Liquidity Services Inc (LQDT) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Q4 and fiscal year 2009 Liquidity Services earnings conference call. I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session at the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Julie Davis. Please proceed.

Thank you. Good afternoon and welcome to Liquidity Services, Inc. earnings release conference call for the fiscal year 2009 and the three months ending September 30, 2009. During this call we will refer to Liquidity Services, Inc. as LSI. Presenting today are Bill Angrick, our Chairman and Chief Executive Officer, and Jim Rallo, our Treasurer and Chief Financial Officer. This conference call is also being broadcast through the internet and is available through the investor relations section of the Liquidity Services Inc., website.

Before we begin, I 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. 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 may be obtained from the SEC or by visiting the investor relations section of our website.

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

Good afternoon. Welcome to our Q4 earnings call. I will begin the 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 Rallo for more details on the quarter and on our outlook for the year.

LSI generated solid results during Q4 '09, in line with our guidance range during a seasonally low quarter for the Company. Q4 '09 GMV was up 2% sequentially to $92.1 million driven by better than expected property mix and volume in our DOD scrap business, adjusted EBITDA of $7.1 million was in line with our expectations. Although we incurred higher than expected losses in our UK business due to a slower than expected ramp up from new sellers, following the loss of our largest UK seller last quarter, due to their restructuring. Q4 '09 adjusted EPS was $0.11 which excludes the effect of noncash compensation expenses and nonrecurring tax items. We continue to demonstrate our financial strength by generating cash from operating activities of approximately $4.6 million during Q4 '09 and ending fiscal year '09 with approximately $64 million in cash and zero long-term debt. Indeed, fiscal '09 was a year with two distinct halves for LSI as we navigated one of the worst economic downturns since the Great Depression of the 1930s.

The first two quarters of the year were challenging for the business as, one, our commercial and municipal Government sellers were severely impacted by the economic downturn, resulting in a material decrease in product flow through our marketplaces. Two, our DOD scrap business was down more than 46% as a result of a precipitous decline in commodity prices and, three, our DOD surplus contract rollout was delayed by five months until February 2009. During this period of uncertainty, LSI's management team remained focused on executing our key initiatives to ensure the Company was well positioned to drive long-term results for shareholders including, one, the ultimate successful launch of our new DOD surplus contact. Two, improving operations in service levels in our commercial business, three, expanding the size and participation of our buyer base and, four, making our marketplaces easier to use. The result of these efforts are reflected in the second half of fiscal '09.

Adjusted of 112% in the second half of the year compared to the first half. In addition, adjusted EBITDA margin improved significantly from 6.5% of revenue and 4.4% of GMV in the first half of the year to 13.2% to 8.8% respectively for the second half of the year. We believe our continued focus on driving operational efficiencies, investing in innovation, enhancing value for our clients and buying customers positions us well for fiscal year 2010 and continued long-term profitable growth and market leadership. The operational foundation we created in the second half of 2009 and our financial strength will enable us to emerge as an even stronger player in the reverse supply chain market during fiscal year 2010. We plan to focus on the following key areas during fiscal year 2010 which we believe will build long-term value for our stockholders.

One, increase the number of Fortune 1000 and municipal Government clients selling on our platform through expanded direct sales efforts and channel partner relationships. In our commercial business, LSI has developed a prestigious client roster which presently includes seven of the top ten US retailers, two of the top three US warehouse clubs, two of the top three US online retailers, two of the top three extended warranty plan providers in the US, and two of the top three retailers in the United Kingdom. These benchmark clients provide LSI with a wealth of knowledge and expertise on how to address the reverse supply chain needs of large corporate clients. We intend to leverage our domain expertise and reputation as the market leader by expanding our base of sellers within the fortune 1,000 market during fiscal year 2010. In our Government business, LSI has developed an unparalleled roster of clients including the US Department of Defense, United Kingdom Ministry of Defense, 11 state agencies, and over 2,000 municipalities. We intend to leverage our successful track record and continue to expand our base of government agency sellers during fiscal year 2010 at a time when government agencies across the US are in desperate need of solutions that drive efficiencies and value for taxpayers.

Second initiative, is to develop new buyer channels and offerings to optimize the net recovery for our clients. During fiscal 2010, we intend to expand our capability to extract higher yields by selling and merchandising client products across a variety of channels including cross listing of items across LSI's B2B marketplaces, development of B2C channels in cooperation with our clients and, third, development of export channels for large lot buyers. Our third initiative strengthen the branding of our e-commerce marketplaces and services to buyers and sellers. We have a great story to tell, both buyers and sellers, and we intend to increase our marketing to both of these constituencies during fiscal year 2010 using public relations, trade promotion, and variety of branding actions. Our fourth initiative is to continue to enhance operations and service levels to improve the customer experience. We plan to maintain strong inventory velocity across our commercial and DOD businesses and launch a suite of new buyer user experience tools on our public website, liquidation.com, that we believe will drive seller satisfaction by improving the participation of our growing base of 1.2 million registered buyers.

