Liquidity Services, Inc. (LQDT) Q1 2014 Earnings Report, Transcript and Summary

Good day to you, ladies and gentlemen, and welcome to your Liquidity Services Conference Call. It's hosted by your Senior Director of Investor Relations, Julie Davis. My name is Kathy, and I'm your event coordinator throughout your call today. [Operator Instructions] And now I'd like to transfer the call over to Julie. Go ahead, Julie.

Thank you, Kathy. Hello, and welcome to our First Quarter Fiscal Year 2014 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 7, 2014, 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 report -- annual report on Form 10-K. As you listen to today's call, we encourage you to have our press release in front of you, which includes our financial results, as well as metrics and commentary on the quarter. During this call, we will discuss certain non-GAAP financial measures. In our press release and our filings with the SEC, each of which is posted on our website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. We also use certain supplemental operating data as a measure of certain components of operating performance, which we also believe is useful for management and investors. This supplemental operating data includes gross merchandise volume and should not be considered a substitute for or superior to GAAP results. At this time, I'd like to turn the presentation over to our CEO, Bill Angrick.

Thank you, Julie. Good morning, and welcome to our Q1 earnings call. I'll begin this session by reviewing our Q1 financial performance and recent strategic initiatives. Next, I will turn it over to Kathy Domino for more details on the quarter. Finally, Jim Rallo will provide our outlook for fiscal year '14. Liquidity Services generated better-than-expected financial results in Q1, driven by a strong top line performance in our Retail Supply Chain and municipal government businesses, which both generated organic growth of over 20% during the quarter. Our Retail Supply Chain business expanded as we helped more OEM and retail clients unlock strategic value in the secondary market for consumer goods through our marketplace channels and service offering. During the quarter, we also continued to expand our GovDeals municipal government business in both the U.S. and Canada, driven by agencies' desire for more transparency, convenience and value in the sale of surplus assets. These strong results were partially offset by a sharp decline in our DoD Surplus business due to changing property mix, which has reduced growth and margins in this area of our business. As previously announced, we are pleased to continue to provide services to the DoD following the recent award of a sole source follow-on contract that extends the performance period of our Surplus contract through February 2015, assuming the exercise of all options. The mix of property under the DoD Surplus contract has shifted to a higher volume of lower-value, smaller-sized items, which has required us to rent more space, incur higher transportation and handling costs and increase our staff size. We continue to provide a high level of service to our DoD client and plan to participate in the RFP process, which is scheduled to conclude in April based on the DoD's current schedule. Next,…

Thanks, Bill. I'm excited about my expanded role within the company. It has been a tremendous experience the last 8 years, being part of an organization that has grown over 800% since my arrival. I look forward to continue working with the senior leadership team to drive our strategic initiatives, preparing us for the next stage of growth. Next, I will comment on our first quarter results. Total GMV was $234.4 million. GMV in our GovDeals, or state and local government marketplace, increased to $38.4 million or 30.1% as we continued to add new clients, bringing total clients to nearly 6,300 out of a potential 88,000 in the highly fragmented state and local government market. GMV in our commercial marketplaces decreased to $146.6 million or 4.5%, principally as a result of a decrease in our GoIndustry marketplace, as this quarter reflects the first quarter with all restructuring activities complete. However, we have made significant progress in our retail vertical, resulting in over 20% growth driven by new programs from existing and new clients. GMV in our DoD Surplus marketplace decreased to $29.8 million or 11.1% as a result of the mix change in property flow from the DoD to a significant amount of lower-value, smaller niche items. GMV in our DoD Scrap marketplace increased to $19.6 million or 27.9% as a result of increasing property flow from the DoD. As sales of DoD scrap have become less material, fluctuations in commodity prices are not materially affecting our financial performance. Total revenue was at $121.9 million. Technology and operations expenses increased 13.6% to $25.6 million. As a percentage of revenue, technology and operations expenses increased to 21% from 18.5%. These increases are primarily due to staff and temporary wages, including stock-based compensation, and consultant fees associated with technology infrastructure projects we…

