Liquidity Services Inc (LQDT) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2011 Liquidity Services Inc. earnings conference call. My name is Marisa, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (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's call, Ms. Julie Davis, the Director of Investor Relations. Please go ahead.

Thank you, Marisa. Hello and welcome to our third 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, August 2, 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. The supplemental operating data includes gross merchandise volume and should not be considered a substitute for or superior to GAAP results.

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

Thank you, Julie. Good morning and welcome to our Q3 earnings call. I will begin the session by reviewing our Q3 financial performance and then provide context on our strategy and where we on our Company's overall development. Finally, I will turn it over to Jim for more details on the quarter and our outlook for the year.

During Q3 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. Q3 GMV was up 36% year-over-year to a record $148.1 million, driven by growth in our DoD, energy and municipal government marketplaces.

Record adjusted EBITDA of $15.1 million was up 43% year-over-year, driven by improved merchandising programs, further penetration of existing clients and improved operating leverage. Adjusted EPS, which excludes non-cash compensation, acquisition costs and goodwill impairment expenses, was $0.52. Excluding tax benefits, adjusted EPS during Q3 was $0.26, up 73% from the prior-year period.

We continued to demonstrate our financial strength by generating cash from operating activities of approximately $12.2 million during Q3, and we ended the quarter with approximately $104.4 million in cash and zero long-term debt. As evidenced in Q3, 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 assets.

As we reflect on our accomplishments during our most recent quarter, let me briefly revisit our strategy and where we stand in our Company's development. Liquidity Services' consistent execution continues to move us towards our stated objective of developing a $1 billion enterprise. Our annualized GMV is approaching $600 million and our annualized EBITDA is approaching $60 million, up 70% and 154%, respectively, since fiscal year 2009. We at Liquidity Services remain very excited about our future, due to several important characteristics of our business.

First, we target and address large, fragmented markets that are still very early in adopting online solutions. Just as other segments of our economy have been transformed by technology, Liquidity Services is revolutionizing the reverse supply chain by developing and delivering innovative and effective solutions that drive transparency and convenience for all parties.

For example, we enabled a buyer in South Africa to purchase a surplus helicopter from a seller in New Jersey, and we enabled national retailers to maximize value for store return and seasonal consumer goods by leveraging our nearly 1.6 million registered buyers across the globe, all in a matter of days in our most recent quarter.

Second, with over 4000 commercial and government clients, including many of the largest and most sophisticated organizations in the world, Liquidity Services is the market leader in our category with strong competitive advantages. As measured by GMV transacted, we're the number-one marketplace in retail consumer goods, surplus liquidation, the number-one marketplace in public sector surplus goods liquidation and one of the top three online players in the sale of capital assets. We believe our innovative business model, large and growing buyer base, long-term seller relationships and unique product domain expertise are very difficult to replicate. We also believe our marketplace model is highly scalable.

Third, we have a talented and deep organization that is focused on expanding our position in the marketplace organically and through complementary acquisitions. During Q3 we closed the acquisition of Truckcenter.com and have commenced the integration of this business. Truckcenter's client base, which includes leading Fortune 500 financial institutions, retailers and industrial clients, will benefit significantly from our national logistics support and large buyer base for a range of high-value capital assets, such as material handling equipment, rolling stock, heavy machinery and scrap metal.

These blue-chip corporate clients are already being integrated into our commercial business, demonstrating our strategic focus on further growing our capital assets vertical and penetrating many existing clients with additional services.

The markets we serve are still very fragmented, and thus we continue to seek and evaluate strategic acquisitions which would enhance our seller and buyer base, product domain expertise and level of value-added services provided to our clients.

Finally, our continued progress has provided a wonderful opportunity to invest in innovation. We continue to enhance our marketplace technology platform and value-added services to make it easier for our buyers to find and buy desired assets and for our sellers to speed the transaction process and recover more value.