With respect to our business outlook, we believe we are well positioned to reaccelerate our growth during Q1 and throughout fiscal year 2010 due to the progress made in the second half of fiscal year '09. Although inventory levels and average sell prices in the retail industry are down year-over-year, trends in our commercial business have improved during the recent months of October and November as we experienced significant growth in the number of auctions completed in our liquidation.com marketplace during the Thanksgiving holiday weekend, Cyber Monday and our restock Tuesday as compared to last year.

In summary, we have a strong diversified overall business that we expect will generate top line growth, positive cash flows, and excellent returns on invested capital in fiscal year '10. 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, we expect to further strengthen during fiscal year 2010. Now let me turn it over to Jim for a more detailed review of our financial results and our outlook.

Thanks, Bill. The amount of gross merchandise volume, or GMV, decreased $7.6 million or 7.6% to $92.1 million for the three months ended September 30, 2009, from $99.7 million to the three months ended September 30, 2008. Primarily due to, one, a $4.2 million decrease in our scrap business as a result of decreasing commodity prices and, two, the $2.8 million decrease in our surplus business as the result of the removal of certain product categories by the DOD in accordance with our new surplus contract under which we began significant operations in March 2009.

Revenue decreased $7.5 million or 10.6% to $62.9 million for the three months ended September 30, 2009, from $70.4 million for the three months ended September 30, 2008, primarily due to the items discussed regarding the decrease in GMV. GMV revenue continued to diversify as a result of the percentage of GMV and revenue derived from our DOD contracts during the three months ended September 30, 2009 decreased to 39.7% and 58.2% respectively compared to 43.7% and 61.8% respectively for the three months ended September 30, 2008. Cost of goods sold excluding amortization increased $4.4 million or 21.9% to $24.6 million for the three months ended September 30, 2009, from $20.2 million for the three months ended September 30, 2008. As a percentage of revenue, cost of goods sold excluding amortization increased to 39.1% from 28.7%. These increases are primarily due to the new surplus contract under which we began significant operations in March 2009 and utilizes the purchase model versus the old surplus contract which utilizes the profit sharing model.

Profit sharing distribution is decreased to $12.4 million or 52.7% to $11.1 million for the three months ended September 30, 2009, from $23.5 million for the three months ended September 30, 2008. As a percentage of revenue, profit sharing distribution has decreased to 17.6% from 33.4%. These decreases are primarily due to the new surplus contract which has no provision for distributions.

Technology and operations expenses increased $600,000 or 5.9% to $11.4 million for the three months ended September 30, 2009, from $10.8 million for the three months ended September 30, 2008. As a percentage of revenue, these expenses increased to 18.2% from 15.4%. These increases are primarily due to expenses associated with our commercial business. Sales and marketing expenses increased $500,000 or 10.6% to $5 million for the three months ended September 30, 2009, from $4.5 million for the three months ended September 30, 2008. As a percentage of revenue, these expenses increased to 7.9% from 6.4%. These increases are primarily due to our hiring of thirteen additional sales and marketing employees.

General and administrative expenses decreased $100,000 or 1.5% to $5.5 million for the three months ended September 30, 2009, from $5.6 million for the three months ended September 30, 2008. As a percentage of revenue, these expenses increased to 8.7% from 7.9% primarily due to the decrease in revenue. The Company continues to generate strong free cash flow. LSI generated $4.6 million of operating cash flow during the three months ended September 30, 2009. Adjusted earnings before interest, taxes, depreciation and amortization or adjusted EBITDA was consistent at $7.1 million for the three months ended September 30, 2009, and 2008. Adjusted EBITDA margins increased to 11.2% based on revenue and 7.7% based on GMV for the three months ended September 30, 2009, compared to 10% and 7.1% respectively for the three months ended September 30, 2008.