Thanks, Kathy. I'm excited about the new opportunities to lead the deep and experienced team we have on the retail side of our business, especially during this period of increasing growth as we continue to further penetrate our existing client base and add new clients to our multichannel network. I look forward continuing the strategy we've had in place for a long time; expanding our capabilities for our selling clients and buying customers; enhancing our technology platform to maintain our leadership position in the industry; and developing, training and promoting the highest-integrity team in the industry. I'd also like to congratulate Kathy on her new role as Chief Accounting Officer. She will assume many of my day-to-day finance and accounting responsibilities, which will free up my time to focus on our retail vertical. Her promotion is a testament to the great work she has done for us during the past 8 years. Kathy knows the finance and accounting organization well and has a thorough knowledge and understanding of our business. We will work together to ensure a smooth transition. As was previously stated in our press release, I'll continue to maintain my CFO responsibilities, including supporting Bill with Investor Relations and certain other corporate-specific functions, both externally and internally. During our most recent board meeting, management has been authorized to implement a share repurchase program up to $50 million. Management is providing the following guidance for the next quarter and fiscal year 2014: We expect GMV for fiscal year 2014 to range from $1 billion to $1.075 billion, which is unchanged from our previous guidance. We expect GMV for the fiscal second quarter of 2014 to range from $220 million to $240 million. We expect adjusted EBITDA for fiscal year 2014 to range from $100 million to $108 million, which is unchanged from our previous guidance. We expect adjusted EBITDA for the fiscal second quarter of 2014 to range from $20 million to $23 million. We estimate adjusted earnings per diluted share for fiscal year 2014 to range from $1.60 to $1.76, which is unchanged from our previous guidance. For the fiscal second quarter of 2014, we estimate adjusted earnings per diluted share in a range from $0.33 to $0.37. This guidance assumes that we have an average fully diluted number of shares outstanding for the year of 32.9 million and that we will not repurchase shares with the approximately $50 million yet to be expended under the share repurchase program. Our guidance adjusts EBITDA and diluted EPS for: one, acquisition cost, including transaction cost and changes in earn-out estimates; two, amortization of contract intangible assets of $33.3 million from our acquisition of Jacobs Trading; and three, for stock-based compensation costs, which we estimate to be approximately $3.5 million to $4 million per quarter for fiscal year 2014. These stock-based compensation costs are consistent with fiscal year 2013. We will now answer any questions.

[Operator Instructions] And your first question comes from Colin Sebastian from Robert Baird. Colin A. Sebastian - Robert W. Baird & Co. Incorporated, Research Division: I have a couple of questions. I guess, first off, on the guidance, you're not flowing through the upside from the first quarter into the -- into a higher range for the year, and the second quarter outlook suggests that the midpoint may decline sequentially in GMV, which I don't think has ever occurred before. So if you could, first off, just comment on the factors driving this outlook?

Let me just first comment that we have observed a trend in the DoD business that has reduced the top and bottom line of that business. Second, there's significant seasonality in certain parts of our business. Certainly, our municipal government business is soft in the March quarter. Second, many verticals in our capital assets client sectors are very slow this time of year, particularly energy and transportation. Those are major drivers to the March quarter guidance.

Yes, Colin, I'd also add, as you know, March quarter is a big quarter for retail, but it's not going to offset everything going on with the federal business, as well as the capital assets that Bill indicated. As far as upside to the year, we had a decent range in there for the year. We feel confident, still, with that range. We had a nice quarter this quarter. And at this point in time, we're just -- we're comfortable with those numbers. We don't see any point in raising those numbers. Colin A. Sebastian - Robert W. Baird & Co. Incorporated, Research Division: So just to be clear on Q2 or the general trends in the municipal capital assets and DoD, you haven't seen additional deceleration in that business, which would serve to make the full year guidance less of an upside opportunity?