After more than a decade of growth and success, we continue to foster an entrepreneurial spirit of Liquidity Services. Our team has a passion to improve our business every day and deliver innovative solutions to our clients. Just like day one of our founding, we measure our success by our ability to create value for our clients and buying customers, and we believe we are just getting started with where we can take Liquidity Services.

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 approved to $48.5 million. In addition to strong core business operating results for the quarter, we embarked on several key initiatives to continue to drive significant shareholder returns in fiscal year 2012.

We closed the Truckcenter.com acquisition on June 1 and have commenced the integration of this business. Additionally, as we previously announced, our United Kingdom subsidiary, Liquidity Services Ltd., or LSL, has initiated the closing of operations. For the fiscal years ended September 30, 2009 and 2010 and the nine months ended June 30, 2011, LSL had adjusted EBITDA losses of approximately $2.1 million, $3.0 million and $3.3 million, respectively. We estimate that LSL will incur a loss of approximately $2 million to $3 million for the remaining three months of fiscal year 2011. We expect to have this process completed by fiscal year end 2011. Upon completion of this effort we will present the results of this business as discontinued operations in our 2011 Form 10-K.

Goodwill of $16.6 million associated with the Geneva acquisition has been deemed to be impaired and thus was written off in the quarter. We have estimated the tax benefit resulting from the closure of the UK operations as an estimated 26% effective income tax rate anticipated for fiscal year 2011 versus our previous estimate for the year of 50%.

Next, I will comment on our third quarter financial results. Total GMV increased to a record $148.1 million, up 35.9% year-over-year. GMV in our GovDeals or state and local government marketplace increased to a record $34.6 million, up 41.8% year-over-year, as we continued to add new clients and thus further penetrating the $2 billion state and local government market.

GMV in our US commercial marketplaces increased to $62.7 million, up 55.9% year-over-year, principally as a result of the Network International acquisition on June 15, 2010. GMV in our DoD scrap marketplace increased to $23.3 million, up 23.2% year-over-year as a result of increasing commodity prices and a mix shift to higher-value metals.

GMV in our DoD surplus marketplace increased to $24.8 million, up 8.8% year-over-year as a result of increasing property flow from the DoD and a higher mix of high-valued capital assets such as rolling stock.

Total revenue increased to $86.1 million, up 18.3% year-over-year, primarily due to GMV growth discussed. Technology and operations expenses increased 13.2% to $13.6 million year-over-year, primarily due to increases in staff, outsourced processing labor and temporary wages including stock-based compensation and consulting fees associated with technology infrastructure projects that we had previously announced.

As a percentage of revenue, technology and operations expenses decreased to 15.8% from 16.5%. Sales and marketing expenses increased 10.9% to $5.8 million year-over-year, primarily due to the acquisition of Network International and Truckcenter.com. As a percentage of revenue, these expenses decreased to 6.7% from 7.2%.

General and administrative expenses increased 12.4% to $6.9 million year-over-year, primarily due to, one, $400,000 of general corporate expenses and business development costs to support the growth discussed above; and, two, expenses of $300,000 associated with the Network International and Truckcenter.com acquisitions. As a percentage of revenue, general and administrative expenses decreased to 8% from 8.4%.

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 third quarter, LSI generated $12.2 million of operating cash flow, an increase of 43.6% year-over-year and $36 million over the last 12 months. Adjusted EBITDA grew 43.1% year-over-year to a record $15.1 million. Adjusted net income was $15.3 million for the quarter, up 285.3% year-over-year including the tax benefit. Adjusted diluted earnings per share was $0.52 for the quarter, up 246.7% year over year, based on approximately 29.4 million diluted weighted average shares outstanding.

Removing the effect of the tax benefit, goodwill impairment and the Truckcenter.com acquisition costs and using a normalized tax rate of 44% would result in adjusted diluted earnings per share of $0.26 for the third quarter, which is a 73% increase from $0.15 for the prior-year period.