I will now discuss the fiscal year 2009 results, and will not provide detailed explanations for changes from fiscal year 2008 when those explanations are similar to the ones previously discussed. Revenue decreased $27.6 million or 10.5% to $236.3 million for the year ended September 30, 2009, from $263.9 million for the year ended September 30, 2008. This decrease was primarily due to a 37.6% decrease in our scrap business which utilizes the profit sharing model, as a result of decreasing commodity prices. This business generated 21.5% of our revenue, and 14.2% of our GMV for the fiscal year ended September 30, 2009, as compared to 31.1% and 22.8% respectively for the fiscal year ended September 30, 2008. GMV decreased $3.7 million or 1% to $356 million for the year ended September 30, 2009, from $359.7 million for the year ended September 30, 2008. This decrease was not as significant as our revenue decrease as our consignment model which generated 10.6% of our revenue, and 41% of our GMV for the fiscal year ended September 30, 2009, as compared to 33.1% and 7.6% respectively from fiscal year 20 -- September 30, 2008, grew 22.6%.

Cost of goods sold excluding amortization increased $15.3 million or 21.4% to $86.6 million for the year ended September 30, 2009, from $71.3 million for the year ended September 30, 2008. As a percentage of revenue, cost of goods sold excluding amortization increased to 36.6% in fiscal 2009 compared to 27% in fiscal 2008. These increases are primarily due to, one, expenses of $5.7 million associated with the full year of Geneva which was acquired on May 1, 2008, and utilizes a purchase model which is a higher cost of goods sold than the profit sharing model. Two, expenses of $10.4 million associated with the new surplus contract which began sales during March 2009 and also utilizes the purchase model and, three, a 37.6% decrease in our scrap business revenue which utilizes the profit sharing model. The profit sharing distribution has decreased $45.8 million or 50.2% to $45.3 million for the year ended September 30, 2009, from $91.1 million for the year ended September 30, 2008. As a percentage of revenue, profit sharing distribution has decreased to 19.2% in fiscal 2009, from 34.5% in fiscal 2008.

These decreases are primarily due to one, a 37.6% decrease in our scrap business and two, the new surplus contract which has no provision for distributions. Technology and operations expenses increased $5 million or 12% to $46.5 million for the year ended September 30th, 2009 from $41.5 million for the year ended September 30, 2008. As a percentage of revenue, these expenses increased to 19.7% in fiscal 2009 from 15.7% in fiscal 2008. These increases are primarily due to, one, the decrease of 37.6% revenue from our scrap business while incurring similar operational costs as pounds of scrap sold during the two periods were not materially different. Two, expenses of $800,000 associated with the roll out of operations under our new surplus contract. Three, expenses of $3 million associated with our commercial business and, four, expenses of $1.2 million associated with the full year of Geneva which was acquired on May 1, 2008.

General and administrative expenses increased $1 million or 4.7% to $22.5 million for the year ended September 30, 2009, from $21.5 million for the year ended September 30, 2008. As a percentage of revenue these expenses increased to 9.5% in fiscal 2009, from 8.2% in fiscal 2008. These increases are primarily due to, one, the decrease of 37.6% in revenue from our scrap business which incurred similar costs during fiscal 2009 and 2008. And, two, expenses of $1 million related to stock-based compensation.

Adjusted EBITDA decreased $2.6 million or 10% to $23.6 million for the year ended September 30, 2009, from $26.2 million for the year ended September 30, 2008. Adjusted EBITDA margins were consistent at 10%, based on revenue and 6% based on GMV for the year ended September, 30, 2009, compared to 9.9% and 7.3% respectively for the year ended September 30, 2008. Net income and adjusted net income for the year and the fourth quarter were adversely affected by a sharp increase in the Company's effective income tax rate from 46% to 58% for the year and 85% for the fourth quarter, due to the recording of an allowance during the fourth quarter against the deferred tax assets of our UK subsidiary, consisting principally of net operating loss and carry forwards. This does not affect our cash taxes.

Net income for the year ended September 30, 2009 was $5.7 million or $0.21 diluted earnings per share. Adjust net income for the year ended September 30, 2009 was $8.4 million, a decrease of approximately 41% from the prior year or $0.30 adjusted diluted earnings per share. Net income for the three months ended September 30, 2009, was $600,000 or $0.02 diluted earnings per share. Adjusted net income for the three months ended September 30, 2009, was $900,000, a decrease of approximately 73% from the prior year's comparable period or $0.03 adjusted diluted earnings per share. Excluding the tax adjustment, adjusted diluted earnings per share for the fourth quarter would have been $0.11 and $0.38 for the year. We estimate that our future effective income tax rate will be approximately 46% which is comprised of, one, 35% for federal taxes, two, approximately 8% for state taxes and three, approximately 3% for book and tax differences including stocked base compensation expenses primarily related to employee stock options which are currently expensed in our financial statements but are not deductible for tax purposes until they're exercised.

