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Overstock.com, Inc.(NASDAQ:OSTK)

Q4 2011 Earnings Conference Call

March 2, 2012 11:30 am ET

Executives

Jonathan E. Johnson III – President and Corporate Secretary

Patrick M. Byrne – Chairman and Chief Executive Officer

Stephen J. Chesnut – Senior Vice President, Finance and Risk Management

Operator

Good morning. My name is [Misty] and I will be your conference operator today. At this time, I would like to welcome everyone to the Overstock.com fiscal year and quarter four 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Mr. Jonathan Johnson, President of Overstock.com. You may begin your conference.

Jonathan E. Johnson III

Thank you, Misty. Good morning and welcome to our fiscal year and fourth quarter 2011 earnings conference call. On the call with me today are Dr. Patrick Byrne, the Chairman and CEO of the company; and Steve Chesnut, Senior Vice President of Finance and Risk Management.

To begin, let me remind you that the following discussion and our responses to your questions reflect management’s views as of today, March 2, 2012, and may include forward-looking statements. Actual results may differ materially. We have additional information about factors that could potentially impact our financial results, included in the press release and the 8-K that we filed this morning.

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

With those preliminary comments out of the way, let me turn the call over to Steve to highlight some of the financial results.

Stephen J. Chesnut

Thank you, Jonathan. Let me give you a brief overview of our financial results for the full year and fourth quarter of 2011. And as we review our financial results during the call today, please keep in mind that unless otherwise stated, all comparisons will be against our results for the full year and fourth quarter of 2010.

2011 revenue was $1.05 billion that’s a 3% decrease. Q4 revenue was $314 million, a 10% decrease. 2011 gross margin decreased by 6% and gross margin declined by 40 basis points to 17%. For 2011, contribution margin fell by 70 basis points to 11.1%.

Q4 gross profit decreased by 40% and gross margin declined by 80 basis points to 16.2%. For Q4 contribution margin fell by a 190 basis points to 10.2%. 2011 combined technology and G&A expenses increased by 18%, this is largely due to an increase in IT related staffing and the higher legal expenses. Q4 combined technology and G&A expenses increased by 24%.

The 2011 net loss was $19.4 million and the Q4 net loss was $3.4 million. During the fourth quarter, we retired the remaining $34.5 million of outstanding senior convertible notes. This was partially funded through a $17 million draw on our U.S. Bank Line of Credit. We also prepaid all of the outstanding technology leases for $20.1 million in cash during Q4. We ended the year with $97.0 million in cash and cash equivalents and negative $14.1 million in working capital. I would encourage you to review our Form 10-K that we filed today for more detailed information on our results.

So with that, let me turn the call over to you Patrick.

Patrick M. Byrne

Thank you, Mr. Chesnut. Patrick here, so we’re up through page three, no reason to review those numbers. Now, I'll start off by saying obviously it was a ugly end to an ugly year. We’re happy there is lots of good questions that will be sent in that we'll be answering, as after we get to these slides.

We do think, I think fundamentally, actually every department is running better than its ever run with one exception, which is marketing, and that is definitely been stumbling, there is and my fault entirely. And but we have made the real ugly period to be honest came in the middle of the last quarter, well, say November to mid December. I would say the Christmas period, we definitely had some problems. Some unexpected contraction very sharp and our biggest problem over the last few years, its sort of two steps forward, one step back, when we have good steady growth, we can adjust our expense structure around it, its when we have great deceleration or even acceleration at sometime its has been hard to, well, when the growth rate changes suddenly some other things get some other ratios get carried (inaudible) want us. Two years ago, we certainly had a quarter I think we were growing 55% and then it tailed off, tail has been very lackluster growth and then in the fourth quarter there was a period with very sharp contraction.

We stopped that. We have stopped the hemorrhaging. We have adjusted our significant adjustment to our corporate expense structure and we think we’ve come out of it quite handily actually and that this Q1 is going to look sort of surprisingly good given where we’ve just in, but we did have a tough year no bounce about it.