We continue to have a strong balance sheet. At June 30, 2011 we had a record $104.4 million of cash or approximately $3.55 per share, current assets of $139.6 million and total assets of $197.9 million. The Company continues to be debt free.

Capital expenditures during the quarter were $1.4 million. We expect capital expenditures to be $4.5 million to $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 to GMV for fiscal year 2011 to range from $540 million to $550 million, which is an increase from our prior guidance range of $500 million to $525 million. We expect GMV for the fiscal fourth quarter of 2011 to range from $130 million to $140 million. We expect adjusted EBITDA for fiscal year 2011 to range from $49 million to $51 million, which is an increase from our prior guidance range of $48 million to $50 million. We expect adjusted EBITDA for the fiscal fourth quarter of 2011 to range from $8.5 million to $10.5 million, which includes an additional estimated loss from our UK operations of $2 million to $3 million.

We estimate adjusted earnings per diluted share for fiscal year 2011 to range from $1.10 to $1.12, which is an increase from our previous guidance range of $0.73 to $0.77 and includes the income tax benefit. For the fiscal fourth quarter of 2011, we estimate adjusted earnings per diluted share to range from $0.18 to $0.20.

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

Bill and I will now answer any questions.

(Operator instructions) Ross Sandler, RBC Capital Markets.

Thanks, guys, and great quarter. I've just a couple questions. First, Bill, can you give us a little color on the GovDeals strength, up 48% in the quarter? You mentioned winning some new accounts. Can you just give us some more color there? Is there anything one-time that was kind of spiky in the quarter in GovDeals? And then I'll just follow up after that question.

Sure, Ross. As I noted in terms of the characteristics at the marketplace, we are still seeing many of these organizations in the public sector experience, for the very first time, the benefits of using an online marketplace to track and sell a variety of surplus assets. And I believe we are benefiting from a secular adoption of online solutions to fill budgetary deficits because we are getting more financial value for these assets than traditional brokered sales or live events in the local market.

I think we are also seeing greater trust in the use of an online marketplace like GovDeals to handle high-value transactions. I think this is a broad trend, I believe, which is in line with the transformation of how people manage their activities. And in the typical agency you have more work to do with less resources, and our online platform steps in, allows much greater efficiency in terms of the number of man-hours to devote to selling off a variety of equipment, vehicles and so forth, as well as getting superior value to put back in the treasury.

So we are taking that value proposition on the road, and it's traveling well. We have expanded in the central and Midwest region of the country, and we are also now having great success in the western part of the United States in big markets like Arizona, California, Washington. So we expect, over time, the online marketplace solution to win out and managing the asset sale function within government agencies.

In terms of one-time, again, I don't think there's anything that's particularly unique, other than adoption. I noted in one of my examples how we are literally creating global buyer marketplaces for things like helicopters. I think we may have a few helicopters running through this last period than normal, but it is the case that when you look at what agencies invest their money in, it's typically things to manage roads, bridges, EMT, emergency support. So there are lots of other sellers like that, but I would note that Governor Christie in New Jersey and some other places have been very active in sort of realigning some of their warehouse storage requirements and fleets, and that's in line with this secular trend I mentioned.

Got it. And then, Jim, tech and ops as a percent of GMV came in a little bit better than expected, down to like 9.2% in the quarter. Are you guys now through the platform investments that we talked about earlier this year? And as we look out to next year, I know you're not going to give official guidance. But with UK winding down and those platform investments not part of the P&L for fiscal 2012, where could we see EBITDA to GMV margin potentially go as we look at next year? Any color there would be great.

Sure. Well, I think a couple things on tech and ops, Ross this quarter -- one, we did get the benefit of realignment of our warehouse network in the retail side of our business. I think, as you are aware, we have shut down our California facility and moved that to Nevada. That took place early in the quarter, and so the cost savings there were reflected in the quarter our lease was up in California. And the business environment in Nevada is just a little friendlier. And from a logistics standpoint it was, frankly, helpful to our clients. So that helped a little bit there.

