Liquidity Services Inc (LQDT) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your First-Quarter 2011 Liquidity Services, Inc. Earnings Call. My name is Tanya and I will be your event manager today.

Throughout the conference, you will remain on listen-only. (Operator Instructions). We will be expecting audio questions after the presentation. (Operator Instructions). I would also like to advise all parties that this conference is being recorded for replay purposes.

I'd now like to hand the conference over to Julie Davis, Director of Investor Relations.

Thank you, Tanya. Good morning, and welcome to our First-Quarter Fiscal Year 2011 Financial Results Conference Call. Joining us today are Bill Angrick, our Chairman and Chief Executive Officer, and Jim Rallo, our Chief Financial Officer and Treasurer. They will be available for questions after our prepared remarks.

The following discussion or responses to your questions reflect management's views as of today, February 3rd, 2011, and will include forward looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our most recent annual report on Form 10-K.

As you listen to today's call, we encourage you to have our press release in front of you, which includes our financial results, as well as metrics and commentary on the quarter.

During this call, we will discuss certain non-GAAP financial measures. In our press release and our filings with the SEC, each of which is posted on our website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.

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 gross merchandise volumes, and should not be considered a substitute for or superior to GAAP results.

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

Thanks, Julie. Good morning and welcome to our Q1 Earnings Call.

I'll begin this session by reviewing our Q1 financial performance and then provide context on our strategy and where we stand in our company's overall development. Finally I will turn it over to Jim for more details on the quarter and on our outlook for the year.

During Q1, Liquidity Services reported record financial results as we expanded our leadership position in the reverse supply chain market by delivering significant value to our clients and buying customers.

We exceeded our guidance range while continuing to make important investments for the future. Q1 GMV was up 35% year-over-year to a record $126.8 million, driving by growth in the volume of goods sold across our commercial and government marketplaces.

Adjusted EBITDA of $11.1 million was up 31.5% year-over-year, driven by improved merchandising, further penetration of existing clients, and improved operating leverage. Adjusted EPS, which excludes non-cash compensation expenses and acquisition costs, was $0.17.

We continued to demonstrate our financial strength by generating cash from operating activities of approximately $6.8 million during Q1, and we ended the quarter with approximately $81.5 million in cash and zero long term debt.

As evidenced in Q1, our e-commerce marketplaces, large and growing network of buyers, and integrated services are ideally suited to solving the needs of corporate and government clients for a wide range of surplus assets.

On behalf of top retailers and manufacturers, we sold a full range of customer returned items on our Liquidation.com marketplace, including clothing, gaming systems, Smart Phones, housewares, jewelry, tools, toys, and HDTVs. According to the National Retail Federation, the volume of store returns grew to $43.8 billion during the recent holiday season.

Retailers are now relying on Liquidity Services to help them improve the cycle time and value recovered from returned merchandise as they transition to the next season.

On behalf of commercial and government clients, we sold a broad range of high-value capital assets including vehicles, boats, material handling equipment, machine tools, line pipe, drilling equipment, and scrap metal.

Our ability to create markets for used, salvage and scrap assets has allowed many of our clients to enhance the visibility and success of their sustainability programs by recovering value from items that have been previously discarded as waste.

As organizations seek to reduce costs, improve transparency, and enhance their financial returns, Liquidity Services' online marketplace solution is increasingly valuable. In turn, this is translated into robust growth and market share expansion.

For example, GMV in our commercial business grew 68% year-over-year to $60 million in Q1. And we now serve over 50 Fortune 500 clients, with the ability to handle their full range of asset recovery needs, from finished goods inventory, to technology equipment and capital assets.

Our GovDeals marketplace, which serves state and local governments, added over 150 new agency clients during the quarter, and set records for number of active sellers and the number of clients using our online financial settlement services.

Our DOD surplus business has continued to benefit from data-driven merchandising actions, which have improved recovery for high-value assets, ranging from rolling stock to heavy equipment.

