Good day ladies and gentlemen, and welcome to the First Quarter Fiscal Year 2018 Liquidity Services' Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and the instructions will be given at that time. [Operator Instructions] As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Julie Davis, Senior Director of Investor Relations. Please go ahead.

Thank you, Jonathan. Hello, and welcome to our first quarter fiscal year 2018 financial results conference call. Joining us today are Bill Angrick, our Chairman and Chief Executive Officer; Jorge Celaya, our Chief Financial Officer; and Mike Sweeney, our Chief Accounting Officer. 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, 2018, 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 Web site, 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'd like to turn the presentation over to our CEO, Bill Angrick.

Thank you, Julie. Good morning and welcome to our Q1 earnings call. I'll review our Q1 performance and provide an update on key strategic initiatives. Next, Mike Sweeney will provide more details on the quarter. Finally, Jorge Celaya will provide our outlook for the current quarter. Though not satisfied, we are encouraged with our Q1 results as our GovDeals segment grew its GMV 27% year-over-year through expansion with existing and new accounts in the U.S. and Canada. And our Retail Supply Chain Group segment grew its GMV 17% year-over-year driven by growth with both large and midsized retailers and manufacturers, utilizing our sales channels and returns management services. Our Capital Assets Group segment faced a tough year-over-year comparison because several large commercial sales occurred in the prior year period. However GMV related to our commercial CAG business, excluding our DoD contracts, grew sequentially by 51% driven by growth in our lot-enabled energy marketplace with multinational energy clients and as many of our industrial manufacturer clients used our platform to sell high-value assets. During the quarter, we added approximately 300 new commercial and government sellers and approximately 38,000 new registered buyers to our marketplaces. Our Q1 results also demonstrate the positive impact of our cost reduction efforts driven by a more streamlined and efficient organizational structure. We continue to reduce our expenses which offset the impact of the wind-down of the DoD Surplus contract during 2018, while integrating our marketplaces and increasing their productivity. Next, I'll take a look at highlights of our business segments. Our GovDeals marketplace growth accelerated in Q1, driven by the addition of hundreds of new clients in the U.S. and Canada, including the Commonwealth of Kentucky, and the Florida Department of Transportation. During Q1, GovDeals completed over 51,000 auctions, including vehicles, heavy equipment, helicopters, and even…

Thanks, Bill. We finished the first quarter of fiscal '18 above the company's guidance range for GAAP net loss, GAAP diluted EPS, adjusted EBITDA, and non-GAAP EPS. Results were at the high end of the guidance range for GMV. Next, I'll comment on our first quarter results with comparison to the prior year. GMV decreased 2.8% or 4.3 million to 155.4 million due to a decrease in our Capital Assets Group or CAG segment, partially offset by increases in our GovDeals and Retail Supply Chain Group or RSCG segment. CAG GMV was down 29.4% or $22.4 million while GoVDeals was up 26.8% or 15.1 million and RSCG was up 16.9% or 4.2 million. Total revenue decreased $9.7 million or 13.7% to 61.1 million, and was a result of decreases in our CAG and RSCG segments, partially offset by an increase in our GovDeals segment. Revenue from our CAG segment was down 10.4 million or 24.6% in line with the GMV change and was due to a lower volume of goods sold under our surplus contract and a change of mix of commodities to lower value commodities sold under our scrap contract. Also contributing to the decrease in revenue was lower service revenue related to our surplus contract as well as a decrease in revenue within our CAG commercial business. While GMV increased in Q1 fiscal '18 for our RSCG segment, revenue was down 0.9 million or 4.3% driven by a change in mix from purchase model transactions to consignment model transaction. GovDeals revenue increased 21.1% or 1.2 million due to additional sales volume from existing clients and an increase in the number of new sellers. Our consolidated cost and expenses were down in Q1 '18 versus Q1 '17, consistent with the lower overall revenue. Cost of goods sold decreased 4.7…

