Overstock.com's CEO Discusses Q3 2011 Results - Earnings Call Transcript

| About: Overstock.com, Inc. (OSTK)

Overstock.com, Inc. (NASDAQ:OSTK)

Q3 2011 Earnings Call

October 27, 2011 11:30 a.m. ET

Executives

Jonathan Johnson - President

Steve Chesnut - Senior Vice President, Finance

Patrick Byrne - Chairman & Chief Executive Officer

Analysts

Daniel Kurnos - The Benchmark Company

Operator

Good afternoon, my name is Bonny, and I will be your conference operator today. At this time, I would like to welcome everyone to the O.co also known as Overstock.com Third Quarter 2011 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions)

Thank you. I would now like to turn the call over to Mr. Jonathan Johnson. Please go ahead, sir.

Jonathan Johnson

Thank you, Bonny. Good morning, and welcome to our Q3 2011 earnings call. Joining me today are Dr. Patrick Byrne, Chairman and CEO of the company; and Steve Chesnut, Senior Vice President of Finance and Risk Management of the company.

To begin with, let me remind you that the following discussions and our responses to your questions reflect management’s views as of today, October 27, 2011, and may include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in the press release and Form 10-Q that were issued this morning, and our Form 10-K filed earlier this year.

During this call we will discuss certain non-GAAP financial measures. The slides accompanying this webcast and our filings with the SEC, each posted on our Investor Relations website, contain additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures.

With those preliminary warnings out of the way, let me turn the call over to Steve to talk about some of our financial results.

Steve Chesnut

Thank you, Jonathan. As we review our financial results during the call today keep in mind that unless otherwise stated, all the comparisons are going to be against our Q3 2010 performance. Revenue in the quarter decreased by $5.7 million or 2%. The primary reason for the decrease in revenue in the quarter were, while our visits to your website were up slightly, we had lower conversion rates and a decrease in new customers, which each resulted in fewer orders. Gross profit decreased by 7% and gross margin decreased by 90 basis points to 16%, primarily due to competitive pricing initiatives that we instituted.

Contribution margin fell by 30 basis points to 10.2%. Combined technology and G&A expense increased by 12%, largely due to increases in IT related staffing and depreciation expense and higher legal expenses in the quarter. Declining revenue, declining contribution, rising operating expenses resulted in a net loss of $7.8 million for the quarter, this is an increased loss of $4.4 million compared to last year.

On a positive note in the quarter, we retired the remaining $24.5 million of senior convertible notes. We funded this through a $17 million draw on our U.S. Bank line of credit, and $7.5 million of operating cash. We ended Q3 with $79 million in cash, cash equivalents and $18 million of working capital. I would encourage you to review our Form 10-Q that we filed today for more detailed information on our results. With that let me turn the call over to Patrick. Patty?

Patrick Byrne

Good morning. I am starting on the slide deck slide five. We have arrested the fall or the deceleration but we are basically flat, have been for a few quarters. That is disappointing. And we know exactly what it is. We know what channel it’s in. The brand morphed to O.co. We are measuring the responsiveness to those dollars spent. And that has dropped significantly our branding -- or branding responsiveness.

Some customers are getting the O.co, some are finding it confusing. So you will see us decelerate that whole brand morph and keep -- maybe it’s going to take two or three years to get people to understand what O.co is but you will be seeing Overstock -- we will be reminding people more of Overstock and just shortcut O.co for the time being until we can get more people shifting.

The early shift to O.co surprised us by how quickly it happened and then there seems to have been some confusion emerge. And so we know that’s exactly the marketing channel that’s been having the problems. The other online channels are generally healthy other then the affiliate channel, where of course we were hurt by all this affiliate tax nexus stuff. But hopefully that is -- or that seems to be reversing.

Slide six. Gross profits have come down a little bit with the 2% decline. Slide seven, this is problematic. We really think, as I said before, I think 11.5%-12% is the right contribution, and maybe it’s 11.5%-12% is what, or I think now. And this is obviously too low and this is a function of us having to gun marketing harder than we would to support this level of sales were it not for what I have just described.