So I’ll hit slide 4 picture affecting what Mr. Chesnut said, we should not be contracting to represent in industry, which is growing 15%, so that’s clearly a problem gross profit everything else suffered, gross profit and contribution suffered with it. You get to technology and G&A, your corporate expenses slide 7, versus our contribution margin and that got upside down. Our contribution margin, we think 12%, 12.5% is sort of where it wants to be and we got upside down on that.

Outside legal expense, slide 8, $16 million. I don’t think we’ve ever revealed this before, right outside the legal expense was massive in the last year. The law suite against Goldman was not the entire in the $16 million, but it was over $10 million of the $16 million

Jonathan can fill in more detail on that if he wishes, legal expense, net income is as we said minus $19 million cash flow still remain a point of optimism, where we get good positive free cash flow and operating cash flow. We retired the last of our debt. These kinds of prices, I am not adverse to taking on some debt swopping, some equities for debt at this kind of a price. To Q4 results, we’ve just discussed recent events. We were again rank number four in customer service. We had a major reduction in corporate staff in January, 8.5 million.

And when you throw in other expenses and legal expenses, I think that you might see even a, in the plan or in the budget for this year for 2012, there is quite a significant reduction overall. It’s not just a corporate staff but legal expenses and some other expenses have contracted or should be contracting with it. The Prime Broker Lawsuit was dismissed in California on jurisdictional grounds. We are appealing that but that’s a far, far lighter bill and should be for the next year too.

I’m going to continue to, let’s say ‘13, ‘14, just ‘15 just keep repeating what we’ve been saying. Jonathan, do you want to say anything about, any of those slides?

Jonathan E. Johnson III

No, I mean I think they speak for themselves. We can see the absolute revenue dollars and the growth are better set the shrinkage in each of those slides.

Stephen J. Chesnut

So I to go to slide 17, the operating and free cash flow which we care a lot about, we’ve remain positive. And I think, we can really well, I don’t know well, I’m suppose I’m not in the business of making productions, but we on these calls, but we’re actually feel pretty good about our cash flow now and our cash position now.

Inventory turns, slide 18, this becomes a problem of course when sales don’t, I mean there was a period last quarter where we were shrinking. We had really went into a very sharp contraction. Sharper, I think it’s about a sharp as we, while not quite as sharp as we’ve ever experienced because there were periods we have experienced 40% to 50% contractions in years past when generally when certain geopolitical events happened and for a week or something we’d suffer very sharp contraction.

But we suffered very sharp contraction in last quarter that lasted a very fair chunk, a significant chunk of the quarter. GMROI and actually our return on capital is our return on inventory capital certainly on a GAAP basis is fine. Customer, net promoter score has, slide 20, has still remained sort of astronomically high compared to retail in general. I just saw another scoring service came out and it put us right at the very top, we scored an 83, well, on another scoring service.

Customers, new, do you want to talk it all about our new customer and new customer CPA, Jonathan, Steve?

Stephen J. Chesnut

Yeah, yeah, so I mean, so from an aggregate standpoint, we keep on adding unique customers. During the quarter, we saw deceleration from acquiring new customers that we had seen in the prior quarter in 2010. From a customer acquisition standpoint we saw an uptick in that cost, part of that was continue to try and drive revenue in the fourth quarter and acquire new customers. So it was a combination of a deceleration on new customers and our marketing cost to try and go grab customers.

Patrick M. Byrne

Customer orders and I’m sorry, I can’t quite make out the average order size?

Stephen J. Chesnut

Yeah. So Patrick let me take this one so, during the quarter, we actually saw an increase in the average order size, we went from just under $113, $113 per order to a $115. So, pretty happy with the average order size.

Patrick M. Byrne

Continuing 24 just, that was said 25. Go ahead.

Stephen J. Chesnut

Yeah so on slide 25, this is a reflection in January we, or in Q4 we ended the quarter with 793 corporate employees. And then, January 3 we went through a reduction of force. We brought that number down to 730. We think that brings our expense structure much more inline with a very modest, conservative approach. So the outlook on where revenue and margins will go this year. That way we’ve sized.

Patrick M. Byrne

Great.

Stephen J. Chesnut

We’ve sized to manage the expense structure and now our quest is to drive topline growth.