Well, let's be clear. We have seen a deceleration in the DoD business, as Bill indicated. We've been seeing that for a couple of quarters now, as we've discussed. But all that was built into our full year guidance when we originally gave that at the end of the fiscal year. So there has been no new information, if you would, since then, Colin. Colin A. Sebastian - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then maybe, Jim, just on the retail segment, the sequential growth in Q1, is that related to any specific new sellers, or are you seeing better volumes across the board with legacy clients as well and assume, as I think you alluded to, that we should see further sequential growth in the March quarter seasonally?

Absolutely. Yes, so we're seeing both those things, Colin. I think this is really -- it goes back to what we said 3 quarters ago when we talked about -- or 4 quarters at this point, when we saw a decline in the CE business, consumer electronics business, particularly from our clients. Look, we continue to have a strong buyer base. And as we said, it will take us a couple of quarters to grow that vertical back with existing clients and new customers, as well as expanding our other verticals within the retail side of the business. And we have done that. Supply for us tends to not be a longer-term issue but more of just a shorter-term issue when you have certain swings, again, in a specific vertical, like we discussed with consumer electronics. So the trends right now for the retail business are strong. Seasonality, this is a big quarter for us. It was a good quarter last year at the same time. But again, we are expecting both sequential and year-over-year growth in the retail vertical for our business.

And your next question comes from Jason Helfstein, and that's from Oppenheimer. Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division: Two questions. The first is a follow-on to Sebastian, the second kind of having to do with kind of growth in enterprise. So just to dig in a little bit deeper. I mean, just -- can you help us understand just why you continue to have the level of confidence for what, I guess, you're effectively saying is a commercial rebound in the back half of the fiscal year? Just given the -- what's kind of the implied, we'll call it, still tepid growth in the second quarter on a year-over-year basis, has there been any change in the way you guys are forecasting new systems or anything that should just give us increased confidence in your forecasting ability, just given that there's been numerous misses if we just look backwards? And then I've got a follow-up.

So forecast is driven by individual programs, individual client wins that we're planning to roll out during the course of the year. I noted that there's been a concerted effort to invest in our sales organization, our branding program to drive awareness of our services, and that has led to a robust commercial pipeline, Jason. And when you look at the type of business that we're signing, it's very impressive from our point of view, both relative to the competition and relative to change in the behavior of some of the large Fortune 1000s that we call on. So we've signed business with one of the world's largest manufacturers of gaming consoles, electronics and mobile devices during the last quarter. We signed one of the world's largest construction and infrastructure development companies; we're doing projects for them globally. We signed one of the world's largest equipment leasing companies, and we'll be rolling out a new program for them. We signed one of the world's largest manufacturers of tablet and mobile devices, and we're working with them globally. We signed one of the world's largest manufacturers of branded consumer packaged goods; we'll be working with them globally. We signed one of the largest state-owned energy companies in South America in the energy sector, and we'll be working with them globally. So business follows market share and wins in the marketplace. And it is true, Jason, that the business can be lumpy. It is true that a $10 million sale could flip from one month to the next and affect a quarter. That's inherent to working with the size and scale of projects that we work with. But the overall focus and trend is long-term market share expansion, and we're pleased with the progress we've made in the last quarter. Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division: So just kind of -- that actually kind of tags into the second question. So given that the kind of the future -- more of the future growth is going to come from more of these, what we'll call, enterprise versus commercial -- or retail clients, we'll break it down that way, is there a way you think about perhaps giving us numbers each quarter, saying, "We signed this many clients in the quarter" with an average GMV value or some kind of metric that we can understand that you keep moving forward and we can kind of track that over time?

So a couple of remarks. Many of the clients I just mentioned are in our retail vertical. As we noted in our opening remarks, we're having a strong reception for our services from manufacturers who supply goods into the retail supply chain and who have historically not had a strategic plan to manage the way their products are handled in the secondary marketplace. So that new pipeline includes many new opportunities in the retail supply chain. This is not a fee-for-service sort of government contracting business, where you might have a backlog of deferred revenue going into every quarter and you could quantify sort of cost plus arrangements. Our business is a marketplace that derives GMV and revenue from actual transactions that occur in a given period. So I think it would be unproductive for the company or for analysts to try to break that down on a sort of asset-by-asset or client-by-client base on a forecast. Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division: Well, I mean, I understand the point, and we can take it offline, but I just think the market would appreciate a way to understand the visibility as you are signing these big enterprises that have a long lead time, even if it's letting us know the number you've signed in the quarter, something. But we can take that offline.

