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Here's the complete transcript of Overstock's Q4 2004 earnings conference call. The accompanying slide presentation is here.

Other OSTK conference call transcripts: Q2 2005, Q1 2005.

Transcript provided by Shareholder.com

Overstock Com Inc [OSTK]

Q4 2004 Overstock Com Inc Earnings Conference Call

28 Jan 2005 08:30 (ET)

Corporate Participants

David Chidester - Overstock.com - VP, Finance

Patrick Byrne - Overstock.com - Chairman and President

Conference Call Participants

Bill Lennan - WR Hambrecht - Analyst

Scott Devitt - Legg Mason - Analyst

Scott Schleffer - Tiger Technologies - Analyst

Derek Brown - Pacific Growth Equities - Analyst

Glenn Krevlin - Glenhill Capital - Analyst

Ron Strauss - Ardmore - Analyst

Aaron Kessler - Piper Jaffray - Analyst

Frank Gristina - Avondale Partners - Analyst

Mark Mahoney - American Tech - Analyst

Bob O'Brian - - Investor

Reid Friermuth - Shimono Group - Analyst

Overstock Com Inc [OSTK]

Q4 2004 Overstock Com Inc Earnings Conference Call

28 Jan 2005 08:30 (ET)

Operator

Good morning. My name is Pam Bass and I will be your conference moderator today. I would like to welcome everyone to Overstock.com's fourth quarter 2004 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, February 4th. The replay can be accessed by dialing 888 203-1112 and entering the access code of 300488. At this time I would like to turn the conference over to the Vice President of Finance of Overstock.com, Mr. David Chidester. Mr. Chidester, you may begin.

David Chidester, Overstock.com - VP, Finance

Thank you, Pam. Good morning and welcome to Overstock.com's fourth quarter 2004 conference call. In addition to myself, 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, January 28, 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 shareholders 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 meanings of section 12 A of the Securities Act of 1933 and section 21 E 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, 8-K and F1.

I will now review the financial highlights for the quarter and the 2004 year. Unless otherwise stated, all comparisons will be against our results for the comparable period of 2003. Total revenue in the quarter was up 80 percent to 221 million; for the full year revenue was up 107 percent to 495 million.

Excluding auctions, gross bookings were up 82 percent to 237 million. However, within gross bookings, B2C gross bookings grew 95 percent to 233 million. For the full year, gross bookings grew 84 percent to 541 million but B2C bookings grew an even faster 106 percent to 522 million.

Gross margins were 15.2 percent in the quarter, up from 9.6 percent, as a result, gross profit dollars increased 186 percent to 34 million. For the full year, gross margins were 13.3 percent, which translates to 158 percent growth in gross profit dollars compared to a smaller 88 percent growth in operating expenses.

In Q4, net income was 2.5 million or 12 cents per share compared to a net loss of 3.2 million or 19 cents per share. For the year, our net loss was 5 million or 1 percent of revenue. This was a 400 basis point improvement from a $12 million loss or 5 percent of revenue in 2003. And also resulted in a loss per share improvement from 75 cents to 29 cents.

We ended the year with 287 million in cash and marketable securities, with positive operating cash flow of 37 million in Q4 and just under 25 million for the full year.

Lastly, I will give a couple of metrics that Patrick won't be covering in the webcast. Average invoice was $92 in the quarter. Repeat revenue was 52 percent of total revenue in Q4; and the BMV business was 11 percent of our total gross bookings in the quarter and 11 percent for the full year down from 14 percent in 2003. That covers my overview. I will turn the call over to Patrick.

Patrick Byrne, Overstock.com - Chairman and President

Good morning, everybody. This is Patrick. I have four quick preliminary points. One is, if you are listening and want to join the PowerPoint presentation I will be going through, go to our website on the lower left-hand side. In the Features, there is a button that you can click through that takes you through the PowerPoint. It says Earnings Report Conference Call.

Secondly, Club O Gold. I am going to make a quick commercial pitch. Club O Gold costs $99, you save 20 percent on your office supplies. And if any of you 500 people out there, buy more than $500 a year of office supplies, join our Club O Gold, you'll make it back just in your office supply savings and you'll get killer deals everywhere else.

Third, if you want to ask questions, my partner here Rich Poungo (ph) has had -- just been having a technical glitch for a moment on the screen showing what colors are on the line and such. So in case he doesn't get that back up I want to announce to everybody if you want to ask questions, all you have to do is do what the operator said. We have a screen here that will organize what's the right order to take people. (INSTRUCTIONS)

So Q4. Great Q4. I am absolutely thrilled with these results. This is terrific. I, of course, have given up trying to understand how Wall Street views things; but for three quarters we have been writing earnings releases and I have been telling you about Building the Ark, I think I called it. We are building this ark and we built the ark, the wave came, we rode, the ark rode the waters magnificently.

You on the outside see the financial results. We are always dealing with system issues. Our systems were just fantastic.

Secondly, we did what we said we were going to do. We walked the talk. We said we were going to tighten operations. I remember, last year on the January call we were saying, "There's 200 to 250 basis points to take out in cost savings." I was actually saying it may be as much as 400 and people were all looking at me like I was crazy.

We pulled out almost 600 basis points in savings in our margins this year. Quite a bit more than even my outlandish suggestion. We finished four stock work projects. Launched Club O which is, I think, the best consumer loyalty program on the net. Club O Gold, which competes head-on with Costco but with better pricing, and it is just getting wider and wider.

We launched an auction tab that competes directly with eBay. Did it for a couple of million dollars and you may not think we have a snowball's chance of doing it but I think we have already become if there is anyone who is going to compete with eBay, it is -- maybe it is going to be us.

Fourth. As of this morning, I do think -- I think the press release went out about 30 minutes ago, but we have opened our own Build Your Own Ring site. Something like Blue Nile. But it is where you can think of the diamond industry, up to $1000 is really controlled by Zales and Wal-Mart and mall jewelers and Blue Nile operates average order size is about $5500. We intend to dominate in the $1000 to $5000 range. Fantastic pricing.

We did a $7 million deal on diamonds that was the steal of a lifetime. Just fantastic pricing in there.

Then of course, we developed, in the last year, our BMV tab to be fully competitive with Amazon. We got hundreds of thousands of new books -- generally 10 to 15 percent of Amazon. So there are a bunch of skunk works projects that we said we were going to do. They all got delivered.

Two others have moved from the drawing board partially into production. One is travel. On January 1st the tab went live again and now just has cruises, which are doing very nicely. You will see in the next four to 12 weeks, the rest of those categories fill in.

Third point, the income statement. People who know me think I am the last guy in the world to talk about pro forma, but I do want to tell you our view of the economics. At one end, you can be completely literal and say, "Okay, our income statements says we made $2.5 million."

A different way of looking and let's say, the other extreme, is we view internally sort of about $9 million of earnings power late in our system from this last quarter. We did a number of things that you don't see.

First of all, we launched auctions, which cost just about $2 million. We bought the online distribution rights to a movie that answered Michael Moore's movie, "Fahrenheit 911". This was called "Fahrenhype" and in interest of fairness we were always completely neutral, always showed on one side of the page Michael Moore's movie, on the other side of the page, the "Fahrenhype" movie.

We lost $700,000 on that transaction so far. I mean it is just getting better as we sell more units. We are down 700,000. On the other hand, we got 70,000 new customers for it. That was a $700,000 hit.

Next, we had a vendor comp charge of almost $1 million. We have a number of vendors that we've made special arrangements with and we've kind of sweetened things for them with some stock options in the past. Those options, since they are not employees, the way we expense them is different; and there was almost $1 million, over $700,000 of that.

Then two more things. I decided in December, I am sort of a fanatic on not letting our warehouse ever turn into a museum. I decided in early December, let's just flush everything that has been around more than a few months. Our inventory has never been this clean. We just marked down, promoted, did whatever we had to do to blow out the older inventory. I lost $1.5 million on that inventory to move it all. But our inventory has never been this pristine.

And then, lastly, something I wanted to tell you is I paid a $2 million bonus around the Company; took $2 million and sprinkled it all around the Company. I did that because these folks have coughed up a lung for five years. They are way underpaid compared with the industry, way underpaid compared with the qualifications and must have been here for many years and have coughed up a lung; and I think this was a banner quarter for us. When I looked at the results I said, "It is time I do something nice." I took $2 million and I really touched people and people here are ecstatic. You have never had such happy employees.

You put all that stuff together, it is about $6.5 million. So, one, I'm not doing this to say, "Well if you just set aside these onetime charges and this and that and pro forma, we have made $9 million." I don't play that game. But I am always trying to show good or bad, what the real economics are and if you want to understand about real economics, sort of at one extreme, you can say almost as much as $9 million of latent power was earnings power, has now been demonstrated to us in the model and we did a whole bunch of Patrick fliers. Some of the fliers are going to work out and some of them aren't.

"Fahrenhype" didn't work out; I think the 2 million on auctions were the great great deal and that's just that -- or a different way of putting it is, if I just wanted to sit on my hands and do nothing, we probably could have squeezed quite a bit more earnings out of the system. There are some fliers in there.

With that said, I'm going to hit the slide show and this is -- I'm going through this briskly. And then take questions. But this is probably a 10-minute slide show. We have a huge audience. Many times, what we've ever done.

