Liquidity Services Inc (LQDT) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2011 Liquidity Services, Incorporated earnings conference call. My name is Modesta, and I will be your coordinator for today. At this time all participants are in listen-only mode. Later we will conduct a question and answer session. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

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

Thank you, Modesta. Hello and welcome to our second 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. We will be available for questions after our prepared remarks.

The following discussion or responses to your questions reflect management's views as of today, May 5, 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 in 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. This supplemental operating data includes gross merchandise volume 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.

Thank you, Julie. Good morning and welcome to your Q2 earnings call. I'll begin this session by reviewing our Q2 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 Q2, 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. Q2 GMV was up 31% year over year to a record $137.7 million driven by annual growth within our DOD, energy, and state and local marketplaces that continued to benefit from improved merchandising, service levels, and our expanding buyer base.

Additionally, our retail consumer goods marketplace grew 25% sequentially driven by the seasonally high post-holiday returns period during our fiscal Q2.

Adjusted EBITDA $14 million was up 37% year over year driven by improved merchandising, further penetration of existing clients and improved operating leverage. Adjusted EPS which excludes noncash compensation expenses was $0.22.

We continued to demonstrate our financial strength by generating cash from operating activities of approximately $9.5 million during Q2, and we ended the quarter with approximately $96.1 million in cash and $0 long-term debt.

As evidenced in Q2, 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 commercial and government clients, we sold a broad range of high-value capital assets including vehicles, helicopters, boats, material handling equipment, machine tools, line pipe, 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.

On behalf of top retailers and manufacturers, we sold a full range of customer-returned merchandise on our liquidation.com market place including iPads, gaming systems, smartphones, housewares, jewelry, tools, toys, and LCD TVs.

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

For example, GMV in our commercial business, which includes our acquired network international business, grew 40% year over year to $60 million in Q2, and we now serve over 50 Fortune 500 clients with the ability to handle their full range of asset recovery needs from vehicles, material handling equipment, scrap metal, IT assets, and finished goods inventory.

Our GovDeals marketplace which serves state and local governments added over 188 new agency clients during the quarter and set records for total GMV, number of active sellers, and number of auction participants.

Our DOD surplus business recorded record GMV during Q2 and 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 leading solution for commercial and government sellers to manage and sell surplus goods, and we now serve over 4,000 commercial and government clients that sell assets online to our over 1.5 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 credibility serving the world's largest corporate and government clients.

First, we will continue to expand our penetration of the Fortune 1000 corporate marketplace which we estimate to be a $70 billion combined market opportunity for consumer goods and capital assets. We have developed both sell-in-place and full service solutions to meet the needs of large industrial corporations, retailers, and manufacturers. We believe corporate America is seeking to centralize and modernize the reverse supply chain function and our web-based solution, value-added solution, 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 and physical on-site auctions due to our 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 market as we have merchandised and sold successfully over $2 billion in GMV of inventory, heavy equipment, rolling stock, and scrap metal 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 3,500 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 addressing 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 on our platform.

A recent example is the expansion of our capability to serve full truckload buyers with the addition of a make-an-offer tool to our liquidation.com platform, which greatly simplifies the buying process for large volume buyers. Ultimately, by making it easier for buyers to fill their specific needs, we will enhance the value to all parties of using our marketplace.

Finally, we will continue to pursue acquisitions of complementary 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 provided to our clients.

In summary, we have a strong, diversified overall business that we expect will generate top-line growth, strong cash flows, and excellent returns on invested capital in 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 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 outlook.

Thanks, Bill. Our record quarterly results and increased guidance ranges, reflect market share gains and enhanced service levels and 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 $43.9 million.

We ended the quarter with a record cash balance of $96.1 million and intend to utilize our growing cash balance to execute our growth strategies, which includes, one, organic growth initiatives to expand our base of buyers and sellers; two, investing in our technology platform and infrastructure to deliver innovative services and to support a much larger business; and three, acquisitions of complementary businesses.

Although we have not dismissed the options in the future for more significant stock repurchases or a dividend, we believe that focusing on our stated growth strategy will drive better returns for our shareholders.

We also continue to make important investments to support our future growth. As we discussed during our last earnings call, we have a significant technology infrastructure project under way 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 continued progress this quarter towards completing this project in fiscal year 2011.

Next, I will comment on our second quarter financial results. Total GMV increased to a record $137.7 million, up 30.6% year over year. GMV in our GOV deals, or state and local government business, increased to a record $26.1 million, up 32.1% year over year as we continue to add new clients, thus further penetrating the $2 billion state and local government market.

