Liquidity Services Inc (LQDT) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2010 Liquidity Services, Inc. Earnings conference call. My name is Anne and I will be your coordinator for today's call. (Operator Instructions). And as a reminder, this conference is being recorded for replay purposes. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session following the presentation.

I would now like to turn the presentation over to Julie Davis, Director of Investor Relations. Please proceed.

Thank you, Anne. Good afternoon and welcome to Liquidity Services, Inc. earnings release conference call for the fiscal first quarter 2010 and the three months ending December 31, 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. web site.

Before we begin, I'd like to remind you that matters discussed on this call contain forward-looking statements that involve risks and uncertainties concerning LSI's expected financial performance, as well as LSI's strategic and operational plans. These forward-looking statements involve a number of risks and uncertainties that 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 web site 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 web site.

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

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

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

Good afternoon and welcome, everyone, to our Q1 earnings call. I'll begin the session by reviewing our Q1 financial performance and then provide an update on our major initiatives for the new fiscal year. Finally I will turn it over to Jim for more details on the quarter and on our outlook for the year.

Q1 was a very productive quarter for LSI as we exceeded our guidance range while continuing to make important investments for the future. Q1 GMV was up 14% year over year to $93.6 million driven by strong performance in our commercial, gov deals, and scrap businesses. Adjusted EBITDA of $8.4 million was up 303% year over year and adjusted EPS, which excludes noncash compensation expenses, was $0.14, up 360% year over year. In summary, LSI has weathered the financial downturn of 2009 and begins the new fiscal year as a stronger company ready to transform the surplus goods marketplace worldwide.

During Q1, the effectiveness of our business model was evident as we continued to add new sellers and buyers in strong numbers. Our improved merchandising, operations, and service levels translated into higher recovery rates for our clients and greater satisfaction for the thousands of small businesses, entrepreneurs, and end consumers who purchase products in our online marketplaces. This in turn drove higher margins for LSI. We expect this virtuous cycle to strengthen as we expand the size and scale of our marketplace for surplus goods moving forward.

In November, we celebrated ten years of excellence at LSI in our mission to provide commercial and government clients and buying customers the world's most transparent, innovative, and effective online marketplaces and integrated services for surplus assets. We believe the new decade holds even greater promise for LSI. By continuing to provide corporate and government clients the most innovative and efficient e-commerce model for surplus assets, we are gaining market share, building a stronger business, and having a positive impact on our clients' environmental sustainability initiatives.

Our growth strategy for fiscal 2010 is straightforward. First we will expand our base of seller clients. Business and government clients have unique needs regarding the management and sale of their surplus, returned, and end-of-life assets that can not be met solely from hands-off do-it-yourself solutions. Increasingly commercial and government organizations are turning to LSI to remove the friction from the reverse logistics process and to deliver higher financial returns. LSI uniquely integrates all required services to make the sale process seamless and secure for our clients, such as transportation management, warehousing, brand protection, inventory verification, export compliance, and financial settlement services. Managing the reverse supply chain is a knowledge business and LSI is increasingly viewed as the most reliable and trusted partner for serving the needs of large corporations, middle market businesses, and government organizations of all sizes.

During fiscal 2010, we will leverage our successful track record and domain expertise from completing over $1.5 billion in surplus asset sales to expand our base of sellers within the Fortune 1,000 commercial and government markets. At a time when corporations and government agencies across the US and internationally are in need of solutions that drive efficiencies and greater value, LSI provides the global reach and transparency through our award-winning marketplaces--liquidation.com, govliquidation.com, govdeals.com, and liquibiz.com, to deliver the highest financial return for clients, surplus, and end-of-life assets. Given our core competencies, we expect to see continued growth, not only in consumer finished goods categories, but also capital assets, including heavy equipment, rolling stock, and scrap metal.

Second, we will expand the reach and scale of our buyer base to optimize our clients' financial recovery. By leveraging our industry knowledge, we are able to deliver the highest financial returns to our clients net of costs. Our market intelligence gained from completing nearly 2 million surplus transactions ensures that each asset is placed in the appropriate sales channel, including B2B and consumer or export-only channels, with the appropriate asset information and quantities to optimize results for the client. Moreover, we see tremendous upside to continuing to study and segment the needs of our nearly 1.3 million registered buyers, which include exporters, traditional retailers, online resellers, end users, and consumers. These insights have allowed us to develop and deliver enhanced features through our online marketplaces.