Safe Harbor, David walked you through. Quarterly results. The numbers I would look at here are first, the gross profit line, going from 11 to 33, almost triple. Line No. 6 and net income breaking through to 2.5 million and that is even given all those sort of, well I just can't get my mouth around the word, onetime charge, but all those fliers; and we still made $2.5 million and we are really convinced of our model. The gross margin, line 7 again.

Last year we were saying at 9.6, we will add 200, 250 basis points and I always think that it was 400. We added almost 600. I am sure there will be questions about gross margins going forward.

Next slide, I would just really good things happen when we make this business double year after year. Really good things happen. I see that there is a slight delay on the technology. That's fine. On this I would say, this is just the same information weekly for those of you interested in logistics. You see that we have got to -- now we have really got to stretch our system to that spike and not the dark shaded area. Which really means that we have the logistics system of $1 billion company which lets you handle the Christmas of a $.5 billion company and now we have to build the logistics system for a $2 billion company to handle the Christmas of a $1 billion company. Which of course I'm not promising that we are going to do $1 billion this year, but -- .

Gross margins. As they say in golf, this is the money shot. Business doubles but its value is more than double because we have been keeping 50 percent more of every dollar we sell. This has been -- you noticed I cut this off in Q3 2003 because of the whole change of accounting before that; and it wouldn't be apples to apples. This is just good management on the part of my colleagues.

You can't imagine how many tens of thousands of hours of work are in there, getting that slide. That slide to look like that. Gross profit per transaction has gone 812 to 1380. Actually if you do the math for the third quarter, of last year on, I think that it would have come out, I'm just going off the top of my head. So I think on the third quarter of 2003, it would have been about 650, 650 or 700.

So in that case the gross profit per transaction doubled. Now it is true our CPAs (ph) went from 12 to 16, our cost for customer acquisition went from 12 to 16 and the gross profit per transaction more than doubled. If there is a second great slide in here, it is the, this is our GAAP net margins. This is not pro forma, operating income, this is our GAAP net margins.

After five years of sucking exhaust fumes, I could stare at this all day. I'm not, well, I've gone over the difference between the 2.5 and the 9 million. We are convinced at this point we got the right model. We have a model that works. I think this shows that this is clearly a breakthrough quarter for us.

Unique customer growth. I will point out that the number of unique people who bought in the quarter grew 73 percent and yet our overall set, B2C sales were up 106 percent. That is an interesting thing to note. Also note that in 2003 Q3, that is where we began branding. That is when we figured we had, there were reasons -- strategic reasons -- to bid in the branding. You can see the effect that has had.

New customer growth, again, had over 1 million new customers in the quarter. First time that has ever happened. That is only 50 percent up from last year but again 106 percent B2C revenue growth. A number of B2C orders. Again, not quite double. I think that is about 80 percent growth.

Aggregate unique customers. Have over 5.5 million now. Now there have been claims that we don't do well --

stand by, I have someone bringing me a message.

We have got claims that some people failed --

someone just let me know that there is a 10 second lag when I click and when you see it. So we are now on slide 12. I'm sorry about that --

-- that we don't manage our customers, or manage repeat behavior well. Clearly, there is room for improvement but if you have got all these other things going up 50 to 70 percent, 80 percent and the top line is going up 106 percent; clearly we are doing some things well. What I am realizing is there's a lot of different metrics you can use to measure customer retention and on some of them we do not as well as I wish; and that is just what we are focusing on. But on some of them we actually do quite well. It is kind of an odd multidimensional issue.

I'm told that you are -- there's like a 10 second lag between when I click and when you see it. So I have got to announce the slide numbers, I suppose.

On 13. People want to know a lot about auctions. We are going to go through this quickly. There is a reason we are doing auctions. There's (indiscernible) proof as to why auctions can work for us. Not certain that they are going to work but why they might work. It's very highly scientific, very mathematical, derivative of the work of Myron Scholes. I don't expect to win the Nobel Prize for this but it is a very strict, scientific proof.

Start with, imagine Joe has a scuba tank and Joe's scuba tank has a pressure gauge on it and Joe wants that pressure gauge to get as high as it can. So he is going to drive the pressure up by building a fire underneath the scuba tank. Now the pressure in there, in that tank goes to -- let's say X -- and it is governed by as those people who remember their high school physics, Boyle's Law pressure equals temperature over volume. So if temperature doubles, pressure doubles. If the volume doubles, the pressure halves. Somebody else comes along with the scuba tank painted Overstock Red and his pressure is -- starts off as 0.

But this fellow drills a hole into both sides of the scuba tank that connects them with a hose. What is the pressure going to do over in the Red scuba tank? Well, the pressure has to equalize. The molecules -- assume the hose is thick enough to allow friction with the flow of molecules both ways. The pressure of the Red scuba tank has to equalize. Now the guy with the yellow scuba tank gets all ticked off, wants to drive his pressure higher and builds a bigger fire. The pressure in the yellow scuba tank goes up -- goes up higher, H -- now what's going to happen with the Red scuba tank? Once again very quickly, that pressure has to equalize.

And in fact if this Red scuba tank is built to scale so with the Red scuba tank can just keeps expanding it and as he does he is just sucking -- siphoning molecules off of the yellow scuba tank. Why is this interesting? Well in our world, pressure is traffic over listings or traffic over products. That is pressure. So let's walk through that calculation for Overstock vs. eBay.

I'm using numbers from comScore public numbers in December. eBay had 13.1 billion page views, 7 to 8 million listings. Let's call that a pressure of 167. For Overstock, we had 333 million page views with a million listings and products. That comes to a pressure of 333, just about double eBay.

Let's talk about Overstock Auctions specifically. Now here, I have to say our data at this point is a little fuzzy. Our traffic data within our site on this new tab has some fuzziness in it. So I have to use an approximation and say that about 10 percent of our traffic is going in there. That is 33 million over 388,000 listings. That is a pressure of 85.

So our pressure is about half of eBay's. Few other things to note about this though. One is that 388,000 listings have -- we did some free listing days and suddenly we had 100,000 listings, 150,000 listings added of what I think was not very good listings. Somebody puts up 200 candles, the exact same candle in. Bunch of keychains or something. It is not really fair. So the pressure on -- well that is one thing to know.

Second thing to know is for businesses only three months old to develop half the pressure of eBay is terrific.

The third thing is, if you look at the Overstock, the vast majority of our page users are actually still on our shopping site. They are not in listings. They are not in Auctions and they're not in book, music, video. So you might say in December that we are probably 40 or 50,000 different actual products, but they got probably 85, 80 percent of that 333.

So if you do the math and for the Overstock site in general, the listings you'd consider to be 40 or 50,000 and you realize they probably kept about 3 million of the page views. You realize our pressure runs in the thousands.

I mention that because people often ask what happens if eBay gets into liquidations? They don't get at our pressure per product. Our list page views for product in our site is so far higher that that is why we can liquidate the way we do.

Just going to slip ahead. Now these are listings to date. You see since we launched about three months ago we got to about 800,000 listings by the end of the year. I believe wish someone could send me the research on this. I spent 20 minutes myself and couldn't find it. I believe that eBay which launched in August of one year by the end of the year had done about 250,000 listings. I'm not completely sure on that. Not sure it's apples to apples. I'd love it if somebody lets me know.

Now people ask me, what is Overstock? What is this thing we're building?

Well, first of all (indiscernible) names of the guess reality. There is the reality underneath and people get hung up on the names. Don't worry about it. If you really have to ask what we are I'd say, first, we are the best outlet shopping on the net. On top of that we have a BMV category that is second to none. It has got far more than a Barnes & Noble superstore has and everything is priced beneath Amazons. 4 or 500,000 actually over 500,000 SKUs now in books, CDs, DVDs. 99 percent of our books are priced below Amazon. We check that constantly. We have loyalty clubs now. '04 consumers and our business that rivals Costco. We have an auction site that is competitive with eBay. Fees started off a third lower. They are probably about 50 percent now. We have a travel site. We will have the lowest online lowest booking fee online and as of this morning we have a Build Your Own Ring site that compete with Blue Nile.

You put all these things together there is a common denominator. We are turning into Earth's Biggest Discounter. Which, incidentally, we have trademarked.

Now a few last points and then I will be done with this. Again, I know there are some people who, oddly enough, hard as it may be to believe try to muddy the waters on my growth vs. profits story. So I just want to take for an assumption that everybody understands anyone -- reasonable -- that we can be profitable now. If we want our car back on the road.

Well, that means that you can expend some amount of money, maximize your growth and if you spent every dollar of profit back into marketing you could maximize (ph) growth and have no profits.

On the other hand you could say, "Hey let's cut way back on marketing," and have, just do enough marketing to sustain our current level, and maximize profits. If you accept those two, there's clearly going to be places in between that could connect with a line. I think of this as our success frontier. Now I have a very good idea of where this frontier is in my mind.

I mean, I know where I believe it is. But in my mind there is a line that, anywhere on that curve can really count as a success. Where is that curve in relation to maybe analysts? I think the curve is well well to the right the analysts have us. I am very up. I have never been so optimistic about what is going on in our business. This is the trade-off I grapple with every day in my job.

