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Here's the complete transcript of Overstock's Q1 2005 earnings conference call. The accompanying slide presentation is here. Update: the Q2 transcript is here.

Event Transcript

Transcript provided by Shareholder.com

Overstock Com Inc [OSTK]

Q1 2005 Overstock Com Inc Earnings Conference Call
22 Apr 2005 08:30 (NYSE:ET)

Corporate Participants
David Chidester - Overstock.com - VP of Finance
Patrick Byrne - Overstock.com - Chairman & President

Conference Call Participants
Douglas Anmuth - Lehman Brothers - Analyst
Jason Avilo - First Albany - Analyst
Aaron Kessler - Piper Jaffray - Analyst
Scott Devitt - Legg Mason - Analyst
Frank Gristina - Avondale Partners - Analyst
Paul Keung - CIBC World Markets - Analyst
Steve Ju - RBC Capital Markets - Analyst
Craig Bibb - WR Hambrecht - Analyst
Brian Bolan - Marquis Investment Research - Analyst
Derek Brown - Pacific Growth Equities - Analyst
John Hibinka - - private investor
Shawn Milne - Friedman Billings Ramsey - Analyst
Jim Krueger - - Analyst

Overstock Com Inc [OSTK]

Q1 2005 Overstock Com Inc Earnings Conference Call
22 Apr 2005 08:30 (ET)

Operator

Good morning. My name is Gwen and I will be your conference moderator today. I would like to welcome everyone to Overstock.com's first-quarter 2005 financial results conference call. At this time, all lines are in a listen-only mode. Later, we will announce the opportunity for questions and instructions will be given at that time. (OPERATOR INSTRUCTIONS). This call is being recorded and will be available for replay beginning today through Friday, April 29th. The replay can be accessed by dialing 888-203-1112 and entering the access code of 204-6043. At this time, I would like to turn the conference call over to Vice President of Finance of Overstock.com, Mr. David Chidester. Mr. Chidester, you may begin.

David Chidester, Overstock.com - VP of Finance

Thank you. Good morning, and welcome to Overstock.com's first-quarter 2005 conference call. With me participating on the call today is Dr. Patrick Byrne, Chairman and President.

Before I turn to the financial results, please keep in mind that the following discussion and the responses to your questions reflect management's views as of today, April 22nd, 2005 only.

As you listen to today's call, I encourage you to have our press release in front of you since our financial results, detailed commentary, and the President's letter to owners are included and will correspond to much of the discussion that follows.

As we share information today to help you better understand our business, it is important to keep in mind that we will make statements in the course of this conference call that state our intentions, hopes, beliefs, expectations or predictions of the future. These constitute forward-looking statements for the purpose of the Safe Harbor provisions under the Private Securities Litigation Reform within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements involve certain risks and uncertainties that could cause Overstock.com's actual results to differ materially from those projected in these forward-looking statements. Overstock.com disclaims any intention or obligation to revise any forward-looking statements. Additional information concerning important factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in documents that the Company files with the SEC, including but not limited to its most recent reports on Forms 10-K, 10-Q, 8K and S1.

Before I turn the call over to Patrick, let me hit a few of the key financial results. Unless otherwise stated, all comparisons will be against our results for the comparable period of 2004 and I have seven highlights to address.

First note that our year-over-year GAAP revenue growth rate is now a good measure of our overall growth as the accounting for revenue will be consistent for the entire 2004 and 2005 years and is thus now comparable. Secondly, total revenue in the quarter was 166 million, up 102%. Third, total gross bookings, excluding auctions and travel, increased 97% to 184 million and B2C only gross bookings grew 108%. Fourth, gross margins were 15% in Q1, up from 10.3%. As a result, gross profit dollars increased 194% to 25 million. At the same time, operating expenses grew 163% to 28 million. Fifth, in Q1, our operating loss of 3.4 million or 2% of sales, a slight improvement over our 2.8% operating loss last year. Our net loss was 4.2 million or $0.21 per share compared to a net loss of 2.2 million or $0.14 per share in 2004. Sixth, we ended the quarter with 193 million in cash and marketable securities with an operating cash outflow of 35 million. However, the twelve-month trailing operating cash flow was a positive 11 million. Above and beyond the 193 million of reported cash and marketable securities, we had 48 million of cash related to our stock buyback program that, for accounting purposes, is not included on our balance sheet even though at this point we have not yet purchased the stock or received any shares. And finally, the seventh and last area is CapEx. We had 28 million in capital expenditures in the quarter. Although a large portion of these will be paid for over three to four years, for accounting purposes, the entire value of the assets and related obligation go onto the balance sheet now. And actual cash invested in capital expenditures in the quarter was 13 million. I will note that one of the benefits of the capital that we raised last year was to unable us if necessary to make investments in technology for the business as we've done this quarter.

I'll end with a couple of other metrics. The BMV business was 10.5% of our total gross bookings versus 14% last year and the average invoice was just over $91, up from $79 last year. That covers my financial review. I'll now turn the call over to Patrick.

Patrick Byrne, Overstock.com - Chairman & President

Thank you, David and thanks to Kathryn. For the analysts listening, Kathryn is leaving in a few weeks to go with her doctor husband to a new residency in Michigan or something. So thanks for arranging these calls, Kathryn.

The numbers are what they are. We are not in the business of giving too much color on numbers or trying to tell people how to think about them. The newcomers on the call, we try to be -- and there seems to be a lot of newcomers on the call -- we try to be -- the numbers are what they are. No excuse. But we do like to give additional details so you can make up your mind. And we are always looking to grow the business and really never trying to manage quarter to quarter, as we've been saying for two years.

So the numbers are what they are. We had straight (ph) growth, but we lost $4.2 million. On the numbers that I think are the determinants of our long-term value, we're seeing tremendous growth -- 102% -- well 194% on growth on gross profit. 194%. As I've been saying for three years, the gross profit is the growth, is the number I'm most concerned with. Sales grew 102%. Gross margins were 15, even up 50% from last year.

The below -- but the operating expenses -- we also have 194% growth in gross profit. We have 163% growth in operating expenses. I would like to see a much bigger spread of not 30 points between the two of those, but 50, 80, maybe 100-point spread between the gross profit's growth and the operating expense growth.

Breaking down the operating expense, it's important to know that the growth in G&A, apart from technology, was 49%. So gross profits grew 194. G&A, aside from technology, grew 49%. Now, technology -- I'm sure we'll be talking a lot about this today -- 193% year-on-year growth. That really comes from a couple factors.

One, or really three factors. The CapEx and the associated depreciation with the CapEx. There's a lot of transition costs involved in even getting that CapEx in. The consultants and the teams have to come in and build it with us. And then we are hiring people within technology. No sense buying all this rocket scientist equipment and not having some rocket scientists -- enough rocket scientists to run it.

I'm sure we'll be talking more about the technology costs, but I'll put it this way. I think our entire CapEx until this quarter had been about $25 million. And the depreciated cost was about $16 million on our balance sheet. And here we're trying to build a business that does a billion and 2 billion, and so on and that was -- we were stretching things very thin. We did accelerate this about a year faster than I would have guessed sometime ago. It really comes down to this. Here we are seeing this 100% growth and as I've said many times, we're certainly going to keep planning for that as long as we're getting 100% growth. So we're looking at doing a billion, 2 billion, 4 billion.

Our current systems would really be sailing at the 1.5 billion level and we figured that we could stretch them out. I'm not talking logistics; I'm talking technology. We figured we could maybe stretch them out and nurse them to the $2 billion level. And there's a six-month transition period between the kinds of infrastructures we're doing. So that really would have put us in -- if we didn't do this now, it would have meant that in January, February of next year, we'd be starting to do it. And if we did it January, February of next year, if everything worked perfectly and we got it in and we'd be fine by August. And anyway that would be -- if next year were a $2 billion year, in other words, if our growth continued at this rate, that would be cutting it too close. So this early February, we just decided to pull the trigger. We had gotten everything pretty well architected and we just said we're going to make these changes now.

Sales and marketing, we did spend a point or 2 more than we should have and I think you'll see that decline quickly this quarter. A couple other numbers on growth. I ran some numbers last night because three years ago, Jason and I were out on the road in an IPO 12 quarters ago. At that time -- here our gross bookings, which is the easiest way for me to compare things, this quarter was 184 million. Three years ago in the first quarter, they were 21.4. So since then, we've achieved 105% annual compound growth in our gross bookings. Gross profits were this quarter 24.9. Three years ago, they were 2.1. So we've achieved 129% compounded growth in our gross profits. So those are some numbers. You decide how you feel about them. I'm going to turn to the slides.