And your next question comes from Shawn Milne.

Jim, I wanted to go back to the retail business. As I recall, last year and in prior years, the expectation was that the retail business would always grow from the sort of August, September time frame into the holiday and then, of course, into the March quarter with the returns. And I recall last year, I believe that actually declined, and then that was an area of big disappointment. So I'm just trying put a little context around the 20% growth against a pretty big disappointment last holiday. Are you really seeing enough visibility now that you think retail is going to grow 20% for the next, let's call it, several quarters? And then the follow-up there is, obviously, you have a new role in the company to help that business. If the retail business is this strong with new pipeline, why the big management change right now?

Well, let me first address the growth. So first off, we have a seasonality business, Shawn, as you mentioned. So last year, in the March quarter, we grew 20% sequentially over the first quarter of fiscal year '13. That being said, that growth was disappointing because it was -- well, we did not grow, actually, year-over-year, and we specifically noted that during that call in that quarter. And we discussed the decline of our consumer electronic programs, which usually have led the charge for us in that type of -- in the seasonality we had back then. That obviously continued for the next couple of quarters. And then, as we've discussed, really, on the fourth quarter call or the fiscal -- full year fiscal year call, we saw a rebound because of new programs with existing clients. And as Bill indicated, we have -- not only have those up and running, but we've also got some new programs from new clients. And that vertical is, again, a leading vertical for us. As far as what I would expect for the growth for the rest of the year, yes, I do expect to get a nice bump next quarter due to seasonality. I also expect to continue to have 20% growth in that vertical for the rest of the year, based on the new clients that we've signed up and, frankly, conversations that are going on today with both existing and new clients.

We've had -- to answer the second part of your question, over the course of our 14 years, 7 of which have been as a public company, we've had a number of individuals provide strong contributions over periods of time and then determine, on their own and with the company, that they would have more success with another endeavor, and we wish them well. And in every case where we've had transitions, we've taken the opportunity to enhance our team and enhance our effectiveness, and we expect the same to be the case here. And so it's not so much a function of what's going on at the company. It's really a function of where you are in your career path and where -- what the company needs to make the next phase of growth possible.

Okay. And just a follow-up. I mean, the second -- it was mentioned kind of before, but to drill down the number. I mean, the implied growth in the second half of the year in GMV is 19%, so you're saying retail, which is 1/3 of your business, is sort of up 20%, you believe. And you've got surplus in the government business. Maybe some of the declines taper off in the second half? Is that how you're thinking about it? And then maybe a little bit of how -- what do you think about the GoIndustry run rate?

Sure. I think, from the DoD perspective, perhaps some tapering off on the GMV side. We expect softness on margins. Clearly, more costs associated with the property that's being processed in that arena. The pipeline, the nature of the programs, the visibility around those programs is giving the company strong conviction as to the range that we have. And in fact, that range should be unchanged during the full year.

And your next question comes from Mr. Gary Prestopino from Barrington Research.

A couple of questions just in terms of the expenses in Q1, particularly sales and marketing and G&A, absolute declines year-over-year. And just for our purposes, are -- or should we be looking at that, what happened in Q1, as something we can apply the back -- the rest of the year? Or is that just an anomaly there?

Yes, so I'll take that, Gary. I would expect a pick -- a little bit of pickup in sales and marketing. I mean, to be frank, most of the decline in sales and marketing has to do with the fact that we have not been growing at our stated growth rates, which is, obviously, no secret. We've been discussing that for a couple of calls. And although the performance has been strong, it's, frankly, only been consistent with prior year, and we compensate folks at this company from the senior levels all the way down to grow the business. So on the sales side, what you've seen there is a reduction in performance-based compensation. On the G&A side of the business -- and again, as we talked about, we do expect growth to start to accelerate in the back half of the year, so along with that, we would expect to pay people for that performance. On the G&A side, what you're really seeing is the benefit from our restructuring globally with GoIndustry. And again, that restructuring is complete. We've taken costs out of the business. And so we don't see a significant change in G&A going forward. I mean, there could be movement here or there, a few hundred thousand dollars obviously, Gary, but no significant changes.