Now, in closing I will just summarize that. That for me people say, "Well, okay. If you say there is a success frontier, what specifically counts as success? " For me success is did we create value? Did we create value for owners? Did we create as much economic wait for the shareholders as we could?

Looking at this summary slide at the end. It just repeats some of those earlier slides. I feel comfortable saying we did a really good job creating a ton of value for owners last year -- 2004. What you own is for more valuable than it was a year ago. So what my guidance is going for is that we are just going to create value. It is one of the -- we are going to create a lot more value than people think is possible. I believe.

This is one of the most interesting case studies in my life. That I just want to play this down the middle of the fairway. I am not at all sure that doing that is what gets rewarded. The jury -- I acknowledge the jury is out of that.

The tools of Satan are among us. They are trying to ruin things. But I'm just sort of counting on, if I focus on creating value and can keep delivering slides like these slides you see in front of you, that's the long run that is, I hope, I think that is rewarded by the world. That is how I define success -- is creating this value.

With that, Operator, let's say who is on the phone? Well let's take Douglas from Lehman then Bill Lennan from Hamrick, please.

Question-and-Answer Session

Operator

Your line is open.

Unidentified Speaker

Thank you. I have three questions; I will give them to you all at once if I may.

Patrick Byrne, Overstock.com - Chairman and President

Please.

Unidentified Speaker

eBay indicated that it saw some early softness early in the quarter and I wanted to ask if you could comment on whether you experienced any similar trends? That's the first one. Second question is, regarding your strategy in travel. Curious why you want to be in the business and how Overstock is really going to differentiate itself? Third, if you could just touch on it a little bit. Really wondering if anything has changed in either your operations or the investment opportunities that you see around the Company over the last few months that maybe has altered your outlook on profitability in 2005 and 2006? Thank you.

Patrick Byrne, Overstock.com - Chairman and President

Thank you Doug. I will take those in order. How the quarter evolved was differently than in the past. I would say the beta since I'm speaking a bunch of Wall Street you guys will get it, the beta of fourth quarter was much higher than past quarters. In past years. The beta -- I'm sorry, I've got someone who keeps waiting and speaking notes in my face. I will get them to go away.

The beta of the quarter was in this fourth quarter was much lower than it has ever been. We just had sort of a gentle swell come in and build and build. The peak week came about 10 days later than it has been previous years. Some of that could have been a calendar thing, based on what date of the week Christmas fell on. But we didn't -- in previous years what happened was, okay, even when we had explosive fourth quarter it was a cause we have a link up (indiscernible) and suddenly we have a whole bunch of extra sales. But the underlying was not -- the underlying sales were not nearly as high.

This fourth quarter, our underlying day-to-day sales, we didn't really have any huge spikes but there were, day after day after day -- we were just getting $5.5 million.

Travel. I totally think we can differentiate ourselves. When we launched with some partners, a travel site, over a year ago, it was not a very good site. I don't think our partners were necessarily the right guys. We didn't get the customer service out of them that we expected and yet just by having it it up we had 500 people calling us, offering us special deals. I have got a hotel in the Bahamas, I want to liquidate all my overstocks with you. I've got -- somebody showed up here from Latin America with a briefcase because they couldn't even get a response.

It's just that we want to liquidate all of our airline tickets through your site. I mean a well-known Latin American airline. There is, we can definitely have the lowest online booking fee. Our marginal costs of doing this are much lower than they are for, say, one of the other big travel sites. So it is going to -- one way we're going to differentiate ourselves is through just the lower booking fees.

Secondly, I think you'll see us developing a bunch of unique offerings that are -- that beat other people's pricing and, third, our interface. We have got some features in the interface that I think are making it particularly smooth for people to use.

But I think that we really can differentiate. Remember our marginal costs of opening a Build Your Own Ring or a travel are now solo. We have got all the traffic, we have got all the computers, the customers so there is a tiny and so we don't have to price nearly as much costs.

Third, the outlook -- has my outlook changed on profitability? My outlook for the Company, short answer is now. Well yes I guess the short answer is, yes, I am more optimistic than I am and more confident than I ever was. We are on a rocket. So it has changed for the better. So many good things are happening.

For example he actually had to hire people to answer the phone for the hundreds of contacts we are getting from people in the travel industry, offering us unique deals. You may know that there are some other people in the hotel industry are not completely satisfied with the opportunities they now have to liquidate hotel rooms. I think we are going to get preferential treatment there.

Just my outlook is, if anything, more optimistic than it has ever been. Just for the first time I am feeling really really good.

Doug, thank you and thank you for picking up coverage on us.

Unidentified Speaker

Thank you.

Patrick Byrne, Overstock.com - Chairman and President

Okay Operator. Next I see Bill Lennan, please.

Operator

Your line is open, Sir.

Bill Lennan, WR Hambrecht - Analyst

I am going to go for five here and be a question hog, but first one I think it's easy. Patrick, I know you were on television this morning and giving I think a little more specificity with numbers about growth rates and things. Could you just for the sake of consistency until we get it recorded in this form where the investors are, give us a summary of what you said on CNBC is No. 1? I guess it was CNBC.

No. 2, the share buyback that was announced earlier this week has caused some consternation. People are curious about the timing. Wonder if you could just address why now and why it was announced the day before an earnings call as opposed to with the earnings call?

Item 3, inventory. Just eyeballing it looks a little bit higher. Wonder if you could tell us if there is -- just give us an idea of what is in inventory and is it in fact a little higher than it usually is at this time appear?

No. 4, a little bit of clarity on customer acquisition strategy for '05 would be helpful. If I have the numbers right, I think you said you lost 700 K. to 1 million somewhere in there on "Fahrenhype 911" but drove 70,000 customers out of that. That looks like a customer acquisition cost that is fairly favorable $10 to $14. So I'm curious as to why you would call it a failure and what kind of tools do you have up your sleeve for '05 customer acquisition?

Finally, sorry for being a question hog here, on the gross margin give back where you say the upside to margins will go to customers. You see that as across the board or do you have certain categories where you will use that as a tactical weapon against competition? Thanks.

Patrick Byrne, Overstock.com - Chairman and President

Thank you Bill. I am going to try to be concise so I get as many different callers through today as I can. CNBC, I don't remember if I gave you are going to have to tell me what I said if it is different -- let me circle back to that. Buyback? I am hoping the long-term callers and people who at this point are long-term investors know all the TV (indiscernible) that is about we don't do anything like. If somebody in here said let's announce a buyback so as to support our stock price, they know they would be fired. There's nobody within the building could bring themselves to utter something like that; and I think no one in the building would think of something like that. We just don't think along within that paradigm.

We announced the buyback because we had a board meeting on Tuesday and it was decided in the board meeting, or actually Monday night was when it was decided, that the opportunity may come, the opportunity comes with this stock is priced underneath what we think is a fair value we'll love to buy, we should be buying it in. Now that has to be announced. That is a material decision that has to be announced. So we announced it. We could not even have waited until Thursday night to do it was my understanding.

So we announced it and it is never enters the calculation. "Oh gee, let's do this" and people now fortunately. I am less defensive about that than I think I used to be. Because fortunately I recognize a whole bunch of the names on the call and I'm just assuming that everybody who has been in this story for a year or two and got to know me knows that.

Inventory. Our inventory management has gotten again better than it has been in five years. We've gotten really solid managing the capital. We did do a very large diamond buy, sort of a deal of a lifetime diamond buy at the end of the year. To support our new BYO, Build Your Own Ring. Dave Chidester do you want to comment on that? Do you think our inventory's --?

David Chidester, Overstock.com - VP, Finance

Yes, I think that was a big buy like you said. It was $7.5 million. You take that out our inventory went from 30 at the end of last year to 37 at the end of this year. That is really managing the it very tightly. So you take and that is all brand-new. That is $7.5 million brand-new inventory. So I think we have always been concerned more that we'll have enough inventory than we have too much. I think it has been managed very well.

Patrick Byrne, Overstock.com - Chairman and President

Good. Let's see next was customer acquisition. The rawer -- ticking off people I'm sorry but the list is filling up with people calling in. Customer acquisition first of all on "Fahrenhype", I hope to make back the entire cost of the purchase and the distribution rights. We didn't make that back. We made it back less 700,000 so far but we still have 150,000 units in stock. They're selling, albeit slowly. We came out 700,000 short. We had 70,000 customers. I actually -- a disproportionate share of them were new but they were not all new. I misspoke when I said there were 70,000 new customers. But I think about 60,000 were new. So it is still an $11 or $12 customer acquisition cost. They were showing some loyalty because I think that they thought it was a pretty gutsy thing to do and I know that there was a lot of blogging going on saying let's do all our Christmas shopping at Overstock and they seemed to be showing some good loyalty.

I really wasn't trying by the way it is not merely as -- it's a Republican movie but it is not a right-wing Republican movie. It is not as far from center as Michael Moore's was. So I know -- I'm proud that we were able to offer it to the public, but we took great pains to always offer them both together and so forth.

I just would have liked to have broken even on it or made a little bit of money and gotten those 700,000 customers (inaudible). Then the gross margin.

