Liquidity Services Inc (LQDT) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2012 Liquidity Services earnings conference call. My name is Onecia, and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). I would now like to turn the call over to Julie Davis, Director of Investor Relations. Please proceed.

Thank you, and hello, and welcome to our first-quarter fiscal-year 2012 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, February 1, 2012, 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.

Thanks, Julie. Good morning and welcome to our Q1 earnings call.

I'll begin the session by reviewing our Q1 financial performance and then provide context on 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 balance of fiscal year 2012.

During Q1, Liquidity Services reported strong 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 for GMV, adjusted EBITDA, and adjusted EPS, while continuing to make important investments for the future. Q1 GMV was up 41% year over year to $179.2 million, driven by growth in the volume of high value asset sales across our commercial and government clients, and improved merchandising on our platform. Adjusted EBITDA of $22.7 million was up 105% year over year, and adjusted EPS during Q1 was $0.37, up 118% year over year, driven by improved operating leverage on higher volume.

As we reflect on our strong Q1 results, let me make a few observations on where we stand in our company's development. First, we addressed the fragmented $50 billion plus reverse supply chain market, which is still in the early stages of adopting professional transparent solutions. This nascent market requires a leader to provide the technology platform and business rules to ensure the reliable execution, compliance, and network effects on the purchase and sale of surplus goods. Liquidity Services is uniquely filling this market need and leading the way in our industry.

Our consistent execution has enabled Liquidity Services to become the trusted provider of choice in the reverse supply chain market, with over 50 Fortune 500 corporations; over 4,000 federal, state, and local government agencies; and over 1.6 million registered buyers utilizing our marketplace.

Quite frankly, in our beginning, it was a formidable challenge to persuade large organizations to change their way of thinking about the reverse supply chain. Today, large organizations are proactively seeking our advice on how to improve and transform their surplus asset management activities, which is very humbling and gratifying for our entire team.

Our progress has generated strong financial results for our shareholders, exemplified by our adjusted EBITDA of $64.3 million and operating cash flow of $44 million over the last 12 months.

Second, we have a talented organization, and our team is engaged in a continuous improvement process that adds both organic and inorganic growth to our business. Our organic growth comes principally from using data and expertise to enhance the value of the assets we sell, penetrating existing client relationships, and adding new sellers to our platform. Our business has strong momentum in all three of these organic growth areas.

We are increasing the demand side of our marketplace to drive higher returns on the assets we sell. We are expanding our existing relationships by improving our clients' management of surplus assets, including the full range of returns, seasonal, and overstock consumer goods, and high-value capital equipment for the world's leading corporations. In turn, we are increasingly becoming a critical tool to enable our clients to reduce waste and improve organizational compliance with sustainability goals.

Our success has not gone unnoticed, and we continue to add new Fortune 500 clients, including retailers, manufacturers, and industrial corporations who desire to leverage our growing platform to stay competitive and reduce their total supply chain costs.

We also continue to grow our business inorganically through acquisitions and partnerships. For example, our recent acquisition of Jacobs Trading has further enhanced our position as the leading reverse supply chain solution for large retailers and their suppliers. We are pleased to report that our integration of Jacobs Trading is proceeding as planned, with our teams working well together to maintain the highest service levels while identifying numerous exciting opportunities to create value for our buyers and clients. The markets we serve are still very fragmented, and we continue to seek and evaluate strategic acquisitions which would enhance our seller and buyer base, product demand expertise, and level of value-added services provided to our clients.

In addition, we leverage partnerships to increase our share of the reverse supply chain market. For example, we have expanded our working relationship with eBay to jointly provide large retailers and OEMs the turnkey solution to manage the storage, fulfillment, and sale of returned and overstocked goods through both our B2B channels and eBay's large consumer marketplace. This joint offering simplifies and improves liquidation process for large brands and leverages the strengths of each organization.

We have also partnered with depot repair firms, warranty providers, and logistics firms who leverage our marketplace to recover more value for surplus and salvage goods. During the past quarter we successfully launched multiple new clients through these working relationships and expect these initiatives to continue to attract clients going forward.