Last quarter there was I guess some who ha because it turns out our slides were 20 or 30 seconds behind my voice, so I'm going to try to coordinate. But we think we fixed that.

Slide 2, there's our Safe Harbor statement, just like David read.

Slide 3, these just go over the numbers we've already been discussing. One line to look at is line three. Last year -- and if you go back to the transcript of the end of the second quarter -- I suggested that what had happened last year was the in the first quarter, we cut marketing too much and we sort of came off a step. We if we were in a speed boat, we came off the step. And then in the second quarter, we had begun marketing to get us back up on the speed boat back up on the plane. And the right way to look at the year last year, and I think I said this at the end of the second quarter, was you really had to average the first and second quarter to really get a feel for what's been going on.

So that makes our comparison with marketing last year -- now we did overspend on marketing -- but it exaggerates that to some degree. Whereas in the second quarter last year, it meant that we've done the (ph) things more than we should have, which means we'll have an easier comparable this quarter. So I would recommend if I were doing a financial analysis, the change from year to year, I would take the first half of last year and average the numbers to get the ratios and then see how they compare with this year. And then the rest of these numbers, we've already discussed.

Okay, gross bookings, GAAP, which is the easiest way, if you were looking -- this is Slide 4 -- if we're looking back more than two years, it's easiest to compare growth on an apples-to-apples basis on gross bookings, which is now very close to our GAAP revenue numbers, within 9 or 10% of that.

Next, Slide 5, doesn't really -- well this shows that our drop from the fourth quarter to the first quarter was 28% a year ago. This year was only 22%. And I'll be getting back to the reasons for that.

Slide 6. This shows our gross margins. We can talk about this. Again, normally there would be a bit of a drop between fourth quarter and first quarter because you lose some scale advantage. We didn't see that a year ago but just because we were fixing so many other things. So anyway, this is a nice graph for me.

Slide 7, this is that graph depicting the spread between the growth in gross profits and the growth in operating expense, which is what I'm so keen on. You see that it did narrow 30% spread this quarter. And as I've said early on a call, on last call, I really would like to see that spread more in the 70 or 80% range.

Okay, Slide 8, cost per acquisition on customers. We're not really seeing the deterioration that one might assume. It just stays -- it was okay, 15, 18, 18, 19, in terms of our online shopping CPA. And even that 19 includes sort of quite a bit of new things that we're trying. That show up, say, in the share of Internet penetration that is described in my shareholders' letter.

But auction, this now has a whole new layer of spend on top of that. We're going to continue to break this out at least for the rest of this year so you can see the difference between them.

Slide 9, gross profit per transaction, again, has declined considerably, slipped a bit from the fourth quarter. But that's normal because the average order size was down.

Slide 10, quarterly net margins. Unique customers -- we're going to get into some customer information more than we have in the past. Our unique customers who bought in the quarter grew 90%, although we had 102% growth in the revenue.

Slide -- (indiscernible). And number of new customers grew 85%, again, versus 102% overall growth.

B2C customer orders grew 80 -- this is now Slide 13 -- B2C customer orders grew 86%, again, versus that 102% growth. What is that -- on aggregate customers are up 85%.

Well, I'd like to talk about a fairly difficult concept to explain. We've been releasing a number that -- and so I'm just going to take a moment and explain how we're looking at churn now because we're changing how we're looking at churn. To see that, we've been releasing a number that says how much of the business in the given quarter came from new customers -- new invoices. And so suppose that number was 45%. Suppose we're talking about the first quarter of 2004 and we said okay, how much of the business in that first quarter came from a first time invoice? That was 45%. Well then we would just say 55% must be from repeat. Well, we realize that's not a very good measure of churn, because it could be somebody bought for the first time in January and then they come back again in March and buy. And if they do that, that March invoice is going to be a repeat invoice, which means that if all of your customer base went away on December 31st, you'd still have some -- by that measure I just described -- it would still show some number. You really don't want that. You'd want it showing zero. So there will be different ways of measuring this.

One is -- and if you look at that measure I just described is the left-hand chart in front of you on Page 15. And that also gets affected by growth and things in different ways. The left-hand chart at the top line.

Another way of looking at it is to say in the first quarter of 2004, how much business came from people who had previously bought prior to December to January 1st. So December 31st, 2003, and before. Well if did that graph, that's the green line on the left-hand graph on the Slide 15. That isn't an all-encompassing measure because you get some built-in inflation over time. Because the tail that you're trailing just gets longer and longer. As reality goes on. So the way we've really decided to look at it is to say take the universe say of people -- and I'm purposely talking about the past, sort of avoid confusing things with current numbers. Take the universe of people who bought in say 2002 and let's say how much did they buy? Well let's say that collective world bought -- that universe of people spent $100 collectively in 2002.

Well let's look at 2003 and say what did that universe of people come back and spend in 2003? So you're really getting -- well, the answer shows up as Slide 3. And it started off three or four years ago at $0.30. And it has climbed over time to 55. And if you actually did it on just the number of customers. So of the let's say 100 people bought in the year 2002, how many of those people bought again -- were active again in 2003? Those numbers were quite a bit like the numbers on the right-hand graph as well, well a little bit lower down. You drop all the numbers 5 or 7 points or so.

And what that means -- that's interesting to me because we've never managed this. We've never -- as I said over and over, we've really been in kindergarten on the whole analytics and CRM side of the business. We've been I think very good at figuring out where to spend money online to grow, but we haven't been sort of great at saying how do we stimulate this big pot of customers to generate the peak (ph) business and avoid churn?

And even though we haven't managed to it or even calculated it before, now that we're getting more sophisticated at it and developing these measures and we go back and re-create the past and see what happens, we see that there's been very good progress. Now, for comparison, I only know one other company off the top of my head and theirs is 41 and they reported and they seem to be proud of that. I think it's possible to get this 55 -- now especially now that we're managing it and looking at it this way, to continue -- our goal is to get this quite a bit higher, the 55. I don't think you ever get it to 100 or even 90. But getting it to -- a retail store does. I think it may be possible to get it quite a bit above where it is at 55.

Okay. Next slide, Slide 16. Some discussion of auctions. This data is taken off a public source called DealsCart that I described in the last conference call. If you go to DealsCart.com you can get all of this. So I'm using publicly available data. I can say that this is very close to our data, but for just some reasons, I'm not going to go into, they want to use their own data.

We launched it. You see these two big spikes on the left. Those are when we had free listing days in December of last year. And as I described what happened then was we got a whole bunch of crumby (ph) listings. And we let those wash out by early January. Well you see a small -- if you go to the very beginning of January, you see where those all washed out and we were back to that 20,000. And then you get to about January 8th or 10th and you see this little elbow and it starts to climb. That's when eBay announced that they were hiking their fees. And it just climbs through that steady hill to about February 18. And then that's when you see this explosion and it got up to about 140, 150,000.

Now we gave -- we wanted to see what happened. We gave a 60 days free listings to some people and 30 days to other people and such. And those all kind of washed out. Those were all stopping in the middle of April. And what we saw was ten days before that and our auctions were getting to (ph) 10-day auctions. Those listings -- when people knew that they were not going to be free past April 15th, they started to fall off and we let it fall just to sort of see what that looked like.

And then we, with some of our auctions sellers, we made basically extended their free or their discount period -- and it's come back. So we're learning let's say there is sort of a high school kid learning to drive a car, learning on the power of different controls and such.

I would say since people are going to be talking I know or wondering about auctions, think of it this way. If our --assume that Overstock's conversion rate is Y% and eBay's is X%. Now I've mentioned that I think we calculate our rates differently. Our conversion rate is lower, but it's -- I think that things will -- equilibrium will be reached where our friction costs are Y over X of eBay's friction costs.

And now what are friction costs? They're really two things. They are the costs of setting up products and all the costs of managing, coupled with the fees that are paid. Just for the sake of this argument, I'm going to say the handling and setup costs are zero. Then what this whole equation says is as long as our fees are in the same ratio to eBay's as our conversion rate is to eBay's, it's rational for people to post here versus eBay. So if our conversion rate were say a quarter of eBay's and our fees were a quarter of eBay's, if you assume away all the friction costs of setting things up and such, people will -- it will be rational to post here.

Now what are those -- can you really just assume away those friction costs? No you can't. Of course there is some cost. On the other hand, the costs of -- those friction costs are reduced by -- those handling and setup costs -- are reduced by the people like channel advisers to it and Toby (ph) and such who make it essentially frictionless to set up products, especially if you are already setting up on eBay there's little marginal cost.