Yes we've gone from 9 to 15 percent. You, Bill, are the fellow who wrote a story last year last June I think, our 15 percent is pretty much the same as Amazon's 23, 24 percent because they do this thing where they move 9 points of cost of goods into SG&A which they disclose and therefore (indiscernible). On an apples to apples basis, basically there really isn't any difference anymore.

Left to its own devices that, I think, goes to 17 or 18. What I am realizing is what we're going to experiment with is if instead of having that go to 17 or 18 we start giving it back in one form or another, reduced shipping or reduced prices to the consumer, is that a better way to spend that margin 2 or 3 than would be, say, spending it on marketing? Now maybe if we do it by 2 points that margin there, it will save us 3 points of marketing expense. So that is the balance, the experimenting with different combinations. Amazon allegedly did that same calculation a few years ago and just decided to drop their shipping to this shipping policy of free shipping over $25 with an asterisk of all the exceptions upside-down in Greek. Just kidding.

We are going to do the same kind of experimentation and we will give $1 back to the consumer if it faces more than $1 in marketing cost. Now again everything I just said was excluding travel and auctions. Auctions is running with about an 80 percent gross margin and as those kick in they may move our gross margin up to back well above 15, but on its own, I actually think that is worth already -- on its own I think you'd see that if we did nothing to correct it. Go to 18 percent. I basically suspect that giving 3 points back to the consumer in one way or another is a better way to spend money than spending that 3 percent on marketing cost.

Now going back to CNBC, what did I say on CNBC that you think was inconsistent?

Bill Lennan, WR Hambrecht - Analyst

Was there a mention of 60 percent? I got an e-mail -- I haven't even seen it yet -- I got an e-mail from someone saying you mentioned 60 percent in some public forum just following up there. Just wanted to make sure that whatever growth rates have been mentioned that we get them recorded here.

Patrick Byrne, Overstock.com - Chairman and President

Sure it's 60 percent to (MULTIPLE SPEAKERS) higher or lower than we --

Bill Lennan, WR Hambrecht - Analyst

The street said low 50s and I just want to make sure I'm getting e-mails that you've said things publicly that is kind of hard to keep track so I just want to make sure that while we're all 500 people here on the call, if there are numbers being thrown around that we get it all straight and then we can come back to this record. So I guess another way to put it you also said that you think your growth curve is probably to the right of where the street is and we are also were in the low 50s I think for next year.

Patrick Byrne, Overstock.com - Chairman and President

Yes I think that's low (MULTIPLE SPEAKERS)

Bill Lennan, WR Hambrecht - Analyst

Just trying to get an idea. It was a good discussion on '05 but I guess the short version of this question is can you just give us -- throw us a bone here? Give us some number we can hang our hat on as to where you think you are going to go next year, knowing that numbers change and sometimes you succeed, sometimes you don't. We are just looking for a little clarity.

Patrick Byrne, Overstock.com - Chairman and President

Okay I would -- first of all if you are at 50 something it's too low. If we go less than 60 percent I've screwed up. I can say within the bounds of not getting sued, count on me here to grow 60 percent. Count on us to grow 60 percent. I can't promise that but the truth is, as I said over and over, we structure ourselves to grow 100 percent. All of our logistics planning is really, actually, to even grow to about the billion 1, billion 2 range this year.

I don't expect that to happen but we do all our planning and our what ifs around that scenario. But I think a 60 percent growth rate is a prudent thing for people to assume we can do this year.

I would like to point out that when you -- okay, last year what did show our GAAP revenue as? Like 290 or let's talk in terms of gross bookings. I think it showed about 295 million last year. And, well, of that last year, Safeway was about 20, 25 and other B2B was about 20, 25 so it really left about 250 gross bookings B2C. And this year that 250 went -- so you have got these different aggregates. And it may look like we only grew 80 percent but one way of thinking of it is the Safeway business went away completely in January of '04; and we lost 8 percent 10 percent of our business. Then the rest of the business slightly more than doubled. So our underlying core business is more than doubling.

I would like to hit one other thing on that and sometimes people ask me, what happened to Safeway? Now that it is all past us I can say, the program we dreamed up with Safeway they told us you could expect to do 20 million, 50 million, 100 million, 400 million. That was sort of the plan with Safeway and we sort of looking out for years listened to them and thinking we were going to be doing 400 million with them. Instead we did 20, 25, 20, 25 and then discontinued it. So people often ask me about Safeway and what about our B2B growth so that was the answer.

Did I cover your questions adequately, Bill?

Bill Lennan, WR Hambrecht - Analyst

You did and I thank you for indulging five or more questions.

Patrick Byrne, Overstock.com - Chairman and President

That's fine. Okay, next, I think we are taking Scott Devitt from Legg Mason and then we are going to be taking Scott Schleffer, for. Okay, go ahead Scott Devitt.

Scott Devitt, Legg Mason - Analyst

I thought you had a very good quarter. Just three questions. First, maybe I missed it but I didn't get the repeat number in the quarter and then, separately, on capacity, if you could add some color as to how much you have when and if you need more, how the Indiana launch has gone and just a little bit of clarity as far as third party sales. And if any of that is fulfilled actually out of Salt Lake City or Indiana or is it all drop ship or how that spread works?

Finally on auctions, currently there is about 40,000 items out there. If you search by most bids, it looks like that when you are searching that way which incorporates an average of about 3 1/2 days until close you get about 10 percent of the items that have bids and from page 32 to 82 more than half of the bids have one bid on them and then when you track as things are closing it looks like close rates are about 25 percent a couple of minutes prior to close. And then on your messageboard you talk a little bit about 40 percent closure rates.

I guess my question is are you seeing a lot of single bid closes or is there another way I need to be looking at that? Thanks.

Patrick Byrne, Overstock.com - Chairman and President

Good questions. One, the repeat, David, that was 52 percent?

David Chidester, Overstock.com - VP, Finance

52 percent, yes.

Patrick Byrne, Overstock.com - Chairman and President

Now we are refining our ways of looking at that. As we announced on the last phone call that repeat rate includes if in the first quarter somebody buys for the first time in January and then they buy again in March, it includes them. Now there is another way of looking at it that says, okay in the first quarter what percentage of your business was given to you by people who had bought previously in the first quarter? That number we have not disclosed yet. We are actually sort of working that back historically.

I am beginning to think that is probably a better way at least as good a way as looking at things, but 52 percent.

The Indiana warehouse came up. I wouldn't even say it was rocky, nothing is completely smooth, but it certainly wasn't rocky. It came up we're very pleased with our results from Indiana. It is allowing us to get some products to customers more quickly because it is east and they're just one type of product called a ship alone product and very simple products to handle. We are very pleased we have a relationship with Osborne, Hessy (ph) is managing it. They're great.

Third party, in general, we spent over we spent quite a bit of money putting in this ecommerce system and we are quite -- which is a third party order management system to manage our drop shipping partners and I think that that had some very positive effects for us in the fourth quarter because, really, it's letting us manage our partners better and better. In fact, it is doing so well that we may put our Salt Lake and the Indiana warehouses set up as partners on this ecommerce system because it is very effective.

Auctions. Well, I would like to suggest everybody when you have time go to a site called www.dealscart.com. In the upper left-hand quarter there some green bars one of them says auctions counts. Click on there, click on Overstock. This is an independent site that counts everybody's auctions and from what we can tell it is accurate to within a few percent on ours.

We have no relationship with them that I know of. I'm endorsing someone else's site because I use it all the time to count our auctions. I'm not in the office. This is what we have learned. We started off, it grew nicely at 20 to 25,000 auctions. Then we started a free -- and we were closing the way we count it in the 35 to 40 percent range. Then we did a free listing day back in late November. And the auctions spiked 140,000 and while we were so excited what I didn't realize was that because it was so much junk and somebody put up 200 of the same keychain for $1 our closing rates just fell through into the single digits. Then those all washed out after ten days and by the way our average auction our auctions are 10 days not I think someone said 7. So when those all washed out if we look at a graph showing our numbers listing and the closing rate they vary inversely. With amazing position. So then we did another one or two free listing days before we really were convinced, that's not the way to go.

When those washed out, since early January it has been back up to the 35 to 40 range. Now for comparison, eBay and by the way I know that most followers of this story know that I go toe to toe with Amazon. I do not mean to be disrespectful to eBay. It is a great company. Clearly we are trying to compete with them and take certain parts on the way. But nothing I treat them with a lot of respect. They're actually good people.

They say that they have a closing rate in the 40s. I think it is 40 or 45 percent. But if you remember they count it differently than us. I believe when we do our analysis, it comes up differently than that. That is, because, I think the difference is, if you put something up on eBay with a Buy it Now feature and it doesn't sell it never counts as a failed auction. As an auction. So it never counts against them. On our site it will. Because after 7 or 10 days it rolls off. So if you make that adjustment I think our -- I think we're doing pretty well. I wouldn't say we are higher than them but I think we're doing pretty well and certainly my feed back on the messageboard within auctions and from the people who are writing me privately is there are all kinds of people doing comparisons (indiscernible). These people are very sophisticated by the way. The eBay power selling community are very sophisticated people and they are doing all kinds of tests and they're certainly areas on our site where they are getting better results than they do on eBay. You now know everything I know, Scott.