And then, was what you saw in retail, particularly with the organic -- on the organic growth side, was that really driven by a rebound in the consumer electronics business, or was that other property that you've won the programs and started selling?

Sure. Well, I mean, it's a combination of both. But let me be clear. We are not seeing a rebound in the consumer electronic industry or consumer behavior. What we're seeing is an increase of flow of consumer electronics into our marketplaces as, again, we've expanded programs with existing clients and added new client programs in that vertical. We also continue to add new programs around general merchandise, whether it's household effects, small appliances, clothing and apparel. So we're winning in the marketplace right now, Gary, because people are looking for a company that is trusted, that is leading in the industry, that's got the technology to provide all the services our clients need and, frankly, the different channels that we can deliver product on. So it's really -- it's a combination of everything right now. I wouldn't say the growth is being driven just by consumer electronics.

Let me also add that the catalyst for the business development wins and some of the program results we've seen in the last quarter is the expansion of our service offering. It is true, we were a marketplace business primarily up until the last 18, 24 months. And we've added additional value-added services in the areas of returns management, refurbishing, in some cases, advising clients on how their brand is perceived in the secondary marketplace. And all of those services have given us a great embrace by our new clients, and that's driving a lot of the new success we're having.

Okay. That's what I'm getting at. You said you had 20% organic growth in retail, okay? So if the consumer electronics business is not growing, all right, then we can assume that it's deeper penetration within existing retailers for new SKUs?

Well, no, Gary, sorry. Clearly, I'm not communicating this point well. We are definitely growing our consumer electronic vertical, as well as other verticals within the retail side of the business. My comment was simply that we're not seeing a change in industry dynamics around consumer electronics. I don't want you to imply that, for some reason, we expect our retailers to be selling a lot more consumer electronics themselves. We're selling a lot more consumer electronics for our retail clients.

Okay. That's what I'm getting at. Okay.

Simply because we're taking business from other competitors.

And your next question comes from Mr. Michael Purcell from Stifel. Michael B. Purcell - Stifel, Nicolaus & Co., Inc., Research Division: My first one was, Jim, Bill, the Wal-Mart contract -- or the Wal-Mart was down a lot last year. It went to 11% of GMV, so it's like down about $65 million or so of GMV. So I was wondering if -- and I think within that, Jacobs was flattish to slightly up, perhaps. I was wondering if you can help us understand how much that pressure was capital asset sales or how much of it was retail and how that -- what the outlook is there, or if it was consumer electronics within Wal-Mart? And then a second, just to kind of go off of Shawn's point, with all these new contracts coming on in the commercial, I think you said 40 new services accounts or so, is the mix of the guide, just so I'm clear that it stays the same, are you looking to have -- within your guide, considering 90 days ago, do you have a more bullish outlook on the commercial side and perhaps a slightly lower outlook on the DoD side?

I think the last point is an accurate point. We've had robust growth both in the December quarter, and we see that continuing, on the commercial side; and the opposite on the DoD Surplus side. Wal-Mart and other clients are a mix of different industry categories or industry verticals. We had made a strategic decision to transition vehicle sales to an online channel through a TruckCenter marketplace, and during the reset of that business, there was a material amount of fleet assets that went away from that industry vertical. And that was a key driver for Wal-Mart. Other than that, we've had more or less a business-as-usual approach there.