Finally, we are committed to investing in innovation to deliver the marketplace and unique breadth of services that large enterprises require to manage their reverse supply chain activities. We will make continued investments in our marketplace platform, merchandising tools, and operational infrastructure to increase client net recovery and expand the volume of supply and demand on our platform. And we will continue to leverage our data, knowledge, and expertise in complementary product verticals to drive market share expansion and reinforce our leadership position as the trusted provider of choice in the reverse supply chain market.

After more than a decade of growth and success, we continue to foster an entrepreneurial spirit at Liquidity Services. Our team has a passion to improve our business every day and deliver innovative solutions that transform the global reverse supply chain. Our entire team looks forward to working together this year to significantly grow our business while maintaining the highest standards of integrity, service, and quality to our clients and buying customers.

Now let me turn it over to Jim for a more detailed review of our financial results and outlook for fiscal 2012.

Thanks, Bill. Our record first-quarter results reflect market share gains and enhanced service levels and operating efficiencies across our entire business as a result of investments we have made to support our growth over the last several years. Our strategy of bringing innovative technology into the reverse supply chain market and ARE efficient business model has translated into strong results for stockholders.

For calendar year 2011, adjusted earnings before interest taxes, depreciation, and amortization or EBITDA, has improved 60.3% to $64.3 million. Our strong results for the quarter were driven by record volumes in both our commercial capital assets and retail supply chain verticals. We historically have had a slowdown in the month of December in these vertical, and this quarter had an acceleration before the end of the year, driven by earlier returns to retailers and the need to sell assets before calendar year end for many of our commercial capital asset clients.

In addition to strong core business operating results for the quarter, we closed the Jacobs Trading acquisition on October 1 and have commenced the integration of this business. Although we had a lot of work to complete the near-term integration tasks of our largest acquisition to date, we are pleased to report that we are on plan while delivering better than expected growth.

Next, I'll comment on our first-quarter financial results, which came in above our guidance ranges. Total GMV increased to $179.2 million, up 41.4% year over year. GMV in our US commercial marketplace has increased to $103.7 million, up 71.8% year over year as a result of the strong performance already discussed, the Jacobs acquisition on October 1, 2011, and the Truckcenter.com acquisition on June 1, 2011.

GMV in our GovDeals, or state and local government marketplace, increased to $24.9 million, up 16.4% 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 marketplace increased to $29.4 million, up 22% 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 DOD scrap marketplace increased to $21.2 million, up 18.9% year over year, as a result of increasing commodity prices and a mix shift to higher value metals.

Total revenue increased to $106 million, up 35.1% year over year, primarily due to the GMV growth discussed. Technology and operations expenses increased 26.4% to $15.8 million year over year, primarily due to, one, expenses of $900,000 in staff and temporary wages, including stock-based compensation and consulting fees associated with technology infrastructure projects; and, two, expenses of $2.4 million from the acquisition of Jacobs Trading and Truckcenter.com. As a percentage of revenue, these expenses decreased to 14.9% from 16.6%.

Sales and marketing expenses increased 13.3% to $6.5 million year over year, primarily due to, one, expenses of $300,000 in staff wages, including stock-based compensation; and, two, expenses of $400,000 for the acquisition of Jacobs Trading and Truckcenter.com. As a percentage of revenue, these expenses decreased to 6.2% from 7.6%.

General and administrative expenses increased 24.2% to $7.8 million year over year, primarily due to, one, expenses of $500,000 in staff wages, including stock-based compensation; and two, expenses of $1 million for the acquisitions of Jacobs Trading and Truckcenter.com. As a percentage of revenue, general and administrative expenses decreased to 7.4% from 8.3%.

The year-over-year comparison of adjusted EBITDA, adjusted net income, and adjusted diluted EPS per share includes the losses from our UK operations in the prior year. We closed our UK operations effective September 30, 2011.

Adjusted EBITDA grew 105.1% year over year to $22.7 million. Adjusted EBITDA margin as a percentage of GMV increased to 12.7% from 8.8%, driven by operating efficiencies in our retail commercial marketplaces. We expect adjusted EBITDA margin to be around 12% for the remaining three quarters of fiscal year 2012.

Adjusted net income was $11.9 million for the quarter, up 145.6% year over year. Adjusted diluted earnings per share was $0.37 for the quarter, up 117.6% year over year, based on approximately 32.4 million diluted weighted average shares outstanding.