I will now discuss the Company's other key operating metrics as I have already touched on GMV which management believes allows to monitor the success of our marketing programs as well as our allotting and merchandising strategies. During the last 12 months we also benefited from our ability to more effectively market assets to potential buyers. Our marketing efforts resulted in a 20.3% increase in registered buyers to approximately 1,202,000 at September 30, 2009, from approximately 999,000 at September 30, 2008. Auction participants increased to 521,000 for the three months ended September 30, 2009, representing an increase of 54,000 or 11.6% over the 467,000 auction participants for the three months ended September 30, 2008. For the year ended September 30, 2009, auction participants increased to 2,118,000 representing an increase of 367,000 or 21% over the 1,751,000 auction participants for the year ended September 30, 2007. Completed transactions increased 12,000 10.2% to approximately 121,000 for the three months ended September 30, 2009, from approximately 109,000 for the three months ended September 30, 2008. For the year ended September 30, 2009, completed transactions increased 97,000 or 26.2% to approximately 469,000 from approximately 372,000 for the year ended September 30, 2008.

The Company continues to have a strong balance sheet. At September 30, 2009, LSI had $64.2 million of cash, current assets of $91.4 million and total assets of $138.6 million. The Company continues to be debt free, with current liabilities of $31.6 million and long term liabilities of $3 million for total liabilities of $34.6 million at September 30, 2009. Stockholders' equity totaled $104 million at September 30, 2009. Capital expenditures during the three months ended September 30, 2009 were $900,000, and $3.7 million for the year ended September 30, 2009. We expect capital expenditures to be between $3 million to $3.5 million for the fiscal year ended September 30, 2010.

The management team is providing the following guidance for the next quarter and fiscal year 2010. While we were pleased with our recent progress, our overall outlook remains cautious due to the economic environment and its impact on the retail supply chain. We are in a period of economic uncertainty and unprecedented market volatility which makes it more difficult for us to forecast business trends in the timing of selected new programs resulting in a wider than usual guidance range.

In the short term, we believe changes in consumer spending patterns may reduce the overall supply of goods in the reverse supply chain and the volume and value of goods sold in our commercial market place. 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 marketplaces. Two, as our corporations and public sector agencies focus on reducing costs, improving transparency and working capital flows, by outsourcing reverse supply chain activities, we expect our seller base to increase. And three, as corporations in 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 the next quarter and fiscal year 2010. One, stabilize commodity prices in our scrap business, two, stabilize average sales prices realized in our commercial and state and local Government marketplaces and, three, the wind down of property sales under our original surplus contract in the second quarter. The loss of approximately $16 million in GMV and our surplus business compared to fiscal year 2009 related to the removal of certain property categories by the Government under the terms of the new surplus contract. Five, an effective income tax rate of 46%. Six, improved operations and service levels in our commercial business which we expect will continue to improve margins during the fiscal year and seven our expectations that we will achieve less than optimal results in our UK business in the near-term as we replace the lost volume from one of our major UK clients which restructured their business.

Our results may also be materially affected by changes in business trends and their operating environment and by other factors such as investments and 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 that we receive from 23% up to 25%. Payments under this incentive feature are based on the amount of scrap we sale 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 in providing guidance regarding our projected financial results for fiscal year 2010, that we will again receive this incentive payment.

We expect GMV for fiscal year 2010 to range from $360 million to $400 million. We expect GMV for the first quarter of fiscal year 2010 to range from $82 million to $92 million. We expected adjusted EBITDA for fiscal year 2010 to range from $26 million to $30 million. We expected adjusted EBITDA for the fiscal first quarter of 2010 to range from $6 million to $7 million. We estimate adjusted earnings per diluted share for fiscal year 2010 to range from $0.40 to $0.48. In the fiscal first quarter of 2010 we estimate adjusted earnings per diluted share to be $0.09 to $0.11. Our guidance, adjusted EBITDA and diluted EPS for the effects of FAS123R which we estimate to be approximately $2 million to $2.2 million per quarter for fiscal year 2010. The Company expects its trend of increasing stock based compensation cost to moderate in fiscal year 2011.

Bill and I will now answer any questions. Thank you.

Thank you. (Operator Instructions). You have a question from the line of Shawn Milne from Janney Montgomery Scott. Please proceed.

Thank you, and good afternoon, thanks for taking my questions. One for Bill and two follow-ups for Jim. Bill, you talked about the improving growth in the commercial business, in the first quarter. We see it north of 20%. Can you talk about what you are doing to drive really sustainable growth through the next couple of years, where you see the sales force, how is pipeline building, how conversion from pipeline to actual bringing product online is working, and specifically, your efforts to tap further into the [EDC] channels as a new avenue of growth. And secondly the one on guidance, you pointed to 8% growth for GMV growth for the year, but about 6% in the first quarter which I believe is the easier comparison, are you being more conservative, just, near term or something there I am missing, and just housekeeping on the tax guidance you guided 46%, where did you think it was before? It is, I think it is a few points higher than what we were thinking. Thank you.