Page eight. Quarterly contribution to growth, basically falls out of the previous two numbers. Slide nine. We remain -- cash flow from operations are basically $32 million, trailing 12 months are $32 million. That’s where it’s been for a while.

Slide ten. GAAP inventory turns, 31, it’s more like six on a real basis, but on a GAAP basis it’s 31. GMROI, slide 11. This actually, on of course the total basis it counts the partner program which is not infinite, but very high. We do have some partner inventory due to returns, but this 650% is acceptable. The 58% isn't. It's really an expression of overcapacity. We have overcapacity in our logistics, and that's what the actual -- the overcapacity hits us and hits this number hard. The actual -- on a product basis, things are doing much better than this, but it's the overcapacity that weighted this number down.

Slide 12, net promoter score. We actually don't think -- or we've gotten it to 60% and again -- or 59% -- and again it's -- this is just for people who contact us. It's actually better for people who don't even contact customer service, customer care. This is, I think an extraordinary number, although I do think that it's asymptotically has -- it has asymptotically approached its limit at around 60%-ish as far as we can tell.

Slide 13, unique customers. While we're up to almost 26 million people in our history, a slight decrease in unique customers this quarter. Slide 14, we remain at about $20 CPA, but again there was a slight decrease in new customers. Average order size, slide 15. There has been a slight decrease, as Steve said, that the traffic was up a bit, the conversion was down a little bit, but the average order size is back up. So the actual revenue per visitor is about flat.

We're on gross profit per transaction, okay. Slide 18, corporate employees were down about 2% and remain very focused, extremely focused on financial discipline. In fact, in sort of all kinds of ways, we feel we're doing -- internally things feel good in the sense of how quickly we're getting certain things done and the way our development teams are working with the business teams in a very agile like way.

There is really one big fly in the ointment, and that is the marketing. We're spending -- we've had this marketing problem. And as a result, we've had to spend much too much to support this level of sales, or put differently, with this much spending we should've seen significant growth return. So that's the problem. We know exactly -- it's not sort of an overall problem in the sense of our online marketing. Various channels are growing nicely, but it's really just the brand morph. We switched into third gear on it. We probably should have run in second gear for six months longer than we did. Okay.

Jonathan Johnson

Bonny, that's our presentation. If there are folks that want to ask questions, we're prepared to answer them.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Dan Kurnos of Benchmark.

Daniel Kurnos - The Benchmark Company

All right, good afternoon guys. How are you doing?

Patrick Byrne

Hello, Dan.

Daniel Kurnos - The Benchmark Company

Just a couple of questions, maybe broader picture here. The second quarter, you mentioned that it was really -- you're really focusing on O.co as the center of your -- center of the rebranding effort and Club O to be specific within that. And that strategy has continued into this quarter. And I guess the question is you realize now that maybe the marketing spend on that side was too high. But why not push the promotional side, the coupon side, which seems to be sort of where most of the other e-commerce players are spending a significant chunk of their dollars?

Patrick Byrne

Great question, Dan. It's like you're reading our e-mail. The truth is my second mistake to how fast I pushed the O.co, would be I probably cut the coupon too hard. I felt that, over the years, we had trained our customers too hard -- too much to wait for coupons, and so we aggressively reduced those. And we found the same thing, that that turns out to be very effective spend. So we are coming back with the coupon spend.

I've told you about O.co. Club O is actually working well, I think. We won't really understand the full economics until we get through this Christmas season, but it's -- we see the power of getting people to join Club O and it makes them much more valuable. And so in lots of ways, the Club O is being successful. We're not getting as many members as I hoped, but we're getting lots of members. But it's going to take another year or so before that moves the needle for the company as a whole. So really to fully understand, we have some predictions about how they're going to behave this Christmas season as such, but we won't know for sure until early January. So we're actually good with Club O. It's the other two things. The O.co and the coupons that you mentioned are the problem.