The other thing is, on the IT spend we continue to roll that out as planned this year, so we have not gotten through that yet. I would say we are about 75% of the way there, and the rest of it looks like it will be done by the end of this year, as planned. That being said, Ross, as you know, we have continued to invest for the growth we are showing. And we would expect to continue to make investments next year. At this point we haven't come up with a specified budget to do that, so I can't comment specifically on whether or not IT spend would be as high next year as it is this year. But again, our mission here is to continue to grow this business and penetrate the market opportunity we have. And that is going to require investments as we grow the Company.

As far as marketing goes, I think we saw a little bit better margin this quarter simply because we had the scrap benefit. So when you look at EBITDA as a percentage of GMV, we received a $1.6 million benefit this quarter as part of the scrap contract. We've received that every year since we've had the contract, and although that number has fluctuated anywhere from $1 million to $1.6 million, that always makes this quarter look a little bit more margin strong than the rest of the year.

So I would expect margins, actually, just to drop some next quarter. And I think this year, we will be ahead of where we were last year, albeit not significantly. But we have definitely made improvement to margins again this year, and we strive to be as efficient as we can on the cost side. At this point I wouldn't anticipate the large margin improvements moving forward with the Company as we, again, continue to invest in growth. We are proud of the margins that we have, at this point the highest in the e-commerce space. So we think we can continue to run at those levels, but we are not looking for a significant increase from here, Ross.

Okay, and then last one, on Truckcenter -- can you just remind us -- I think it was $50 million run rate was what was disclosed when you guys acquired them. What's baked into the 4Q guidance? And what is the normal seasonality for the Truckcenter business?

Sure. As we said, that was about a $50 million run rate business. We'd expect to have numbers around that this quarter. That business is -- the seasonality of that business is not as much as our other businesses. When I say that, like GovDeals, for example -- in our guidance, obviously, we have GovDeals coming down significantly in the fourth quarter. That's just the way that business operates. It's -- most of the state and local governments have a June 30 year end. There's a lot of activity that goes on in the June 30 quarter, and things are a little slower when they start the year.

Truckcenter hasn't really experienced that. A lot of our clients on the sell side there are financial institutions. We mentioned GE and B of A as some bigger ones. On the corporate side, you've got clients like Wal-Mart. Those entities have trucks that are rolling off lease or have been used to their useful life as deemed by the corporate side. And that continues to be sort of regular type of flow.

Now, that being said, that business is a little lumpier on a monthly basis and can be a little lumpy on a quarterly basis. But it doesn't really have an inherent seasonality in it.

Great, thanks, guys, nice quarter.

Colin Sebastian, Robert W. Baird.

I'll add my congratulations on the quarter. So a couple of questions here for you -- first off, on the comment regarding pricing pressure from buyers in the commercial marketplace of retail goods, does that dynamic allow you to adjust pricing that you pay for the goods in the purchase model? I guess the point would be to protect your margins there a bit.

And then, secondly, just stepping back on the GMV guidance and the sequential decline in Q4, you mentioned that GovDeals would be a bit slower seasonally in Q4. Is there also just sort of prudent conservatism there, or maybe is there any other segment of your business where you might be seeing any slowdown, seasonally or otherwise?

Thanks for the questions, Colin. As we have created this national solution for large retailers, we understand that retailers are looking for a one-stop solution. They'll want a marketplace that can handle the full range of products and the full condition categories of products. And a big piece of large retail operations is consumer electronics. In those categories, there is constant innovation, and therefore, I believe, pricing pressure both at the retailer level and that passes through the reverse supply chain.

That's normal. We've been in the consumer electronics category for years. We have been very sensitive to how those changes flow through in terms of our pricing model. I think, as of late, many of our programs have a lower strike price and upside revenue sharing with those clients so that we are able to focus on sharing the upside from our marketplace as we have grown.