Our DOD scrap business has benefited from strong property flows and solid global demand, as we target and reach a truly global buyer base for millions of pounds of scrap metal and other end-of-life materials.

Today, Liquidity Services is the most trusted solution for commercial and government sellers to manage and sell surplus assets. And we now serve over 4,000 commercial and government clients that sell assets online to our over 1.4 million registered buyers across the globe.

We believe our recent progress and continued focus on driving operational efficiencies, investing in innovation, and enhancing value for our clients and buying customers, positions us well for fiscal year 2011 and continued long-term profitable growth and market leadership.

Liquidity Services will continue to execute our multi-pronged growth strategy to achieve $1 billion plus GMV enterprise, by leveraging our product domain expertise, scalable technology platform, and creditability serving the world's largest corporate and government clients.

First, we will continue to expand our penetration of the Fortune 1,000 corporate marketplace, which we estimate to be a $50 billion market opportunity for consumer goods and capital assets.

We have developed a full range of both sell-and-place and full-service solutions to meet the needs of large and mid-sized retailers and manufacturers. We believe corporate America is seeking to centralize the reverse supply chain function and our web-based solution, value-added services and global buyer base is a key enabler for implementing this strategy.

We believe the internet presents a more efficient and effective model for commercial sellers of high-value assets, as compared to physical on-site auctions, due to global buyer reach and competition, faster sales cycle times, reduced transportation, logistics and other make-ready costs.

Liquidity Services brings important core competencies to create value for sellers and buyers in the commercial marketplace, as we have merchandised and sold over $2 billion in GMV of inventory, heavy equipment, rolling stock and scrap metals since our inception.

Our second growth initiative is to further expand our public sector business to capture an increased share of the $2 billion federal and municipal government surplus market. With over 3,400 government agency clients, our brand awareness continues to grow.

Federal, state and local government agencies are increasingly interested in improving transparency around the sales process and recovering more value from surplus assets to address budgetary deficits. We believe our e-commerce solution is ideally suited to address the pressing needs of government agencies of all sizes in the coming year.

Our third growth initiative is to develop and grow our buyer base to deliver the maximum recovery for clients. We are making considerable technology investments during 2011 to improve buyers' access to assets across all LSI buyer marketplaces, which will improve the activity and conversion rates of existing and new buyers in our platform.

Additionally, we are taking actions to improve our branding and page optimization across all LSI marketplaces with clients and buyers. A recent example is our automation of the merchandising and fulfillment of large lots on our Liquidation.com platform for export buyers, which has greatly simplified the buying process.

Ultimately, by making it easier for buyers to fulfill their specific business needs, we will enhance the value to all parties of using our marketplace.

Finally, we will continue to pursue acquisitions of complimentary businesses. The markets we serve are still very fragmented and we continue to seek and evaluate M&A opportunities which would enhance our seller and buyer base, product domain expertise, and level of value-added services to serve the needs of our clients.

More over, the improved depth of our leadership team and 2011 infrastructure investment program will allow us to accelerate the integration of acquired companies.

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 during fiscal year 2011.

We have leading e-commerce marketplaces addressing multiple large market opportunities. And we have the financial strength and operating discipline to execute our growth strategy to create long-term value for our stockholders.

Our entire team of over 700 associates looks forward to working together 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 our outlook.

Thanks, Bill.

A key element to our strategy is growing our commercial business with Fortune 1,000 companies. Capital assets are now over 50% of our business and a source of significant growth.

The Network International acquisition has performed above our expectations as we continue to increase our penetration with 22 Fortune 500 corporations and 8 of the world's largest multi-nationals across the energy supply chain.

Our continued high level of service supporting The Department of Defense, and over 3,400 local government entities, has resulted in an increased flow of capital assets which we expect to continue throughout the fiscal year.

Our record quarterly results and increased guidance ranges reflect these market share gains and enhanced service levels in operating efficiencies across our entire business.

Our strategy of bringing innovative technology to the reverse supply chain market and our efficient business model has translated into strong results for stockholders.