Patrick M. Byrne

Right. And I would say we’ve also replaced a lot of, our technology is starting to work for us. It is rather than sort of consuming more man labor, getting it, labor getting it filled and tuned in. We have a lot of systems now that are doing things that either, were previously done by employees, or not being done at all. And, so that has led us, that’s part of the reason we’ve been able to rationalize this. I don’t think we’ve missed [to be] by on the slide 25 by this rationalization over the last year of labor force.

Let’s go to questions.

Stephen J. Chesnut

Okay.

Patrick M. Byrne

Do you have anything else on the slides Jonathan or Steve?

Stephen J. Chesnut

Just let me point out one thing Patrick on slide 12 under recent events. During the quarter, we also deployed a marketplace initiative and we’re starting to bring our assortment live on other marketplaces.

Patrick M. Byrne

I thought we weren’t talking, okay. Growth, how much do you want to say about that?

Stephen J. Chesnut

That’s all I want to say.

Patrick M. Byrne

Okay.

Jonathan E. Johnson

Okay. Patrick, we had a number of questions that’s been sent in. Let me post them one at a time, we’ll go through some of them and we will take maybe some questions on the call and then finish up by wrapping up with some of the other questions that have been sent in.

One of our shareholders notes that we’ve done a lot of things and fits and starts over the last 12 to 18 months and talks about ASEBA and the O.co rebranding and then the hiring of tech people and we had downsized later on, asks to talk about this filter that we used for new business ideas?

Patrick M. Byrne

Okay, well, first I take all the final responsibility for these decisions are mine, totally my responsibility. My fault, bad decisions are my fault, the good ones are invariably my colleagues. Part of the decision making, I’ll run through a number of these questions that were sent in on this point. Part of the decision, a big part of the decision is what the commitment is to pursue a business idea and what’s the commitment in terms of manpower and money. We in general have gotten away from very large multimillion dollar ideas. And we’re trying lots of things, and often the things that cost few hundred thousand dollars to develop and launch.

ASEBA, I would put in that category, we’re doing others like that and some of them work. A lot of things are working beneath the hood that we’ve been wanting to do for years and are making our site better and better. And in fact in general that’s the direction we’re steering rather than for independent things like ASEBA. We’ve realized that the human capital and the financial capital are best deployed and starting programs that are very close to something we know and understand already. And it’s just an extension of, and so I think our site has gotten significantly more intelligent and not just attractive.

But I mean the technology underlying the site, and the various optimization routines that are going on, are driven by different groups of people and we’ve really decided that generally, I think I can only think of one exception at the moment that, that’s where our resources are best spent.

O.co was my bad call and I should be clear actually. Stormy left marketing largely, but year and a half, two years ago. She has been working on another project that is I think one of the most important ones we’ve ever done, having to do with our partners. And it’s working beautifully, she is developing this, she has been developing that for a year and a half. But it, there was some bad decisions for, which I take responsibility in marketing O.co. O.co was odd and then it worked at one level.

It did get out there into peoples heads, but what we discovered and we turned it up slowly and we actually had nice adoption from the beginning of last year, gradually people shifting to O.co and then, but we got into the Christmas season and it worked terribly for people who were not familiar with us. There was a tremendous amount of traffic diverting to O.com and I think we’ve figured out. It was about eight out of 13 people who were trying to visit us through O.co. Eight were typing O.com.

Now some of them may have come, trying anyway. So that was a part of the slide. There was another big decision I made last year on an aspect of marketing. That also was a bad decision from a competitive reason. I don’t want to disclose it, but we tried something. And so we were doing something that wasn’t working very well. We tried killing it and it turns out that it was better, not to have killed it and just have let it keep going and not have an ROI, a good ROI than to kill it all together.

So, some bad decisions in marketing that were totally my fault. And I think that, however, we have reached a place where we we’re doing things much more incrementally and we are able to test and this is to me sort of the big development in the last year. Our ability to test, not just at the cosmetic level within the site, but deep down in the site in terms of algorithms, has finally really snapped into place.