Yes. I'll add a little bit more color, Michael. So look, as far as our Wal-Mart relationship goes, it's as strong as it's ever been. What we talked about all last year, our consumer electronic programs not only from Wal-Mart, but other clients, were down significantly. So it's no surprise that, as a percentage of our overall business, Wal-Mart's down. Additionally, on the capital assets side, Bill mentioned transportation assets. But we're there to serve our clients, and that -- their needs cycle, so let me be specific about that. We sell a lot of things for Wal-Mart on the capital assets side when they do store remodels. If they're redoing warehouse and distribution centers, there's equipment and racking from that. And their cycle last year was slower than it's been on those 2 fronts in prior years, and that's fine. I mean, we're there to serve the client and their needs at the time. There's going to be up and downs, especially in the capital assets side of the business, based on their strategic plans and budgets as they roll out the year. And on the retail side, it was primarily, again, related to the CE program. The clothing apparel, household effects, all that were very strong last year. When I say very strong, as strong as they've been. We haven't seen a lot of growth in those programs because, overall, you're not seeing a lot of growth in consumer spending. So to the extent those programs were up, it was low single digits. But again, when you talk about the staples of clothing and apparel and household effects and so forth, really, not a lot of change year-over-year for Wal-Mart or any of our other retailers. Michael B. Purcell - Stifel, Nicolaus & Co., Inc., Research Division: Okay. So then just to tag on, just so I'm clear, I understand the variability in the capital asset sales because they're large -- a lot of items, large GMV items going back and forth. Bill, can I infer from your comment that -- will they have -- do they just go through cycles of fleet sales, and so it was down 1 year, and then it'll come back through TruckCenter? I wasn't sure what you meant by that "went away." And then, I guess, the second part, really just drilling down the retail. I understand the weakness in the consumer electronics within retail and that, that's across the boards, but the crux of the question really is, are you losing supply to other vendors within Wal-Mart?

So we have had consistent market share with Wal-Mart entering -- through fiscal '13, entering fiscal '14. We are not the exclusive channel for rolling stock sales of Wal-Mart, and there is cyclical issues on the pace of replenishing fleets, which drives used truck sales, so both of those are factors that result in down GMV in a given year.

Yes. Just to add to that, Michael, as you know, most of our Wal-Mart product is under a 5-year contract that goes through May of 2016. So we're not seeing a loss of merchandise from Wal-Mart under our contractual relationships.

And your next question, that comes from Mr. Dan Kurnos from The Benchmark Company.

First, I don't know if you guys -- maybe I missed it, I don't know if you answered Gary's question on what your expectations for GoIndustry run rate are this year? So let's start with that.

Sure. Absolutely, Dan. So when you look at GoIndustry, as you know, we've spent the last 18 months, really, I'm not counting this quarter, restructuring that business, which was completed at the end of the last fiscal year. We came out with a fresh quarter here in the beginning of fiscal year '14. We're very pleased with what's going on in that business. So we would expect that business to be a run rate of around $130 million to $140 million, which is in line with what we told people we'd do. And then we would expect it to grow from there with the addition of a lot of these new client wins that Bill discussed earlier.

And let me just add that we've been in this journey of integration since we acquired GoIndustry. And we think about the business less based on the brand of the acquired marketplace and more as a consolidated capital assets group and leadership team, and that team is taking on board an integrated functional organization with 1 global head of sales, 1 global head of marketing, 1 global head of operations. The marketplaces are moving to a consolidated technology platform. And so it really becomes less a discussion about the P&L or the growth of an individual marketplace and more of a discussion about our penetration of these large, capital-intensive industry verticals, which are being serviced by a unified global operation across Liquidity Services.

Got it. Great. That's helpful. And then, not to keep pressing this point, but just in terms of your guidance going forward, is there any more color you could give us on what you think the mix is in terms of upside between existing client penetration and new client wins or how that's contributing to the accelerating growth going forward? As we all know, existing client penetration has always been stated or cited as potential upside, so I would love to hear some more color on how that's progressing at all.