And in addition, we have the goodwill of a lot of eBay power sellers, who are willing to tolerate a little bit of extra work in order to help us get going and help the competitor of eBay evolve. So it's not limitless. The goodwill isn't limitless. But that's the basic equation. And so, as long as we keep our fees -- if our fees are say a third of eBay's and our friction costs -- and I'm sorry -- if our fees are a third of eBay's and our conversion is a third of eBay's, people will migrate. Now, we don't want to keep them forever a third of eBay's, but I don't think they need to get past 50 or 60% of eBay's. Okay.

Other notes to talk about -- I'll go through these, just design your own jewelry -- just give it some more time. Club O Gold, we're giving it a long leash. Travel cruise is up and doing fine. We hope to have the rest of it (ph) by the end of Q2.

A few questions that I'm anticipating -- we've asked investors to e-mail Kathryn with questions so we can sort of get through them quickly.

Stock buyback -- again, it's a -- why did we need a stock buyback last quarter? Oh, the stock buyback and say put us (ph) a $500 million shelf up there. Well, and isn't that a confusing signal. Well it might be except as we say over and ever, we're not in the business of giving signals. They are two totally different things. They happen like this. For the last two years, our Board has been telling me, get a universal shelf up because any time we try to do an offering, you've got to monkey around for a month or two getting things filed. And so this January, the Board and we (ph) said hey, we've been telling you this for years. Go ahead and get it up. So we go ahead and got ourselves together and put it up. No intention of selling at even the prices that were etched (ph) at that.

But people read into -- tried to read into, what are we really trying to say there? Well we're not trying to say anything with that. It's just we're trying to get a shelf up and a shelf is something you put on the shelf and the expectation of in the next two or three years, it may take some of the stock out and issue it.

On the buyback, the buyback -- I don't want to talk about our expectations or thinking about the future and why we would do this and that; last quarter people were saying would you buy here at 56? Well no, we just, in November, we just sold stock at 56. And we're not going to buy it back in January at 56. And so I'm not going to comment on why or where in the future we would buy stock back in. But we put in place a way to buy stock back in. And as you've seen from our filings, we've sold some (indiscernible) or essentially like in many respects like buying stock back in. Depends on how they work out.

That sales level where you show profit is a question. Well the answer to that is you tell me when our growth tails off. You tell me when we're not growing 100% a year and when we can't grow 100% a year and I'll tell you when our -- at what level we will show profit.

Are all these projects distracting us from the main business? No, I don't think so. The majority of the Company is focused on the main business. If you put an O on everybody's head who's working on regular foundation Overstock business and an SP for those who are on special projects, you walk around here, you'd see almost everybody -- 90% of the people have an O. And we really do try to bifurcate the Company so there's not two people who straddle the two sides.

Somebody wrote the Company is run like a private company rather than a public one. Well, yes, I suppose that's probably true. I think we've always said -- I think we always make our decisions like it's a private company. I think it's not a bug.; it's a feature. So somebody commented (ph) that way. Yes, you're right, we do try to run it and make all the decisions as if it's a private company.

Another one was the Company will get the same credit for growing at 60% or 100%. The public won't value you more for additional growth, someone wrote. Well, again, we'll make the decision based on how the public is going to value us. We don't worry about what kind of credit the public gives us.

Okay. So wrap up -- our management team is focused on doing great things, building value for the Company. As I've said over and over, we're here to build value for the Company, which I think for as long as we can be growing gross profit at these sort of astronomical rates, that's what we should be doing. We don't want them to grow -- we don't look to try to manage quarters, and I'm just trying to give you the facts and you folks are free to decide for yourself how you feel about them.

Okay with that, that was a longer introduction than is normal. I'm sorry. But I hope it was dense and worth it. Glen, operator, could you take our -- give us our first -- we now have 12 analysts, so we're going to try to get through them all.

Questions and Answers

Operator

(OPERATOR INSTRUCTIONS). Douglas Anmuth with Lehman Brothers.

Douglas Anmuth, Lehman Brothers - Analyst

Great, thank you. I have a few questions. I'll give them all to you upfront here. First one is you didn't mention gross margins much. I just wanted to get your thoughts on whether you think they can go above the 15% that you sort of outlined last quarter; that was number one. The second one is regarding the large binomial marketing experiment that you mentioned in your letter. Can you provide some more details on that? The third question is regarding $1 shipping, if you can give some feedback on how that performed and what you're doing now in terms of some of your other shipping initiatives. And the fourth one is, do you think you can be profitable in 2005?

Patrick Byrne, Overstock.com - Chairman & President

Thank you, Doug. Nice to hear from you. Gross margins -- I think you can see that you can expect sort of 30 to 50 basis-point growth in each of the next couple quarters. I can't really see out farther than that. And that's really -- I'm thinking about shopping. That's not really even laying on any impact from travel or auctions, which of course are 80, 90% margin businesses just from shopping. I think each quarter you can expect 30 to 50 basis points.

On the -- let me skip to the $1 shipping. $1 shipping is -- we're really analyzing the results now. It does help, but it's -- we're not really sure does it change -- do you really get a higher level of sales out of it or do you just get -- or do you just move -- do people wait when they know it's coming. And then do they push their sales back a week or two until they are in $1 shipping period. And then at the end of $1 shipping, does their sales drop off considerably?

As I said in my letter, we did start off with a very sluggish April. Now it's sort of climbing out of that. But and the same thing happened last year. And we're not sure, but it happened a bigger way this year. I don't know if it's tax day. I don't know if it's the pope. It seems when 9/11 happened, we had a terrible drop in sales for about ten days. And just based on when people -- it was like a gloom or a mood that takes over the country. I think the same thing happened starting at the beginning of April and traffic and other things really dropped. It's (ph) come back.

So it's hard for us to disaggregate all those numbers and figure out the true effect of dollar shipping, but we're working on that this month. You may see another experiment -- maybe some different shipping terms where -- what it really comes to is we're giving up $2, which is about a 2% margin by going to $1 shipping. And that's really 1/7, 1/8 of our margins. So sales have to pick up by 1/7 or 1/8 to pay for itself. And my guess is offhand that they didn't quite do that.

The marketing experiment, I can't give you more than a certain amount of color on that just because relationships with vendors are such that we often cannot really go into details. But it was an experiment that had a 60-day out. I can't tell you what area of the world of the Internet or off-line it was, but I can say it had a 60-day out and it took us about ten days from the end of January to run the numbers and figure out what it had done. And when we saw that it had sailed, we cut. But it had a 60-day out, so the spending had to continue until actually April 15th or 17th. And that altogether, that was about 2.6 million.

There was another area -- I'd say there's almost another $0.5 million of marketing spend and sort of incremental online experiments, especially key words that, I would say don't meet our normal standards.

And then as far as profitability, yes, I do think we can be profitable. I stand by what I said last year or last quarter. You can expect this to grow 60 to 70 -- well 60% and making that percent GAAP or EBITDA is probably -- well GAAP is a reasonable expectation.

Douglas Anmuth, Lehman Brothers - Analyst

Great. Thank you.

Operator

Jason Avilo with First Albany.

Jason Avilo, First Albany - Analyst

Good morning, guys. Thanks for taking my call. My question relates to G&A. Patrick, I think you said historically -- and you sort of alluded to this, on a comp basis from last year, you grew G&A 49%. But you talked about sort of a 1/5 ratio in terms of revenue growth relative to G&A. Obviously, there's some investments in 2005. But wondering how we should think about that maybe heading into 2006. I mean in the worst-case scenario, how much more money do you think you're going to have to spend into G&A? And should we start to see that 1/5 leverage kick in into 2006? Thanks.

Patrick Byrne, Overstock.com - Chairman & President

Thank you, Jason. Well, in my mind, we've made the purchases we've had to make. But maybe -- but they've not all been flowing through G&A yet. David, can you comment on that? David gave me the G&A numbers for the rest of this year. Go ahead.

David Chidester, Overstock.com - VP of Finance

Yes, what you see is with the CapEx, it goes on the balance sheet now, a lot of it. But when it will start getting depreciated is over time as these projects get implemented and the assets are actually up an fully implemented and running. And that's why you'll see an increase throughout the year. It doesn't all hit today. But there's no question that we've spent probably 80 to 90% of what we're going to spend this year. And probably no more than 35 to 40 this year. And then I think some of the investments we made this year are things that are going to last us three to four years. And the accounting is that they will be straight-line expensed. However, and that hurts us this year, but it actually helps us in the future as we grow because these big investments will stay the same for the next three to four years.

Patrick Byrne, Overstock.com - Chairman & President

Yes, some of these have sort of weird terms on them. And we've got to be, again, discrete because of the -- at the wish of our vendors. But for example, one of the large deals we made had a payment ratio over the next four years of 1X, then 2X, then 3X then 4X. And X being some number -- some seven-digit number. Well we thought that -- initially, we thought that's how it would flow through the income statement. But it's actually flowing through just -- that all comes to 10X over four years. That's going to flow through our income statement 2.5X each year.