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 $12.2 million of operating cash flow, an increase of 79.8% year over year.

We continue to have a strong balance sheet. At December 31, 2011, we had a cash balance of $69 million, current assets of $121.8 million, and total assets of $322.8 million, with $51 million in working capital. We have debt of $40 million in the form of a subordinated note.

Capital expenditures during the quarter were $1.2 million. We expect capital expenditures to be $5 million to $6 million for fiscal year 2012.

Management is providing the following guidance for the next quarter and fiscal year 2012. We have assumed that we will once again receive the annual incentive payment under the DOD scrap contract in the third quarter of fiscal year 2012. We expect GMV for fiscal year 2012 to range from $700 million to $740 million, which is an increase from our prior guidance range of $690 million to $730 million. We expect GMV for the fiscal second quarter of 2012 to range from $165 million to $175 million. We expect adjusted EBITDA for fiscal year 2012 to range from $83 million to $87 million, which is an increase from our guidance range of $78 million to $82 million.

We expect adjusted EBITDA for the fiscal second quarter of 2012 to range from $18.5 million to $20.5 million. We estimate adjusted diluted earnings per share for fiscal year 2012 to range from $1.32 to $1.38, which is an increase of our previous guidance range of $1.26 to $1.32.

For the fiscal second quarter of 2012, we estimate adjusted earnings per diluted share to range from $0.28 to $0.32. This guidance assumes we will have an average fully diluted number of shares outstanding for the year of 33.4 million, and that we will not repurchase shares with the approximately $18.1 million yet to be expended under the share repurchase program.

Our guidance adjusted EBITDA and diluted EPS -- for acquisition costs, including transaction costs and amortization of contract intangibles of $33.3 million from our acquisition of Jacobs Trading; and for the effects of FAS 123R, which we estimate to be approximately $2.3 million to $2.5 million per quarter for the remaining three quarters of fiscal year 2012. These stock-based compensation costs are consistent with fiscal year 2011.

Bill and I will now answer any questions.

(Operator Instructions) Ross Sandler, RBC Capital Markets.

Good quarter. I've just got three quick questions. First, Jim, on the full-year guidance, given the 12.7% EBITDA to GMV margin that you reported in the first quarter, I think the midpoint of the full year assumes about 11.8%. So is there something that you're seeing which would actually cause margin to go down, or is that just conservatism?

Ross, do you want to answer them one at a time or are you going to go through the other two right now?

Yes, and then the other two I guess -- registered buyer growth was 12% in the quarter, down from 14%. Just a little color on it -- is there any saturation in the buyer base, or why is that decelerating given the acquisitions? Or is that like a definitional thing?

And then the last one was just some color on the GovDeals growth rate has a little bit below the recent trajectories, so anything think that is driving that? Thanks.

Sure. As far as the full-year margins go, Ross, again, from my comments earlier, I think we expect to be around 12% for the year. I didn't check your math on the 11.8%, but certainly that is around 12%. We had a couple of nice things happen this quarter that drove margins a little higher, both in the retail side of our business and commercial capital assets. So from our full-year guidance, we would expect to continue to have stronger margins. As you know, when we originally guided for the year, we expected margins to be really around kind of 11% to 11.5%, so we feel pretty strongly that our margin trend will continue, that, again, the 12% guidance that we've given is much higher than where we started at the beginning of the year.

On the registered buyer growth, nothing really specific in this quarter, Ross. The acquisitions -- Truckcenter was done in June, so their buyer base has already been incorporated into that number.

If you remember, the Jacobs Trading model for the most part -- they are truckload buyers, so the number of buyers added to our buyer base really did not move the needle at all. You're getting a little bit of what I will call the law of large numbers here, but we haven't seen any changing dynamics as far as the buyer registrations. We continue to do the same marketing programs that we've done for years. We continue to attract new buyers every quarter, new bidders every quarter. And frankly, we'll continue to operate the way we have growing that buyer base.

On the GovDeals growth rate, that was a little bit of a tough comparison year over year; we had some pretty big sales in the prior year. This is not the strongest quarter for the year, as you know, in GovDeals.