We can test things we’ve been dreaming of testing for years and that we never really could test adequately. Now we are testing. I mean, we could not have tested for technological reasons, could not have tested correctly before, but for the last several months we have been able to test. We are learning. And so, I would say that in general the filters in place now, we really aren’t trying. We don’t to pursue big expensive ideas and we’ve backed away from the big expensive ideas for a couple of years. For example, Zebo was not a big expensive idea to test and it just did not catch on.

Stephen J. Chesnut

Patrick, my comment on a [zebra stripe area rug].

Patrick M. Byrne

Yes.

Stephen J. Chesnut

My view on Zebo, it was definitely something we are trying. And I think that what we’ve learned as a management team is to try things particularly that are relatively low cost, but if they don’t work turn them off quickly.

In the past we’ve rolled new things out, sometimes left them running for a long time. Auctions would be an example. As we saw Zebo’s performance and what it was bringing and what it was not bringing to the company, we made a quick decision to go back. So, I would actually view the [Zebo] test roll out and turn off as a positive, relative to negative.

And then, another aspect of this question was a ramp up in debt hires and then letting some of those developers go in January. We had for many, many quarters been talking about ramping up our debt hire. And as we’ve been managing our expenses, we’ve been very careful not to let those debt hires to go because of the projects that we needed to get done.

But anytime that an organization hires a lot of people, some of those people are going to be better than others. And so, when it came time to do a little bit deeper cut in the work force, it frankly made sense to stop giving development of pass and cut some of those people away. So again I think that hiring ramp up with something that we needed and perhaps we should have been calling people earlier than we did, but I’m pleased with the cuts we made in January.

Jonathan E. Johnson III

Yeah. And, well, I’m never pleased to cut, but we did ramp that department up extremely quickly over the last four or five years and we have been a little belated ramping it up and then we grew it quickly and we are extremely selective on the way and we had never really made any deep cuts. But it meant that when you ramp up a department like that [and then] how selective you are on the way, and it means that when you go from seven to 160 people, which is I think what we did, when the time comes to say can you cut 30 or 40 people, you can find them.

And then, in addition, the question is on the bonus and this is a fair, very fair question, [GE] and it’s why do we pay bonuses. Well, we come up with the bonus formula. Usually it changes each year. We have it at the beginning of each year. We publish it, people understand it. And it’s designed to incentivize what the behaviors we’re trying to really focus on that year and what seems fair. There has been years when the formula generated that. Even if results were bad, it generated large bonus and there have been definitely years where we had relatively good results that the bonus, the formula really generate us a small bonus pool. And that just has to do with reality, some times working out differently than as was anticipated by the formula.

We really have lived by that bonus, by that bonus formula. And again, there were times when it generated a fairly, where people made a very large improvement overall in a year, but the formula didn’t spit out [a bit] would spit out a small bonus. And when that happened we lived by it and we told people we have to live by it.

There have been at least two years that the executives came and said they felt the bonus pool was too chintzy, given the progress that their colleagues had made, that they voluntarily said, we’d surrender our bonus and the executive bonus is just a slipper of the overall bonus pool. And they would say, we’ve surrendered our bonus, so as to augment that that the general employees got. So we just lived by this bonus. Also sometimes it does end up. It has generated results, but they’re a little bit odd looking to the eye, both on the positive and the negative side.

Patrick M. Byrne

Steve, yes you may.

Stephen J. Chesnut

May I comment on the 2012 bonus plan, just to kind of give the investor community…

Patrick M. Byrne

Sure

Stephen J. Chesnut

Some insights into the thinking. As we look at this year, we said, we’re going to establish a net income for that unless and we use different terms of net income. We call it management income, internally which is kind of income from the business before corporate expenses i.e., interest, some litigation. And we established that for at $19 million. So there is no bonus pool being created unless management income exceeds $19 million. That way, I think, well designed, so it protects the investment community in the process.

Jonathan E. Johnson III

Right.