GMV in our DOD surplus increased to a record $27.9 million, up 30.8% 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 US commercial business increased to $60.5 million, up 40.7% year over year principally as a result of the Network International acquisition on June 15, 2010.

GMV in our DOD scrap business increased to $20.6 million, up 15.9% year over year as a result of increasing commodity prices in a mix shift to higher value metals.

Total revenue increased to a record $92.1 million, up 21.5% year over year primarily due to, one, the increase in our scrap and surplus businesses previously discussed, and two, a 24.3% increase in our US commercial business as a result of several new programs for large retailers utilizing the purchase model.

Technology and operation expenses increased by 18.2% to $14.4 million year over year primarily due to increases in staff, outsource processing labor and temporary wages, including stock-based compensation and consulting fees associated with technology infrastructure projects. As a percentage of revenue, these expenses decreased to 15.6% from 16%.

Sales and marketing expenses increased by 23.3% to $6 .2 million year over year primarily due to, one, expenses of $500,000 in staff wages including stock-based compensation, and two, expenses of $600,000 associated with Network International.

As a percentage of revenue, these expenses increased to 6.7% from 6.6%. General and administrative expenses increased by 10.4% to $7.1 million year over year primarily due to, one, $200,000 in general corporate expenses to support the growth discussed above; two, expenses of $200,000 associated with Network International; and three, $200,000 associated with business development costs. As a percentage of revenue, these expenses decreased to 7.8% from 8. 6%.

The Company continues to demonstrate strong capital cash flow generation and growth, as our overall working capital continues to be a source of cash. During the second quarter, LSI generated $9.5 million of operating cash flow and $32.3 million over the last 12 months.

Adjusted EBITDA grew 37.1% year over year to a record $14 million. Adjusted net income was a record $6.2 million for the quarter, up 26% year over year. Adjusted diluted earnings per share was a record $0.22 for the quarter, up 22.2% year over year based on approximately 28.1 million diluted weighted average shares outstanding.

We continue to have a strong balance sheet. On March 31, 2011, we had $96.1 million of cash or approximately $3.42 per share in cash, current assets of $133.5 million and total assets of $189.7 million. The Company continues to be debt free.

Capital expenditures during the quarter were $1 million. 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 $500 million to $525 million, which is an increase from our prior guidance range of $480 million to $525 million.

We expect GMV for the fiscal third quarter of 2011 to range from $120 million to $130 million.

We expect adjusted EBITDA for fiscal year 2011 to range from $48 million to $50 million which is an increase from our prior guidance range of $43 million to $45 million. We expect adjusted EBITDA for the fiscal third quarter of 2011 to range from $11 million to $13 million.

We estimate adjusted earnings per diluted share for fiscal year 2011 to range from $0.73 to $0.77 which is an increase from our previous guidance range of $0.66 to $0.74.

For the fiscal third quarter of 2011, we estimate adjusted earnings per diluted share to range from $0.18 to $0.20. Our guidance adjusted EBITDA and diluted EPS for acquisition costs and for the effect of FAS-123R which we estimate to be approximately $2.2 million to $2.4 million per quarter for fiscal year 2011. These stock compensation costs are consistent with fiscal year 2010.

Bill and I will now answer any questions.

(Operator instructions) Your first question comes from the line of Ross Sandler with RBC Capital Markets. Please proceed.

Hey, guys, good quarter. I've got three quick questions. First, on the DOD, so the contract's locked up for a couple more years, and I think you've got options on the end of that. There's been some change at the top of the DOD recently, which could be read as a positive from what we can tell because they're probably focusing more on revenue generation going forward. Any sense of how this new DOD management might impact the contract renegotiation?

Ross, we have a long-standing very close relationship with the Defense Logistics Agency, segment of the agency that we work with. I would note that we have worked with four consecutive directors of the DOA disposition services branch, and have had a wonderful opportunity to continue to be a value-added solution to support the mission of the DOA. And I believe strongly that they look at our solution as a best practice and as an approach that is perfectly aligned with the DOD's overarching goals to be more efficient, to drive cost savings, and to perhaps even outsource certain functions to reduce and streamline their cost structure.

So we would expect to frankly benefit from where the DOD and sort of the overall budget discussion is going.

Okay, great. Second question is on the commercial GMV. The growth here has been above company average, I think 41% in the quarter, but has been decelerating a little bit for two quarters now. Is that a volume issue or a mix shift issue, or anything else? Any color on what's going on with commercial and then new on the competitive front? Thanks. Then one more question on expenses.