Trailing 12 months adjusted earnings before interest, taxes, depreciation, and amortization, or EBITDA, has improved to $40.1 million. And trailing 12 month operating cash flow has improved to $35 million.

We also continued to make important investments in the first quarter to support our future growth. As we discussed during our last earning's call, we have a significant technology infrastructure project underway that will allow us to continue to provide a high level of customer satisfaction as we scale the business to $1 billion of gross merchandise volume or GMV.

We made progress this quarter towards completing this project in fiscal year 2011, however, the pace was slower than anticipated, resulting in a less expense in the first quarter. We expect the pace of these initiatives to accelerate in the next two quarters, resulting in a shift in expenses from the first quarter to the second and third quarters.

Next, I will comment on our first-quarter financial results.

Total GMV increased to a record $126.8 million, up 35.4% year-over-year.

GMV in our DOD scrap business increased to $17.8 million, up 22.9% year-over-year, as a result of increasing commodity prices and a mix shift to higher value metals.

GMV in our DOD surplus business increased to a record $24.1 million, up 22.1% year-over-year, as a result of increasing property flow from the DOD and a higher mix of high-value capital assets, such as rolling stock.

GMV in our GovDeals, or state and local government business, increased to $21.4 million, up 13.9% year-over-year, as we continue to add new clients that's further penetrating the $2 billion state and local government market.

GMV in our US commercial business increased to $60.4 million, up 67.9% year-over-year, principally as a result of the Network International acquisition on June 15th, 2010.

Total revenue increased to a record $78.5 million, up 20.2% year-over-year, primarily due to one, the increase in our scrap and surplus businesses previously discussed, and two, a 15.8% increase in our US commercial business as a result of several new programs for large retailers.

Technology in operations expense increased by 10.2% to $13.3 million year-over-year, primarily due to increases in staff and temporary wages, including stock-based compensation and consulting fees associated with technology infrastructure projects. As a percentage of revenue, these expenses decreased to 16.9% from 18.5%.

Sales and marketing expenses increased by 29.4% to $6 million year-over-year, primarily due to one, expenses of $500,000 in staff wages, including stock-based compensation, and two, expenses of $700,000 associated with Network International. As a percentage of revenue, these expenses increased to 7.7% from 7.1%.

General and administrative expenses increased by 13.4% to $6.7 million year-over-year, primarily due to $600,000 in staff wages, including stock-based compensation, and two, $200,000 in business development costs. As a percentage of revenue, these expenses decreased to 8.6% from 9.1%.

The company continues to demonstrate strong cash flow generation and growth as our overall working capital continues to be a source of cash. During the first quarter, LSI generated $6.8 million of operating cash flow, up 83.4% year-over-year.

Adjusted EBITDA grew 31.5% year-over-year to a record $11.1 million. Adjusted net income was $4.8 million and adjusted diluted earnings per share was $0.17 for the quarter, based on approximately $28.3 million diluted weighted average shares outstanding.

Adjusted net income and adjusted diluted earnings per share for the quarter were adversely effected by a sharp increase in our effective income tax rate from approximately 46% to 50%.

We estimate that the fiscal year 2011 effective tax rate will be approximately 50%, which is an increase from the estimated 46% discussed during our last call.

The estimated 4% increase in the effective rate is the result of the increased estimate of the fair value of the earn-out at the time of the Network International acquisition, from $2.8 million out of a possible total earn-out payment of $7.5 million, to $7.5 million.

Upon review of the estimate as of December 31, 2010, LSI determined that the operating results of Network International are exceeding original estimates significantly, and have estimated that the full $7.5 million earn-out payment is likely, based on the last 6 months of operating history and estimates for the next 12 months.

Therefore, the company recorded an additional liability of $4.7 million as of December 31, 2010 and reflected this increase in the statement of operations for the three months ended December 31, 2010, which is not deductible against US taxable income.

This is in accordance with the new authoritative guidance relating to business combinations issued by the FASB in December 2007, which LSI adopted for fiscal year 2010.