Collectively, in rough numbers, our IT is going from I think 6 to about 15 million this year. And our depreciation is going from about 3 to 10 or 11. And that is not all -- so did that bound your question, Jason?

Jason Avilo, First Albany - Analyst

Yes. I think so. I think so. Also, I have a follow-up on the gross margin line. It looks like you spent you said 1.2 on the dollar shipping or invested that much in the $1 shipping. So if you add that back to gross profit, it looks like margins are running more at the 16% level. I know you said that you might do some testing into Q2 in terms of giving shipping dollars back to the customers, but wondering what sort of is the natural gross margin level of the business.

Patrick Byrne, Overstock.com - Chairman & President

Well, I do think that that starts sounding like the right number. And remember, for comparison with others, I think Amazon, last I checked on our basis runs at about 13 because we include our fulfillment and our cost of goods sold. They don't. So if you made things apples to apples, I'm saying 16 and that's 3 points or so above Amazon. I'm not always trying to pick on Amazon. I'm just trying to calibrate. Everybody else runs, that (ph) calculates their gross margin one way. We calculate it a different way. I don't think you see our shopping gross margins go above that. And we're down -- we've squeezed 500 basis points out, 600 basis points out --the operational efficiencies over the last year. And there might be 100, maybe 200. And I'm not sandbagging. There maybe 200 left, maybe less. And there's no sandbagging there. That's really -- we're asymptotically approaching the efficiencies that we've got.

Jason Avilo, First Albany - Analyst

Great, thanks.

Operator

Aaron Kessler with Piper Jaffray.

Aaron Kessler, Piper Jaffray - Analyst

Hi, guys. How's it going? A couple of quick questions. One, in terms of the marketing, what have you learned over the last few months -- a couple of quarters. Marketing effectiveness in terms of either online marketing or off-line marketing? And then I'll have a follow-up question after that.

Patrick Byrne, Overstock.com - Chairman & President

I think you will see our off-line marketing drop now. You'll see our off-line marketing drop. And you'll see our online marketing -- there are areas where we're going to -- where we've taken kind of a scattershot approach in some new areas and have found a seam or two. We'll be exploiting those seams, but we'll be tilling the rest of the scattershot. So you might not see our online marketing actually drop. The two should probably roughly wash each other. The fact that we're going to be cutting some of the spend but exploiting some new seams we found, some new arbitrages, and you will see our off-line marketing drop.

Aaron Kessler, Piper Jaffray - Analyst

Great. And then can you update us on the status of some of your analytics priority (ph) that you're working on, whether it's the Web site analytics, collaborative filtering, or search-engine marketing type of analytics?

Patrick Byrne, Overstock.com - Chairman & President

Yes, search-engine marketing is up. It's live. It accounts for -- in my letter to you folks, there is a Page 4 there is a table showing that we've gone from 6.3 million visitors a month last year to 15 to 17 million a month in the last quarter. I actually think some of that is comScore just started measuring us better. I didn't write about this before because CEOs are always saying oh these guys under-measure us, but I always thought comScore under-measured us. But sometime in the last year, they tuned their dials in and they started -- and I say that because I can see when our traffic spikes and now they're picking up those spikes. I don't know what they did.

So a lot of that growth is from online. Some of it is from search words. Search words don't convert as well and that's why if you have 172% growth in traffic, we don't actually have 172% growth in revenue.

But a lot of it is from having reached some kind of tipping point in the public consciousness. And that I think is at least as much a result of our off-line spend.

Anyway, the search engine marketing tool that we built took us 9 or twelve months, is working well. But it still hasn't tuning (ph) in to do (ph), but it's working well.

The other analytics -- a lot of the technology we're buying is to support the other analytics. It's just we've grown past the stage that we can do things with Excel spreadsheets and hand calculators. We announced the other day a deal with Teradata. It's quite a large deal. We've gone with what I think of as the Lexus Aleutian (ph). My IT guys say no, no, it's not. But we got a big honking Teradata system being built. And they are being terrific with us.

Oracle and some other vendors were going I think really first-class. We've given up on saying we're going to try to develop this ourselves with our own programs and such. We do have collaborative filtering live -- this program we call Propeller. If you go to our Web site, people get bifurcated and put in their control group and another group. So they may have to go back a couple of times. But even within another week, probably 95% of people who visit our Web site will be having recommendations given to them.

And I don't think there's a way I could tell you whether you can tell whether you are part of the control group or the test group. But within another week, basically everybody will be getting a collaborative filtering. We are seeing a nice lift in it. And it's -- what we've really been working on is instrumentation of the test and to have a very precise measure of the lift. And we've just in the last week or two gotten that done. And that -- so we have a very good AB testing system built that's quite precise. And you need it to be precise to tune the system in. So I think we have another two months of tuning there probably. But it's alive and I think it's a kind of a leapfrog in the collaborative filtering. What we've done is we've gone from having no collaborative filtering to having a very advanced package that will work for repeat visitors. What we now have to go do is build the middle layer of collaborative filtering -- the not-so-advanced package, which is a product-based system. But it's actually quite an easy algorithm and should take us this summer to get done.

Aaron Kessler, Piper Jaffray - Analyst

Great. Thank you, Patrick.

Operator

Scott Devitt with Legg Mason.

Scott Devitt, Legg Mason - Analyst

Great. Thanks a lot. Hey, Patrick. First, on the revenue growth rate, the business grew about 100% in the quarter, and I think you just mentioned that still that 60% figure in terms of an annualized number. I was wondering if you could speak to that a little bit if you think the growth rate is going to drop that much throughout the year or if you think 60 is a bit light. And then secondly, in relation to the GAAP number, I think you have been seeing negative 1 to 1% and I believe you just said that it was actually going to be a positive 1% number for the year. And then I had one follow-up question.

Patrick Byrne, Overstock.com - Chairman & President

Okay. Stand by just a moment just to take notes. Okay, on the revenue growth, I was going to tell folks after we finished with 100% in the first quarter that hey, you all have a 60%, roughly, growth rate implied for this year; you can raise that to 70. And if we have another 100% growth in the second quarter, I probably would say you can raise it to 80. I'm hesitant to do that because April came in -- April the first ten days, like I said the first 15 days, I don't know if it was the pope and the malaise or if it was the tax day thing, but we just had a real soft spot.

So I'm not -- if it were not for that, I'd be saying fine, everybody raise -- I'm comfortable with at least a 70% growth expectation for this year. Do I still want to say that? I don't know. I guess I can say you now know everything I know, so if you want to change your number or raise it up or make it 65 or something, that's -- I would if I were Greenspan -- I forget what is his terminology -- favoring up or whatever, yes. I think that we will beat 60. I'm comfortable saying we will beat 60 something really has to go wrong. But I don't think I'm completely comfortable yet saying well everybody can assume it will be at least 70 now.

On the spread, I know last year I said that we would run at breakeven which I define as minus 1 to 1. I certainly am comfortable with that this year. I'm actually comfortable with really redefining the ranges as plus 1/2 to plus 1, is I think a better expectation for this year. So if we grow -- if you go 60%, we do 800 million, that means you should do 5 to 8 million of GAAP net income. And I still think that's reasonable. And you had one more question?

Scott Devitt, Legg Mason - Analyst

Yes. Thanks. This is more of a landscape question. Your business let's say it goes to 800 million this year. About 90% of it is non-media and about 70% of Amazon's business is media. And you're growing at 5 times the rate of the market in the U.S. And it seems like that 90% of your business is more eBay power seller-like than it is Amazon items. And I'm kind of wondering if you could just touch on that a little bit, and this is to your thought process on where the share shift is occurring. Because you're clearly becoming a number three player in the space and I'm trying to get a grasp on where the share shift is coming from. Thanks.

Patrick Byrne, Overstock.com - Chairman & President

Well, thank you. A lot of it is new -- we're still pretty far up on the adoption curve -- I mean the United States is. People are just shifting more, so I don't think we're necessarily taking it out of Amazon's hide or eBay's hide. Certainly not eBay. We're probably starting to make a little bit of a dent in Amazon. But a lot of it is just people switching to the Internet. We also provide a kind of shopping I think people see as neither quite Amazon or eBay like.