So I think those are both -- if you'll take them individually, they're both catalysts for growth at Liquidity Services. I mean, it's no accident that we've targeted the largest companies by revenue in the retail channel, the manufacturer channels that supply to the retailers and in the capital assets business. We've had modest penetration with these relationships, and they are large, bureaucratic organizations, in some cases, that have a core business to take care of, and we are attacking 5% of their business on the reverse supply chain. So we have realistic expectations that those are sales cycles that you need to manage and that, in some cases, there are multiyear relationship development exercises. But there is huge potential with existing clients to grow the business. And as you get credibility with blue chip companies, many of which are thought leaders in their areas, that is a great source of referral for new business. And we have many new business opportunities because our existing clients, both retailers and manufacturers, refer us to their partners in the retail supply chain. So that is the focus of our growth trajectory in that we enjoy opportunities both through the penetration of accounts and these referral relationships that add new business and new programs.

Would you say, in the back half of the year, excluding seasonality, that the bulk of the acceleration is due to new client wins or penetration gains?

I'd say that they're probably equally partitioned.

All right. Great. And then just one last one for me. Bill, you talked a lot about some of the technology initiatives that you have going. We know you've spent a lot in investment improving or modernizing the platform in the past. I just would like to hear your thoughts on how much more incremental investment you think you have to make, where you feel the platform is at from a technology perspective?

Well, when you're moving to cloud-based delivery of your services, you are always investing. I think, under the leadership of our CIO, Leo Casusol; and our senior leadership team on the business side, we've made a very focused effort in fiscal '14 to increase the allocation of investment in these areas. And we feel like we're getting the benefit of both integrating our acquired marketplaces; make them more scalable; improve the user experience; improving the applications available through the sort of on-demand services, whether it be trying to manage how you value inventory, how you allocate inventory to the right sales channel, how you benchmark the recovery data of sales through our channel. That's all made available by extending access to our tech platform, by extending access to our data and making it easier to onboard into our sales channels on the clients side. And on the buyer side, people want to access the right assets via mobile devices, via tablet devices, in multilingual environments. And we intend to have a multi-lingual global platform that's easy to use that further cements our leadership position in the marketplace.

[Operator Instructions] We have a question, and that's from Mr. Jason Helfstein from Oppenheimer. Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division: Just one more follow-up. We did notice that inventory outflows -- or capital outflows that fund inventory was up $7 million, which is double any prior other quarter. How should we think about this? Is this just a kind of a sign of strength in the capital assets of inventory you took on the books that, then, you were going to sell in the back half? Just some color on that.

Yes. Actually, Jason, a lot of the inventory increase was on the retail side of the business. If you're going to have 20% growth or better, you're going to expect to be taking more product. So just also, we're entering the high season, so I would expect inventory probably to go up again next quarter as well from that. On the capital assets side of the business, we do not take inventory, as most of our programs are consignment. The exception to that is the DoD. And so, actually, you really bring up a good point that the DoD inventory is at its highest level since we've been running the program. However, those products are all the lower-value, slower-moving products that require a lot of processing. As Bill talked about in his notes, we're adding distribution center space. We are hiring people, increasing shifts. So the margin on that business is down from where it was. And we'll continue to process inventory -- the inventory at those levels probably for the rest of the year, at least at this point that we can see in the DoD business. So I'd say part of that $7 million increase, maybe 1/3 of it or 40% is the DoD, and then the rest would be the retail piece of our business.

And your next question comes from Mr. Nat Schindler from BoA.

Two quick questions. One, as the DoD has shifted their rules for the contract to break off the rolling stock and move that to a revenue-share agreement, how will that -- and I know you don't know the percentages yet, but how do you see that likely affecting the profitability of that part of the contract and the whole -- the contract as a whole? Secondly I'd like to ask you is, if you look back just about 13 months ago or 14 months ago, we were at your Analyst Day in Indianapolis, and you guys had a -- were talking about a really retail reverse supply chain focused business. And now, you are saying you're organically growing that business for the rest of the year, but if the rates are growing, it seems pretty hard to see how that could ever get near that $2 billion -- you could get this whole business up to a $2 billion GMV, as you had expected. What changed in the last year?