We estimate that our future effective income tax rate will be approximately 46% which is comprised of one, 35% for federal taxes, two, 8% for state taxes, which combined approximates our cash tax rate of 43%, and three, approximately 3% for book and tax differences, including stock-based compensation expenses, primarily related to employee stock options which are currently expensed in our financial statement, but are not deductible for tax purposes until they are exercised.

We continue to have a strong balance sheet. At December 31, 2010, we had $81.5 million of cash, or approximately $2.88 per share in cash, current assets of $115.9 million and total assets of $172.4 million. The company continues to be debt free.

Capital expenditures during the quarter were $2 million, as we purchased much of the technology infrastructure assets that will be deployed throughout the year. We expect capital expenditures to be $4 million to $4.5 million for the fiscal year ended September 30, 2011.

Management is providing the following guidance for the next quarter and fiscal year 2011. We expect GMV for fiscal year 2011 to range from $480 million to $520 million, which is an increase from our prior guidance range of $465 million to $505 million.

We expect GMV for the fiscal second quarter of 2011 to range from $115 million to $125 million.

We expect adjusted EBITDA for fiscal year 2011 to range from $43 million to $45 million, which is an increase from our prior guidance range of $40 million to $44 million.

We expect adjusted EBITDA for the fiscal second quarter of 2011 to range from $8 million to $10 million.

We estimated adjusted earnings per diluted share for fiscal year 2011 to range from $0.66 to $0.74, which is unchanged from our previous guidance, as a result of an increase in our effective income tax rate from 46% to 50%.

For the fiscal second quarter of 2011, we estimate adjusted earnings per diluted share to range from $0.10 to $0.14. This guidance reflects the recent impacts of our stock repurchase program under which we repurchased 229,575 shares for approximately $3.5 million during the prior quarter. However, it does not assume that we will continue to repurchase shares with the approximately $8.1 million yet to be expended under the program.

Our guidance adjusts EBITDA and diluted EPS for acquisition costs and for the effects of FAS-123R which we estimate to be approximately $2.2 million to $2.4 million per quarter for fiscal year 2011. These stock-based compensation costs are consistent with fiscal year 2010.

Bill and I will now answer any questions.

(Operator Instructions). Colin Sebastian, Lazard.

I guess first on the commercial side of the business, I'm curious with your retail customers if there's been any meaningful change in the mix of merchandise from product returns to shelf pulls and overstocks.

And then secondly, maybe you could go into a little more detail, what happened in December in terms of where the out-performance was in the quarter specifically. And I have a follow-up, thanks.

So, Colin, with respect to the mix in merchandise, I think what we typically see coming out of the holidays is an increase in the returns of products. And frankly, most of those returns are high-quality condition, lightly used.

There were some big bets placed in the holidays season around technology, HDTV, some of the new Apple products, and I suspect we'll continue to see a good flow of those types of products into our marketplace. And I think we're well positioned to be a strategic solution for the retailers as they transition out of this post-holiday season.

Jim, I think, can help you on the question regarding December.

Colin, as you know, you've been with us for a while, December tends to be the lowest month of the quarter for us historically. Trends are October is usually pretty good, November can be about the same, maybe a little higher, and December trends down with the holidays. That did not occur this year.

In fact, every single one of our business lines out-performed in December. When I say out-performed, out-performed above our expectation and out-performed significantly above the prior year.

So it wasn't really any one area per se. Again, the DOD business performed well in December. Network International had some very large auctions that went off in December, which were last minute. And the consumer business, on the retail side, we started getting returns earlier this year than we have in the past.

I think that's because, I know you follow a lot of retail clients, but there was a tremendous amount of spending this holiday seasons pre-Thanksgiving and there was a Thanksgiving period, in other words, it was all front-loaded and I think we saw those returns earlier, although I will tell you that in January those returns continue to be strong. But again, the out-performance was above all our segments.