For example, we recently conducted a beta launch of a new version of our liquidation.com marketplace that is responsive to the needs of our buying customers and the way they interact with our marketplace and manage their own business. Early results are very encouraging regarding increased site conversion and buyer satisfaction. During fiscal '10, we intend to extend the most promising site enhancements from this new launch to many of our other marketplaces. We also expect to realize greater synergies with our buyer base by further integrating our UK and US commercial marketplaces and our government marketplaces. Together these actions will further improve the buyer experience and boost recovery rates for our sellers. Finally, during fiscal 2010, LSI will continue to enhance operations and service levels to improve the customer experience.

Clearly we are seeing the benefits of our relentless focus in this area within our commercial business. During Q1, our operational throughput and inventory velocity improved 35% year over year. We improved the quality of our web site experience and fulfillment process, resulted in a 39% year-over-year decrease in the number of customer disputes and a 28% year-over-year increase in buyer retention. These gains are more impressive considering that we grew the number of completed commercial transactions by 43% year over year during Q1. Our 2010 plan calls for additional investments in our customer care operations and back office infrastructure to support future growth and higher transaction volume. In summary, our continuous improvement culture is allowing us to scale more effectively and drive operating leverage in our business.

In closing, 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 2010. We have leading e-commerce marketplaces addressing multiple large market opportunities in the surplus goods category. We have expanded our leading roster of clients, which now includes seven of the top ten US retailers, thousands of middle market businesses, and over 2,800 government agencies to create the most trusted solution in the reverse supply chain.

Finally, we have the financial strength and operating discipline to invest in future growth to create long-term value for our customers and stockholders. Our entire team of associates, now over 700 strong, looks forward to working together this year to expand our business while maintaining the highest standards of integrity, service, and quality.

Now let me turn it over to Jim for a more detailed review of our financial results and outlook.

Thanks Bill.

As we indicated on our last call, we expected to resume growth in fiscal year 2010 and our quarterly results reflect the focus we placed on enhancing efficiencies in the second half of fiscal year 2009, as well as the strength and reputation we have in the marketplace with both buyers and sellers. We launched several programs with large clients in the last quarter of fiscal 2009 and the beginning of this quarter, which further enhanced our portfolio of over 475 commercial sellers, to include seven of the top ten US retailers, two of the top three US online retailers, two of the top three US warehouse clubs, two of the top three European retailers, and over 2,800 government agencies at the federal, state, and local levels. The 33% growth in our state and local government client base combined with the growth of our commercial client base has enhanced the product mix in our marketplaces, which has resulted in increased activity and retention within our buyer base. This cycle reinforces the power of the network effect generated by our business model.

We were pleased this quarter with the progress made in our UK business. Our business development efforts and focus on efficiencies, including both system and process enhancements, as well as improved product growth from our top UK retail clients supports our previously-disclosed plan to be profitable again in the UK by the end of the fiscal year.

Investments in systems and value-added services for our sellers and buyers continue to drive improved financial results. For example, we've added financial settlement services onto our govdeals.com marketplace over the last year. The addition of this benefit and its high acceptance rate among buyers and sellers has allowed us to increase our average fees as a percent of gross merchandise volume or GMV by 16% from 7.6% from three months ended December 31, 2008 to 8.8% for the three months ended December 31, 2009.

The amount of GMV increased $11.5 million or 14% to $93.6 million for the three months ended December 31, 2009, from $82.1 million for the three months ended December 31, 2008, primarily due to one, 20.3% growth in our US commercial business as a result of several new programs from large retailers; two, 33% growth in our scrap business, which utilizes a profit-sharing model as a result of increasing commodity prices and a higher mix of high value metals; and three, 20.7% growth in our gov deals or state and local government business as we continue to increase our seller base. Revenue increased $9.7 million or 17.4% to $65.3 million for the three months ended December 31, 2009 from $55.6 million for the three months ended December 31, 2008, primarily due to the items driving GMV growth.

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 December 31, 2009 decreased to 36.6% and 52.4% respectively compared to 38.1% and 56.2% respectively for the three months ended December 31, 2008.

Cost of goods sold excluding amortization increased $8.4 million or 45% to $27 million for the three months ended December 31, 2009 from $18.6 million for the three months ended December 31, 2008. As a percentage of revenue, cost of goods sold excluding amortization increased to 41.3% from 33.4%. These increases are primarily due to one, expenses of $6.1 million associated with the new surplus contract, which had its first full quarter of operations in the third quarter of fiscal year 2009, and utilizes the purchase model; and two, increased cost of goods associated with our US commercial business as a result of the growth discussed above.