Let me address the industry structure and the landscape. We think that the market is very interested in modernizing and centralizing reverse supply chain, both on the retail consumer goods side and on the more industrial capital assets side. We are well positioned to cross sell our services to address the full range of assets. Our logistics capabilities and distribution center network are unique in the market. So we can help our clients either fully outsource the logistics elements or sell those assets wherever they may be located. Our energy clients truly do business around the world in very remote locations. So our virtual market place is of high interest. And we believe, we're really early on in penetrating the Fortune 1000 market and have a lot of room for additional growth.

There is seasonality and that mix can change from quarter to quarter. I think the energy supply chain is a more lumpy business. It is more tied into business and investment cycles. As I noted in the opening remarks, our retail consumer goods business did benefit from the seasonally high returns season following the holiday, so January, February into March.

But the broad strategic initiative is to be the best practice to help these clients move away from broker dealers and move away from live auctioneers to access this growing global buyer network that we've assembled.

Great. Just one last housekeeping question for Jim on the tech (inaudible). So, you guys have said historically that you're expecting $2 million, $2.5 million investment for the platform upgrade. It looks maybe $1 million hit in the March quarter. Do you expect the rest of that in the June quarter, or how's the remaining investment going to kind of phase out in the next couple of quarters?

Yes, Ross, it was a little bit less than $1 million in the second quarter. At this point, we actually expect it to be spread out pro rata throughout the rest of the year. So although I know initially at the beginning of the year we thought there would be an acceleration in the first half, just the way the projects are rolling out, it looks like it could be spread out more pro rata.

Okay. Thanks, guys. Good quarter.

Your next question comes from the line of Shawn Milne with Janney. Please proceed.

Thank you and thanks for taking my questions, and again just a congratulations on a very strong quarter.

Maybe start off, Bill, you talked about some of the commercial acceleration on the retail side based on healthy returns. Can you give us an update on just more on the consumer electronics side of that business? And it certainly doesn't look at least in the financials that there continues to be any margin hit there. You know, we're certainly expecting I would think we're going to see a very healthy flow of consumer electronics products into that market given some of the product cycle ramps and tablets and mobile, maybe an outlook on that front?

And, Jim, just on the financial side, you know, in terms of the margin structure, the margins were very healthy this quarter. As you think though the next several quarters, are there other places in your business you're looking to reinvest or should we continue to think through, you know, healthy flow through on the bottom line? Thank you.

Regarding thank you Shawn for the questions. We are clearly a beneficiary of the ongoing product innovation and disruption caused by this next generation of mobile devices, e-readers, you know, playbooks. The idea that there are new product categories that are inching their way into the store shelves of traditional retailers and in many cases creating new online or multi-channel business models.

As an example, we have rolled out the sale of iPads and iPad 2s as, you know, that category grows. The PDA devices, the smart phone devices, the gaming systems in our liquidation.com market place reflect that we are making the market for retailers to manage their way through this product innovation cycle which we believe is a multi-year transformative part of the retail industry.

So, we are delighted to be able to bring the product knowledge, the compliance management aspects of protecting retailers from the removal of sensitive data. We're delighted to be able to provide the full range of buyers, whether it be large export buyers, palleted truckload buyers, or even end-user consumer channels. We have the logistics support to help transfer these assets out of stores on an expedient basis so they can make way for the new season's goods.

So we have the full service solution, the know-how and ability to scale in this area. So we will leverage that for both the retailers who bring these products to market and their supply chain partners who are either supplying the products or responsible for removing the products or providing after-warranty services.

So we're right if the midst of all those macro trends, and that will be a benefit. Now the margins, you know, the structural margins in consumer electronics are more narrow, but that doesn't limit in any way what we believe is the growth opportunity for LSI.

Okay, and Shawn, if I can just add to that. You know, I think the margin profile of the business has been consistent the last couple of quarters. We haven't really seen a degradation. We also haven't seen a significant increase. I think what you're seeing in the aggregate numbers are a third of our business, approximately a third of our business is on the retail side. And again as I indicated, the profile hasn't changed much. But two thirds of the business is associated with capital assets, you know, including scrap, and the margin profiles in this business have improved over the last couple of quarters primarily due to a mix of high-value rolling stock, high-value metals on the scrap side from the DOD.

And so, specifically to answer your question, I think as we look at the rest of the year, we anticipate probably similar margins, at least in the next quarter because we've got, as you know, the scrap incentive payment, which at this point we anticipate receiving. So that's a benefit that occurs in the June 30 quarter.