Okay, and as you sort of mix in more of the Network International and maybe diversify the partner base overall, where do you guys expect take rates on the commercial side to trend over time? And also, I noticed, there's obviously a shift between the consignment and the purchase models.

Well, the shift in the consignment and the purchase model is being generated primarily by Network International, which, as you know, that business is all consignment.

The take rates in that business are fairly consistent, between 12.5% and 13.5%, depending on the client mix. We don't really see those take rates changing.

In the consumer retail business, those take rates have been consistent, frankly, for the last couple years. We don't anticipate those changing as well.

So I think when you take a look at the last quarter mix, we would see that for the most part as normal moving forward to the extent that we do have some volatility in the business, particularly around Network International. For example, we discussed in our June 30 quarter call, when we did the Network International acquisition, that that business does have seasonality. That seasonality occurs in the March quarter, which is our next quarter. And frankly, that is the lowest quarter of the year for those types of assets.

Historically energy companies have not liquidated a lot of surplus assets in the first three months of the year. And so we've anticipated that in our guidance. And again, that would probably change the mix next quarter in the consignment area.

And let me just add, with respect to the strategic plan and our growth strategy, we today serve many of the world's largest corporations. Some of them are retailers, some of them are energy clients, some of them are manufacturers who supply retail supply chains. And they have a wide range of needs with regard to asset recovery, asset disposition, liquidation.

And what we are doing is cross-training our enterprise sales team to go into those organizations where we may have initially sold finished goods, we are now selling capital assets. Where we initially sold rolling stock or high-value capital assets, we're now selling technology equipment or finished goods.

And so that is the commercial growth opportunity and we have the buyer base, the merchandising knowledge and the service offering to be a one-stop shop for corporate American to handle, from end to end, these needs. So, there'll be a lot of cross-pollination in this part of our business going forward.

Okay, good. Thanks very much.

Shawn Milne, Janney Capital Markets.

Just a couple things. Jim, just on the timing of investments, can you walk us through a little bit of how much was delayed from Q1 into Q2? It looks like you did about $13.3 million in tax spend. It was up about $1.3 million year-over-year. Were you planning on doing something closer to $14 million or can you help us out with that and how much is going to flow into the next two quarters?

And then, Bill, looking more broadly, you talked about some investments to try to tie in some of your sites and marketplaces together. Maybe if you could expand on that a little bit and do you believe that your buyers are also looking for applications to work with tablets and mobile devices? Do you think that will that help out your business at all? Is that something you're looking into?

Shawn, on the tech expenses, although we have purchased a significant amount of the assets, as I discussed, this quarter, the expense side of that, which is really some consultants that are helping us to roll those out throughout the year, only about $400,000 hit in this quarter. So, that was significantly below the over $1 million that we assumed.

As we indicated in our last call, we expect the total expenditures, that were above what I would say is our normal annual spend, is $2 million to $2.5 million this year. So, we see the rest of those expenses primarily getting recorded in Q2 and Q3. Only a small amount probably rolling into Q4 at this point.

And just with respect to the buyer base. Historically, buyers have registered onto a single marketplace. And by virtue of that set of credentials has been given access to assets in a given marketplace.

And so, notwithstanding, what I would say light cross-promotion, we believe there are silos across these marketplaces that have been a barrier to buyers accessing, conveniently, the full range of assets that match their purchasing criteria.

Consequently, within this technology investment plan, Version 1.0, sort of a universal buyer marketplace concept, is to allow buyers to have unified bidder registration and credentials, such that they don't have to do anything. They're logged in and we feed them the full range of assets, whether they be government assets, retail assets, in some cases international assets, to them.

And so they'll have sort of universal permission and access, conveniently, to see the full range of things that help them drive their business. I think we will also have, as a result, improved taxonomy of how assets show up across the full range of buyers that will support improved cross-search, from a buyer perspective, to make it easier to find and buy what they need. And will also be very powerful for sellers to realize a higher yield on what they sell through us.