Profit-sharing distributions decreased $5.3 million or 37.3% to $9 million for the three months ended December 31, 2009 from $14.3 million for the three months ended December 31, 2008. As a percentage of revenue, profit-sharing distributions decreased to 13.8% from 25.8%. These decreases are primarily due to the new surplus contract, which has no provision for distributions.

Technology and operations expenses increased $200,000 or 1.3% to $12.1 million for the three months ended December 31, 2009 from $11.9 million for the three months ended December 31, 2008, primarily due to increases in staff wages. As a percentage of revenue, these expenses decreased to 18.5% from 21.4%, primarily due to the increase in revenue while leveraging our fixed costs such as programming staff.

Sales and marketing expenses increased $200,000 or 4.9% to $4.6 million for the three months ended December 31, 2009 from $4.4 million for the three months ended December 31, 2008, primarily due to the hiring of six additional personnel. As a percentage of revenue, these expenses decreased to 7.1% from 8% primarily due to the increases in revenue while leveraging our fixed costs such as marketing staff.

General and administrative expenses increased $200,000 or 3.4% to $5.9 million for the three months ended December 31, 2009 from $5.7 million for the three months ended December 31, 2008, primarily due to increases in staff wages. As a percentage of revenue, these expenses decreased to 9.1% from 10.3%, primarily due to the increase in revenue while leveraging our fixed cost such as corporate staff.

The company continued to demonstrate strong cash flow generation and growth during the quarter. LSI generated $3.7 million of operating cash flow during the three months ended December 31, 2009.

Adjusted earnings before interest, taxes, depreciation, and amortization--or adjusted EBITDA--increased $6.3 million or 303% to $8.4 million for the three months ended December 31, 2009 from $2.1 million for the three months ended December 31, 2008. Adjusted net income increased $3.1 million or 357.7% to $3.9 million for the three months ended December 31, 2009, from $800,000 for the three months ended December 31, 2008.

Adjusted diluted earnings per share increased $0.11 or 367.7% to $0.14 for the three months ended December 31, 2009 from $0.03 for the three months ended December 31, 2008 based on approximately 27.7 million and 28 million diluted weighted average shares outstanding respectively.

The Company continues to have a strong balance sheet. At December 31, 2009, LSI had $61.3 million of cash, current assets of $92.9 million, and total assets of $139.7 million. The Company continues to be debt-free with current liabilities of $33.3 million and long-term liabilities of $2.9 million for total liabilities of $36.2 million at December 31, 2009. Stockholders' equity totaled $103.5 million at December 31, 2009.

Capital expenditures during the three months ended December 31, 2009 were $1.2 million. We expect capital expenditures to be $3.5 million to $4 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. We expect GMV for fiscal year 2010 to range from $360 million to $400 million. We expect GMV for the fiscal second quarter of 2010 to range from $85 million to $95 million. We expect adjusted EBITDA for fiscal year 2010 to range from $26 million to $30 million. We expect adjusted EBITDA for the fiscal second quarter of 2010 to range from $6.5 million to $8.5 million. We estimate adjusted earnings per diluted share for fiscal year 2010 to range from $0.40 to $0.48. And for fiscal second quarter of 2010 we estimate adjusted earnings per diluted share to be $0.10 to $0.14.

This guidance reflects the recent impact of our stock repurchase program under which we repurchased 511,082 shares for approximately $5.1 million during the prior quarter. However, it does not assume that we will continue to repurchase shares under the program.

On February 2, 2010, the Company's Board of Directors approved an additional $10 million for the share repurchase program. The Company had $1 million remaining in the share repurchase program from the original authorization on December 2, 2008, resulting in $11 million currently available.

Our guidance suggests EBITDA and diluted EPS for the effects of stock-based compensation, which we estimate to be approximately $2 million to $2.5 million per quarter for the remaining three quarters of fiscal year 2010. The Company expects its trends of increasing stock-based compensation costs to moderate in fiscal year 2011.

Bill and I will now answer any questions.

(Operator Instructions). And our first question comes from the line of Shawn Milne with Janney Capital Markets. Please proceed.

Thank you and good afternoon. I appreciate you taking my questions and nice quarter. I've got three questions, Bill and Jim. One, Bill, just what's your thought process on the commercial business? It looks like January is off to a good start as well. Do you expect to see more sellers come online or just further penetration with the new sellers you brought on recently? And do you think we can see an accelerating growth as we go out throughout the year there, albeit I think there's a bit of a tough comp in February/March.