Thanks for your questions. Let me address a few before I hand it over to Jim. We are seeing reacceleration of growth in the commercial businesses as you noted. We had a good October, relative to the prior year, and November, was better than October relative to year-over-year growth. So we are seeing some nice trends there. We also saw that closed auctions have been trending up nicely, up 40% on liquidation.com over this restock Tuesday campaign which is just an add on to Cyber Monday for a B2B marketplace, if you consider that any of our buyers are destocking, in preparation from last holiday season. So those trends we think are quite vibrant for the business.

The other thing that I would point out in terms of the contact, the prior year has been a year of focusing on improving operations and service levels in our commercial business, as we identify and bring on board new large organizations. It is worth noting that during the course of fiscal 2009 for example, our inventory velocity dropped from 64 days at the end of 2008 to less than 38 days in Q4 '09. That's created a lot of benefits. We're a more capital efficient business. We've also created the capacity in our distribution center network to increase our volume about threefold with marginal incremental fixed costs, so with improved inventory velocity, with improved conversion rates on the buyer side, our buyer base has continued to be very robust -- 20% year-over-year growth, those are two pillars, Shawn, to preparing to take on the next set of clients.

Over the last six months, we have signed approximately 20 Fortune 1000 clients to various new programs. That gives us quite good visibility as we look out to fiscal 2010 and beyond so that not only are we getting some benefit from the sales outreach -- we hired two business development directors in March and we are seeing some benefit of that as we exit fiscal 2009. We have the operational capacity and service levels to continue to grow the business on a sustained basis. We talked about some of the functionality over the course of last year we are building -- we expect to release a new set of higher experienced tools on the liquidation.com platform in the coming month or so. This is part of a continuous improvement exercise so if you're a bulk buyer who wants to export product, you are going to have a different user experience from someone who might want to buy a pound of goods to resale in an online store front versus someone who is really looking for that single LCD TV because they're an end user.

As far as where we sit strategically with our clients, our clients believe that we are in a great position to help them to handle the sale of new overstock or shelf pulled goods that really we haven't historically targeted. These items which are like new or still in the original packaging, these clients have historically sold either on their own branded e-tail sites or close out section of their store or perhaps they sold these in single units on eBay or even Amazon.

But what our clients are saying is one, this is a noncore function and, two, we believe LSI is in a position to handle this more efficiently. We have economies of scale, and shipping, storage, transportation management, handling these items, and so clients just think please manage this piece of our product flow, we can free up resources or even reduce costs and LSI frankly can optimize the overall recovery for the client by determining if that item is best sold in bulk or small quantities five to 10 on our B2B marketplaces or in single units to an end user, either on a marketplace we have or through a client's channel. Or, even a third party marketplace for that client. There are multiple prongs to just expanding the relationship that has come in to play and what we are seeing are items such as high end consumer electronics, power tools, toys, sporting goods and equipment fall into this multi-channel B2C offering and we think there's just an evolution of the relationship we're developing with these large players.

I think the rest of your question can go to Jim.

Thanks, Bill. On the first topic you had which is GMV growth, I think what you really have to do is break down the business by unit. We have a portion of our business -- to be specific -- 22% of our business which is a surplus contract for the Department of Defense. That business is going to be down, our estimates are around 15% year-over-year. We knew that I talked about that before, that's due to the fact that certain items we use to sale, under the old surplus contract will no longer be available for us to sell under the new surplus contract. That was always part of the plan.

If you look at the rest of the business, we certainly expect to get 20% or better growth in our commercial business as well as our GovDeal business, as well as Europe. As Bill talked about the pipeline, we are building back our GMV quickly in Europe from the loss of a significant client, we are working with some of the biggest retailers in the UK now and we feel like by the end of the year that business will be back on track and profitable by the end of next fiscal year. You also have a component of the business, Shawn, about another 20% that is a scrap business. When we look at scrap and we forecast scrap, we don't really consider that to be a growth business for the Company, we that possibly growing in single digits next year. We are anticipating stability in scrap pricing, meaning we've taken the prices for the last several months of this fiscal year and applied them to our next year's forecast.