When I look at the next quarter or the last quarter of the year, I think the margin profile will be similar to what we saw on the first quarter at this point, which I think overall will have us end up higher on the margin side than we anticipated at the beginning of the year slightly.

So, you know, again, we've had a great mix of product throughout all of our marketplaces, and at this point we continue to see that in the near term.

Just a couple of quick followups if I may. So, Bill and Jim both, on the consumer electronics side, it seemed like you guys made a little bit of a cautionary comment a couple quarters ago just on margin, but it seems like now maybe really the message is, this is going to be a very good volume business, albeit a little bit lower margin but, you know, still drives very good operating dollar growth. If that's fair, if you can comment on that? And then secondly you made a comment, Jim, in your prepared remarks about scrap being driven more by prices. Are we seeing better property flow there as well or are we in a situation where as we roll into the next fiscal year, you know, given where commodity prices are, that may be a bit of a tougher call? Thanks.

I think the point on what drives retail sales in America today and clearly there is a high content of consumer electronics and devices becoming a more indispensable part of people's lives. And as that mix shift unfolds, we will be a mirror of that in terms of the product that is sent into our marketplace. We believe that there's a lot of excess capacity in the overall infrastructure and that driving that additional volume even with regard to lower margin products, the electronics categories are sold for low gross margin at the original point of sale, and have a lower margin structure even in the secondary marketplace.

But as you, I think correctly, point out there's a lot of operating leverage and contribution dollar leverage in our marketplace and in our business model because we're a growth company and we haven't fully leveraged our capacity and we continue to invest in that capacity.

So we believe we're still in the early days of achieving the full contribution dollar benefit of the consumer goods side of our business. And on the commodity side, I'll let Jim answer that question.

So, Shawn, on the scrap business, we really haven't seen a significant increase in what I would say is poundage given to us to sell, or really a big change in pricing. What we've really seen is a mix shift from the DOD and more high-value metal. So if you sort of look at -- again, when you are just focused on the top line, you see what looks like stronger revenue because you've got less of what I would call what we normally do, steel and aluminum, and more metal such as brass particularly in the last quarter which have allowed us to have the more significant top line.

But again, it's not necessarily an increase in poundage that we're selling, nor is it a lot of increase in specific commodity prices. It's just been our product mix that has changed.

Okay, thank you, and again good job. Thanks.

Your next question comes from the line over Jason Helfstein with Oppenheimer & Company. Please proceed.

Thanks. So two questions, I guess. So, commercial GMV does not appear to be slowing. I think maybe what was a previous concern and kind of our calculation was kind of about 30% on a pro forma basis. You know, do you think this level of commercial growth is sustainable beyond this year? And I mean I think we all agree that there are factors kind of industry wide driving it in your favor. So any kind of commentary you can give us comes on the long term for commercial growth.

And then secondly for international, you know, this is an area that historically you guys have struggled with from a number of different factors, call it partially systems and kind of putting people in place. The idea of having more of a virtual marketplace internationally, can you just talk about if we move toward that direction how you can leverage that? And then do you think you need to do additional acquisitions internationally to add scale to that operation over there? Thanks.

Thanks for the questions, Jason. When you look at the overall opportunity in the commercial market, we size the retail supply chain opportunity in the range of $30 billion, $20 billion to $30 billion for a range. And then on the corporate capital asset side, the vehicles, the rolling stock, basically all of the capitalized assets used to run and grow businesses, that's about a $50 billion opportunity.

So these are huge opportunities. And when you look at where we are in terms of adoption of e- commerce, it's very early days still. So we'll do $0.5 billion dollars of GMV, but less than 1% penetrated in the overall market. And the adoption of new solutions in the large Fortune 500, Fortune 1000 marketplace is incremental. I mean, the inertia in these large, in many cases multi-national businesses, is incremental. And so we believe that, you know, if you look 5, 7, 10 years from now, people would never want to go back to the manual fragmented brokerage approach to calling the 30, 40 contacts out of your Rolodex to sell high-value equipment.

There's every indication that we're going to be able to do in the reverse supply chain what was done in the forward supply chain with the DRP software and modernization of how newly manufactured goods moved to market. And so our opportunity is to create the systems, the buyer network, the value proposition to lead the Fortune 1000 marketplace to a much more efficient process. And they need to do that because they see there's a huge financial return on organizing, centralizing, and leveraging these tools or these capabilities. So we believe there's every ability to sustain the type of growth that we've achieved in this year.