Daniel Kurnos - The Benchmark Company

So sticking with the marketing theme for a second, I have noticed a few TV ads lately, so I'm glad you guys are getting your brand out there. I did notice, in one of the ads, that there was an offer for some specific items accompanied by free shipping. Is that -- is free shipping something you guys are looking at for maybe split shift items or items over a certain price? Is that something that's entered your thought process?

Jonathan Johnson

Yeah, this is Jonathan. We are being a little bit more product-centric on our ads. So when you saw products on there, I think you'll continue to see that. We will have lots of free shipping promotions during the fourth quarter as part of the Christmas promotion, so you'll see that on sometimes for orders of a certain size and at some point for all orders.

Daniel Kurnos - The Benchmark Company

Okay. That's great. And Patrick, if you wouldn't mind just, I know that you said it's early to sort of determine what you think the spending habits are going to be. But if you wouldn't mind sharing sort of your outlook for the holiday season and how it's sharing -- how it's shoring up right now, even if it's just sort of broad color.

Patrick Byrne

I can't really say anything about the holiday season, but I can just say we -- a lot of people build up points in Club O, in their Club O account. Some of them, like Jonathan, come and every visit they spend all their points. Some of them, like others, like Stormy for example, she saves it all up and then wants to come at Christmas and have it for Christmas.

So we've built up quite a lot of Club O points. Our customers have built up quite a lot of Club O points. It's just going to -- and we don't really have a full understanding of which person they're like at Christmas. Do they come in and spend them al;, do they come in -- and so forth. So we'll have a better -- a bigger sample this year than last year, a better sort of our first really full analysis, I would say, at the end of this year.

Daniel Kurnos - The Benchmark Company

Has your view of the broader economy improved at all? I know you've been bearish for a while now.

Patrick Byrne

Well, I'm very bearish, but in a much deeper way. I just don't think this is an ordinary recession. And so I think that the -- we're just being propped up. We're just being propped up. So I do expect someday a real crack. It's like seeing a bridge that was built to hold a thousand cars, and I see four thousand cars on it. And you can ask, well, is the next car that drives across it going to break it? And the answer is, I really don't know. I wouldn't have thought it held four thousand cars. But until then, things are going to look like a bottom-bouncing recovery. Not a good recovery, but we're going to be up one quarter in growth, I'm talking about the country, and then down a little bit more than expected.

But I think all of that is kind of Fugazi as we would say in the clear closeout industry. I think that ultimately that's all just being done by cheap money propping up and various actions of the federal government. And they're just postponing - it's morphine shots for cancer patients. They're not addressing the actual problem. And I don't know when that problem manifests. So I think that what we're in now is this bottom-bouncing. I think, did I hear on the way in that some numbers came out this morning that showed a little...?

Steve Chesnut

GDP was what -- up mid 2%.

Daniel Kurnos - The Benchmark Company

2.5%, yeah.

Patrick Byrne

I think that that's all just, it’s the bottom. We're not going to have a -- I can't imagine us ever getting to a strong recovery before we go through a deeper crisis first.

Daniel Kurnos - The Benchmark Company

All right. And just one final one from me, just sort of a one-off. I know you that guys reset the trial date. Was there any particulars as to why the date was shifted from this December?

Patrick Byrne

We certainly didn't reset it. We want to go to trial. Jonathan?

Jonathan Johnson

Yeah. We very much wanted to keep the December 5 date. The court schedule was backed up, and the judge asked if we would push it back. In order to push it back as far as it did, we actually had to waive a provision that says all cases in California need to be tried within five years of the trial date. We're going to miss that by a month, but we intend to do all we can to keep that March 5 trial date.

Daniel Kurnos - The Benchmark Company

Got it. Great. Thanks a lot guys. Appreciate it.

Operator

(Operator Instructions)

Jonathan Johnson

All right, thank you. If there’s no other calls we will get back to work and talk to our owners next quarter.

Patrick Byrne

Thank you.

Operator

Thank you, this concludes today's conference call. You may now disconnect.

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