The GovDeals, which is our public sector marketplace for state and local governments, really has a strong quarter in the June quarter. So the December quarter, the March quarter, they tend to be okay. We had, again, some good things happen prior year. So really, there's nothing going on there other than a little bit of a tough comparison, but we are still pleased with that growth.

Okay, great. Thanks, guys. Nice quarter.

Colin Sebastian, RW Baird.

Congrats on the strong quarter. I have a couple of questions. First off, on the outlook for Q2, what's implied here is a pretty big drop off on the year-over-year growth rate in revenues. I wonder if you could just walk through that in a little more detail. For example, if there was any shift of retail returns into December from January, is one example, or maybe Jacobs is slower seasonally in the March quarter?

And then if you could give us some indication as to the organic growth assumption in Q2 excluding the recent acquisitions?

Well, let me first say, Colin, the strategic plan we have is sound. We are very encouraged by the increasing interest in using our platform and service offering to manage the full range of returned, and, in some cases, more industrial equipment. I think as we moved through the holiday season, it was reported on and we experienced a change of behavior by many of the large players in the retail industry. In years past, you saw a heavy amount of in-store discounting. In this past season, I think many retailers were very protective of that margin -- in-store margin -- and moved volumes out of the store earlier. That helped improve volume in our business. So hard to speculate if that's a structural change, but I can say that we observed that in many of our existing programs in 2011 in the December quarter.

But I think overall, we are very optimistic about the progress we're making, particularly with the organic growth in our retail supply chain business.

We have had a number of new relationships established. It's very difficult for us to forecast early on in these relationships, because there are lots of things that clients control operationally to roll things out, but I think if you look at the fiscal 2012 outlook and beyond, we've never been more excited about our business.

Yes, Colin, if I could add just a couple points specifically -- when we look at the second quarter, really, the second quarter is in line with where we expected to be at the beginning of the year. So nothing really out of the ordinary there. In fact, we expect that quarter to be up 25% plus year over year on the GMV, and 40% plus on the EBITDA line. So we feel good about where we've guided to.

I think the different dynamics that maybe some folks have to remember about the second quarter for our business is just some seasonality. Let me be specific.

So the commercial capital asset side of our business, as well as, really, the public-sector capital asset side -- I mentioned the GovDeals comment earlier -- but this is a down quarter for them, particularly on the commercial capital asset side, where we are starting a new year; the focus is not really on moving surplus assets. We tend to pick up that business in the June quarter and the September quarter, but again, that's typically a down quarter.

Now, we all know that this is a strong quarter for us on the retail side. We are dealing with a lot of store returns. We did get some of the benefit of that in December, and we are currently seeing strong product flow in January and would expect that to continue through the quarter.

So again, I think overall, the top line and the bottom line for the quarter is coming in as planned.

Okay. So there's nothing you've seen in January that's giving you any concern about product flow or linearity or velocity through the second quarter?

Absolutely not, no.

Okay. I'll get back in the queue; thanks.

Jason Helfstein, Oppenheimer.

So just to reiterate that, and then another follow-up -- so was it fair to say, though, you probably saw some pull forward with respect to the capital assets business? So not only do you tend to see GovDeals seasonally weaker in the March quarter, but you may have also had some pull forward into the December quarter? Is that an accurate assessment of what I've heard you say?

I don't think so, Jason, because again, the second-quarter guidance that we've given really is in line with what we expected at the beginning of the year. So we did see, obviously, a good quarter this quarter in capital assets that was a little higher than we expected, obviously, as I mentioned in my comments, but I wouldn't define it as a pull forward. In other words, we don't expect Q2 to be lower more than our original expectations. We had always expected it to be lower, just due to the seasonality.

So if I think about the impact of the acquired assets, i.e., Truckcenter and Jacobs and how that impacts the GMV, can you talk about if you take the $175 million, what the implied contribution with those would be? So what the pro forma growth for GMV would be using that $175 million? Because on our math, that's kind of nominal GMV growth, but we may not have the correct pro forma assumptions for Truckcenter and Jacobs.

Well, again, we have not provided detailed guidance or forecasts by individual marketplaces, Jason. So I'm not sure how to answer that question other than, I will tell you that organically, we grew over 20% last quarter, but we are not seeing really a change in that growth rate throughout the year, and obviously the acquisitions are additive to that.