I guess going back to the growth, I mean it's a broad question, so I'm going to answer broadly and I hope I'm not evading your question. I think it's -- we do all of our planning around 100% growth because if you do it around the 60 or 70% and 100% happens, you -- Shawn has a term -- decrapitate (ph). And our internal systems, to be honest, not (ph) are decrapitating. That's why we're switching to this other. We've got people nursing the systems along here, the systems we used to manage marketing campaigns and things like that are decrapitating, in Shawn's word. So we are trying a -- but with these new systems, our goal is actually to beef (technical difficulty) -- our dream is that we beef growth back into the 120, 150% range. So where is that coming from? I think that it (indiscernible) -- I don't think it's coming out of eBay's hide. I do think it will be coming out of Amazon's hide, especially on books. We're now having some weeks where we sell 150,000 units. And you know, they sell 2.5 million units in North America a week in books. And so we're starting to make a single digit percentage difference there. But I think mostly we're convincing new people to shift their spending dollars online.

Scott Devitt, Legg Mason - Analyst

Thanks, Patrick.

Patrick Byrne, Overstock.com - Chairman & President

Thanks, Scott. I hope I answered your question. And thank you, analysts, for keeping these questions short so we can get through a lot of them.

Operator

Frank Gristina with Avondale Partners.

Frank Gristina, Avondale Partners - Analyst

Thanks. Good morning, guys. I had a question about the direct versus the fulfillment business at Overstock. You guys have ought inventory in the past on a cash and sometimes a cash-in-advance basis. And just thinking historically, some of these haven't worked and some of them have caused actual consternation from manufacturers. Taking it as a Frank -- Frank Mueller watches and the Tiffany products. And so I think I've received a lot of questions about your decision to purchase diamonds last quarter -- $7 million worth of diamonds. And I wanted to give you guys a chance to talk about that purchase, kind of how the deal came about in an industry that doesn't usually conduct in cash-in-advance basis. Why didn't the seller go through some pretty liquid channels that already exist? And why would you guys want $7 million worth of diamonds when your online competitor has "virtual inventory" where they don't carry the risk -- the inventory risk? So if you're saying -- I want to figure out if you're satisfied with that, if the quality of the stones was what you thought it was going to be. Some people think maybe the stones aren't good stones or even stolen stones. So I just want to give you a chance to talk about that.

And then on a broader basis, maybe you could talk about why you guys would even source inventory -- you already have relationships with manufacturers where you're taking kind of the return risk. Why would you go out on sort of a potential ledge and buy inventory and take the inventory risk as well as the return risk?

Patrick Byrne, Overstock.com - Chairman & President

Okay. I'll hit the first three of those and leave the last to David. Cool, David?

David Chidester, Overstock.com - VP of Finance

Yes.

Patrick Byrne, Overstock.com - Chairman & President

Okay. First of all, on -- I'm just going to hit Mueller, Tiffany, and diamonds. Mueller -- yes, that deal cost consternation. It didn't cause consternation for Mueller, it caused consternation for me. It turned out to be a bad deal, but we bought those from Frank Mueller, so that was that.

Tiffany is a totally different situation. I don't really know -- we are evolving more and more to just saying when we buy branded products like this, we're only going to get them from the manufacturers, because there's just a lot of noise in the world and there's some people who are honest and there's some people who are dishonest and it's hard to tell the difference. Tiffany is a different situation altogether. But there's this lawsuit about it.

I will mention that that lawsuit is about I think 1200 30, $40 necklaces that as soon as we heard that there was a question -- I remember like it was a Thursday night or something that we heard there was a question -- I think we had sold half of them or -- I sent out an e-mail to all of the customers saying someone has raised the question about the authenticity of this. I'm informing you. You now know everything I know. Somebody has raised a question about the authenticity. We thought it was authentic, but feel free to return it, we'll give you your money back. And by three or four days later, when we had reason to -- still don't know, but reasonable doubt the authenticity or have a real question about it, we said folks, we now have a real -- we sent them all an e-mail. We have a real question about the authenticity. This necklace we sold you and if you like it -- if you want to send it back, we'll give you double your money back. So I think we acted as, on the assumption that everything we did was going to be on the cover of the New York Times. And while Tiffany is making a federal case of this, we're trying to be the good guys. We got that from somebody non-Tiffany and I regret it.

Diamonds, there's so much questions has been raised about this. I have heard all kinds of exotic periods (ph). I've not been over in Angola. I have not been over in Sierra Leone. This deal -- I'll go ahead and tell without divulging any -- this deal came about because two people in the diamond business were splitting and they asked a friend of mine to value the inventory. Actually that's a friend of a friend of mine to value the inventory for them. And they had to figure out who was going to pay what and stuff. And they were having a nasty split.

And this friend of a friend went in and he gave a value and said, look, I can find a buyer. And anyway they called -- he called my friend. My friend called me. And we went in and said yes, we will pay it. We paid 7.2 million and I think we took a turnaround the next two weeks. So we came up with a wire for 7.2 million and got it. And it was on sort of -- all on a three-hour basis -- not three hours, but overnight basis.

So that's how we got the diamonds. And we could I'm sure flip them the next day for -- or within a week anyway for 8 million. We can probably piece them out in fairly large blocks for 8.5 million, but instead, we decided to set on it. It is probably 10 million to $12 million worth, or 10 million at the normal jewel low-level and 12 million at the retail level.

So it was a -- I think we probably could have made 500,000 in a week if we just wanted to get out of them quickly. So it was really just a matter of being in the right place at the right time and having some cash -- it's with a partner that we did -- it is with a colleague, not a shareholder partner in the sense we use that word here, but it's with somebody we've done business with before -- quite a bit of business. I think $25 million or so business last year in diamonds. And we have done a lot of great business together. So that's the story of the diamonds. I know that there have been all sorts of exotic explanations.

So then, Dave Chidester, why would you say we do -- why don't (ph) we just do everything on a dropship basis?

David Chidester, Overstock.com - VP of Finance

Right. Frank, you have a good point. The partner business is a wonderful business. We can set up relationships. They dropship for us. The only risk we have when items get returned. However, there are a lot of manufacturers. There's a lot of inventory out there that manufacturers can't dropship. They just don't have the ability. And there's inventory we could never get if we didn't have a fulfillment operation. Bankruptcies, international sourcing, there's a lot of places whereby us being able to do both a partner business and a direct business, we can get access to inventory no matter how -- no matter what shape or form it is in.

So, sure, we've made some mistakes, and we have done some buys, but we just need to get better at that. We look at each deal and decide economically what makes the most sense. And if we've made some mistakes in the past, those were some buying mistakes that we are trying to eliminate. But really, in the big picture, having both a dropship business and a direct business allows us the flexibility to get access to any deal that comes our way.

Frank Gristina, Avondale Partners - Analyst

Great. Has the mix changed in terms of what you're sourcing directly from manufacturers versus what you're kind of buying from the jobbers? And does that continue and where do you see that?

David Chidester, Overstock.com - VP of Finance

Yes, I mean we -- once again, we look -- it's an economic decision. And so if we can find products we can direct source that make sense economically, we'll do that. But the main business is still buying excess inventory and I think it always will be.

Patrick Byrne, Overstock.com - Chairman & President

Yes, just to put a footnote on that, you can think of there being three tiers and there's really more, but the manufacturers, the distributor tier and the retail tier. And there may be five or six tiers really. But the manufacturers are generally unable to dropship themselves. And you've got buy and step in and when they want out of a lot, they want out of a lot. The distributors and the cataloguers, they can do the dropshipping. So it really depends on where in the supply chain the excess inventory is accumulating.

Frank Gristina, Avondale Partners - Analyst

Great. Well, one more question, back to the diamonds -- have you been able to place any of them into rings and sell them yet, or is that something you're expecting during the holiday season?

Patrick Byrne, Overstock.com - Chairman & President

No, that's doing -- it's not doing much yet. It's doing, I think we did 50 grand or something last month. It's a new business. We did -- you're the fellow (ph), Frank, that sent me that guy's article; I did some research on 38 -- some blogger wrote something about the mystery of the 38 diamonds. It was actually I think 44 or 42. He hadn't done his homework, but yes, we sold them off in the lot. We sold off 44 diamonds for a nice little profit in a lot. So these diamonds are sitting in New York and over on 47th Street and in a big safe and we're actually moving them in pieces. I think that was actually two lots -- actually moving them to people out of there in the jewelry business, still at a discount. So we'll be wholesaling some lots but selling them one at a time. But the one at a time sort of design your own jewelry is really just doing 20 to $50,000 a month at this point. But it's early days.

Frank Gristina, Avondale Partners - Analyst

Great. Thanks, guys.

Operator

Paul Keung with CIBC World Markets.

Paul Keung, CIBC World Markets - Analyst

Good morning. As you -- three questions. I guess first, as you sort of plan out your future, I'm trying to understand this Q (ph) -- you're trying to develop a plan for like 100% growth, at least that's the target. Your CapEx this year could be 35, 40 million. How should we think about the sort of delivered CapEx or the plan in CapEx over a longer period of time? Is there any sort (inaudible) levels?