In terms of the international opportunity, we've spent most of our time in the UK and some adjacent countries and, frankly the market, the reverse supply chain market there, is still very early on in embracing new ways of doing business. There's a lot of inertia in the United States. There's even more barriers frankly in the UK both on the buyers' side and the sellers' side. They're just behind, I believe, where we are in the US. That requires lots of patience to continue to find a way to create value on the timeline that those organizations are willing to adopt new ways of doing business.

Having said that, we do believe there is many overlapping opportunities to tap Europe through our existing marketplaces. Today we have buyers in those geographies that participate in one or more of our marketplaces -- buyers of scrap metal, buyers of specialized machine tools and heavy capital equipment. That marketplace is vibrant.

And again I think, as people transition to mobility and using online channels, that buyer base will naturally grow. But, the last two or three years are evidence that that marketplace is still trailing the US in terms of adoption of technology in the reverse supply chain market.

And do you think that's going to be more driven by, A, just waiting it out and kind of having them come around like the US has? Two, internal development? Or, three, acquisitions? Or kind of a combination of everything?

I think we will need to innovate in the mix of business we intend to pursue in the large economies in Europe which would include Germany, the UK, perhaps sort of Benelux region. And so we have a broader portfolio today than we've ever had, Jason. So we're going to just prioritize our entry points into those markets with whatever solution we believe they're most receptive to. So that will be more likely organic innovation or acquisition in the next few years.

Thank you.

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

Good morning, add my congratulations on the quarter. A couple of followups on the investments and taking advantage of all the growth opportunities. You talked about putting your cash to work, and I'm also just wondering if you could, perhaps, frame the operating impact from that as well in a financial basis? Do you plan to spend a portion of your incremental cash flow? Is there a way to look at it from that sense? And then secondly on the buyers' side, you've talked about before how important it is to maintain that balance between buyers and suppliers and the volume. Are there any initiatives, say newer incremental initiatives, to maintain that balance to really reach out and bring more buyers onto the platform? Thanks.

Thank you, Colin. Let me address your second question regarding this balance. You know, marketplaces benefit from growing each side of that two-sided network. The buyer base that we have today is largely tied to the specific marketplace a buyer initially registered on.

So if you were a buyer of laptop computers or cars from, let's say the state of Florida or Georgia, you came through our GovDeals marketplace, registered, and you tell us what you have a desire to purchase. And today we limit, frankly, most of our interaction with you based on your home marketplace.

Our stream of work on the technology infrastructure is going to allow us to cross-pollinate your buying through our other marketplaces without you having to do anything. Meaning your account, you know, your home marketplace, let's say it's GovDeals or our DOD marketplace GovLiquidation, we'll show you what's available in your home marketplace and then we'll automatically serve, based on your preferences, assets in any other part of LSI's marketplaces. So, we believe there's huge upside in terms of conversion of our existing buyers by automating and making their experience a more universal buyer experience across all of our marketplaces. And that's just simply the integration of our marketplaces and what buyers see when they log into their My Account or when they're searching within a marketplace.

So that's additional growth that will just come from investment technology. In terms of the broader landscape, you know we now have an opportunity to further access the share of purchasing power, a share of wallet of a buyer because we just have more to offer.

We have more and more categories, more ways to help a reseller fulfill their purchasing needs. If you're an exporter and you want to move container loads, we have a greater variety of products to put on that container. We have automated many of the ways that they do business with us. We have another stream of work to automate how they pay or how they're invoiced to give them premium support for larger-volume transactions.

There's a huge global market place of businesses that can benefit from engaging our marketplace. We are an incubator for small businesses. We have still large untapped segments of the global buyer base to penetrate. And so we have many, many growth opportunities on the buyer side.

Of course, as we add supply into the marketplace, there's a set of existing buyers who were buying that supply from another channel, and they will naturally come to our marketplace. You know the other thing that we benefit from is when our buyers research a product or research a business service, they'll go online. They use search engines, and in the categories that we play in, retailer consumer goods, vehicles, many of the industrial categories, we are very highly indexed in terms of organic search results because of the size and scope of what we do and on the detailed manifest information that is in each and every auction.

And so one of the virtuous sort of circle of growth elements is the more information and content we have in our auction marketplaces, the more easy it for buyers that we don't even know about to find us as they reach out and use a variety of search tools which, you know, view our content very favorably.