Again, the growth dynamics in the second quarter are just a little different, because you've got the slowdown in the capital assets, Jacobs being -- let's go through each of the two acquisitions. Jacobs, being a retail focused business, is going to have pretty strong performance in the second quarter. Truckcenter will, again, have pretty weak performance in the quarter relative to the other quarters of the year. But again, both of those businesses right now we expect them to perform as we had originally planned at the beginning of the year.

Okay, and then just two other quick ones. So it seems to me that some of what we learned from Amazon last night -- fourth quarter in particular is becoming I think a very apparel-driven quarter, which they don't tend to do as well. And you're also seeing brands trying to be savvy about keeping certain things away from them to protect them, which would make it seem like they need more partners on the retail commercial side to help move inventory through the supply chain, and that would seem beneficial to you. So I'm just curious if there is conversations that suggest that some of the trends we are seeing with Amazon and how the industry is trying to react potentially more beneficial to you?

And then secondly, can you just comment how you feel about the current status of your balance sheet and your desire to fund acquisitions this year and into next year? Thanks.

So in terms of -- retailers are looking for Liquidity Services to play an active role in managing rebalancing of products in store, through the secondary marketplace in some cases, using our channels in combination with their online channels, to move returned goods. We are very integrated in that planning and thought process, which results in very attractive long-term growth prospects and how we're going to influence the management of this supply chain -- this reverse supply chain. So we have a variety of activities underway with 35 or so very large retailers; we see the outlook for this current year as being another strong step forward in leveraging this online platform and value-added services. And we've seen other players in the industry increasingly look to us for advice, whether they be other partners, like I mentioned in the outset, other manufacturers who hadn't figured out how to move branded goods through the marketplace.

There was a comment about buyers earlier. We have a key role in maintaining compliance and brand protection for these large manufacturers and retailers, and so many of these items may move outside the country. Because of the volume requirement to export these goods, we have larger wholesale transactions with international export routes that don't necessarily move the number of registered buyers as high, but are essential to meeting the needs of these clients.

So we think the convergence on our platform is going to continue. We think that clients are looking for the professionalism and the compliance management around this area of their business.

And I would say just in terms of observing where we are for the year, we've moved our GMV up $10 million at the midpoint, moved our EBITDA up $5 million for the year, and we moved our EPS up $0.06 for the year. So it seems to me that there's some rebalancing that has got to occur between the March and June quarters, because our June quarter historically has included our scrap venture incentive. And I don't know that that's been smoothed out in the way that the analysts are looking at this.

And Jason, to follow up on your last point on the balance sheet, so, look, our balance sheet is extremely strong. We added $20 million of cash to the balance sheet in the last quarter alone. We've got, obviously, $69 million of cash on the balance sheet now. We've got a line of credit for $30 million that we haven't touched.

And I will tell you that we have no issues if we wanted to use debt to fund a transaction; we are very comfortable with that. To be point-blank, we've got the flexibility that we need financially to achieve any of the acquisition goals that we have in our pipeline. That being said, whether or not anything is completed or not is just speculation, I think, at this point. But I can tell you that again we've got the financial flexibility we need to do any of the long-term acquisitions that we can see right now.

Jordan Rohan, Stifel Nicolaus.

I hate to refocus on the same thing, but I'm curious about the statement that the lower margins in the March quarter, as noted in your guidance for EPS and EBITDA, was all according to plan. Does that also mean very specifically that there should be a big lift in margins by the end of the year after you've fought through the brunt of the integration-related expenses?

And if you could be a little bit more specific -- what are you spending on in order to alleviate costs in the future? Am I thinking about this the right way?

And finally, on the Jacobs, you may not give out pro forma numbers, but are you making more money on the same truck loads of goods from Wal-Mart by increasing yield through your auction system? Do you have enough history to speak to that?

Let me take the first part of your question, Jordan, and then Bill will take the last part. On the margins, again, let me address that.