Scott Devitt, Legg Mason - Analyst

If I could just -- any data on single bid closes? Or what you disclosed that just as far as activity within the closure rate?

Patrick Byrne, Overstock.com - Chairman and President

I couldn't tell you off the top of my head.

Scott Devitt, Legg Mason - Analyst

Thank you.

Patrick Byrne, Overstock.com - Chairman and President

Take care. Scott Schleffer is up next.

Scott Schleffer, Tiger Technologies - Analyst

I appreciate it, great quarter. On the SG&A side, I appreciate the color you gave in the conversation. What did -- and you have given this stat before. What did payroll grow year-over-year in the fourth quarter?

Patrick Byrne, Overstock.com - Chairman and President

Just a moment I'm getting somebody -- okay.

(MULTIPLE SPEAKERS)

Scott Schleffer, Tiger Technologies - Analyst

Ballpark -- excluding all the onetime stuff. What would you think G&A would have grown year-over-year?

Patrick Byrne, Overstock.com - Chairman and President

If you take payroll and you set aside things like this now 35 people or so we have developing auctions, programmers, and things like that, travel etc. and say what are the businesses we have live January 1st of last year and what did they do over time? It only grew about 27 percent. Now there is a whole bunch of other stuff involved where you are carrying to set up travel. We are carrying 10 people for a year as they get all the development and contracts done and things like that. So the underlying what I think it was in the core business the payroll was going about 27, 30 percent then we gave this bonus. And then we have also got this (indiscernible) which eats but doesn't -- well so that's the answer.

Scott Schleffer, Tiger Technologies - Analyst

Second, can you give some real basic stats maybe on gross merchandise GMV that went through your auction site in Q4 or where you ended the quarter? And what you think you might be able to do in '05 or if it is too early to tell just what you have done over the past few months in terms of the amount of dollars closed on the auction site?

Patrick Byrne, Overstock.com - Chairman and President

Let's see. Over $10 million of transactions occurred slightly over 10 million in the fourth quarter. From a standing start that was pretty good.

The neat thing that has happened has been since January -- early January when all the stuff washed out, when the last listing stuff washed out and it went back to 20,000 now it is continuing to build, but in a much more less steroid-enhanced way, much more organically, with good auctions. The closing rate is staying up and it is building very nicely; and then of course last week was a tremendous boon to us. Once eBay did what they did, you are just seeing all this defection and all kinds of people testing on our site.

If you go to that auction count that I described dealscart.com go to that auction count. It tracks our auction listings back to about December 4th. Like I say it's accurate, you can create the same curve that I just described. But what the cool thing that is happening now is that as it spins up now without the free listings but with sort of good eBay power sellers and our power sellers now trying more things. It has organically climbed back to well it is actually up about 40,000 now I believe. Did I hit your --?

Scott Schleffer, Tiger Technologies - Analyst

Absolutely. Thanks a lot.

Patrick Byrne, Overstock.com - Chairman and President

Thanks a lot. Operator I see Derek Brown is on the list. How about we take Derek Brown. My old friend and naysayer Derek Brown.

Operator

Derek Brown. (OPERATOR INSTRUCTIONS)

Derek Brown, Pacific Growth Equities - Analyst

I appreciate that. Few questions. No. 1, can you just -- I guess going back to the question of some parameters around what your business might be doing. How you see both G&A and sales and marketing coming out in '05 as a percentage of revenue? I know there were a bunch of onetime events and against you are trying of bunch of experiments in '04. What might that look like heading into '05?

And then also prepaid expenses. If you could just walk through some of the dynamics there and why that number is moving up and how we might think about that as the year progresses as well?

Patrick Byrne, Overstock.com - Chairman and President

I do see it ended the year at 14 percent, our SG&A. I do see that probably dribbling back down a little bit this year. Not going any higher even though we do have -- we don't have the massive project development but we are actually moving into a new building across the street in a few months and we are actually taking one floor. We are going to put all the new projects together on one floor and run the rest of the Company one-way and run all the skunk (ph) works a different way. I don't think you see that 14 percent go higher.

If it even stays that high if you saw us, say, double our marketing spend it is only because we thought we could be growing at least 100 percent or more. If we are not growing 100 percent or more, you'll definitely see that come in. Or you should.

The prepaid expense. Did -- David Chidester, did they ask about this on CNBC today? Why is the prepaid expense $7 million higher than people expected?

David Chidester, Overstock.com - VP, Finance

Sure, I think what people need to understand is the biggest number in prepaid is always prepaid inventory and the reasons that we've prepay for inventory in general are large takeoffs, bankruptcies, international business. But in the liquidation business we are an opportunistic business. And we have learned that having cash available gets us great deals. It is a number that is different than any other retailer that will move around, based on opportunity. And now that we have more capital we are able to use cash as a way to get better deals. So what happens is the prepayment amount went up at the end of the third quarter. We got all that inventory during the third quarter. More opportunities came up in the fourth quarter and prepayment amount balance really didn't change because we have more prepaid inventory that we are now going to receive in the first quarter.

That is where we have seen the increase and I think that is, as the business grows, that prepaid amount might grow. It just depends on we're opportunistic and where cash (indiscernible) allowed us we may use that to go out and get inventory. So that is the increase that you are seeing is in prepaid inventory.

Patrick Byrne, Overstock.com - Chairman and President

Next I'm just going to keep I found out I was under the misunderstanding in other conference call that we had cut off at 9:30. I am going to try to continue for another 15 minutes because there are a number of people on the phone. Glenn Krevlin.

Glenn Krevlin, Glenhill Capital - Analyst

Nice quarter. Was wondering if you could give me some sense. I mean you have indicated that you think you can grow the business 660 percent plus. It was clearly a tickup in the G&A expense in this quarter -- fourth versus last year. As I look out here, what kind of leverage -- ? Can we expect EBIT margins to make -- forget about gross, gross margins. I understand you are running that like Costco. You are tapping it. How should we look at EBIT margins going forward in terms of leverage in the business?

Patrick Byrne, Overstock.com - Chairman and President

We think of -- Glenn, you've got some static on your phone.

Glenn Krevlin, Glenhill Capital - Analyst

Sorry.

Patrick Byrne, Overstock.com - Chairman and President

We've got 500 people on the line. That's a first. Hope their Club O Gold customers. I don't think you see that EBIT margins go to 5 or 6 percent while we are growing 100 percent. I think if while we are growing 100 percent and that can stay, you are not going to see that get to 5, 6, 7 percent. The day will come when if our growth becomes more normal, it will. How I think of it is I think of it as being three ranges.

Subsonic, which is up to 60 percent, 60 percent to 120 percent growth SuperSonic and over 120 percent we call Hypersonic here. At this point what in a perfect world I want is the gross profits to be growing hypersonically and I want the G&A to be growing subsonically. So collectively they actually grew a little over. The SG&A estimate grew a little over 100 percent this year and the gross profits grew 186 percent. Well that is still a very nice spread. And if you just model that out and if we could just do that -- if you just model that out and say what happens if we do that for the next three years? You see why I get so excited about the business. I would like to see the spread increase and I'd like to see it, I would like to see the G&A move into the subsonic range while the gross profits go into the -- or stay in the hypersonic range. That is not impossible to get to but I'd say that is about as difficult to get to as this year adding 560 basis points to our gross margin. It's doable.

Glenn Krevlin, Glenhill Capital - Analyst

Secondly, as you have gained scale, can you talk about the ability to buy? That has always been a concern of how deep the market is?

Patrick Byrne, Overstock.com - Chairman and President

It's bottomless from our point of view. There is so -- and it has got so much easier. I think this is one of our motes. Everybody is calling us. We are getting these deals that three years ago no one would have called us. If they had we would said, "we will take 20 of that." Now we are saying, "Is that all you got?" We are just stepping up and we are one of the few players now, anyway, we have never had a worry about the general size of the market. We never have a worry about it. It is -- I know it's a natural question for people ask. It is the one thing everyone asks about that we never once discuss as a strategic issue here. It's just bottomless. We have never plumbed, we have never heard of the bottom yet.

Glenn Krevlin, Glenhill Capital - Analyst

I will let someone else ask. Thank you very much.

Patrick Byrne, Overstock.com - Chairman and President

I see Ardmore. Folks I haven't heard from in a long time. Does Ardmore Partners want to come on? Ron Strauss.

Ron Strauss, Ardmore - Analyst

Thank you for taking my call. Couple of questions. First on the buyback. I'm just trying to understand you had a share offering at 57.50 and the you announce that buyback when the shares are higher. How does that make sense from a shareholder return perspective?

Patrick Byrne, Overstock.com - Chairman and President

Well two answers, one is time goes by and 1.57 could have been a good price and another good price to sell and our optimism about the business may become such that we think buying in at 80 is a great price. However, in general, I don't think we meant to announce and we didn't announce we are going to be buying stock at this price.

There is definitely -- we have such beta. I don't know what our beta is, what our actual beta is. I assume it is two or three times -- that is, two or three but it is we never know. I mean there've been quarters where we thought we did great and the market pukes on us and there have been quarters where we laid an egg, in our mind, and the stock goes up. So we just don't know.