Jim, surplus was better than expected. Did something change there? Were you able to get more product flow than we expected, any color around that? And then lastly just in terms of guidance, if I just use the midpoint of your second quarter earnings guidance, it looks like you're actually guiding down the second half of the year earnings despite the fact that you beat expectations nicely in the quarter. What am I missing on that?

Thanks.

Thank you for the questions, Shawn. With regard to the commercial business, I think we're doing well in both arenas, both penetration of existing sellers. I think we are seeing some strengthening in the business of many of the core accounts. And I think one of the strengths of our overall model is that we've aligned with very healthy market-leading retailers who all in all have emerged from 2009 in pretty formidable competitive position. So as their business strengthens during the course of the year, I think that's a good tailwind for LSI and the volume in the marketplace. In addition, as Jim noted, we have added both large and some midsize sellers continuously as we've gone through the last say six months. We expect that onboarding to help propel volume forward. So we do expect solid growth in the commercial business in the current quarter. January evidenced that. We did have very strong performance in the prior year by implementing some of the stair step function efficiency gains, which really took hold last year around this same time. But nonetheless, I mean, we're very comfortable with 20% year-over-year commercial growth. We're seeing more diversity along our seller base. And I think for us the endgame is being the best practice and the clear choice for any Fortune 500 manufacturer or retailer to manage store returns, online returns, manufacturer overstock or return-to-vendor programs. And we're getting that message out.

And I'll let Jim answer your remaining two questions.

Thanks Bill.

Shawn, the surplus side of the business, so you're correct, we received some additional property flow last quarter, which - well, actually at the beginning of last quarter, which we moved out in November and December, were a little stronger than we expected. We turned that property around a little quicker than expected. That property was some - what we refer to as some surge property. And we're not considering it to be repeatable in the next quarter.

So, again, surplus was a little higher than expected this quarter, as well as the scrap business. You didn't ask specifically, but the scrap business came in above expectations, primarily as a result of a large [in-canal] sale that we had. As you know, once in a while we get those specialty metals and those auctions are big enough to move the quarter a little bit. Again, we did see that in the December quarter on the DoD side of the business.

As far as the guidance goes and the midpoint of the range and the effect of the second half of the year, so, Shawn, we're really looking at the guidance in a similar manner that we did at the beginning of the year, which is that we have provided what we believe is a cautionary range for the year. We do anticipate seasonality in the business as we have always had.

So let me just walk you through what we would expect the quarters - how the quarters to roll out. Based on the guidance we've given for the next quarter, we do expect the next quarter to be similar to this quarter. It is a fairly strong quarter for us during the year. So it'll be around where we were this quarter. I think, again, our guidance reflects that. The next quarter after that is our June quarter. We would actually expect the June quarter to be a little higher just because we get the scrap incentive payment in the June quarter. And then we would expect a fairly decent drop off in the fourth quarter as we've historically seen. So, again, as far as guiding down the second half of the year, I think it's really a quarter-by-quarter specific rhythm to our business, Shawn, which we've seen for the last couple of years.

And I would just add to that, we like you really can't predict over time what's going to happen in the marketplace for say commodities. Obviously you've seen increased volatility as of late in a number of the alloy prices and so forth. So I think the range creates the necessarily contingencies if, you know, do we have increased volatility along the commodity markets.

Okay, that's helpful. And one real quick follow-up on that, you're not sitting here telling us - you mentioned some investments on systems and what not, but are you saying - you're not saying specifically that the tech and ops line will move up sharply in the second half of the year. It's more about trying to protect some volatility?

That's correct, Shawn.

Okay, thank you very much.

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

Hi. This is [Paul Beaver] for Colin. Thank you for taking my question. Regarding the new site that's in beta right now, I was wondering if you've seen the conversion rates increase? Or I was wondering if you could share any other metrics with us? And then just wondering are there any categories that you have higher inventory levels of after the holidays and are you comfortable with your inventory levels right now?

Sure. Let me give some observations. On our second point, we have been very pleased with the efficiency of our operation with regard to processing and fulfilling transactions and I would say our operational team working, together with our account management teams, both on the commercial and the government side, both in the US and the UK have made great strides. And so inventory aging is not a concern of ours.

With regard to why does one take the time and energy and investment to look at the public web site, well, clearly as a continuous improvement-driven organization, we're always looking for ways to understand the needs of our buying customers and bring to them solutions that are convenient, intuitive, that help them really build their business around our channel as the primary channel to source goods. And I think that's what we've done over time.