There are a host of things that our collective marketing teams are working on, in a much more collaborative way, under the direction of our Vice President of Marketing and Strategy.

So, we are very sanguine about the upside that we could realize with buyers, with respect to how buyers access information over a desktop or a laptop or an iPad or mobile device. I think it will be a natural progression for us, as sort of the world behavior moves to more mobile devices, to allow them to access information over those devices.

Clients, for example, can access a lot of very interesting information about the current value of a wide range of goods, finished goods, high-value capital equipment. And we're using a lot of these techniques to make it very efficient for them to quickly understand the value at any moment in time of these items.

So, there's a lot of interesting opportunity here. For us, this is just research and development. We continue to want to expand and improve the product.

That's helpful. And just, Jim, I don't know if on the prior question if you actually broke out Network International or just give us the sense of the size relative to the $60 million in commercial for the quarter?

So, Shawn, as you know, we're not breaking out specifically our commercial business. I would tell you that we had good growth in our, as you look at it, the traditional retail side of that business. And we also had good growth in the Network International business, albeit on an apples to apples basis. We didn't own them in the first quarter of last year, but going back and looking at historical numbers, they were certainly significantly ahead of that as well.

And last question for me, you mentioned something in your commentary about continued strength in returns in January. Are you seeing part of that on the consumer retail side? Can you just aggregate that or give a little more color around what you're seeing from online retailer returns in January?

I think the returns, as far as the verticals or product categories that we work with, Shawn, it's really, again, everything is above the normal levels throughout the year, which is not unusual for us in this time period.

As you know, January, February, March, tend to be very strong for us in the retail goods space. My comment was specific that I think there was, earlier I'd mentioned the front-loading of those returns in December, which was unusual for us compared to prior years. So I don't want you to think that that necessarily means a slow down in the January, February, March time frame for that business. We are not seeing that at this point. So that was sort of the point of that comment.

So, I guess I read it the other way then. If you're getting good return volume in January it sounds like the pace of that of that business, or the pace of online retail buying, or at least the way we see it, continues to be pretty healthy.

I would agree with that comment, yes.

Gary Prestopino, Barrington Research.

Coming into this quarter, when you reported your Q4, you had said that you were a little bit concerned about some discounting during the retail season and how that would impact your commercial market or your retail markets. Did that actually manifest itself during Q1 here and has that continued into Q2 here?

I think if you looked at a lot of the commentary during the holiday season, there was some aggressive pricing in certain categories. I think it was notable that some of the larger retailers had challenging results as they exited the holiday season. And have addressed that in some ways through discounting strategies to move products.

Undoubtedly, that ripples through to the secondary marketplace. And I think our cautious outlook in certain respects is just a reflection of the post-2009 environment we live in. There's a level of discounting that retailers still employ to retain volume.

Having said that, our business model turns inventory very rapidly, 30 days or so. Secondly, the pricing, whether it's profit sharing, purchase or consignment, is driven by current retail pricing. So to the extent there are changes in the street retail pricing, that is also reflected in the prices that come onto our costs of goods sold. So that's important.

And I think third, in the past, people that have been following us since our IPO, in the past, we have simply walked away from programs that we believe don't provide the appropriate return on effort or investment in our business.

So, I personally believe that as we move through 2011, there will be increasing discipline on behalf of retailers to restore full margin price points. But you have to kind of go category by category and retailer by retailer to understand their specific business context.

But I can tell you that we have a very robust buyer base for the full range of technology assets coming through. And you're going to see a lot of interesting new products on our marketplaces coming out of this holiday season.

So, we'll kind of update the [theme] as we move through the year. But I think we're a very valuable solution for these retailers. Because ultimately when those products are end-of-season or returned, it's a negative margin proposition for them to continue to touch, handle, market, and sell on the store floor. So, I hope that provides good context.

Yeah, it does. In terms of Network International, obviously it's performing better than you expected. Can some of that be attributed to the fact that drilling on the Gulf has basically been shut down or new drilling endeavors? And that these oil and gas companies are just trying to sell this surplus equipment that they're not using? Or is this really a function of just more cross-selling as well as market share gains?