Of course, as street retail prices change, any commitments that we have will change in accordance with that. So we have insulation there. But frankly, this backside of Moore's Law, if you will, which requires retailers to constantly replenish their SKUs and clear shelves, is a catalyst for our business. And it's one of the reasons we believe we have a terrific growth opportunity in the retail supply chain.

On the GMV question on Q4, yes, obviously GovDeals is a driver of that. Typically also we see a slowdown in the DoD business in the summer months. Particularly right now, we are seeing a slowdown in scrap. So we do anticipate scrap being down in the quarter. In surplus, I would say, it's probably down slightly, certainly flat at best. But right now we definitely see scrap is down in the quarter. So that's probably your two drivers for the decrease in -- the slight decrease in GMV.

Okay, and then one housekeeping item or a clarification on the $2 million to $3 million of losses in the UK business in Q4 -- how much of that is closing costs versus operating losses in that business?

I would say about half of it is operating losses, and the other -- well, I would use the term operating losses carefully because, at this point, we're focused on closing the business down. So we are not driving as much margin from our products, Colin, as we normally would. So frankly, I would say if it incorporated that, probably two thirds of it is one down costs and a third of it would be operating losses.

Thank you.

Shawn Milne, Janney Capital Markets.

Thanks and thanks for taking my questions, nice quarter. Jim, just to follow up on the last comments relative to guidance, we saw the original or at least the initial July numbers were up for GovDeals. And yes, sequentially they are down, but they're still up almost 30% year over year. So you are not saying that you are basically disappointed in the seasonality, now the difference and then the growth trajectory still looks good in that business.

And if I kind of work through it, I mean, so the question before Truckcenter at a $50 million run rate annually -- I mean it seems like -- and so we should expect $10 million to $12 million in the quarter from Truckcenter.

And, Bill, big picture, the business has sort of very strong numbers here over the last several quarters. As you look through fiscal 2012 -- I know you are not giving guidance -- maybe just in your mind some of the pushes and pulls on growth and the outlook. And I think, just to clarify, you continue to invest in your business. And maybe on an apples-to-apples basis, you wouldn't see a lot of operating leverage. But, Jim, you are shutting the UK business. So we would expect to see some operating margin improvement just from that.

Yes. Let me first indicate that this long-term growth strategy is very consistent with what we've had for the last few years. We believe that we are on pace to meet or exceed our $1 billion GMV target. Within the next five years we believe that, as we grow, the perceived risk of large corporations changing from in-house solutions is low -- is lower. There's this constant inertia that exists within large organizations, whether they be commercial or public sector. And our success has been a calling card into those organizations to revisit and take on much larger sort of transformative projects.

So the opportunities for LSI are to increase our volume through business development by adding commercial enterprise and government accounts. You've seen very strong growth in our commercial business. We believe we are an integrated solution. We handle the full range of inventory, fixtures and capital equipment that businesses use to run and manage their supply chains. And we will be cross-selling those services over time, and that's a great way for us to drive operating leverage in our model.

We believe that over time, the integration of our back end and website marketplaces will allow us to drive greater buyer participation more cost effectively. Many of our marketplaces are centrally stand-alone today. So if a buyer is looking for a forklift and they are on GovDeals, they may not necessarily have an easy way to access that supply from other sellers outside of a state or a local seller.

We are fixing that. We are in the process of rolling out what we call our BUX platform on each of our marketplaces so that we can render a marketplace brand for a distinct customer set. But we drive the registration and the processing of assets in an automated way. So, in effect, this lowers your cost to acquire and retain a buyer tremendously. And that's a synergy that we have yet to fully realize.

So strategic long-term, we are still early days in penetrating a roughly $50 billion market opportunity on the commercial side. We have about 3600 government agencies out of 60,000 in the state and local marketplace, and we are already the number one market place in public sector, for a variety of reasons -- cost savings, headcount reduction. Those agencies need assistance, and we are there to provide it.