Thank you, Mike. Good morning. As our first quarter results reflect, we are making progress on our 2018 goals to grow our commercial and municipal government marketplaces and are on track with our e-commerce platform and ERP solution. At the same time, we are seeing the benefit of our realignment in 2017 of our truck center and our IronDirect businesses. And also, the reorganization efforts this last fourth quarter and first quarter of fiscal year 2018 to reduce our overall cost structure, create efficiencies across the business, and streamline our technology, corporate sales and marketing function. Regarding our fiscal year 2018 outlook as impacted by the DoD surplus contract, we have defined and are executing on the wind down plan and expect to sell through all remaining inventory by April and complete most of the wind down of contract-related expense by May, including a reduction in headcount to warehouse locations and multiple field types. We do not anticipate profits from the surplus contract starting with this upcoming second fiscal quarter of 2018. However, for fiscal year 2018 we expect to generate cost benefit of $12 million to $14 million as a result of our reorganization efforts. These benefits, combined with the benefits from the realignment of our TruckCenter and IronDirect businesses in fiscal year 2017, will offset the impact of the surplus contract compared to fiscal year 2017. Turning to our fiscal year 2018 LiquidityOne initiatives, we expect our overall timeline to remain on tract, and our associated spending is expected to be in the $1.5 million to $2.5 million range per quarter for the remainder of 2018. Our second quarter fiscal year 2018 results year-over-year comparison reflect, one, favorable results in our RSCG segment as we continue to add new seller relationships and benefit from higher volumes received from…

Certainly. [Operator Instructions] Our first question comes from the line of Colin Sebastian from Robert W. Baird. Your question, please.

Thanks. Good morning, and congrats on the improvement shown in the quarter. One thing I think might be helpful for me to talk - to hear from you guys is how much of the important you're seeing is related to new client growth versus existing client volume. And then discussing perhaps how that pipeline looks. And then on the retail segment what you're seeing in terms of the seasonal liquidation trends after the holidays. And I have a follow-up.

Sure. So we are very buoyant in the addition of new client relationships in both the retail supply chain, I'd say the industrial supply chain, and the municipal government market. Well over 300 new accounts signed during the December quarter. Let me go through each area, Colin. The municipal government market, which is a market that we've been in really since the inception of the company is one where our peers heavily influenced the adoption of beat practices with 11,000-plus clients at the state, county, local level who largely attend similar conferences, and are asking their peers how to solve the initiatives related to property management, asset disposition, and other matter. We're really well positioned there as the leading player in that channel. And we continue to add clients both from a geographic perspective, a type of client from form of [ph] transportation, schools and universities, large administrative services throughout government. We've expanded geographically west and northwest in the United States. We've expanded north of the border to Canada. So I think this is just broad-based secular growth driven you the efficiency of our model, the adoption of digital approaches to solving the needs of government, and the efficacy of driving higher recovery rates on the platform as our supply grows our buyer base grows, and so forth. On the industrial supply side, the supply chain is very disruptive; people are changing their preface to holding assets. Property, plant, and equipment, and entire factories are being relocated, in some cases downsized. And we're benefiting from that trend. As I noted, we have the strongest pipeline in the Capital Assets Group commercial business that we've had that I can recall. And so we're working with Fortune 100 companies, Fortune 1000 companies, and even small midsized businesses that are trying to leverage…

Yes. Maybe as a couple of follow-ups, any sort of change to where you guys are thinking about the volume level needed to hit EBITDA breakeven levels. And then as a housekeeping item, where is headcount today versus where you expect it to end the year? Thank you.

On the headcount I'd say we're still aggressively hiring in certain categories, particularly in the software development engineering area. I think we've taken headcount down in the warehouse sector, specifically with the DoD wind-down that we have. Where are we trending versus overall plan, I think we're perhaps slightly below the annual target as we take our time on the engineering and software development hires and make sure we have the right cultural fit. I think headcount overall, Colin, is down year-over-year. And as far as the growth of our business relative to breakeven, obviously you have costs that are constant with a business of our size publicly traded. So at the margin, if we were to sunset a long-standing program, like we are with DoD, we're not going to make dramatic changes to some of those areas of our business. However, as we grow we're growing a lot of service revenue streams which are attractive high-margin service relationships that have multiyear attributes to them. And that provides a very attractive aspect of our growth. So we will continue to manage product volume and move sales through the marketplace, but we're bundling a lot of our, let's say, core liquidation activities with value added services related to returns management, value added handling of the merchandise, and eventually the data that we create for our clients and that can be valued in how they manage their own supply chain.