And I think we've got a very interesting set of buyers ranging from people that have physical storefronts, people that resell online through their own web site or through larger marketplaces like eBay, people that export products all around the world, and even end users or consumers. And each of those segments of our buyer base has unique needs and we need to be able to recognize on the front end that profile and guide them through our marketplace in a manner that's going to be very satisfying to them.

So we've taken the time to segment that buyer base, understand their needs, and then make the appropriate adjustments to our marketplace. And I think what we're seeing is that in every threshold action improved conversion rates, whether you're a first-time visitor, do you take the next action with us to register? If you're a registered buyer, are we getting you in front of the relevant products to stimulate interest in bidding? And obviously as you increase the bidding participation, you're going to be driving better financial results for the seller. So we're seeing across-the-board improvement.

The other thing I would say is in this economic climate, we're just getting more organic traffic. I think you have more people interested in the whole notion of surplus and value-priced merchandise. And it's incumbent on us to convert a lot of this organic traffic to the site to more fulsome usage, whether it be bringing them into our email alerts or actually getting them to the bidding process. And so that's another key driver for this process.

So it's early days. We haven't released this at a full scale yet, but we're very pleased thus far with what we're seeing.

And one quick follow-up, I was wondering if you could give a quick update on the Dyscern business.

So in accordance with many of the client needs, we have a segment of our sellers who historically have taken new-in-the-box product and moved that through either their own consumer channel or other business-to-consumer channels. And they've asked us look, if you're going to be able to manage the full reverse logistics process for us, ought you be able to handle this on our behalf and obviate warehousing costs, sorting costs, manifesting costs, and bring your business intelligence to drive highest recovery? And in response to those needs, we have been able to deliver superior overall returns. And the team that is behind that is a broad-based team that includes some individuals that came to us from outside the company and many who have been working with these clients for months and years. And that channel optimization team is really doing a nice job on behalf of our clients, whether they be retailers or manufacturers.

Thank you. And good quarter. Thanks for taking my questions.

And the next question comes from the line of Brian Nagel with Oppenheimer & Company. Please proceed.

Hi good afternoon. I have a few questions. I just wanted to focus on GMV if I could. So first off, Jim, you gave some color on this in your prepared remarks, but as you look at the upside, so to say, in your guidance in Q1 from GMV, is there one area you can call out or was it more broad-based between your various categories?

Well, Brian, on the GMV, I mean, I think that we had anticipated growth, which we got, both in our commercial business, as well as our state and local government business. So that really came in, well, I would say at our slightly above expectations, where the two business lines that came in a little bit ahead than our expectations were, again, the surplus piece of the business and the scrap piece of the business, which I discussed earlier.

Okay. And, again this is the (inaudible) all lumped together, but first off, if you could - again, I know last quarter you gave some comment about - at least the start of the quarter, how so I just wondered if you could comment about the trend in GMV through Q1 and then possibly either into Q2.

And then the other - this next question I have, with respect to your second quarter guidance, if my math is correct here, so you had GMV grew about 14% in Q1 and you're guiding to, you know, the range is kind of a negative 7% to a plus 4%. So should we read something into that, what at least seems like a deceleration in your GMV growth rate as we go into the second quarter?

So let me give you some observations on the trends. I think the trends in the commercial business have been quite positive in our December - the month of December as a result of expanded relationships and the fact that we're just operationally poised to be more responsive. I mean, our volume was up 20% plus year over year. And I think as January tends to be a little bit of a slow start, we maintained pretty good momentum through January. And I think the pipeline, if you will, of volume moving through the sales channel is visible and gives us a pretty firm, positive view.

Now as Jim noted earlier, the DoD business doesn't have the same sort of visibility as our commercial business. We manage exclusively all of the scrap yards for the DoD. And our visibility into that business is typically 30, 40 days out. So we would tend to normalize guidance around our annual views and not annualize around extraordinary events like an [in-canal] sale, which we had in the last quarter. And so that's why I've taken down some of our GMV guidance and it's related to the DoD scrap business, as well as the surplus business, which worked through a backlog of surged property under the old contract.

And, Brian, I think what - just one other thing on the guidance. As we anticipated with our original guidance that we gave for the year and as we've talked to people about the new surplus contract, the new contract has certain product categories that were removed. The removal of those product categories basically allowed us to anticipate that we would have negative growth or be down year over year in that business anywhere was 15% to 20% on a given quarter. So when you look at last year's surplus business and compare it to where we think it will end up next quarter, we certainly expect to be down 15% to 20%. So you've got a decent chunk of your business, which, again, was always intended to be down due to the new contract constraints.