Patrick M. Byrne

Great. And I would say as far as the senior talent, I’ve never had such confidence in this team. Well, I’ve never had such confidence in our team as we finally have. I think all the right executives in place and none of the wrong executives in place. With the exception, as I have said in the past. Marketing, there was something of a hole there. I think after Stormy left and there were some management confusion, I would say among the leadership and/or within the leadership, within the department. That has been resolved. We have the leadership within the department is the best I’ve ever worked with. And we’ve hired, we can’t say who, but Jonathan can I explain what’s happen or not?

Jonathan E. Johnson III

Yeah, I think you should.

Patrick M. Byrne

We’ve hired a very senior person from another company, who will be starting in a couple of weeks. The announcement has not been made who it is and from the company the person is coming from and such. So, somebody with large brand as well as the kind of experience, very quantitative and such. However, unlike I’d say in the past, we really have at the next level down, we really have some very strong leadership in the respective chimneys within marketing and this is just sort of the last person I think we’ve been missing. That announcement will be made within a couple of weeks who it is.

But in the mean time, we’ve actually quite. We’re shrinking 10% in the fourth quarter and there were periods in there where we were shrinking 30-ish, 40ish percent. We’ve bounced back nicely. We’ve bounced back handily. It still isn’t where I wanted to be. So walking into a good situation with the right, with good people in place but the senior leader will be announced within a couple of weeks.

Jonathan E. Johnson III

Yeah, Patrick let me just provide a little more color. The senior leader is going to be a Senior Vice President, Marketing basically filling a Chief Marketing position. He comes from a retail. He has retail background. And we think he is going to be a very good addition to the executive team and provide good marketing leadership within the company.

Patrick M. Byrne

And let me explain Stormy a year and a half ago. And she was, well, Stormy was the best, but year and a half ago, I moved her off to do something that I don’t think anyone else has done. Well, at least as we are doing it, basically taking everything we’ve done in Customer Care, and creating a duplicate version of it all and pointing it up the supply chain.

So we now have, as we have Customer Care, which is one of the best in the world, if not the best in the world, according to some people, we now have Partner Care and Supplier Care. And it’s the same kind of operation pointing up to supply chain. I think it’s making an enormous difference to hear. Our suppliers tell it. They love it. There is a large group that’s been build, a Partner Care team.

And so, building all of that has taken Stormy, a year and a half. I don’t regret sort of pulling her off marketing in order to do that. But it has meant that we’ve had more turmoil in the department than we should have. I think it’s the term period is over. It’s actually running reasonably slickly now, still lots of. Everyday, every week we are learning lot of things that we’ve never learned before, but what we have is a senior person from another retail company coming in.

Jonathan E. Johnson III

Patrick, let me ask two other questions that have been submitted. And then we’ll open it up to take some questions from those who dialed in. One question I asks, about the lawsuit and why has this been a good thing for the company and what can we expect going forward?

Patrick M. Byrne

I just, on the…

Stephen J. Chesnut

I’d like to answer that.

Patrick M. Byrne

Well, I would like to turn it over to you, I’m going to hit the first part, I felt and feel essence of duty that this has to be done, this has to be done, when the world understands what it is that happened and the stuff from Goldman gets revealed, there is, we – I have just felt a very strong ethical duty that this had to be done there is no way I could back out of this, I will then leave it to Jonathan to talk about the cost benefits. I basically feel this is a serial killer on the list, there is a serial killer named Goldman Sachs on the list and somebody has to expose them and stop them. Jonathan?

Jonathan E. Johnson III

Let me talk about some of the fast assume from this effort and where it is going forward. First a lot of the activity that was very obviously happening for example augmenting on the regulation showed threshold list because of massive amounts of sales to deliver on our stock has ended. The SEC has closed many of, often and many of those loopholes so I think the efforts that we have taken have been a benefit to our shareholders, we ended the market in general on that front.

This is something that gets, they could talked about in Washington, President Obama have an executive, issued an executive order to look into how make it short selling can be used as a tool of economic warfare. So I think there has been real benefit to this. As far as lawsuit goes, we of course were disappointed that the Judge in California while acknowledging the manipulation was going on to determine that the California Court wasn’t the right place to try that.