The second question is (inaudible) million dollars in sales (inaudible) 5 to 8 million in GAAP net income. Is that inclusive of some of the higher spending levels that we're looking at now?

And the third is, given the slowdown in some of your traffic in early April, can you handicap (ph) the probability you could see some unanticipated spending and sort of offset what we've seen so far?

Patrick Byrne, Overstock.com - Chairman & President

Well, I'll take -- not sure I understood your third. Let me get back to it. On the hyper growth, if you extend now what we -- if we discontinue -- as I said, we've been growing 105% now compounded for the three years we've been public and then we just did 102%. If you extend that, the year after next would be 4 billion. Well, do I really think we could do 4 billion the year after next? No. Do I think we will? No. But I want to be able to in case it happens. And that's been the debt we've made all along the way. And in this case, it meant migrating -- we would come apart at the seams at sort of that 1.5 to 2 billion level, we realized. We really realized this Christmas. We just found where the choke points were and we found that we keep tinkering with them and keep trying to expand them and such. But it was time to get off the low-end Dell boxes and stuff that we were on -- I mean Dell is a great partner and we still have a lot of dell throughout the system and even the new system. But it was time to start getting into some pieces or equipment as well as all the technology associated with analytics, which we've been trying to do on the cheat (ph) and we just realized you can't get down to cheat.

So we're migrating to this whole new architecture and new platform, which is a mix of IBM and Dell and Teradata and Oracle etc. And the nice thing is, theoretically, some of that stuff is going to help us accelerate. I'm we think now in terms of what happens if we're growing -- if we get to growing 120, 140%, we're now doing our planning around that. Although it's just geometric progressions, (indiscernible) their own anchors; it's the nature of things. Our growth rate is going to at some point tick down from 100 to 80, to 60, to something more secular.

And I don't think that was what we saw in the first part of April. I think that we actually saw -- it was so abrupt, I think it was something -- I don't know what it was. So in the first half of April, maybe I've just got to remember tax day.

As far as the CapEx, I don't think -- it's not an ongoing thing. We migrate from the sort of the kinds of system we started with to this new set of IBM P5s. Shoot I could be an IBM salesman at this point with what I've learned about them and Dell and so forth. But from that point, there's not any abrupt transition to mainframes. The systems we chose to go with, which are the mid-level IBM P5s are processors expandable to 16. And so that will be able to accommodate a bunch of growth, and even after that, there's another level of P5 that's 16 expandable to 64. So you won't have, I think for quite some time, like the 8 to $16 million level, this kind of sharp break where we have to go out and just completely rebuild from scratch a whole new set of layers of our technology.

Was my estimate of saying we should be able to make 0.5 a percent to 1% this year inclusive of the marketing spend that just happened the first quarter? Yes, it was inclusive of the first quarter.

And three, I didn't quite follow three, Paul; I'm sorry.

Paul Keung, CIBC World Markets - Analyst

No, just trying to -- given what we saw in the float on April, I'm just curious whether you're thinking you might just have to spend more money to make up for some of the lost sales in April so far.

Patrick Byrne, Overstock.com - Chairman & President

No, it's not really a -- maybe to a small degree, but I think that you'll see -- what was our marketing as a percent of sales? 10.2 this quarter? I think you should see that drop a point anyway in the second quarter, even given the slowdown in April.

Paul Keung, CIBC World Markets - Analyst

Thanks a lot.

Patrick Byrne, Overstock.com - Chairman & President

Thank you, Paul. Thanks for picking up coverage. Even though it is a cell. It's okay. (indiscernible). We really -- it's just nice that people are paying us some attention now. And I totally respect the people who are intellectually (ph) honest and this call is (indiscernible). So that's very cool.

We have -- we're reaching -- it's 9:30. We've gotten through quite a bit of our analysts. Let's go on. Let's go onto the next person.

Operator

Steve Ju with RBC Capital Markets.

Steve Ju, RBC Capital Markets - Analyst

Thanks. Two questions. One, it was helpful to see the repeat revenue analysis. I'm wondering if you can provide a little color on what you've seen with order frequency for a customer -- is it 1.2, 1.5 times a year? And have you seen any improvement there?

And then the second question, just with regards to some of the different categories, just some color on how you're feeling the cross shopping is doing, or how you're feeling the merchandising various categories looks and maybe just a little bit of comment on the inventory levels -- or how you feel in terms of some of the aging at this point.

Patrick Byrne, Overstock.com - Chairman & President

Okay. Cross -- I'm just making notes on that. On the 1.2 to 1.5, I'm not going to give you that number, but I will give it to you next quarter. I hate to say it, but these are the kind of numbers that we're just now getting around to looking at, which some people are going to find laughable, because it's like step one in the catalogue company to know those things. We're just getting around to looking at that. I do have a rough idea of the number and you're in the vicinity of it, but I don't want to give you a number until I actually know it. But I should be -- three months now, I should be able to give you that number. Is that cool?

Steve Ju, RBC Capital Markets - Analyst

That's fine.

Patrick Byrne, Overstock.com - Chairman & President

Okay. Cross merchandising -- well one thing to know is from our auction customers -- are coming in and turning into shoppers, which surprised us. But we did over $1 million in the last quarter just from people who first came to us as auction customers. Really promoting the cross merchandising is on the one hand, there's a spark to it and it's what the buyers do and it's what the team does. But the real cross merchandising is going to come when -- as I said in my letter, we've broken up this congealed mass that was this one big database that just got to the pointing we couldn't do anything with it. And one of the things pieces we're breaking out is all the customer information. So all that customer information goes into an Oracle customer hub, which should be live in another four or five weeks.

And the whole theory is you get this unified view of your customer, whether they're going into books, whether they're going into shopping, whether they're going into auctions or eventually travel or anything else we might do. All the information is being sucked away from the system that support those various tabs into one hub. And then your analytics can run off that hub. And so it should enable our analytics to get a lot better.

And then the cross merchandising, it's driven by that system rather than sort of subjective estimates up in front. It may turn out that people who are buying a certain type of book when they go into shopping, we should be showing them -- people who are buying Paul Thoreau, we should be showing them vacation packages for South America. Well, we're never going to know that by just having people try to guess. But by getting all the data broken out of the one big customer base and do a -- into a dedicated customer system, providing a unified view of all the behavior -- what they're clicking on, what they're buying, what they're revisiting -- and then running our analytics Teradata and the system we call it the teller, off that customer hub, we should be able to find the meaningful patterns.

So cross merchandising is -- we're trying to make it less and less of a -- and by the way, we do know there are some categories that are quite good at getting customers who come back and become very good customers across all categories. It's really encouraging that we're seeing there's three or four places we know hey, these are (ph) the customers, the customers to get. They become regular customers.

Aging -- I've never -- Dave, why don't you -- I feel great about the aging. We really have cleaned things up, but Dave, why don't you talk about the aging?

David Chidester, Overstock.com - VP of Finance

Yes, we've just run -- the last four or five quarters, we've run our days on hand at a steady rate. We're very proactive in analyzing inventory. And we don't put inventory on our books that's not sellable. As soon as we determine it's not sellable, it's written off and then we find ways to get money for it. But no inventory that we know isn't going to sell sits on our books at anytime. So I think we're very conservative in how we show inventory. And like I say, the days on hand, it's run up (ph) consistently for four or five quarters, is right in line with our plan.

Patrick Byrne, Overstock.com - Chairman & President

Yes. In fact I wish that we had more inventory. I'm always worried in the back of my mind that we're choking sales by not having sufficient inventory. But financially, it all just looks like we're doing just fine. And (indiscernible) especially since we have so much cash, I kind of wish we had another 5 to 10 million of inventory. But on a financial basis, by any analysis, it's fine where it is.

Steve Ju, RBC Capital Markets - Analyst

Okay, great.

Operator

Craig Bibb with Hambrecht.

Craig Bibb, WR Hambrecht - Analyst

How -- so it sounds like market is going to back off about 100 basis points in the current quarter and longer-term I think you'd want it to kind of 8, 9%. How much does sales slow as you back off on marketing?

David Chidester, Overstock.com - VP of Finance

Well, I think that another way of saying that we wasted 3 million in the last quarter is to say that you could cut 3 million and not have it slow at all. That's what it means, it was wasted. And that's basically where we are. We wasted -- I wasted -- 2.5 to 3 million, made a mistake. So if everything else had just stayed the same, I would think that we could take 2.5 to 3 million out and not have a slowdown. I am afraid of coming off the step. Or I want to stay up on the step until it just becomes prohibitively expensive to keep this thing up on the step, meaning 100% growth and such. And -- so there's going to be a question of how much we have to -- I don't quite know how to think about the first part of April. So I'm not going to go there. I just don't how to think about it. And if it were part of an ongoing pattern then I might think hey, we have to -- we do have to keep things at the 10, 10.5% level through the rest of this year. But I think that we're going to see sales come back and I think that it was a temporary phenomenon.