The other thing is that when you look at last year, we went up to $91 million of GMV, which is basically the midpoint of our guidance range. I mean, I think that we would fully hope to show growth for the quarter. We certainly anticipate growth in our commercial business and our state and local government business, which has really been the driver of growth for us. We would hope to see a little bit of growth out of our UK business, too, as that has continued to rebound nicely since the loss of that large client about six, seven months ago.

Okay, thank you very much.

And our next question comes from the line of Stephen Ju with RBC. Please proceed.

Hey guys. I think most of my questions -- but I'm just wondering how many commercial clients you have right now and what that number was a year ago? And I recall you guys talking about about 30% of your buyer base at least on the commercial side are eBay PowerSellers. Just wondering where that is right now? Thanks.

So in terms of what commercial client base we have, there's really sort of two tiers of clients that we focus on. In terms of the number of meaningful commercial sellers, that number is just under 500. And I think it's a number that's disclosed in the Qs. So we have improved that quarter to quarter, year over year, on a consistent basis. I would point you to that.

Second, in terms of penetration of the Fortune 1,000 marketplace, what we're seeing is success breeds success as you noted as a trusted partner, financially transparent, being able to bring the right sophistication and breadth of service, we're getting more and more traction there. And it ranges from the big box retailers, department store chains. There's a second set of what I'd call Fortune 1,000 retailers that are looking to the big guys as sort of thought leaders in defining what are the best ways to manage the supply chain, including reverse supply chain and store returns. And we're talking to providers of technology products who are big direct sellers of these products who not only manage returns, but also supply technology to large organizations who are doing technology refreshes and view LSI as a attractive bundled service to help them bring their service and new products to market by taking product out of these corporate clients.

I mentioned also, Stephen, that we expect to grow not just in the commercial sort of consumer finished goods category, but also in the capital assets. So whether it's IT assets, rolling stock and vehicles, trucks, material handling equipment, we're seeing opportunities to cross-sell both the corporate capital asset side and the excess inventory side in our business and in our business development pipeline. And we see that as very attractive.

When you look at our buyer base, we sell a large volume of capital assets, whether it be scrap metal, vehicles, machinery, heavy equipment, and we think that buyer base provides a really important competency to expand within existing accounts by adding capital assets, or going into other categories like IT hardware refreshes with some of these large "direct retailers" of those services.

On the small business buyers who resell on eBay, well, that's always been a part of our business and we have been an incubator for those types of entrepreneurs reselling in pallets. A third roughly would be in that category. I think the only change over the last year has been many of those small businesses have been setting up their own storefronts rather than relying on a single mass marketplace to resell.

Okay, thank you.

(Operator Instructions). And our next question comes from the line of Heath Terry with FBR Capital Markets. Please proceed.

Great. Thanks. You mentioned the addition of some new customer commercial partners over the last couple of quarters. I know it takes some time to get these partners up and running. Can you give us a sense of what the pipeline looks like now for your commercial customers?

So when we began in earnest our calling effort on the Fortune 1,000 space, we brought on two business development directors, who had nurtured well over 50 conversations through the process. Some of these are in a diagnostic phase. Some have actually initiated pilots, and some have evolved from pilots to actual programs where we're handling either wholesale product categories or regions or we've taken over an entire returns process. What's interesting to note for us is we've also been able to identify opportunities to take existing relationships in the US and transport those relationships to the UK and are doing so with a number of our larger retailers, some of whom are large global corporations.

So we're pleased with the progress. It's an enterprise sales process, so we're really looking at solving needs, being good listeners, providing an array of the right matrix of services, the right disposition channels with the right compliance management and certainly all geared to maximizing financial recovery. And we have seen again and again that the needs of large sellers are more complex and we are very well positioned, Heath, as a result of bringing both the e-commerce platform and this 1.3 million buyer base who can absorb large volumes, but also the appropriate attention and the ability to integrate pre- and post-sale transportation, qualification of a buyer. Some of our programs involve selling products outside of the United States, export-only products. And one of the things I discussed was the integration of our UK and US platforms. It's going to be very efficient for us to flip a switch and have these products only exposed in the UK. So those are the types of things that have attracted our clients.

Great. I really appreciate that. Thank you.

Ladies and gentlemen, this concludes today's question-and-answer session. I would now like to turn the call over to Julie Davis for closing remarks.

Thank you. That concludes our First Quarter Fiscal Year 2010 conference call. Jim Rallo and I are available to take additional questions. Thank you.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a wonderful day.