Colin, on the cash flow, as far as how does that affect operations or do we have any specific targets for the amount of cash flow we plan to invest going forward, I think our board, the management team as a policy, we're trying to drive the greatest return to shareholders. At this point, we believe that we've got things that we can do strategically which are going to do that.

We don't have a set aside percentage or a certain amount that we plan to do every year. I think that we're sensitive to making those decisions at a specific time. Whether it's a new innovative service, an acquisition, or some sort of geographic expansion, those considerations all will be taken up at that time.

As far as operational returns, we have stated that we are only interested in doing strategic items which are going to drive earnings and cash flow such that any outside acquisitions that we would do would be accretive. And so then I would expect them to increase the operational effectiveness of the business.

Okay. So we're not talking about layering on, you know, a significant additional operating expense initiative in the near term as part of this growth plan?

Well, no. I think we're trying to keep our margin profile consistent with what we have had over the last two years.

Okay, great. Thanks, very helpful.

Your final question for today comes from the line of Gary Prestopino with Barrington Research. Please proceed.

Hi, good morning everyone. Hey, Bill, I just wanted to get an idea. When you factor out Network International, the acquisition, your growth in GMV, how much of that is really coming from the addition of new clients and how much of that is coming from repeat business and increased GMV being sent to you because of what you're doing in terms of increasing the terms?

Well I think there are a couple of drivers for GMV. One must recognize that as we add buyers, as we prepare more accurate or comprehensive information for the buyer base, we're able to command a higher sales value for the same item or similar items than a year ago or a couple of quarters ago. So a lot of the growth that we're able to achieve is just higher sales value, and that's a function of the merchandising strategy and we ought to be able to continue to leverage that.

It's interesting to note that some of the products that we've involved in handling six, seven, eight years now, we're still finding ways to improve the sales value, improve the reach and efficiency of the way the buyers find and buy. And we get closer to the end user or ultimate consumer of the product. And that sort of disintermediation in process helps us increase recovery rates.

In terms of the mix of existing and new clients, well we target the largest corporations in the world for a reason. Once we start a relationship with them, there's lots of opportunity to further penetrate those relationships. So still today, a significant contributor to growth is penetration of existing relationships.

We have an active and growing business development effort. We have more sales professionals than at any time in our history calling on new clients. And there's a virtuous benefit of the more prestigious your client roster, the more trust and credibility and past performance that you've built up serving large complex organizations, the easier is it to land the next ones.

And we find it interesting that on reverse supply chain, there really is not a competitive element of, well if you're working with someone else in my industry, I have concerns. It's quite the reverse. It's like, I now trust that you know our product stream, our supply chain issues, our compliance issues. I'm happy to do business with you because of that. So we're going to see, I think, a broad portfolio of very large companies a lot that offer multiyear growth opportunities just through penetration of those relationships. And for us, we want to make sure we have the full breadth of services, product domain expertise to cross sell in those large global companies.

Well when your sales force reports back to you, and they're in these commercial and government markets, what are they saying the client perception of the company or your services or whatever? What has changed over the last two years and quite possibly made their job easier in terms of getting new GMV through the door?

Well I think, one, in the last few years there is an increasing desire to explore the incremental efficiencies that can be had in the reverse supply chain. So, whereas when times are very, very good, you know maybe there's more complacency in the view that, hey, if it's not broke, don't fix it, on the reverse supply chain. That has changed since the fall of 2008. And they're now looking for every available efficiency, willing to open up and discuss strategically how we can redesign the reverse supply chain and move decisions out of sort of local stores or local warehouses to the CFO or the head of the supply chain, or even in some cases at the CEO level.

What is the upside opportunity of modernizing reverse supply chain, centralizing that process, driving additional value through an efficient auction marketplace? And that's our opportunity, and we elevate that discussion because we have lots of proven data and case studies where we've done it before. And that puts us in a great competitive position because we're one of the very few companies that's been willing to invest in a national distribution center network to invest in a global buyer marketing effort to attract 1.5 million buyers so we have the demand to absorb $10 million, $50 million, $100 million of goods from an individual retailer or manufacturer. And we have the team that's dealt with these products and understands whether those products need to be defaced, de-labeled.

We have an export capability which is unique to move these products outside of the country to protect the channel relationships of some of our clients. So we really are delighted to move the discussion up the chain because we have those capabilities.

Thank you, Bill.

Ladies and gentlemen, that does conclude our Q&A portion of the call. I would now like to turn the call back over to Ms. Julie Davis for closing remarks.

Thank you for joining our call today. As always, if you have any followup questions, Jim Rallo and I are available.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.