So I think again the comment was why lower margins in Q2? My point exactly is the margins in Q2 are higher than what we expected at the beginning of the year. It typically, as you know Jordan, our Q3 is the strongest margin quarter for us in the year. And the reason for that in Q3, as Bill mentioned earlier, is the scrap incentive, which is a straight drop to the bottom line. Last year that scrap incentive was approximately $1.5 million. We would expect that scrap incentive to be similar this year, and so we would expect stronger margins in Q3 than we're going to see in Q2 and in Q4. That's just the natural seasonality of our business because of that incentive.

But again, we started out this year thinking we would be somewhere between 11% and 11.5% margins; we are now comfortable saying we're going to be around 12% margins. We feel good about the efficiencies we've gained throughout the year. Specifically, projects we are working on we outlined in our last call -- most of them are IT-related as far as the back office of Jacobs and our back-office as far as the warehouse management systems and things of that nature, so those are going on as planned. They will be rolled out throughout the year. And I'll let Bill answer the last part of your question regarding the transactions moving through our marketplace versus their marketplace.

So I think the big picture here is every investment that we make -- people, process, infrastructure -- is answering the question of what does it take to be a several-billion-dollar GMV company? And we see with the relationships and the credibility in the marketplace our business growing at a very robust rate for many years. And so when we look at infrastructure investments this year, we are doing all of the natural things one would want to do to support a highly scalable, reliable marketplace.

We've moved to a private-owned cloud infrastructure. We've built a product development team of about eight people new this year to manage our product development roadmap, which affects how buyers sign on and get permission to view and bid on assets across our public-sector and commercial marketplaces. We've got an integrated sales force and CRM tool that's allowing us to cross sell, up sell across consumer goods and industrial categories -- in some cases, within the same corporate clients. So there's a whole stream of work there that you don't get a payback in year one, but certainly going to give us more scalability down the road.

The other thing about this business, and one of the key drivers for organic growth and margin expansion is the longer we spend with products and client programs the better we get in yield. And in our longer-lived programs, like the DOD or other public-sector agencies, we are still getting improvements of 10% to 20% year over year, purely on improvement or list in the sales value realized for the same item. So that's a huge cumulative and compounding factor for us in our long-term growth, is, the ability to harvest this data that's generated from every auction to use that to inform our marketing and participation of the buyer base. And that, in a marketplace model, drives long-term margin expansion.

And the other thing that's nice for our business is the average transaction size continues to trend up. So we become more efficient. The average ticket, if you will, processed through a B2B channel, is thousands of dollars. And because of the increasing trust we have from many of the largest multinational companies in the world, they are giving us higher-value equipment to sell, which is improving the average transaction size, which drops more dollars independent of margin to the bottom line. So we like those dynamics over time, and I think with any large retailer, Wal-Mart or others, absolutely, we will be improving the yield. over time. Empirical evidence suggests that.

Shawn Milne, Janney Capital Markets.

I just have three questions. First, Bill, can you expand a little bit upon the new relationship with eBay? I know that you had acquired a company that had worked with eBay previously. Is there something stepped up from that? If you can detail that a little bit. And secondly, Jim, I think people have beaten up the guidance enough for Q2, but are you factoring in now, it seems like, a bit more conservative scrap number? Is that part of what's at play here? We saw it come down just a little bit through the end of the December quarter.

And then lastly, just as housekeeping, there was some comment about GovDeals maybe not growing as fast in the quarter. But we've seen already this morning it looks like, if this is correct, the January numbers extremely strong in GovDeals. Did you have one big auction, perhaps, that maybe flip-flopped from December into January? Thanks.

Let me just address this enterprise marketplace that we've been focused on since the day we opened our doors. It's a very distinctly different marketplace than other consumer-facing businesses such as eBay. The reality is that large manufacturers and brands want a do-it-for-you solution, not a self-serve marketplace. And they recognize that.

I think partners -- people that have observed this industry unfold, and they've seen Liquidity Services successfully address those needs. They've been very interested in our ability to support the needs of these large brands and manufacturers, to integrate into a turnkey solution, the large-lot liquidity that is needed to absorb increasing volume, regular flow of goods, with the pre-sale and post-sale value-added services and be able to provide important information to the buyers, understand what the buyers are looking for, and to have the trust of the buyers to do that.

So I think when you look at a working relationship with eBay, they are leveraging our strengths and they are trying to solve the needs of large brands who may have a portion of their volume that's suitable for a consumer marketplace.