Certainly if scrap prices go up, we can do better, if scrap prices go down, we certainly could do worse. We feel it is our job not to try to guess what the prices are going to be but to deal with the data we currently have. So, given that, I think we have given a fairly wide range, and the numbers you are talking about of 8% and 6% in your question, those are certainly the mid points of the range. So I think again, what's driving some of the pressure on GMV growth next year is a reset in the surplus business specifically. On the tax rate, 46% is actually the rate we used for the first three quarters of fiscal year 2009. If you look at the description in the press release you will note that I tried to break it out for people because I do understand our tax rate is confusing especially this year. We are a full federal taxpayer at 35%. Our state rate is approximately 8%. Those two combined are 43%.

Now, we have got an additional 3% that's been affecting us which is unfortunately stock based compensation that has been growing through our financial statements. And, we've not received the deductibility for that in our income taxes. That will flip assuming that the stock price rises and people -- employees who have options will be able to exercise them. So, when that happens we will get the benefit of that and that last 3% will disappear, and eventually, we would arrive at somewhere between 43% and 44% which would be a normalized tax rate for LSI. But, right now, we are anticipating a 46% rate next year, assuming we don't get any tax benefit from the exercise of options.

Next question, please.

We have a question from the line of Stephen Ju RBC Capital Markets. Please proceed.

Good afternoon, guys. So just going through the guidance, and making certain assumptions on a segment by segment basis, I guess, $360 million to $400 million range in GMV for next year contemplate a mid single digit growth, in the commercial segment, at the low end, do probably around the mid-30s growth range for the commercial marketplaces. Just wondering if the math is correct. And also looking at the EBITDA profitability.

Steve, can you do me a favor, you were a little light there, the phone was breaking up. Can you repeat the first part of that question.

The first part of the question is going through each segment, GMV based on your prior commentary, and looking at the range of $360 million to $400 million, it seems you are contemplating the growth rate of the commercial segment of something in the range of mid single digits at the low end to almost probably over 30% at the high end, just wondering if my math is correct there, also on the EBITDA profitability for the first quarter and the full year -- especially for the first quarter, it seems a little bit light versus where, what we were expecting. Just wondering if you have any color there, I'm looking at the EBITDA divided by GMV and looking at that versus where you guys were historically. Thanks.

Sure. Let me comment first on the commercial growth. As I said answering Shawn's question, our anticipation that commercial will do 20% or better growth this year, I do understand the math you are talking about from the range we have given on GMV, because we have done that because of a certain uncertainty in other parts of the business. We can see significant fluctuations in the scrap business, depending on property mix, we've certainly seen significant fluctuations in that business this year due to pricing. Also, again, with the surplus business, we are obviously counting on the DOD to give us a continuous supply as they have over the last year, but again still fairly new with the new [CV3] contract, and want to allow some room in there for volatility and property flows during certain periods with the government. But, again, we do believe we can do 20% or better in the commercial business this year, and that's what we built in to the forecast.

As far as the EBITDA margins go, if you look at it on a percentage of GMV as you are, we were about for the year, 6.6%, 6.7%. It was obviously higher in the second of the half year, running 7.7% in the last quarter. We actually applied a pretty much similar margin in the first quarter of the year as we had in the fourth quarter, a little bit of exception to that would be traditionally, it is a little lower quarter in GovDeals so that has some effect on it just due to seasonality. And, again, as we indicated before, we are losing money in our European business today and expect that to continue through December. That's dragging a little bit on margins through the first and second quarter. But, as we look out through the year, we would expect GMV margins to be better than they were this year, overall, again about 6.6% to 6.7% this year, and we would certainly expect them to be somewhere between 7.5% and 8% next year on a percentage of GMV.

Got you. Should we assume that the run rate on the surplus business should be somewhat in line with what's flowing through under the terms of the new contract -- I believe that's around $16 million or that range?

Absolutely, yes. Again, I think that we don't really consider the surplus a growth business. We do think we can probably drive single digit growth out of that once it normalized, but I think right now the normalized run rate is, as you have said, around $16 million.

Okay. Thank you.

We have a question from the line of Colin Sebastian from Lazard Capital Markets. Please proceed.

Thanks for taking my questions. Just a couple of them. First of all, your guidance for 20% growth on the commercial business next year -- or this year, fiscal 2010 -- does that imply or are you expecting increasing product flows from existing customers, or is that more about bringing on customers on the commercial side or it's probably some mixture of both. Secondly, maybe you can expand on the B2C strategy -- do you need to segment the website at all to appeal more to consumers, is there much of an investment required as you start to focus more on that channel?

Well, with regard to, what are the drivers for commercial growth? As you would expect it is a mixture of both. We do know that retail sales, I think the last numbers that I saw were down 7% year over year through November across the board. You've got two ends of the continuum. Guys like Saks are down 21% year-over-year, and the big box retailers discounters are up year-over-year, the secular switch to online. So some of the big online players are doing better. We happen to be serving a portfolio of clients that are at the right end of that continuum -- at the positive end of that continuum and they are fairing better on a relative basis than say some of the department store chains.