But there is definitely enough volatility that there is a price out there at which we would step in and buy in and buy in a lot of stock. And I don't think the market, well, I don't know if the market is going to get there or not but I gave up trying to --

Ron Strauss, Ardmore - Analyst

Okay, I mean it is just a little bit of a confusing message to be sending to investors to do an offering and then to announce the stock paradigm (ph). And then the other question is, you said on the call today that you have been underpaying your employees. Does that mean that we should expect payroll to increase in 2005?

Patrick Byrne, Overstock.com - Chairman and President

No. I mean it will increase the basic payroll will increase 5 percent or so. Or -- I'm sorry -- in terms of raises and then we are hiring new people. I tried to say underpaid, where Utah (ph), I think people are paid fairly, our costs are quite a bit lower than they would be on the coast.

There is not some great -- now, we are not going to ratchet everybody up to San Francisco pay. What has also happened is we have slowed way down on giving out options; and what we're setting up is more of instead of compensating people with a big slug of options we are creating a cash bonus that filters around the Company. But, no, there is not any big 10, 20, 30 percent hike that we are giving across the board.

Ron Strauss, Ardmore - Analyst

One more question on one of the slides you showed today. When you were building your equation, you said you had 338,000 listings on your site. That was the denominator. I thought it was more like 37,000.

Patrick Byrne, Overstock.com - Chairman and President

No, that is how many listings we had in December.

Ron Strauss, Ardmore - Analyst

Oh, it is in December. Thank you.

Patrick Byrne, Overstock.com - Chairman and President

And just on your other point. I'm sorry. Are you still on, Ron?

Ron Strauss, Ardmore - Analyst

Yes.

Patrick Byrne, Overstock.com - Chairman and President

I understand that if somebody says, "Okay I am issuing stock at 57" one day and then they announce a buyback plan. I can see why it's can -- I understand the point why it would be confusing, but we are all -- I am a value guy. I don't even take a salary. I am completely about increasing the economic weight per share. So if the opportunity comes to increase the economic weight per share, we will take it.

But I was surprised people didn't understand that and, even I would be very surprised if we were buying our own stock in at 57 any time in the near future. That would not probably be the right price.

Ron Strauss, Ardmore - Analyst

Thank you very much.

Patrick Byrne, Overstock.com - Chairman and President

Operator is Aaron Kessler still on the phone?

Aaron Kessler, Piper Jaffray - Analyst

Can you hear me?

Patrick Byrne, Overstock.com - Chairman and President

Hello, Aaron Kessler, Avondale. How are you doing, sir?

Aaron Kessler, Piper Jaffray - Analyst

Actually Piper.

Patrick Byrne, Overstock.com - Chairman and President

Someone really (MULTIPLE SPEAKERS)

Aaron Kessler, Piper Jaffray - Analyst

Couple questions for you. One, any plans for profit building that we should expect in Q1 through Q3 of this year? Second would be, given that you are going to be giving more money back to consumer should we expect to see sales and marketing come down as a percentage in 2005 or at least off of Q4 levels? Thirdly with the recent cash raise have you been able to put any of that extra cash to work in the last couple of months here?

Patrick Byrne, Overstock.com - Chairman and President

On the marketing, I think if we are growing at these kinds of rates at say, 80 percent or more, then you see our sales stay about where it is as a percentage -- actually a different way of saying it I think you see our sales marketing expense stay where it is more or less no matter what our growth rate goes. Because if our growth rate comes down, we will be coming back on on the marketing spend.

Have we put the money to use? Yes we bought $7.5 million worth of diamonds. That is something we would not have done if we were flying at $20 million in the bank as we were at this point last year. It wouldn't have been prudent. But we've so that is one of that's one example of how we use it.

Dave Chidester, do you have any others?

David Chidester, Overstock.com - VP, Finance

Yes and I think you might be talking about us putting it to work as far as investing it. And, yes, we are putting together a strategy and have managers that we work with and we hope to make a nice return on the cash, the extra cash that we have.

Patrick Byrne, Overstock.com - Chairman and President

Thank you. Take care. Frank Gristina from Avondale.

Frank Gristina, Avondale Partners - Analyst

Thank you for taking so much time with questions. With regard to auctions my knowledge of physics might be a little bit rusty, but wouldn't your experiment work a little better with a catalyst under your tank as well? So are you guys going to start promoting auctions whether it is to the mom-and-pop listeners or to promote more power sellers? Because our study of the bid ratio was a little bit less positive than what I heard on the call. 3, 3.5 percent bid ratio. How do you ramp that up and if it is going to be a model where make it mine contributes to a lot of the conversion and how do you make potential listeners aware of that?

Patrick Byrne, Overstock.com - Chairman and President

It depends on when you did your analysis. If you did it in December or any time up until the last 10 days you will have gotten different numbers than you'll get -- substantially different than if you get them now. But yes we are definitely promoting it on the buy side. We thought, we didn't know what was going to be harder to attract, the chicken or the egg? The buyers or the sellers?

We discovered the buyer, the sellers are every bit as sophisticated as you would want them to be. They understand, you go on our messageboard you see all these sellers talking about the strategic issues between us and eBay and they are really very sophisticated. So we have got all the sellers we can get all the sellers that are traffic and support. So we have in the last week started going out and attracting buyers, putting in our e-mail, we devoted half of an e-mail the other day till it got 20,000 new people in and registered.

We are developing radio ads. Our TV ad if you have seen our TV ad, where our TV woman Sabina as the "we are taking on the big boys" spot. That was really geared to attract eBay sellers. We are going to be doing other spots that are more to attract auction buyers.

Frank Gristina, Avondale Partners - Analyst

You mentioned in the past you bought up Club O Gold a couple of times. You mentioned in the past you might let us know when you break through some thresholds on subscriber levels. Any update on Club O Gold subscribers?

Patrick Byrne, Overstock.com - Chairman and President

Club O, I think when I talked about subscribers I was talking about Club O and there we have had so many subscribers come in and pay the $29 that we actually just decided, it's such a good thing we didn't want to reveal too much about it to the world. But there are a lot of people who will take that deal.

Club O Gold is a little bit mixed. I think we have technically we have about 70 to 75,000 subscribers but we grandfathered about 68,000 people who had already registered on our B2B site. We grandfathered them for six months. So how many have actually come in and paid? I think over 1,000 have come in and paid and then there are a lot of people who have taken advantage of our -- we have this relation with Advanta (ph) that you can register for an Advanta card and you get a free three- or six-month membership with our Club O Gold and there are several thousand of those.

Frank Gristina, Avondale Partners - Analyst

With Club O, are you noticing how many purchases a quarter they do vs. someone who is not a member? Is it a 3X multiple or -- ?

Patrick Byrne, Overstock.com - Chairman and President

I can't tell you on the persistency but I can tell you on the average order size. It is over two times.

Frank Gristina, Avondale Partners - Analyst

Thank you very much.

Patrick Byrne, Overstock.com - Chairman and President

Mark Mahoney and Bob O'Brien on the phone. Mark Mahoney is American Tech and I think these are the last calls. Mark Mahoney.

Mark Mahoney, American Tech - Analyst

Thank you very much for taking my question. Wanted to ask you, to draw you out a little bit more on auctions, and maybe a little bit more about your strategy there. You have been pretty public about how you are going to compete on price vs. eBay. I like the scuba tank analogy. There are also other things that obviously eBay has done over time in terms of building on trust and safety initiatives and setting in a series of guarantees and having to deal with fraud on the site, etc. Any color from what is the plan for growing auctions other than just drawing over power sellers based on price? How aggressive do you want to be in building out the rest of the auctions network that eBay has developed to date? Thank you.

Patrick Byrne, Overstock.com - Chairman and President

Great question. We want to do basically what they have done. So we have shown no disadvantage in comparison to them. Now remember that a lot of the things -- eBay is more of an ecosystem. There are a lot of companies within their ecosystems that address trust and safety issues, address ease of the power sellers, easy use of the site.

Those people are all contacting us. They love the idea that there will be another venue; and a couple of them that have already gone live with us on the third party power seller software. If you are a guy selling 1000 computer monitors a date on eBay, you don't post them individually, you use tools. Those tools are provided by third parties. Those third parties, you will see five of them come live with us very quickly.

On trust and safety issues, we really try to model and there is no reason they should be able to do something that we can't. Some of that trust and safety issues are handled by third party companies that have different tools and bonding and safe and escrow kind of stuff.

You will see us working with all of them. We want our ecosystem to be just as happy an environment for them as eBay's is.

I actually saw there was a Justin Post from Merrill. Justin Poot (ph) for Merrill? Is he still on the phone?

Operator

I believe he is no longer on, Sir.

Patrick Byrne, Overstock.com - Chairman and President

There was a guy, Bob O'Brian.

Bob O'Brian, - Investor

Yes, I'm on the line. Thank you for taking my call, Dr. Byrne. Congratulations on a great quarter.

Patrick Byrne, Overstock.com - Chairman and President

Thank you very much.

Bob O'Brian, - Investor

You…probably, the name is not familiar. Let me start out by introducing myself. I’m a shareholder, and also a retired guy. I sold my company a few years ago and now I'm an investor, and actually, in my spare time, I guess, I created a web site - NFI-info.net - that tracks another company that is going through a lot of the same stock action that you guys are. The Wall Street Journal actually wrote an article about it last year and I just thought it would be interesting to call in - I appreciate your taking the time, by the way - and just ask you a couple of questions. Maybe compare notes and share some observations, because I really kind of think there’s a lot in common between the two situations.