Let's understand the consumer marketplace. The tolerance for less than new goods is very low. So there's a large percentage of volume that wouldn't normally flow to a direct consumer buyer, and that's where we can step in and help and provide the full range of volume buyers; we can handle the processing and fulfillment of goods through our B2B channel and consumer channels like eBay quite well. It truncates the cycle time for these large sellers to have to deal with these different marketplaces independently. We bring it all together under sort of one integrated solution, which makes it very interesting.

And I would say the same for large retailers. Increasingly, the traditional retailers have opened up online channels under their own brands and they have the same perspective. If they can partner with Liquidity Services to provide the data to determine whether items should be sold individually through their consumer channel or bulked and lotted through our wholesale channel, that increases their recovery, it reduces the complexity, it accelerates the recovery of value in the channel. And that's why clients are partnering with us.

On your scrap question about the slowdown in December and did we see that going into the next quarter -- again, our budget for scrap, if you would, at the beginning of the year is really unchanged from our guidance or expectation for next quarter. December normally is a slowdown for scrap just because, again, it's not a big holiday item, obviously. And our government partners tend to take some time off during that period, so if there's a flow-through of product for us. So the dynamic of the December scrap really did not have any effect on our outlook for scrap for the next quarter.

On GovDeals as far as the strong January, glad to see you're keeping track on the websites. Yes, look, we did have a good January in GovDeals. That really was as expected.

Again, on the state and local side, you get a little bit of holiday effect in there. People take off; they are not interested in selling as much assets.

We do expect to have a decent quarter for GovDeals. Again, it's not the strongest quarter of the year. We would expect the June quarter to be much stronger in the GovDeals marketplace -- that, again, just a seasonality in the rhythm of that business. But the January really kind of came in as expected.

Great, and just one follow-up if I may. This was maybe one of the first quarters in a while where you've talked about improved efficiency in your existing retail business. Are we starting to see -- I know you talked a little bit about, on the call, starting to see some better efficiencies and throughput through your distribution centers in the core retail business. Is that something that we also saw on the margin side in the December quarter?

I think that's an accurate statement. As I mentioned, we've been growing the client portfolio. We've been adding new products and new programs to that marketplace, and there's always a learning curve. This is a knowledge-based business, after all. So we are really focused on harnessing the data, understanding what we are seeing in the marketplace, and then improving. We have the continuous improvement process with how we merchandise and sell, and as we've had some experience now with these new relationships, relationships that may have started nine, 12, 18 months ago, we are now getting improved efficiency through better merchandising and higher yields, and that's driving efficiency in the business. And obviously, there's an absorption of fixed costs as we grow our volume.

Right, great. Okay. Thanks, great quarter.

Gary Prestopino, Barrington Research.

Could you give us some idea of -- you have a statement in here about funding major upgrades, technology infrastructure, and all that. Incrementally what kind of expenses related to this are going to hit your P&L this year?

Yes, Gary, as we laid out in the beginning of this year, after our -- on our December call after our September quarter results, we expected to spend several million dollars this year really on several IT projects that Bill discussed just a few minutes ago, as well as the integration of Jacobs Trading. All of that is incorporated into our guidance, both historically and obviously the upgraded guidance. That really is rolling out pro rata, if you would, over the year. And again, we are operating on plan.

Okay. So that's a pro rata rollout across the quarters.

All right, a question I have is -- and everybody's harping on this whole issue with the GMV and going into Q2 versus Q1, but you mentioned something about that -- the capital asset business generally slows down in Q1. And in terms of your commercial -- total commercial GMV, could you give us an idea of year-over-year, because of the acquisitions, what you've done with the company, what the shift is change in commercial versus retail GMV is? Is it now more heavily weighted towards capital assets versus retail, or is it vice versa?

Actually, now, with the Jacobs acquisition, Gary, pretty much half the business is retail and half the business is capital assets.

And had that been heavier in -- well, I guess by your answer there, it had always been -- it maybe had been heavier in capital assets in the past?

That's correct.

Okay, okay. All right, that's all I have. Thank you.

(Operator Instructions). Dan Kurnos, Benchmark Company.