Craig Bibb, WR Hambrecht - Analyst

And then with gross margin, it sounds like if you get rid of $1 shipping, you basically go to 16%. And the efficiencies in the warehouse get that up another 50 basis points from there or is it 50 to 100 basis points from the 15?

Patrick Byrne, Overstock.com - Chairman & President

It's 50 basis points from the 15. I think you can count on each quarter. Because we may do something else like $1 shipping. Maybe we do $1.5 shipping. Maybe we do to $2 shipping. So we'll try other things this quarter. So it won't be as if we're running at the 2.95 the whole time.

Craig Bibb, WR Hambrecht - Analyst

It seems like sales slowed immediately after you got rid of with $1 shipping when you're not pointing to that as the reason for the slowdown.

Patrick Byrne, Overstock.com - Chairman & President

Well, it did stop in March. The dollar shipping stopped in March, and yes, early April we had the slowdown. But the truth is that at the end of March, other than the last day of March, we started to see some softness. The last few days of March other than the last day, we started to see some softness. So you have to ask, was the drop in April -- did the $1 shipping, maybe all it did was it accomplished shipping some spending from early April into March. Maybe that's what it did. Maybe, though, on the other hand, maybe it's because the pope was sort of sick the 27th, 28th, 29th and then he died and then there was ten days. And maybe that was what happened. Or we look at last year and we see there was a very similar phenomenon from about March 15th, so maybe it's tax state. We haven't really quite disaggregated that, but you now know everything I know.

Craig Bibb, WR Hambrecht - Analyst

Okay. And then my last question, on auction, what has to happen for conversion to get up and for conversion to increase and to make it economic for your sellers to list there?

Patrick Byrne, Overstock.com - Chairman & President

Well, three things. And by the way, somebody just handed me a question. To set everyone's expectations, we have five more folks on the phone. I will take -- will be taking these five people. Brian Bolan, Derek Brown, Shawn Milne, John T. Binger (ph) and Jim Krueger (ph). So we've have five questions and I know we're into the trading day.

What has to happen for auctions? There's one thing that's going to happen very soon is we have say 100,000 -- is we're going to integrate search. We're going to integrate search between our shopping and our auction. Now what's the effect of that? Our auctions have about 100,000 people a day, so that's 50,000 of them search and they the search about six times each. So that's 300,000 searches are performed per day against our auction database. Our shopping site has a million visitors a day of which about 220,000 search. They search for five times each, so there's about a million searches. What we're about to do -- what we should be doing -- really we've solved the problem technologically and it's just a couple weeks of -- three lines of dollar script (ph), as I would say. Is getting it so that when people search on shopping, we're going to -- they'll have -- right now, they see BMV results, other category results and that's it. There's going to be a third tier where they see any results from auctions. Now we are not going to open up every Tom, Dick and Harry on the auction site to have their products show up in our shopping searches. We're sort of going to select and vouch for certain -- like a trusted seller -- certain sellers are going to allow that we can trust and so forth, we're going to have their products show up in shopping.

What that means is, you're going to have sort of a 4 to 5 times increase in the amount of search traffic that gets exposed to auctions. I think that's going to do something for auctions. And then secondly, we really have not yet cracked. We've gotten good on key word searches like Overture and Google versus in our shopping system. But we really have not gotten resolved the system that buys the right key words to drive traffic to our auction site. We're working on it and it's doing something, but we've got to resolve that. Then there's a third system, there's a third element, which is just -- I don't want to say; it would give some of the competitive advantage. But there's a third thing -- I'd say it's on the order of those first two things. So we have three more cards to play in the next month or two.

And you know, in answer -- that guy Frank Gristina like I said, that blogger stuff -- but I certainly don't want to leave anybody with a misimpression. I'm not running around saying hey, I know our searches are going to work -- I mean our auctions are going to work, or hey, we're going to be 20% of eBay or something. I don't know if auctions are going to work. I know that there's all of these obvious reasons that they look like they're not going to work. eBay is huge and deep pockets and they have got a great brand and they got there first and they got liquidity. So there's all the obvious reasons -- people say well auctions would never work on Overstock. But there's these other reasons that say maybe it might. And that is we've got discount-seeking traffic that is a large amount of traffic; it's now about 1/3 or 1/4 of eBay's domestically, that already knows how to do auctions and they already -- they're looking for discounts. And we have a lot of disaffected eBay sellers that we can cater to and we have built our site sort of listening to them. So here's these -- and now here's these three more things we're doing and we're integrating search and we're getting the key words resolved and there's this other program. So now you know essentially everything I know. I don't know if they're going to work, but that's business.

Craig Bibb, WR Hambrecht - Analyst

Thank you.

Patrick Byrne, Overstock.com - Chairman & President

Thank you, Craig. Go ahead, Gwen.

Operator

Brian Bolan with Marquis Investment Research.

Brian Bolan, Marquis Investment Research - Analyst

Thanks for taking my call and appreciate your candor, as always. If you wanted to speak for just a few minutes on the travel end of the business? I know you've got the cruise engine up and running. How is that going? And then when you expect to see the rest of the items come online?

Patrick Byrne, Overstock.com - Chairman & President

The cruise is -- cruises are going nicely. We tick along. We're doing -- cruises are doing nicely. It's not turning the world upside down, but we have a nice little cruise business ticking along. No complaints whatsoever.

We did think we would be live in April and it is set basically to June now. And part of that is mission creep. We were building some pretty cool technology in travel for the hotel, especially for the hotel and vacation package area. And we're building what's called an IBE -- an Internet Booking Engine. And it looks like now to me June is a reasonable expectation. We should be testing in May. You know, that's, again, something I think people -- I think there's a real market for specialty overstock discount packages. Based on travel, the fact that we give it no promotion within the site -- there's just a tab at the top and based on what cruise has done, I'm actually -- I think this could be very nice for us. But time will tell.

I don't have really anything more to say other than cruises are doing well. I think we're doing about $1 million a month in cruises. And so it's not -- and I'm sorry, $1 million a month in bookings on a GAAP basis, that's 40,000 or something. But the fact that that's happened without any promotion or anything, people are just finding their way there to it, that tells me that there's a lot of latent demand in our traveling.

Operator

Derek (ph) Brown with Pacific Growth Equities.

Derek Brown, Pacific Growth Equities - Analyst

Hi, thank you. Eric (ph). How are you doing? Two questions. The first is on the marketing front, you seem fairly confident that you "wasted" I don't know whether now it was $3 million on marketing. And I'm curious, how you -- what you're doing to test whether that was actually wasted or not. How do you know that was -- you threw that money away? Are there measurements or gauges that you guys are using? Number one.

Secondly, in terms of the sort of the profit margin forecast you guys are giving, just in terms of 0.5 % to 1.5%, I'm just doing some back of the envelope and having a difficult time getting there based on the growth rate you guys have talked about and the gross margin and G&A assumptions you guys are talking about. It seems like there's just -- doesn't leave enough room for sales or for marketing -- certainly not relative to what you will have done during the first half of the year. So I'm trying to figure what I'm missing there.

Patrick Byrne, Overstock.com - Chairman & President

Okay. The -- I might have misspoke or maybe I misinterpreted. I'm don't (ph) think (ph) that if you're not 0.5 to 1.5. I'm saying 0.5 to 1%.

Derek Brown, Pacific Growth Equities - Analyst

Okay. I mean, even so --?

Patrick Byrne, Overstock.com - Chairman & President

Okay. Fairly enough. Just being clear. So G&A, I said in my letter, I think we could see, because of the depreciation and all of these costs and the people that we're bringing in for this year to help us build these systems, a lot of them are from these big-name companies or sort of consultants coming in and building systems. Assume well how do you get there -- if we really only sell 800 million this year, we won't be able to get there. We've got to sell more than 800 million to get there. So --

Derek Brown, Pacific Growth Equities - Analyst

I mean -- it's sort -- that's part of my question. It seems that in order to get to the profit numbers you are talking about, there has to be a much higher growth rate than 60 to 70% that you've talked about.

Patrick Byrne, Overstock.com - Chairman & President

Well (indiscernible) marketing has to be a little bit more efficient, 8% and maybe our margins can get to 16, 17 by the end of the year, in which case it all works out. You've got to triangulate because there's three or four different pieces actually that have to come together.