I think I can explain what is going on with your stock and, basically, why so many people are saying mean things about you.

Patrick Byrne, Overstock.com - Chairman and President

I would love to know that.

Bob O'Brian, - Investor

It’s all theoretical, but I think I’ve got a few points that are going to be intriguing to the listeners. Let me start off by just saying that legitimate shorting, what we keep hearing about on the message boards, etc, the short short short is - legitimate shorting is fine, and I’ve got nothing against shorting. It’s a perfectly legitimate way to bet against a Company or a sector. What I’m going to describe doesn't really have a lot to do with legitimate shorting.

What I am going to describe is what I call a systematic serial killing of small cap companies. And I think you guys are a victim of it. I’m talking more along the lines of criminal manipulation, collusion, fraud, libel, naked shorting - basically, every violation of 10(b)5 that you can probably imagine, and some you probably couldn't.

I’ve watched this happen to a company called NFI for almost three years, and like I said, I think you guys have been targeted. If you will indulge me for just a few minutes, let me tell you how I think it all works.

Patrick Byrne, Overstock.com - Chairman and President

Well go ahead. If -- well if you have a question that would be great but if you have something you want to tell you may go ahead too.

Bob O'Brian, - Investor

Actually I do have some questions. Let me save them for the end, because I think they are pretty decent questions.

Patrick Byrne, Overstock.com - Chairman and President

By the way, your voice is cutting out. I can't quite -- well, your voice is cutting out. Could you speak a bit closer to the phone?

Bob O'Brian, - Investor

Can you hear me better now?

Patrick Byrne, Overstock.com - Chairman and President

Much.

Bob O'Brian, - Investor

OK, phase 1, what I tend to call phase 1, is you target a small cap company that has hard to grasp accounting, or an unusual business plan for Joe Average to get his head around, or maybe is in a sector that has a stigma, like a dot com, Overstock.com. What you're going to do is, you establish a short position, then you have your media machine just unleash a barrage of hatchet jobs. You'll see stuff - the “when did you stop beating your wife” kind of articles that you’ve seen - where they question the companies ethics, their accounting, the business plan, management integrity, you name it. And generally it’s all for headline value.

Concurrent with that, you'll also usually get some pet lackey analysts to write some nasty things. And I’ll tell you, the things that those guys come at is a little different – you’ve seen it - corporate governance – there's a good one. Board oversight - always kind of scary. Earnings quality… Camelback’s a name you’re familiar with, actually loves that one, and makes it seem very scary. I know, by the way, they are big fans of yours is the (indiscernible) in the marketplace. At this point you also see a lot of related party trading to increase the volatility. I think that speaks to, I think, what you’re seeing in your stock action. Even this morning. You see, when you’ve got this machine going you want to increase volatility and basically create the impression of a very dangerous, unpredictable stock to own. You want to double, triple, quadruple the volume and basically create the impression of a stock and a company in crisis. Something no one in their right mind wants a piece of.

I think you saw that kind of action yesterday in After-hours and I think you are seeing it right now. I don't think it would have mattered what your numbers were. You could have come out with 20 cents a share. I think probably it was set up weeks ago, and it is basically all theater for the cheap seats in the back. It’s essentially a mechanism to create an impression, in order to scare the Average Joe shareholder. Because your institutions -- they've seen it, they know what’s going on.

Phase 1 goes on for six months, a year, a year and a half. It's basically until all the juice is out of the game and the manipulations aren't working anymore. Once that sort of slows down and they can't make these 10 15 point swings on for basically no reason they’ll go into phase 2.

As an aside, by the way, it is sort of too bad Mr. Rocker…I know he was on the last call with Kramer. (unintelligible), Herb Greenberg…

Patrick Byrne, Overstock.com - Chairman and President

I've invited them on. I've told them to call in.

Bob O'Brian, - Investor

It is too bad. I would love to actually talk to them.

Patrick Byrne, Overstock.com - Chairman and President

I would love it so when you are done if they're on the phone, let's put them through.

Bob O'Brian, - Investor

That would be a fun call. I've noticed Herb Greenberg has been writing a lot of nasty things about you and, you probably know his history, he used to write for Thestreet.com. I think on the last call you mentioned it. I just want to underscore this, not that it has anything to do with what I am describing, of course, but Rocker is the largest independent shareholder of the street. Along with his offshore fund Helmsman, and I always thought that was kind of interesting, especially given the fact that street.com is not exactly having stellar performance, but be that as it may.

Let me just cut to the chase through this. Tell you what happens in phase 2, because this is where I think you are right now.

Phase 2 is pretty insidious; and it starts with basically listing you on a foreign exchange or two. Now, I checked and I don't even know if you know this, but Overstock has been listed on 5 different German exchanges. They're in Frankfurt, in Berlin, Munich, Stuttgart -- one other one. I am just going to guess that you didn't call and ask for that.

Patrick Byrne, Overstock.com - Chairman and President

It's news to me.

Bob O'Brian, - Investor

You wonder why?

Patrick Byrne, Overstock.com - Chairman and President

I do.

Bob O'Brian, - Investor

I can tell you why, at least my theory why. It is basically so you have a pretense for failing to deliver the shares you are going to naked short. See, when the DTC asks for the shares you naked shorted from your offshore fund, you can just say you are waiting for, I don't know, XYZ broker in Berlin to deliver the shares, and the DTC will probably say "Well, we know how that goes." Then they will lend you shares from their stock borrow program, which is a centi-million dollar a year business for them.

So the DTC has no real incentive to look too hard under the curtain and make sure the shares are there and that they really made an affirmative determination. And neither does the SEC - because they receive a little part of the piece, too.

The next day, go ahead and short another gazillion shares. This time you can say, "Well this time we’re waiting for ABC broker from Dubai," and you'll get the same song and dance. The DTC will lend you the shares. Same cost. Everybody makes money of course, except, of course, the Company and, well, the shareholders.

The reason that the naked shorting is so key in phase 2 is because you are going to need big volume for the grand finale and there is typically no borrow by then. Not a legitimate one anyway. It's all dried up. I think your float is what? 4 million shares or something?

Patrick Byrne, Overstock.com - Chairman and President

Outside the institutions, yes.

Bob O'Brian, - Investor

I think you traded that, you’re probably going to trade that in the first hour today. So, is everybody on the planet selling your shares 5 times? I find that very unlikely. Anyway, the grand finale, and I am telling you this because, again, I have seen it happen again and again. I think you need to know this. I think that your shareholders and your institutions need to know this, the grand finale is they will break a huge slam in a big paper like the Wall Street Journal or Barrons, and this will be filled with all the same innuendo and alarming allegations that you saw. All the previous junk and usually a new hook of some sort. Doesn't really matter if there is any meat to it. They just need sort of a frame to hang everything on.

The key is now it is in a credible paper, mainstream, and sometimes you'll see, like, Forbes and people like Liz McDonald - but usually she is pretty low level. She will usually only be in phase 1.

Now you have hit the Big Time, and they are in grand finale stage, because the Wall Street Journal is going to have something in the C section. The article they did on me was in the C section. They seem to have an endless appetite for these expose pieces that maybe in retrospect doesn’t contain a lot of meat on the bone.

Basically, as the article breaks they’ll just hit you with a series of frivolous class action suits and a regulatory probe. It is really a 1, 2, 3 punch. That is usually the sequence. The article comes out, class action suit after class-action suit after class-action suit, and then a frivolous regulatory probe. Again it doesn't matter if there is any merit to any of it. It’s all for headline value. Very circular. You have investigations, that are based on class actions, based on articles, that the hedges planted in the first place. Or I should say, there is usually an anonymous source that the reporter is quoting and can't divulge, blah blah blah.

Anyway this is all a dance, and as we go through this, the naked shorting – they’ll just naked short it into the ground, trying to scare everybody out of the stock, and once it's tanked 50, 60, 70, 80 percent, basically when your stock is so poisoned that nobody in their right mind wants to get within 50 feet of it, and it is just radioactive, they will just cover at their leisure and move on to the next one.

Now that’s how I think it works and if I’m right, Overstock is about in the beginning of phase 2.

I watched this happen with NFI, I watched it happened with ACAS, I watched it happen with PPD. My bet is you are next on the list.

Nasty articles…you’re going to see frivolous class actions and a bogus regulatory probe, coupled with huge offshore naked shorting. All manipulations being, in my opinion, it has nothing more to do with legitimate shorting than a pump and dump does with legitimate buying.

I’ve got to apologize. I know this probably sounds a lot like the X-Files; but I want to mention a number, and just sort of close. The numbers kind of stopped me in my tracks the first time I heard it. It is an amazing number to me. That number is 25 percent. 25 percent of the U.S. companies on the New York Stock Exchange Reg SHO threshold list are Rocker Partner shorts. That is four out of the 16 U.S. companies on that list, and there are three more on the NASDAQ list - I just looked at it a couple minutes ago. If you haven't been following this, the threshold list is a list of companies that have been abusively naked shorted beyond the threshold of what is reasonable, and this naked shorting, by the way, has been against the law - there have basically been rules against it since 1934. The companies on the list, they’re kind of saying “we really haven't been following the rules”, but there's a list of companies that have been gang raped by mountain men, and this is them. This goes to the delivery failures that I was talking about when I mentioned the DTC.