We have an outstanding growth opportunity to continue to make change in the way assets are tracked and managed. A lot of the business intelligence that we can extract from our marketplace and put on mobile devices, iPads, other things to support the sales organization and support the asset recovery managers in the field, we think, is ultimately going to be a differentiator for us. So we will be looking to leverage our data as part of our service offering in the future.

And we are going to try to be the innovative market leader and continue to develop solutions that are unmatched by our peers to drive more supply and retain that demanded our marketplace.

Yes, Shawn, the two quick things I think you had for me as far as the GovDeals marketplace and the seasonality -- yes, we absolutely expect that to continue to show strong growth year-over-year. Just -- the only comment I made earlier was around the seasonality. So I agree with your point there.

The other one was on the operating leverage of the business for the UK closure. Obviously, the shutting down of that business and the discontinuation of those losses is going to be helpful to the bottom line on a margin. On a margin perspective, it's really -- it depends on how you look at it. Again, as you know, we like to look at our business based on GMV. And when you look at those margins on a GMV basis, I think it's going to be somewhat helpful but, frankly, not move the needle a whole lot next year, given where we plan to be on GMV, just growing at our normalized growth rate over this year.

On a revenue basis it would be slightly more helpful, obviously, because the UK business was all purchase model. But again, if you looked at the press release this quarter, you will see the purchase model is becoming a smaller slice of the pie. Almost half our business this quarter was consignment. And assuming that ratio next year, I wouldn't imagine we would have a whole lot of pickup on a GMV basis in EBITDA margins.

Okay, great, thank you.

Jason Helfstein, Oppenheimer.

So just kind of going back to the GMV and the outlook, do you think there was any kind of pull forward in this quarter? Obviously, much stronger than expected quarter -- do you think there was any business lines that were pulled forward into this quarter that might negatively impact the fourth quarter, i.e., make it grow a little bit slower -- again, on a year-over-year basis, not taking into account seasonality?

Then just a question on margins -- I mean, while you are not giving guidance for next year, I would guess it's obvious that margins improve just with removing the UK operations, which were a drag. So it just maybe comment a little bit on that.

And then lastly, perhaps a little more color on the acquisition pipeline and timing of deals.

Why don't I address the business development and M&A pipeline piece, and then Jim can discuss the GMV outlook and margins.

I think one of the benefits of being a public Company and having a business model that's very cash flow generative is looking for ways to further invest for growth. We have a good pipeline of organic investment projects that we are executing. Many of those relate to further integrating our marketplaces, developing a world-class sales organization and practices and so forth.

I think the other is continue to identify and cultivate complementary acquisitions. And we have a very, I think, well honed strategic filter of the types of transactions that create value for us. They are typically allowing us to add seller relationships and supply to our marketplace that's complementary. In some cases it can be expanding existing relationships. In other cases it can be adding new seller relationships. It's a situation where we can add to our buyer base and product domain expertise. We can add value-added service offerings. We can enhance our competitive position in the marketplace. And I think LSI's demonstrated track record shows you that management is looking to be a steward of shareholder value and look for those strategic situations where we can advance the business strategy, do so on an accretive basis for shareholders and be the positive force in the marketplace to create innovation, to create positive change for the sellers and buyers.

And as we collapse more supply and demand into our marketplace, whether it's through organic initiatives or strategic acquisitions, everyone benefits. Everyone wins. Sellers have access to a greater set of services, a larger buyer base. Buyers get access to a breadth of products and a single-destination marketplace with great services, pre-and post-sales support.

So this is a natural evolution, we believe, of our marketplace is to sort of consolidate and grow our position in the retail supply chain. And we will be looking for and have cultivated over many years those sort of strategic situations to support those objectives.

On the pull-forward question, Jason, we didn't really have any specific business that was pulled forward this quarter. So I think, again, that the drop in that quarter is only regarding the seasonality that I discussed earlier in both the DoD and the GovDeals business as well as, really, our retail business, too. Obviously, the June quarter is still not quite as strong as the March quarter on the retail side of our business. Those drop down from the summer and picks up again as we close out the calendar year in December.

