our final question comes from the line of Gary Prestopino with Barrington Research. Please proceed, sir.

Yes, most of my questions have been answered. But I just want to make sure I am right on this. The basic reduction in guidance is just strictly due to the scrap business and lower prices in scrap that you anticipate?

That's correct, Gary. I mean, the biggest change from our expectations in the beginning of August again were around the scrap contract. We have seen prices in our marketplace decrease significantly, particularly in recent months, meaning October and November. So, again, our marketplace is probably a little bit of a laggard behind the pure commodities marketplaces. And again, there is a correlation of our pricing to that marketplace, although our volatility is less, we are going to move with commodity prices. So, again, we expect at least a 30% decrease next year in the scrap business.

Okay. And then just in general, because I have got a lot of questions, the buyer demand and price realizations at auctions, as people are somewhat concerned about if that demand going into a recession or in a recession is going to remain strong, could you possibly address that?

Sure. Well, we have been through this before, maybe not to the same extreme, but during 2002 and through 2004, slow growth, a lot of drop in discretionary spending, our business grew 35% a year on the top line through that last recession. So, we are a countercyclical business. When a lot of people have demand for less than wholesale-priced goods, there is immediate sort of economic, rational economic behavior. If people want to source those goods, we are a very transparent destination marketplace that through a web browser, people can find the goods that we sell. And since we are an auction marketplace, it is competition that drives who is awarded that property. So, that is a favorable environment in terms of buyer demand.

We also see that when there is a shift in jobs, a lot of people that are well-trained, have technical engineering experience, are laid off, they are looking for other things to do to make ends meet in an economic environment. So, they are entrepreneurially interested in looking at opportunities around products they understand. And so a lot of the products that we bring to market can take advantage of skill sets where people are looking for something to do to generate income and so they are sourcing from us, buying a pallet to a truckload of goods, breaking it down, refurbishing and then selling it through an online storefront, through Amazon, eBay, what have you, to generate income. So, that's another reason why demand is a little bit more resilient in this market.

Would in this kind of market though, do you see any haircut to your price realizations?

Well, we talked about scrap.

Well, I know scrap, but I am talking about on the commercial side.

Commercial, again, pretty efficient, high velocity. We haven't seen any sort of major shift. There is a natural dynamic property flow in the commercial business and technology and product obsolescence drives price more so than sort of the cyclical downturn of the economy at this point. So, it is much firmer on the commercial side than what we have seen in scrap.

Okay, thanks, guys.

And there are no further questions in queue at this time. I would like to turn the call back over to Julie Davis for closing remarks.

Thank you, Latrice. We appreciate everyone's participation. If you have any follow-up questions, please direct them to Jim Rallo or myself. Have a nice evening.

Thank you for your participation in today's conference. This concludes the presentation. Have a great day.