So regarding the 2 questions, like you, we are in receipt of information that DLA has made available publicly on the Surplus programs. And I think it's important to remind you that, with respect to what's considered rolling stock and non-rolling stock, rolling stock is often product -- in fact, the vast majority of the items sold under the "rolling stock" category are not operational, and they're missing major components. And these are items that are very expensive to move. So as compared to our TruckCenter rolling stock business with Class A trucks and tractor trailers, we put a driver in the car and he drives off lots of rolling stock. For DoD, it is product that, frankly, is not even operational. As it relates to how that mix is being created, I think that's still a work in process. I think DLA is still working on how they expect to shape that property, what the inbound processing costs will be for that property. And so we are still in the process of doing due diligence on that. The change in our business, I think what you've seen in the last 18 months is a continued penetration of the manufacturing side of the retail supply chain. I think the retail -- the credibility we've developed with our retail clients has led to more referral of business from manufacturers. Manufacturers, in many cases, are seeking to outsource the way inventory is returned, processed and then, ultimately, sold, and done so in a manner that protects their brand. And so we see lots of opportunity at the manufacturing side of the retail supply chain. Some of that relates to capital equipment. Most of it relates to inventory. So no big change in terms of emphasis on retail supply chain. I just think that the trajectory of some of the non-retailer business continued to grow. As to $2 billion or $5 billion, look, at a current run rate of near $1 billion, to double the business in 5 years is about 15% CAGR. So we feel that, that's a reasonable long-term growth rate for Liquidity Services.

And your final question comes from Mr. Shawn Milne.

Yes. I just have 2. I think, Bill, you outlined some incremental investment spend in the last call of $9 million -- or maybe Jim better to answer that. Where are we are in terms of pacing on that? And then secondly, Bill, you've talked about, before, some of these SaaS applications, which -- one of them you acquired with the GoIndustry transaction, which already had clients up and running. But you then laid out, on the prior call, sort of Marketplace-as-a-Service and opening up your market information, et cetera. Do you have any clients using some -- are these technologies still in development? I mean, I'm just trying to parse out, you were saying that there are clients on new -- some of these new services, but I think that's more in capital asset. If you can give me more color there?

Sure. In general, Shawn, this is an incubative part of our business. And the way that you sell SaaS applications has more of a fee-for-service type of nature, so it's not material as a percentage of our revenue today. But what it really presents for us is a new front of growth to serve our clients, to leverage our tech investments and leverage the data and the access to the data that our clients think -- that we believe they want and to make that an easy experience. On the AssetZone application, today, we have 6,000 users from Fortune 500 multinational companies using that application to aggregate information within the 4 walls of that client organization that they can manipulate, perhaps, value; perhaps redeploy; and then it seamlessly moves to sale, based on certain business rules. We have a handful of clients testing our Marketplace-as-a-Service offering today. We're in a business development process, getting the voice of the customer on what they desire with this application. And we'll continue to update shareholders as we have more concrete productization of Marketplace-as-a-Service. And certainly, if it becomes material, we'll spend more time discussing the revenue model. We have appointed a general manager to run our offering of self-serve and Marketplace-as-a-Service offerings in the middle market. I think that's an important milestone internally, and we'll just continue to work at that.

The second part of your question, Shawn, regarding our technology investments this year, where we are with the spend, so we're rolling out on track. We do expect to have most of that spent this year, which is, again, what we guided to at the beginning of the fiscal year. So I don't really see any ups and downs in that now. I would think there -- our scheduling of this project has it rolling out pro rata, and at this point, I don't see any change in that. So I'll update you on the next call if there is something that significantly moves in that area, but right now, we're operating at plan for those programs.

Ladies and gentlemen, that concludes your conference -- your Q&A sessions bit on your conference call. I would now like to turn the call over to Julie Davis for closing remarks. Thank you.

Thank you. We would like to thank everyone for joining our call today. Jim and I will be available for follow-up questions this afternoon. Thank you.

Thank you, ladies and gentlemen. That does conclude your conference call for today. You may now disconnect, and enjoy the rest of your day. Thank you.