On the margins, again, I feel like I touched on that one during the last line of questioning. Let me shape it up for you this way. So you've got several million dollars worth of losses this year in the UK that are what I would call the normalized operating losses, not including the close-down costs because those really are one-time in nature. If I look at those and I compare them to what our GMV should be next year, Jason, you're looking at possibly 40 to 50 basis points of margin pickup, everything else being equal.

So I do think we can get something out of that. It's just not going to -- on a GMV basis, which is how we look at the business, it's not going to move the needle a whole lot over this year. But again, we do focus on running the business as efficiently as we can. And so we constantly strive to improve our margins. I think that we are running at very high levels right now, and I don't see any degradation of those margins at this point. But I also don't see a big step from where we are at.

Just a quick follow-up, just on the back of the M&A question -- just more specifically, do you think investors should continue to expect at least one acquisition a year about the same size that you have been doing historically?

I think acquisitions will be a more recurring element of our growth strategy. And I think the idea of size is really case specific. The team here collectively has done multi-billion-dollar acquisitions over the course of our careers. I think we have a marketplace that has just a handful of larger opportunities, and under the right circumstances, where shareholder value is a key component, of course we would be looking at anything from tuck-in to mid-sized transactions. And I think that's one of the reasons that we are here is to take actions, whether it's organic or strategic transactions, that advance the business strategy.

And when we have aggregated more supply and demand in our marketplace, it drives really powerful results for all parties. And that's one of the key ingredients for us.

Thank you.

Jared Schramm, ROTH Capital Partners.

Good morning and congratulations on the quarter. On Truckcenter, how successful have you been in integrating Truckcenter compared to your expectations?

Well, let me just time-stamp the Truckcenter transaction. Here's another example of cultivating ideas. We have observed that there's a high component of transportation rolling stock equipment in our marketplace, owing to some of our retailer clients, many of our state and local clients and the federal business we have. Truckcenter provides a really interesting set of higher relationships, I think well over 100 consignors who have sold everything from trucks and tractor trailers to specialized over-the-road equipment. And so we identified that, ultimately closed the transaction on June 1.

And like a lot of transactions, your first goal is first do no harm, make sure that you have continuity of service with our existing client base, focus and retention within your management team, and then look for mid-term opportunities to drive synergy.

So bottom line here, it's very early days with Truckcenter and we have an integration plan that will, over time, leverage our corporate technology platform in that marketplace, leverage the broad buyer base we have in that marketplace and allow cross-selling of services with the client base that will realize, we believe, a lot of business value.

Okay. And then lastly here on a macro level, do you see any potential changes in the DoD business going forward with the proposed cuts in defense spending coming out of Washington?

From our perspective, we are very well positioned to be a part of the solution to a government that must be more efficient. And as a provider of an integrated solution on an outsourced basis, we bring together all the essential services to run the sales function for the Defense Logistics Agency, including our global buyer base, our marketing and merchandising support, our storage solutions, our inventory screening solutions, our global customer service and compliance management.

So, having recently been awarded a vendor excellence award for cost savings, we believe we are very well positioned to contribute to their mission.

Okay, that's it for me, thank you.

(Operator instructions) Gary Prestopino, Barrington Research.

Jim, would you feel that your tax rate will still go down to about 46% for next year?

Actually, I think we can do better than that next year, Gary. So one of the issues we've had with the tax rate is that it has been masked a little bit by the losses in the UK. So I would expect the tax rate next year to actually be somewhere between 42% and 44% at this point in time. I'll have a better update on that on the next call. But yes; I would definitely think it's going to be better than 46%.

Okay. And then could we just talk about, Bill, how you -- you're obviously being very successful in what you're doing here. How have you seen your sales cycles on new business? Have they compressed vis-a-vis maybe where you were two or three years ago, just because of the success you are having in the market?