So while things are still sluggish year-over-year, they're not in a free fall. The environment is, we feel with the consumer still nervous about job security, still somewhat frugal, we are expecting that some of our most mature programs could be flat to even down a little bit. So we see a larger growth frankly is annualizing some of the business we brought on in the last six months and getting the full benefit in fiscal 2010, that's point one. And, point two, these are less mature relationships, so we are going to be able to expand the volumes of these clients, as they annualize with us in fiscal 2010. So that's at the heart of what's driving growth -- it is visible, it is based on current client pipeline.

In terms of the B2C strategy, what our primary goal is -- is we listen to the clients, let them frame for us where their pain points are, and I think that clients universally are saying look, I need to find every efficiency possible and drive the cost reductions in their model in the current year. And so we are able to look at this segment of property that might be new or overstock, and where clients say look you are already handling a good range of products for us can you just tack this on, we are already sending flows to you on -- to your distribution centers. We tack this on, (inaudible) to scale, we do have quite a bit of data, Colin, to tell our clients is it worth breaking items out in smaller quantities or even single units to drive higher net recovery. So that's a very important part of the intellectual frame work for working on the B2C side.

We don't see ourselves as driving large scale B2C offerings. What we do see is leveraging existing channels, some of which our clients might be bringing to the table. At the margin what we've seen in this last six to nine months is people are coming to liquidation.com who aren't businesses. People are looking to save money and they are coming to our site and being very interested in single unit LCD-TVs, iPods, high-end power tools, exercise equipment.

So it doesn't cost us a lot more to break out say a unit of five to a unit of one or two and that's what we've done. So, we have a single unit section of liquidation.com, but we wouldn't see strategic long-term that being a consumer site. So you might see 10% to 20% of our flows over time, migrate to end user sales just because our clients are pulling us in that direction.

Bill, if I can follow up on one of your earlier comments -- in the second quarter, the March quarter -- are you going to expect some impact from -- in terms of growth -- from last year where you probably had a lot of inventory coming in post holiday where as this year obviously retailers have been more constrained in their inventory purchases?

I think what we are seeing is the breadth of the clients that we're bringing on will be driving very strong year-over-year growth, independent of this macro headwind of lower retail volume. So, March to March quarter seasonally is always a good quarter for us. And, we expect that to be the case this year as well.

We have a question from the line of Gary Prestopino, Barrington Research. Please proceed.

Most of my questions have been answered but is this really the last quarter where you should have a negative comp on the scrap. This negative quarter that just -- a negative price comp on the scrap this quarter that just finished up.

I will let Jim answer that.

Obviously, our answer to that is we believe so and what I mean by that is that we have seen scrap prices bottom about five or six months ago. At this point, from the bottom, scrap prices are up somewhere between 8% and 12%, I mean there's a lot of volatility in that number depending on if you're scrap steel or aluminum or copper. We would certainly expect not to see a decrease like we did in 2009 compared to 2008 in scrap pricing when obviously commodity prices hadn't hit a bubble.

It's certainly possible from a pricing perspective, we wouldn't expect big dips. Obviously, we are not in control of the macro economic conditions of the world, but that is our viewpoint today. I would say again remember for us the scrap business is a little volatile, that mix of product that we get on a quarter to quarter basis from the government can be different from each quarter. You can see volatility within the year in that business, either up or down. Hopefully that answers the question.

Yes, that's fine. In terms of -- is the new surplus contract fully ramped up?

Yes it is.

So when you are saying that you are going to have $16 million of property out of this contract, we would have to assume if it's fully ramped we take -- get some annualization -- take $16 million out of that annualization number and that would be a number that we would be looking at here?

Yes, approximately.

Okay. And then in terms of your GMV, the range is $40 million, is there any market that gets you to the high end of the range, or is there any market you are looking at that could get you there or even above there as a commercial or just scattered across different markets?

If you go through each of them, Gary, commercial has always had the opportunity for stair step growth as you work with large organizations. So, that is always a potential catalyst for moving you to the high end of the range. This year we have invested in expanding our sales force in the municipal government business, GovDeals -- this is a market of about 60,000 municipalities in the US that has grown fairly virally over the last two years. This year we have a new national sales manager targeting higher population centers.