We’ve entered into a, we considered filing a suit either in New York or in New Jersey where it’s clear that this manipulation was going on, but we’ve entered into a tolling agreement with both Merrill Lynch and Goldman Sachs so the statute of limitations has been told and is not running.

And we’ll appeal the suite in California, hopefully gets to take its trial in California, but if we lose on appeal our rights are preserved in New York and New Jersey. So going forward, the appeal is not a management intensive process, it is also not a very expensive process from an outside Counsel perspective that there is no discovery, there is not the massive documents to look through, it’s really just making legal arguments most of which are well formulated from the briefings that we’ve done during the discovery in pretrial part of the case.

So you’ve seen that our legal expenses last year were up in the $16 million range. That included our fight, roughly half of that included our fight against Wall Street, another big chunk of that was a successful defense against a patent troll down in Eastern Texas, where not only where we found not to have infringed Alcatel Lucent’s patents, but we were able to validate one of their patents. So I think all of those expenses have been well spend, unfortunately lawsuits costs a lot of money but I think we’ve, I think we’ve been justified in our expenditures.

Patrick M. Byrne

And we have developed a reputation. We’ve seen this pay off on a couple of occasions of late where people went patent trolls and there is a whole for those listeners who don’t know. There is a whole industry of people who’d think that they patented the internet or they bought patents somewhere along the way and they come in and say look we patented having a shopping card. We patented having just the most basic things. They claim patents on.

And most people pay them to go away. And at one case recently other folks in the industry paid them big, big money, more than our legal budget for the last year to go away. And we’ve fought the patents, spend a couple of million dollars fighting the patent and got it and validated. And so that’s one of, that’s Jonathan and Mark Griffin, our General Counsel. So we hope that that have some. And then we have some evidence recently Jonathan that people have come to understand that they’re risking their own that there is a risk to coming after us with patents.

Jonathan E. Johnson III

Yes, we recently have the patent troll that filed suite against us, ask us if they could withdraw the suite and that was dismissed with President and so we’re doing with that. And we didn’t have to pay a single penny, so…

Patrick M. Byrne

So it was an expensive reputation to build but we think that it will have benefit in the future. Then I’d say an addition, I see that I’m asked here about my time spend on TV, what on I spend more time talking about uplifting parts of the business, world stock and things like that. I’m sure this I don’t get to control it, when I go on TV. And not only I although of course I love to talking about Overstock and do feel that the TV appearances have certainly helped a well, I like to think that they’ve helped make us, helped enhance our brand. Not only don’t I get to choose, I often don’t know until the moment I’m on satellite what I maybe am going to talk about or maybe I thought I was going to talk about, get to talk about Overstock and I end up talking about being asked about ObamaCare or the Federal Reserve or something.

And I would say at least 50% of the time I don’t even know what I’m going to be talking, about. I’m told to be in the satellite studio and I’m either not told what we’re going to be talking about. I’m told one thing but there is some other breaking news and that’s what they want me to talk about.

I still it’s worth doing. I think it still helps build our brand and build awareness for us. I would love nothing more than to get on TV and talk for 10 minutes every time just about Overstock and Worldstock and things like that. But it’s really, I’m afraid it’s not part of the equation that I get to determine that.

Jonathan E. Johnson III

Okay. Misty why don’t we, we’ll do some of these other questions in a minute. But Misty, why don’t we open it up to those who have called in?

Patrick M. Byrne

But wait a second Jonathan I see that there is another set of questions from Sanjeev.

Jonathan E. Johnson III

Some of those have been answered. I’d like to take a few from the call and then we’ll answer the rest of Sanjeev’s...

Patrick M. Byrne

Yeah, I guess you’re right.

Question-and-Answer Session

Operator

(Operator Instructions)

Jonathan E. Johnson III

While we’re waiting for the roster, let me ask you this Patrick. Sanjeev has talked about Zappos and how it’s grown in roughly the same rate as Overstock but that it’s been valued in much greater level, due whereas management have any comment on why market values Overstock and Zappos stay differently.

Stephen J. Chesnut

I don’t know how the market, Sanjeev, could answer that much better than I could answer that. And I don’t really, I can’t say pay attention to that. Its how Amazon valued Zappos versus how the market has valued us is not something that I will comment on.