Just a couple questions that you touched on briefly here. First, in terms of the cost of revenues as a percent of GMV, you guys were able to hold that down even despite Jacobs. I was just curious if that -- that sort of points to the efficiencies that you were talking about, so maybe some color there.

Secondly, in the press release you guys had mentioned that it was sort of a merchandising and lotting strategy to scale back on the number of transactions and focus on ramping that average transaction value, so maybe some more color on that strategy, and if that's expected to persist?

And then finally, you had mentioned that Jacobs would present you a tremendous opportunity to grow the retail business, and I'm just curious if you're seeing any initial returns on that from other retailers initiating or increasing their business with you? Thanks very much.

Yes, Dan. Can you -- I don't understand the first question on the cost of goods sold. Are you -- you said in your model I guess you were expecting cost of goods sold to increase because of the (multiple speakers)?

It was flat year over year. And I was just curious what your -- you had kept it flat year over year as a percentage of GMV with the increase in retail. And I was just curious if it was from increased operating efficiencies and how that might trend if it's just going to remain roughly flattish year over year as a percentage of GMV?

Well, again, I don't get into sort of that detailed level of guidance. What I would say is that a lot of that is driven by the mix of the business, so in this quarter we had a lot of consignment business. So GMV was up significantly due to consignment, and that's because, again, commercial capital assets had a very good quarter this quarter as I mentioned in my earlier remarks. So just when you look at the pure math of cost of goods sold to GMV, as a reminder, consignment business doesn't really have a cost of goods sold, because under the accounting rules, we are not buying anything.

So you didn't really get the effect that you would have probably expected with the addition of Jacobs. You'll probably see a little bit more of that in the second quarter as we expect the commercial capital assets business, as I mentioned earlier, to come off a little bit. So therefore you will have a higher mix of purchase model as it relates to the GMV.

On the average transaction size, that's been a phenomena that has really been going on for the last six quarters, and that's being driven by a couple things.

One, a larger transaction size in our retail business because, again, historically our clients have been trying to maximize efficiencies and logistics, thus buying larger lots from us on our Liquidation.com marketplace.

In addition, the Jacobs acquisition simply added to that phenomena because itself is primarily a truckload model, and so therefore, obviously, selling things by a truckload is going to have a higher average transaction size than selling items by just one or a couple pallets.

In addition, my earlier comment about the high level of capital assets in the quarter driving a lot of the top-line, B, that again, capital asset sales tend to have a higher average transaction size. So it's really does three things that are driving that trend.

Dan, let me just add a couple points in terms of the opportunity in the retail supply chain.

Notice that we use the term retail supply chain. We don't just say retail, because in retail supply chain, you have outlets that bring goods to consumers. And you have the manufacturer or supplier base that has to produce those goods and get them to the point of sale. We serve both constituents, and you've got to tip your hat to companies like Wal-Mart.

Wal-Mart for many years has been focused on how do we reduce waste in that retail supply chain? How do we be more efficient? And the reality is, you can't be more efficient unless you can create marketplaces for all the material and inventory that may be viewed as surplus to the needs of retailers and vendors. That's what we do.

We've been invited in to help be an active participant in creating a secondary channel, a marketplace, for the items that have -- over the last 20 or 30 years probably in many cases ended up in the waste stream. And being able to provide a very expedient channel to sell everything from scrap metal to end-of-life material handling equipment, to returned items, some of which are nonworking or need to have new parts or are missing accessories -- that's a huge opportunity.

I mean, you look at the vendor base to retailers like Procter & Gamble -- another huge proponent of sustainability. We are right in the middle of that with the world's largest secondary marketplace with large lot buyers who can stand ready to absorb a lot of this product. That's very exciting, very unique, and so in many cases, we are a sustainability platform as much as a marketplace. So we'll continue to have opportunity there.

In terms of the lotting strategy, recognize that certain items have to be exported, and you're not going to have as many buyers buying at the container load size as you would with a palette. And so that will affect the level of buyer participation in the marketplace. In other cases, you have very specific industrial assets where the universe of potential buyers in the world would be measured in thousands. On the consumer goods side, mass merchandise items might have millions of potential buyers. So there's a big difference in the addressable market for certain equipment.

Great, thanks.

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

As always, we appreciate your participation on today's call. If you have any additional questions, please contact either Jim Rallo or myself. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.