Sure. I think there are two things, two elements or two prongs of that question. First, I think, in the normal enterprise sales pipeline, you're going to have business managers do their own risk assessment of, for me to drive change in my organization, what is the marginal cost benefit? Am I comfortable as a middle- to upper-tier manager as being sort of a champion of that?

And without question, with each and every logo that we add to our resume of experience, the balance is now pointing to we are in a position to make positive savings, positive results for my business. And I might get the question as a manager, why am I not using the Liquidity Services platform when many of my peers are?

So what may have been, a few years ago viewed as sort of the risk-free solution was just to stay put. Now the risk solution maybe not embracing these cost savings, these higher recovery rates in the reverse supply chain. And we think at the margin that's improving the sales cycle on the enterprise side. That's one part of it.

And then the second is companies that may have had no intention of ever looking at the reverse supply chain as a source of potential value creation are now jumping in. And that, I think, is one. It's 2011; everything is being digitized. Wherever you look, people are looking at technology as an enabler for more efficient, lean organizations. You've got a lot of this information going through the cloud in the way large organizations manage their organization.

And so naturally, if you are moving manual processes to digital or technology solutions and other functions, people would want to look at reverse supply chain. And when you look at reverse supply chain, who can help make that transition seamless? And it's Liquidity Services. So we think there's sort of the secular tailwind that will help us attract a larger share of the marketplace.

Okay, so all right, that's good. And within your existing clients, one of the things you have always said is that you have very low penetration overall. Could you give us an idea -- or if you could even measure this -- where that penetration has gone over the last couple of years? Relative to maybe where it was two years ago, where is it now? Where do you think it can go?

Sure. I think you would be looking at penetration rates a few years ago of 10% to 15%. We've seen that growth as high as 50% for many of our long-standing client accounts. And the complexity of what the retailer is trying to manage is helpful to us. Many retailers are trying to be multi-channel. They are trying to sell online and have folks pick things up in the store. They are trying to move themselves, wean themselves off of in-store discounting programs because, while there's a short-term fix to maximize comp store growth, it's structurally not sustainable. And the right thing for their business is to remove the low-margin product from the shelf, replace it with a superior margin product and sell it at full price. And so our solution is a precise address of that need. And so that is helping us increase the penetration rate and actually be a solution for not only brick-and-mortar stores but also the online component of a retailer's business.

We are also bringing on new accounts, and therefore we have less penetration there. But that's how we see our business doubling again in the next four or five years to exceed our $1 billion GMV target.

Okay. And then last question, I promise -- as you think about your business and the economic outlook, are you planning -- or is this even a fair question -- are you planning for kind of more of the same with the economy? Are you looking at things, maybe they will get worse but your fortunes would get better because the economy is slowing down? Could you help us there?

Well, I think the first question might be, can it get worse than it is today? Well, maybe 10-20 days ago we all thought it might get worse if members of Congress didn't do their job. I think we've gotten through that potential clip. And now I think we are sort of muddling through an economic recovery. It's likely to be the case that over time you're going to see some inflation, and for the most part, if prices improve we are going to benefit from that.

Again, we're talking sort of very high-level economics 101 here. But pricing improvement is probably a net positive for us in terms of consumer spending. I think you are seeing the repairing of consumer leverage, and that is allowing for more discretionary spend to come back to the marketplace. That's helpful.

You are seeing fits and starts of improved outlook for jobs. It has been stubbornly high, but I think a year from now, three years from now, I would bet unemployment is lower than where it is today, which will be a net positive.

The other thing is just this secular trend that more people are buying things online, and that's going to help our business. The return rates for products purchased online are higher. The online retailer value proposition is, look, we want you to feel comfortable trying and buying products with us, and we will make the return process extremely convenient. And so that drives volume in the reverse supply chain and, ultimately, volume in our marketplace. So those are some thoughts there, Gary.

Okay, thanks a lot.

I show no more questions at this time. I would like to turn it back to Julie Davis for closing remarks.

Thank you, and we appreciate your participation on today's call. Jim and I will be available for any follow-up questions that you may have.

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