Colin, this is Jorge. Our headcount is down over a 100 on the quarter over the same quarter last year.

Okay. And then you would expect to add a little bit to that by the end of this year, this calendar year? Did I understand that correctly, on the engineering side?

Correct. I think sales, marketing, engineering are the areas for growth. We are getting back office efficiencies as we consolidate systems with regard to operations, finance, and other, say, back office functions.

And of course the surplus contract headcount we'll be reducing between now and the end of the spring, as I noted, because we're still executing on that.

Okay. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Gary Prestopino from Barrington Research. Your question, please.

Hi. Good morning everyone. Couple of quick questions that just really need some short answers to, first of all, is your re-org basically over in terms of the restructuring that you've done. I think I read, you said it was Q4 and Q1 of this year or Q4 of last year and Q1 of this year. But is it over by and large?

Yes.

Okay. And then in terms of the sales or the expenses as a percentage of your total sales that were cited by Mike. Are those fairly good run rates throughout the entire year for Q2, Q3, and Q4?

Those rates will move a little bit as we have seasonality in the business, for example, in the March quarter, the seasonally high quarter, so we'll get some leverage on the sales function. But I think generally the band that you see between, let's say, Q1 and Q2 would be representative of the full year.

Yes, and we've done something [indiscernible] as revenue grows the numbers are going to change quite a bit just as they fluctuate as a percent of revenue. We've also done some things to create more variable expense that will help us eliminate that -- having the fixed cost base. So as we go forward we're also looking more and more where we can create areas where we might view them, especially in our operations, where they may be more fixed cost, that we can turn that into variable. But just from a cost perspective, the costs that we've taken out in our restructuring are costs that are permanently out.

Good. Okay, that's great. And then in terms of your overall business, can you maybe give us a percentage of where you are on GMV based on fee versus -- or consignment versus purchase?

Sure. Consignment is a trend that has continued to increase with our clients. So we're over 75% consignment on a consolidated basis today. And as we sunset the DoD Surplus contract we would expect that number to continue to grow as a proportion to the total.

Okay, so that --

And let me just add, the surplus contract, a contract that we ran successfully for many, many years is a contract that we would've certainly liked to retain. But the contract terms were so onerous. And it was a 100% purchase model relationship. So you had to buy the inventory, be contractually obligated to take any and all property flow, whether it was high value or low value, pay a single lump sum price. So we know in many of the commodity categories you're underwater as soon as the property is referred to you, much less when you have to them apply labor, marketing, and sales. And you are obligated to stay in that contract for the duration. There's no termination for convenience by the contractor. So you could be losing millions of dollars on that contract, and you have to stay in it with the federal government. So, while we would've liked to have secured it, we felt bidding any higher on that contract would've been damaging to shareholders. So we've turned our attention and our focus in our balance sheet on growing much more attractive, high potential areas that use the consignment method primarily to grow.

Right. And I would agree with that strategy. I think you get a higher valuation without having a purchase model. And then just a couple more, Bill. In terms of the CAG group, would it be possible to just give us an idea of -- with the GMV, what percentage of it is not related to the DoD contracts? Just so we can get an idea as we model out the backend of the year.

Sure. Well, let's just focus on Surplus. Surplus is a small percentage. So the commercial business would represent the vast majority of the CAG segment as we move into Q2, Gary.

I'm sorry, repeat that again. The commercial business would…

Yes, what I'm saying is, in Q2, DoD surplus is winding down.

Right.

Becoming a smaller part of that CAG segment. And once we -- both in Q2 and beyond, the vast majority of that business is commercial.

Right. Well, that's what I'm trying to get, just for modeling purposes. All right, I understand. So, the vast majority is going to be commercial. Okay, that's great. That helps a lot. Thank you so much.

Thank you. And this does conclude the question-and-answer session of today's program. I would like to hand the program back to Julie Davis for any further remarks.

Thank you. Thanks to everyone for participating in our call today. If you have any follow-up questions, please contact me, and we will get those answered. Have a nice day.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.