I think the latter point really does go to the growth strategy. We refer to Network International because of the legacy name, but really they're a prong of LSI's corporate capital assets opportunity. And we've been selling capital assets since the inception of the company. It just happened to come primarily from government clients.

Yet we have a very significant history and data and buyer base for these types of assets. And I think the credit to the leadership team within the capital assets organization is a function of they have been able to articulate the value proposition to larger industrial clients that it makes no sense to ship a very large piece of equipment to a land-based auction. And then wait for buyers to be assembled every three months to sell that item.

And so this virtual marketplace is invaluable when equipment could be literally, in the four corners of the globe, surplused to an individual program, or a refresh of a fleet of vehicles, line pipe that is being reset, that can be put up for bid in a virtual marketplace and you're going to attract business buyers very expediently and create the competition that's going to improve the value recovered for that client and obviate a lot of those shipping costs.

So, we just think, inherently, we are starting to have more success because we have more resources, articulating that value proposition to the market, with very large existing clients and that attracts a peer group of very large prospects to become clients. And we're going to continue to execute on that.

And just one last question, more of a big picture. With all the rhetoric going on about cutting government spending and shrinking government, does that give you any concern on a longer term basis with both your surplus and your scrap contracts, in terms of what that impact could be? Or are you just really touching the surface of what is available out there for sale in both surplus and scrap goods for the government?

Gary, we see a huge opportunity in the public sector for a variety of reasons. One, both at the federal and local level, civilian government employees are being asked to do more with less. And there are fewer people available to manage procurements, manage asset recovery, provide services.

And there is important work for this country to live within its means, which means you're going to have a right-sizing of that government infrastructure. So, they're going to be more reliant on services and solutions which can recover value or sustain services.

We're not a manufacturer of DOD weaponry. We're not a producer. We're not a cost plus contractor. So, we don't have the same position as others that are really being asked to reduce their volume or output for a DOD budget that might be shrinking.

What we are is a sales channel and part of the solution to solving their needs. And that's why we feel this is a great era to be out there discussing our solutions. And there's a really interesting peer group of government agencies, state governors, mayors, local city councils, all trying to attack the same issue. How can I get more value for my surplus property? We no longer have the parking lot or the warehouse to store these items.

Many of them are very focused on the sustainability or benefit of using online marketplaces because you don't have as much cost to travel. You don't use as much paper. There are a lot of sort of optical things around an online solution that are very appealing.

So, we continue to think this macro-trend is a catalyst for us rather than a barrier.

So just very quickly, in terms of the scrap, in both of these contracts, you're not doing everything that you possibly could be doing for the federal government. They are outsourcing this to other entities as well to sell product for them?

We have, I would say, a significant portion of the addressable market. But we are, this quarter, going to be working with other agencies, in addition to what we currently serve for DOD scrap.

We see many of these agencies saying how can I leverage the buyer base, the marketplace, the service offering that LSI has established for DOD? So, yes, there's additional growth over and above what we're doing.

(Operator Instructions). Jason Helfstein, Oppenheimer & Company.

I've got two, one longer one and one shorter one. I'll ask the shorter one first. Can you just talk about the type of visibility you have based on the discussion you have with vendors, whether that's kind of short-term or long-term, just so we can kind of get a perspective of how you think about kind of forecasting your business? And then I've got a longer follow-up.

Well, Jason, the visibility question really is different depending on what type of assets, what client base we're talking about. So, in the commercial retail space, we've got a fair amount of visibility as most of the product is moving through our distribution center network.

As Bill indicated, we usually turn out within 30 days and the retailers we're working with, there's this consistent [flow of product.] We've been working with many of these folks for four or five years now, so we understand the cycle of their business.

On the other pieces of our business, such as the DOD scrap and DOD surplus, there can be surprises in that business. You asked for our philosophy. I think our philosophy is we try to take a realistic viewpoint on what we would expect, again, based on our experience of serving that client for over 10 years now.