Operator

You have a question from the line of [Steve Liner].

Unidentified Analyst

Hi. A question about a comment Patrick you made a little bit ago that I was hopping you could give more clarification on you said that you are not adverse to flopping equity for debt, I presume that means taking on that and buying back shares, what’s the plan for this. What are the thoughts now, things going in wrong directions kind of levering up, if you could just give more color on that comment and then I have one another question for Jonathan after.

Patrick M. Byrne

Sure Steve, I’ve – my – you did read me correctly that yes if we could issue debt had an attractive enough price. That wouldn’t be interested in issuing any debt with any warrants, but a piece of straight debt and at 8-ish percent or something which is where we understand the market for BBB as these days. If we could issue debt at that level and buy an equity, I think that that’s something that we would strongly consider.

Unidentified Analyst

Any thoughts on how much that you would take on, how much stock you would buyback. I know that depends a little bit on the share price but and all for the timing, when you might deal this.

Patrick M. Byrne

Well I shouldn’t be clear this is I’m just sharing my thoughts not that there is no plan to do this. There is no plan as something we’ve of late discussed, but somewhere north of 50 and less than a 100 would be the appetite. And Jonathan is there anything inappropriate without me, so these are just my I’d say my ruminations rather than any corporate plan at this point.

Jonathan E. Johnson III

Yeah, we don’t have a corporate plan in this front, we do have an S3 which filed and effective and it allow us to issue debt and if the market conditions are right and we get the right prices, we always consider, we’re always looking to manage our capital structure on our balance sheet the best we can.

Unidentified Analyst

Okay, and then one other question this is kind of follow-up to the lawsuit question, you guys answered a second ago. So, basically Jonathan you said one of the benefits for the shareholders has been the these loopholes in Reg SHO and what not have been closed, but having said that that in doing this you’ve, cash flow essentially would have been 50% higher, I do not done it, and the stock price is probably 60% lower.

So I am not exactly sure how closing Reg SHO helps us it really doesn’t have any effect on the stock price, which I thought was the ultimate goal when battling this problem so, just kind of your thoughts on that considering it has cost some much and free cash flow would have been 50% higher?

Jonathan E. Johnson III

Yeah, had these loopholes not been closed and had their, had manipulators been allowed to continue unchecked failing to deliver millions of shares a day, who knows what the stock price would have been and who knows what would have happen there. So it’s a little bit of guess Steve to know it’s benefited the stock prices or not, I don’t know, but I think it is been good for Overstock and good for the market…

Unidentified Analyst

I have already uttered so many words on this subject. I’m going to keep my mind now to just a footnote and that is, when the story comes out, and we now have five years discovery. We know soup to nuts what happened. We have the whole story in a way we did not even a year or two ago. So it’s not supposition. We have the whole story. When it finally comes out, which I just have to trust that it will, what happened and what certain parties were doing, I think that it will become more clear at least, why it just had to be done.

The people made a decision to destroy us in 2004, 2005. There is – some large entities made a decision to destroy us. And I think that if we had not fought back and lord knows, it turned into a hell of a fight. But if we had not fought back as we did, I don’t know, Jonathan do you think – would you think we’d even be around today? But when people will understand when the whole story comes out, why it certainly is not black and white. This is a very difficult question. Jonathan, do you have any comment? This has been your…

Jonathan E. Johnson III

Well, I agree with that. I frankly don’t think we would have been around had we not chose to fight this fight, but that’s just my opinion.

Unidentified Analyst

Okay. Thank you.

Jonathan E. Johnson III

Okay.

Operator

(Operator Instructions)

Jonathan E. Johnson III

Patrick, another question that’s come in is does management think it has a good handle on operating expenses at the current time given that with $1.1 million in revenues and making losses last year, do we think we’ve got things under control?

Patrick M. Byrne

I really do, I really do. It’s really not we have tighten up our expenses. We’ve – our cash expenses – do you want to say the number that’s in the management income number you quoted Steve in terms of what our expense structure is, probably not.