Patrick Byrne, Overstock.com - Chairman and President

The German exchange that -- ?

Bob O'Brian, - Investor

Yes, because guess what? “We are still waiting for Berlin.” Right now you may be waiting for Berlin for six months, a year. “Because those Germans -they take awhile.” Anyway I just found that 25 percent number fascinating, and of course, I am not saying that there is anything, any impropriety to it. But I just find it fascinating that out of a constellation of thousands and thousands of U.S. companies, that 16 are on the New York Stock Exchange REG SHO threshold list and Rocker’s short 25 percent of those.

I was hoping that he would call in - and I would love to hear his spin and his comments on what I just described, because he is an acknowledged expert on shorting. Maybe he could disabuse me of these notions. But again, if he does call in please ask him "Why are 25 percent of the U.S. companies on the threshold list your shorts along with the three on the NASDAQ?"

By the way I’ve got that documented. He made statements, or Mark his partner did, so this is not some rhetorical theory. This is all documented.

I know I've taken up too much time. I just want to say one thing. Cramer - I just love the last conference call where he stuttered through the – “I've only met the largest shareholder in my company in the fresh fruit section of the A&P”. It killed me.

Patrick Byrne, Overstock.com - Chairman and President

They've met before -- in your mind?

Bob O'Brian, - Investor

The reason -- well yes. In short they have. I actually - after that, because I made Overstock a little hobby of mind. I had a reader on the Web site actually send me stuff. I will read it to you.

(READS ARTICLE) Now, You were on Kramer recently, weren't you?

Patrick Byrne, Overstock.com - Chairman and President

About a month ago.

Bob O'Brian, - Investor

So you were sitting there, drinking a glass of water talking to him on national TV. Would you say that you’d met him?

Patrick Byrne, Overstock.com - Chairman and President

That's -- Jim -- Kramer is an honorable man and if he said he only met this guy Rocker once and they're buying celery I'm not going to question that.

Bob O'Brian, - Investor

If he calls back, here is what I would ask him. Which grocery store was that?

Patrick Byrne, Overstock.com - Chairman and President

Listen. Did you have any -- so you want to ask a question. Did you have any other questions?

Bob O'Brian, - Investor

No, I just want to congratulate you. I am looking at your trajectory and it certainly looks to me at least that you broken through to the point of profitability and I know you can't talk about numbers coming up for the next year or two. If it is any consolation or any indication of my faith in you, hey I'm a shareholder and I'm not planning on selling.

Patrick Byrne, Overstock.com - Chairman and President

I appreciate that. Nice to have such -- you know a heck of a lot more about it. I buy toasters and sell toasters. It's nice to -- I don't know any of the stuff you are talking about but it is interesting stuff.

Bob O'Brian, - Investor

A little hobby of mine.

Patrick Byrne, Overstock.com - Chairman and President

Take care Mr. O'Brien. Operator, is David Rocker on the phone?

Operator

No he did not join, sir.

Patrick Byrne, Overstock.com - Chairman and President

There is one more, a person Jason Avilio from First Albany.

Operator

Your line is open.

Patrick Byrne, Overstock.com - Chairman and President

No? Hello?

Operator

Your line is open sir. Please go ahead in your question.

Patrick Byrne, Overstock.com - Chairman and President

Nobody there. Is there anyone else waiting for a question, operator?

Operator

Yes. We have two others holding.

Patrick Byrne, Overstock.com - Chairman and President

Go ahead with one of them. I don't know who are.

Operator

Reid Friermuth (ph) with Shimono (ph) Group.

Reid Friermuth, Shimono Group - Analyst

I just had a question about customer satisfaction. You have talked about customer satisfaction being so good at Overstock in the past and in fact, you mentioned the company Cento (ph) in the last quarter I believe. I was wondering, how is customer satisfaction going now and how is your relationship with Cento going now and are you planning on expanding or detracting that?

Patrick Byrne, Overstock.com - Chairman and President

Good question. I'm sorry. Reid? Your last name.

Reid Friermuth, Shimono Group - Analyst

Friermuth.

Patrick Byrne, Overstock.com - Chairman and President

Customer satisfaction. We are doing a CSI -- American Customer Satisfaction Index survey. That will be completed sometime in a couple of months. The first one we did last year, we scored an 81 and was the highest first score ever given I think they told us. They told us it was higher than all brick and mortar retailers and higher than all online people except for three. Barnes & Noble, eBay and Amazon.

We don't have that test updated. That is going to be done twice a year, so I don't have a number for you. Cento is this company about 20 miles down the road. We have a very integrated relationship with them. Good, they perform well. Not all relationships are flawless but we have worked through it and they had some growing pains. I think they were surprised by -- people don't really believe us until they see the wave, how big the wave gets. So that was part of it. They do fine work a bunch of good solid folks down in Spanish Fort, Utah. We have a nice relationship with them.

Did I hit -- did you ask anything else?

Reid Friermuth, Shimono Group - Analyst

Yes. Are you going to use them for your auction site, do you think?

Patrick Byrne, Overstock.com - Chairman and President

There is a small number of CSRs down there who are auction qualified but what we ended up doing because we hired 30 CSRs to work within our building here just on auctions and that is because as specialists we're developing auctions, I wanted to close the feedback rather than having people talking to customers 20 miles away and making it back through e-mails three connections to the people running auction. The people running auctions now are sitting literally across the hall from the 30 people talking to the customers.

I think that is going to be our model in the future. As we develop projects in scout work we will develop the in-house customer service teams to support those projects. And then, maybe when the things get off the ground and running and after a year or so we will gradually move the customer service over to Cento.

We have one more person on the line?

Operator

Bill Lennan.

Bill Lennan, WR Hambrecht - Analyst

My stuff has been covered.

Patrick Byrne, Overstock.com - Chairman and President

I have no -- I will -- I guess I should comment. I don't have any on that other -- that other fellow. O'Brien. I don't have a dog in that fight. I don't pay up a whole lot of mind. I show, I will tell kind of funny story which is after the last conference call where I got into it with Mr. Rocker, I got a bunch of warnings from seemingly knowledgeable people who said that you can count on in the next four -- that you're going to count on right away there are going to be people journalists calling you to do hatchet jobs. There's a woman named Elizabeth McDonald at Forbes is going to call you, from Greenberg of course, Lapdog Herb we call him, Wall Street Journal, Barron's. Within 48 -- that was on a Friday, by Tuesday afternoon every single person that I had been warned would call were calling including Ms. McDonald. Now when I asked her with a witness there did someone pick you up to this? David rocker? And she feigned, she said, "David Rocker? Who's that? No no one put me up to this." Which is so I'm just saying five years of business I had never heard from Elizabeth McDonald and as soon as I got cross publicly with Rocker and was warned that she would call, she did call.

So I suspect she was lying. Other than that I get all these messages of support about taking these folks on. I really don't -- my take on the whole thing is, there is a concept in economics called a captured regulator. Like, we have the interstate commerce commission in the 1920s that was to regulate trucking. What they did was they just prevented any new entrants into the field. You had to be licensed and then they jacked the rates through the roof. So the people in the field could make super profit and they became captured as regulators because they -- either through bribery or through just they knew if they were good boys for 10 years in the ICC they could become directors on some trucking company making megasalaries or just psychologically they get invested with the people they are supposed to regulate. That is called a captured regulator.

I would say say one of the most interesting lessons from this job is learning how our financial press and as a block (ph) are basically self-regulating or commenting on the financial industry. They seem to me to be captured by the people. Herb Greenberg so it is like -- I don't know -- accusing Herb a lapdog like Herb Greenberg is just a waste of time. It is interesting to me to see how this Section C editor of the Wall Street Journal and Elizabeth McDonald do this stuff.

Other comments on the future. I think that people's expectations for this year are becoming more more confident. We are, I think we can crush. Now we make crush them in different directions than people would expect us to, but when I am looking at what is happening in this Company we are just -- we have passed through the tipping point and things are just breaking our way. I don't say this all the time, long termers know when things go bad, I say, "Hey, this went bad and we have got to fix this. ' We have a lot of things to get better at but we are really on a roll here.

Thank you all. I see that our attendance -- I thought that we would lose people at 9:30 and it just keeps getting bigger and bigger 531 people now. Welcome to newcomers and again to dour shopping, join Club O Gold pay $99 and your company will save money on office supplies and a whole bunch of other things. Also I am going to be in New York in two weeks. I usually eat at Novita, best Italian place in New York, 22nd and Park. My special friend, a woman named Gina runs it, I am in there most days. Two weeks from now you'll see us. If anyone wants to visit, just come on to Novita. Really is the best Italian in New York.

Thank you for your business. Bye-bye.

Operator

Thank you. This does conclude today's conference. We do appreciate your participation. You may now disconnect.

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Source: Overstock.com Q4 2004 Earnings Conference Call Transcript (OSTK)
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