Derek Brown, Pacific Growth Equities - Analyst

Okay. And so then as sort of the follow-up to that I guess, which was my first question, why are you so sure that you wasted marketing money? And if you remove it, things don't change?

Patrick Byrne, Overstock.com - Chairman & President

On a -- it's -- the amount that I consider pure (ph) on us (ph) got (ph) waste (ph) 2.6 million and I know. And I can tell you I know down to the ZIP code and I can't give any more data than that. But that's a ZIP-code-based analysis tells me that and I'm very confident in it.

Derek Brown, Pacific Growth Equities - Analyst

Okay. Thank you.

Patrick Byrne, Overstock.com - Chairman & President

Okay.

Operator

John Hibinka (ph), private investor.

John Hibinka, - private investor

Thanks for taking my call. I think I'm going to try to ask the question that the previous caller just asked in a different way. You have kind of a number of variances on your press release that negatively impacted earnings and the bulk of which were marketing experiments. Was there anything that you did that kind of surprised on the upside that would have positively impacted the income statement? And then I mean just can you talk in general about your budgeting process and how we can avoid large marketing experiments in the future? I think one of them you pointed to cost $0.13 a share. Thank you.

Patrick Byrne, Overstock.com - Chairman & President

Okay. Budgeting processes is -- (indiscernible) cannot point to anything that surprised on the upside yet. I think we had more sales and higher margins (indiscernible) than anybody expected us to and much higher gross profits than anybody expected us to. As far as experiments, remember, everything that works on our -- that does work within our system, I mean we could just stay for the things that we know already work. But remember that everything that does work is itself the survivor of some earlier set of experiments where we tried four or five different things, we found the one that had the best results. And so we can just now say okay, let's not try any new experiments. Let's just stick to the things we know.

I'd say the ratio of -- in what we do, the ratio between things where we know exactly what we're doing and exactly what the results are that we're going to get versus the new experiments has gone from being sort of 1 to 9 to being 7 to 3 or 8 to 2.

I do -- this marketing experiment in particular is the last. It was kind of a oneoff thing and it was an all or nothing thing, and it was outside our normal budget. But we actually have a very precise budget. We just did something -- I decided to do something that was outside our budget. And some of the things we've done in the past outside our budget work out. Some of them don't. Okay. Gwen?

Operator

Shawn Milne with Friedman Billings Ramsey.

Shawn Milne, Friedman Billings Ramsey - Analyst

Good morning, Patrick. Last but not least. Hey, a lot of questions have been asked. Let me just ask quickly on books, music and video. What are you seeing right now there? I know you've been trying to -- you're not concerned about that as a percent of sales although you've been trying to (inaudible) it down a little bit. Any impact on profitability? And what are you seeing with -- any color on Amazon Prime? Thanks.

Patrick Byrne, Overstock.com - Chairman & President

Well, we don't have a goal of trying to make that 10% 8% or 15%. We do have a goal of it growing very aggressively. I'm mentioned last quarter, we're trying to get to a million units by September, in September -- a million units of BMV in September, which I think puts us about roughly 1/10 the size of Amazon in North America in books, music, video.

We have some technological hurdles, impediments that are I think in our way that we're going to have to clear up this summer on that. And I'm sorry. What was the other part of your question?

Shawn Milne, Friedman Billings Ramsey - Analyst

I'm just wondering if you've seen any change in consumer behavior on your site relative to BMV now that they've rolled out their expanded shipping initiative in Amazon Prime?

Patrick Byrne, Overstock.com - Chairman & President

No, I don't think we can disaggregate in our results, and I don't think Amazon Prime has had -- I don't know how Amazon Prime has done. I think I mentioned last time I was surprised at how they constructed it. But I think it's smart of them to do a loyalty program. I don't see -- I'm actually probably I probably still count as a loyal Amazon customer, because when I can't find something, I'll buy it from them and I buy a lot of things. And I can't imagine joining Amazon Prime. But maybe people are doing it. Maybe bookstores are doing it. But I can't find in our members any evidence that there's been such a widespread adoption of Amazon Prime that's hurting us.

We reach, I think, 93% of ZIP codes in America. And we get the order in by I think it's 1:00 Eastern time, well 20 minutes to 1 because it takes us 20 minutes to transmit it to our warehouse. And the person will have it two days -- it will be sent that day and it will reach the person within two days in 93% of the ZIP codes in America. So I don't see the advantage of Amazon Prime when somebody really knows all those facts. And that's just using our normal shipping rate. So I hope I answered your question. And Gwen, last question, a Jim Krueger (ph).

Jim Krueger, - Analyst

Hello, Patrick. Congratulations on doubling the top line and your tripling the gross profit. If you could talk about two things, please. First, gift cards have maybe been with you now for maybe 4.5 five months. How would you characterize them? Have they behaved as you expected? And then more globally, in 2004, and particularly in the fourth quarter, you were very successful in creating value for owners. How would you characterize that performance in Q1?

Patrick Byrne, Overstock.com - Chairman & President

Okay. On gift cards, we have a wonderful vendor. We tried doing gift cards by ourselves and the accounting and -- this is some years ago, we couldn't get done. So we didn't have big gift cards for several years. We finally got a vendor who we outsourced part of this to. Just stand by a moment. Rich Calgo (ph), do you know the name of that vender? Well I wanted to give him props because it's a terrific company. And they actually handle the back end of our gift cards. We now have a pretty sophisticated gift card system where you can choose cards and they actually get mailed and they're very nice, glossy -- it's a really first-class operation.

Unidentified Company Representative

Patrick, they are called Arrow Eye.

Patrick Byrne, Overstock.com - Chairman & President

Arrow Eye. Thank you. Arrow Eye. Well, now we did have some glitches at Christmas and part of that was we of course were rushing at the end to get it implemented and smoothed out. There were a few glitches at Christmas. They have been resolved. And I actually had one little glitch last week, and now I think it's running beautifully.

And as far as the amount that we're selling these cards, people use gift cards a lot. I'm kicking myself that I let all of these years go by without having gift cards because -- I'm not ready to give you a percentage of our sales that are gift cards -- I mean it's a probably an insignificant percentage overall, but it's just the fact that I've been leaving that amount of hard dollars on the table makes me kick myself. So this Arrow Eye group, and it's a really first-class company. In fact, I'd have to say it's rare that I hear people in this company speak so highly of a vendor, but they're just a marvelous (ph) group.

In terms of value, and I'll close on this note. The value for our shareholders -- I try -- it's funny when I hear guys like Herb Greenberg, (indiscernible) Jim Kramer and they're talking about how I manage my stock. I think I'm the least managing CEO in America. I don't manage my stock at all. I'm trying to give people the facts and -- if I say anything beyond the facts, people say oh, Byrne is starting to spend it and Byrne is trying to -- I'm not trying to spin (ph) it. So I'm a little loathe to answer that question. But as I, internally, we're not dancing around in joy because we see that there are -- we've got a little of this -- well, it isn't so much that there are problems we have to fix because they're just decisions I made that said let's try this, let's try that, oh, that didn't work; okay, we kill it. It's not like it was three years ago we were saying, how are we going to get this margin up? How are we going to solve this returns problem? It's all solved.

So when we have variances, it's because we're making conscious decisions to try and stop. We're very happy. I mean I'm glad you asked. We're very happy with it. I'm not trying to spin anything. And shareholders, we've tried to give the facts and I've tried to give the facts extremely candidly and everybody makes up their own mind.

I'm extremely happy. I think that three years from now and everything works out like we anticipate, people are just going to look back and think holy cow. These guys were growing gross profits 194% -- tripling gross profits. How did the world miss it? How did the world miss this steamroller that was barreling down at it? I don't know, but it's fine with me if they miss it. I know I've got some shareholders who wish that things were different. But we're here just feeling great. You know, great. Yes, we've got some things to fix and stuff, but we feel really on top of things. So I hope that answers your question.

Okay. Gwen, are we -- that's the last of the people and it's 10.00 Eastern, so I better shut up. I want to thank everybody for attending. I again want to thank Kathryn for a couple years of great service. She won't be with us after another few weeks, moving back.

More -- David, do you have any closing remarks you'd like to make?

David Chidester, Overstock.com - VP of Finance

No, I think you've said it.

Patrick Byrne, Overstock.com - Chairman & President

Okay. Well, I welcome all the new callers. We had -- I didn't even check how many callers, but I know that we had several hundred when we started off. So great. Great, we have about 500 between online and just on the telephone. Thank you very much. We look forward to talking to you in the three months. Bye.

Operator

Thank you, everyone. That does conclude today's conference and you may disconnect at this time.

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Source: Overstock's IR website.

Source: Overstock Q1 2005 Earnings Conference Call Transcript (OSTK)
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