But, we’ve tightened up our expense structure. We don’t think it’s a problem, although we have the ability and the will to – if our contribution margin kept sliding, we have the ability and the will to keep knocking millions of dollars out of our expense structure. But we think we have tightened it up appropriately and it’s just a matter of getting the contribution margin growing again. And also we’ve arrested without going into too many – certainly, as I’ve mentioned there were some very ugly period in the middle of the last quarter where we were shrinking much faster than the 10% that the overall quarter turned out to be, and we’ve arrested that slide and started bringing it back.

So I think given that I think our – we made some healthy cuts this year in our January, on our expense structure and I don’t think any more award to now, until or let them we see how the current round plays out. But we do feel like we arrested the slide and are climbing back.

Operator

(Operator Instructions)

Jonathan E. Johnson III

Any other questions, Misty?

Operator

There are no questions at this time.

Jonathan E. Johnson III

Okay. Let me then address some final questions we’ve received about internal controls and about our amendment the 8-K we filled the day after our annual shareholder meeting. That amended 8-K we filed reported that our share – that 8-K initially reported that our shareholders had approved our executive compensation and the board’s recommendation about the frequency of future advisory votes on executive compensation.

The SEC's rules required an amendment of that 8-K within a few months after the annual meeting to report the company’s decision regarding the frequency of future advisory votes on executive compensation. At our annual meeting, management had recommended the votes be held every three years. The shareholders approve that recommendation. So wasn’t much news that we intended to follow the shareholder vote, was follow our original recommendation. But the fact is, we filed an amendment and it was late.

In January, we realized that we needed to file the amendment, and we filed it within a day. It was an inadvertent mistake, and a minor one at that. Since it was obviously late, there is no need to say so in the amendment, but missing the amendment deadline could have adversely affected our S3 eligibility.

When we requested from the SEC a waiver for the late filing, the SEC granted it. So our shelf registration in the form of Forms S3 is still valid. We have also received a question whether we should have filed an 8-K to report the late 8-K amendment as a triggering event under our finance agreement with U.S. Bank. The answer is, no. The 8-K requirement applies only if the consequences of an event are material to the registrar.

As this is our practice, we analyze the question of materiality on all the facts available to us, and we determined it was not material, U.S. Bank agreed and quickly provided a waiver when we requested in that. Since that analysis nothing leads us to question our determination.

Unidentified Analyst

Do you want to expand on why was it material or, minor?

Jonathan E. Johnson III

Well, having the S3 in place or not frankly was this not something we think is material to the company. And late filing was minor because it said we intended to follow, what we recommended to the shareholders and the shareholders approved.

Unidentified Analyst

Okay, any last words.

Jonathan E. Johnson III

No, I think we have answered the questions that have come in, we are – those are grindstone working hard focused from important initiatives within the company. And as Patrick said I think we have rested the decline, we saw in the fourth quarter, and we are looking forward to 2012.

Unidentified Analyst

Caveat through, we are I can’t recall its been some years as we’ve been this optimistic as we are internally, which doesn’t mean that work in place and we don’t think we have all the problems worked out. But almost everything, is humming and even the parts that hasn’t been humming for sometime marketing, which is been scribbling along is we are worse it definitely seems to be have made a good aggressive sharp turn to the – in the right direction. And I have never been so confident as the people, the people we have running in the different chimneys within marketing. Some of them or most of them were have been there, a number of years. And we just in Jan we have lot of things kicking in. We just have a lot, we have more things kicking in now, then I can’t ever remember at any stretch, and we are, don’t want to overstate it, but we’re very optimistic about this year.

Patrick M. Byrne

Steve Chesnut, since you’re the CFO, I’m sure you can give a healthy dose of, well I don’t know

Stephen J. Chesnut

Let’s leave it at that, Patrick, and we need to go to start, just continue to execute.

Patrick M. Byrne

Okay

Stephen J. Chesnut

Thank you very much, and shareholders and owners those that are interested, thanks for calling us, we’ll talk to you next quarter.

Patrick M. Byrne

Thank you very much

Operator

This conclude today’s Overstock.com fiscal year end quarter four 2011 earnings conference call. You may now disconnect.

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