We have just started some work in California, high population center, significant budget issue, so we are getting some traction in southern California actually there. So there is some possibility for upside in that business. Scrap, well, as prices improve -- I think Jim commented on this earlier -- we would have potential upside there. It is obviously the opposite on the down side, and there's another element of scrap which is sometimes there's just large referrals of volume, you don't have visibility in that business beyond say 30 to 45 days. So very hard to predict that. I'd say the least amount of upside would come from our new DOD surplus contract which is a more stable business.

Very quickly, I assume you are looking at an operating environment very similar to the latest quarter you just operated in for the fiscal year. Really no real improvement from these levels in the economy in what you are projecting here?

Yes, look, I think that's right. I think, you look at the picture of November, same-store sales, and it's a very mixed bag. I think the overriding issue is still consumers have some pessimism, and while certain online players might be getting some traction on a deal hunting mentality, it is hard for us to see any sharp improvement in the outlet for retail.

I think Gary, with 10.2% unemployment and obviously the true unemployment number being a lot higher than that is those folks fall off the rolls, and I think it is going be tough for us to expect any pick up from business, just due to the economy next year.

What we are doing is getting close to our clients against this backdrop, to give them every avenue to save cost, drive efficiencies, our distribution center network is quite valuable, it helps sellers obviate their own space needs, they may be able to consolidate facilities or even close facilities by letting us handle the flow of store returns. In any economic environment, you still see a high degree of return volume even in -- there's even buyer's remorse in today's environment, someone may have exuberance and buy something they don't really think they must have, it is a nice to have, not a need to have, so they will take it back. So return volumes are relatively steady if not even going up in this economic downturn.

It would assume that the retailers are maybe a little more especially on a new business way that they're more willing to listen to your story and more interested in what you can do for them versus maybe where you were six months ago with the environment then?

Unquestionably that's the case. This becomes a much more strategic conversation for them -- let's offer a new paradigm for how to manage new reverse supply chain. Let's take some costs you're incurring and turn them into savings by leveraging, economies of scale, our buyer base, distribution center network and frankly we have all the data on how to maximize recovery for large retailers and the vendors who supply the retailers. So we are trying to partner with our clients and get very strategic in this environment.

Okay. Thank you very much.

(Operator Instructions). We have a question from the line of Heath Terry at FBR Capital Markets. Please proceed.

Great. Thank you. I was hoping you can give us a sense, you mentioned the 20 new partners you've added Fortune 1000. Can you give us a sense of any specific mix or type of partner within the commercial side of the business that you're having particular success with. And when you're having these conversations, the final answer ends up being no, thanks but no thanks. Generally what's the reason that you are not winning that business?

Sure, as I mentioned at the beginning of the call if you look at our present client roster, some the top ten US retailers, that's by revenues. So, who are working with and I believe we added four of those in the last six months. So these are large national -- either big box retailers in some cases, do it yourself home improvement retailers. We have interestingly been embraced by a large national grocery chain to optimize the handling and sale of unsaleables and a lot of those are nonfood items, certainly they are all nonperishable items. We have seen a lot of interest in the sporting equipment, sporting goods space, the technology space, both online and traditional retailers. That's our bread and butter. Really you look at large national retailers and hard goods, consumer electronics, toys, sporting equipment, to some extent better department store apparel -- we have seen some interest in that.

The other thing that's interesting is, as we rolled out our UK capabilities, we have a lot of interest -- keen interest -- in LSI because we can take product put it in the US efficiently or move it out of the country which is a requirement for some of these retailers. So the interesting question that you pose is well why wouldn't you win business? I can tell you three or four or five years ago, people didn't really have a sense of urgency to look at transforming the reverse supply chain.

Why? Well, the economy was pretty healthy. Business was good. There wasn't really as much scrutiny around transparency. Fast forward to this last year that we've had -- business is tough, everyone is looking for efficiencies, actually transparency is extremely important for a variety of reasons. Clients are looking for ways to re-enter their business to make permanent reductions or drive permanent efficiencies so that's a great environment for us, and it is not really a question of we are going to choose some other alternative -- what Fortune 1000 sales is all about is driving behavioral change -- and where we see our business having success is we are starting to reach that tipping point of where four or five years ago it was less risky to just maintain the status quo, that the inertia was very high. In this environment it may be risky not to look at new solutions, and not to leverage the best practice. And I think when we were able to sit down with these clients and talk about the data, net recovery rates that we can bring to the table, it is very compelling and we are in a very good environment. So, what we are selling against really isn't a third party, it is the inertia and in-house solution that has driven most of this industry over the last many, many years.

Great. Thank you.

This concludes the question-and-answer session of today's conference. I would like to turn the call back to Julie Davis for closing remarks.

Thank you for joining LSI's Q4 and fiscal year 2009 earnings call. You may contact Jim Rallo or me with any additional questions. Thank you.

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