At times there have been surprises to the positive. That's always nice. But at the end of the day, that business tends to be a little bit more lumpy, again, than the consumer retail.

The addition of some of these larger multi-national energy companies has increased that volatility a little bit, only because, again, you're dealing with a significant number of larger assets that are spread out around the world. And so that visibility doesn't come into play necessarily as quick as you would want it, even if you've been serving these clients for a while, because frankly, in many cases, they're not exactly sure what they have or what they're going to need in the next quarter or year.

And so, again, I think we try to take a realistic viewpoint based on seasonality and our experience with these clients. And then over the longer term, there's obviously less volatility. I think your question really revolves around the quartet-to-quarter dynamics. When you look at it on an annual basis, for example, there's not quite as much volatility in the business.

Now, Jason, just to supplement Jim's remarks. As we've been cross-selling clients and growing our share of the higher value equipment that comes onto the marketplace, some of these items might sell for $1 million. So, you have a handful of those sales that come into a particular month, it can begin to move the needle.

So, that's just a function of our continued growth and diversification and we're reluctant to sort of forecast a very high value piece of equipment unless it's already been consigned and in the marketplace.

So now, just kind of longer, or longer question. So, clearly, in our view at least, there's a disconnect between your outlook and kind of how you see the business and the valuation investors are putting on the stock. I think using your guidance your stock is now trading at 7 times EBITDA. It's one of the lowest valuations in e-commerce.

I think part of this is liquidity driven -- no pun intended -- and part of this perhaps is investors getting comfortable with the way you provide guidance, particularly with some of this quarter-to-quarter volatility.

But regardless of that, there's still a big disconnect, at least in our view, on the valuation side. My sense is that there's no near-term way to address the stock liquidity unless Bill, you or some of the other large investors are willing to sell stock, which I doubt at these levels.

So, if we just think about other ways you can try to kind of drive valuation, one of the ways might be to implement a meaningful dividend. The second, I'm just kind of throwing this out there, have you considered taking the company private? Maybe comment on those two items.

Well, I think the purpose of our calls is to provide an update on our strategy and our performance in the markets we've targeted.

I could reiterate we see enormous opportunity relative to the markets we serve. There's still very modest penetration of the categories that we currently serve, retail supply chains, corporate capital assets and the public sectors.

So, with regard to valuation, we think there is certainly significant upside based on our performance, our track record and where the current valuation is. But frankly, having run the business since inception, we make decisions on long-term valuation, long-term benefits to our clients, and stockholders that understand the very unique position to have an e-commerce platform that's a market leader on a $0.5 billion of GMV, which clearly can double in the next three to five years. I think they'll find that value.

And just have you thought about the idea of a dividend?

I think, Jason, obviously we've got a significant cash balance on the balance sheet. Historically, we have used that cash to purchase acquisitions which we find to be adding value to the platform, either in some sort of domain expertise, a new vertical, new buyers or sellers that are really going to be synergistic to the platform.

And I think the conversation we have at the board level is we're trying to provide the highest value to shareholders. We have a lot of shareholders obviously inside the company, as Bill indicated. We take a look at the long-term strategic viewpoint of what we're going to do with that cash. We've had discussions around the proper use of that cash and everything is always on the table.

I will comment, though, that right now our M&A pipeline has never been healthier. We're seeing a lot of companies that are looking to join up with somebody like LSI that is a market leader, that can add significantly to their client base. Again, Network International is an obvious example of that.

And I think there's a lot of opportunities that today we like to keep the flexibility for. So, I wouldn't expect a near-term dividend. Again, that's certainly always an option, if we think that's the greatest way to return value to shareholders. But at this point, we think there's greater ways to increase the business and shareholder value.

I would like to hand the call back over to Julie Davis for closing remarks.

Thank you for joining our call this morning. And as always, we will be available for any follow-up questions. Feel free to give Jim Rallo or myself a call. Thank you.

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