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Overstock.com, Inc. (NASDAQ:OSTK)

Q1 2012 Earnings Call

April 19, 2012 11:30 am ET

Executives

Jonathan E. Johnson – President and Corporate Secretary

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

Dr. Patrick M. Byrne – Chairman, Directors and Chief Executive Officer

Analysts

Justin T. Ruiss – Sidoti & Company, LLC

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 quarter one 2012 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, sir.

Jonathan E. Johnson

Thank you, Misty. Good morning and welcome to our first quarter 2012 earnings conference call. Joining me on the call today are Dr. Patrick Byrne, Chairman and CEO of the company; and Steve Chesnut, Senior Vice President 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, April 19, 2012, and may include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results as included in the press release filed this morning and in the Form 10-K we filed on March 2, 2012.

During the call, we will 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.

Please review the Safe Harbor statement on the second slide of the presentation, and we’ll be going over today. With that out of the way, let me turn the call over to Steve to highlight some of the financial results that are on the third slide of the presentation.

Stephen J. Chesnut

So thank you, Jonathan. As Jonathan said, let’s go to slide three of the presentation slides. And let me take and highlight a couple of the bullet points, I won’t cover all of them. The first one I would like to cover is the last bullet point.

Net income for the quarter was a positive $2.7 million of $0.12 per share. This is a $3.2 million improvement over last year and was due primarily to lower operating expenses, which declined by a combined $5 million from Q1 last year. On the top line, total net revenue was just over $262 million, 1% decrease from last year.

Contribution declined by 5% to $33 million, due largely to a 5% decrease in gross profit. And our combined technology and G&A expense decreased by $4.2 million due primarily to a reduction in compensation and legal costs.

While it’s not on this slide, let me highlight a few items from the balance sheet. We ended the quarter with $72 million in cash and cash equivalents; this compares to $100 million at the end of Q1 last year of $97 million at December 31, 2011. The principal reason for the change in cash from last year was the retirement of over $20 million of finance obligations that we paid at the end of 2011.

Working capital at the end of Q1 was a negative $9 million, while working capital at December 31, 2011 was a negative $14 million. So those are a few of the highlights on slide three of the financial performance. So Patrick, with that let me turn the call over to you for a balance of walking through the presentation.

Patrick M. Byrne

Okay and since I am offsite, I am actually going to call on Jonathan and Steve Chesnut a little bit more than is normal than is my custom during these slides. We had under recent events, we hired an outstanding SVP of Marketing, Tim Dilworth has just joined the Company, he came from Coldwater Creek. We received a closure letter from the SEC, Jonathan, regarding a 2009 investigation. Jonathan, do you want to say anything about that?

Jonathan E. Johnson

It is as expected that the SEC decided to take no action and closed the investigation. But it’s nice to have letter in our files now.

Patrick M. Byrne

Another closure letter, you can wallpaper your office with those Jonathan, We’ve launched the O.info customer information portal. Next slide, we see quarterly revenue growth, we’ve broken the, we were down as far as 10% down, we are minus 1% for the quarter end.

We are, I see that a question is come in saying what can we expect going forward well, I do in terms of revenue growth, and I do think that we’ve turned the corner on revenue growth and you can see it climbing back into the black immediately.

Next slide gross profit growth, pretty much follows revenue growth. Next slide, gross margin and contribution, we told you a long-time ago, that you should really expect, I think around 12 plus or minus 50 basis points or something.

We were disappointed that for a couple of quarters that was running down at 10% we are back at 12.6. I think the Gods of economics wants this to stay around 12.6, we can move it higher and actually it has been moving a little bit higher, but we, I think this is about where it should be. Next slide quarterly contributions $33 million. Again just a hair down from last year.

Next slide operating expenses same. Actually, Steve Chesnut do you want to – why don’t you speak to this slide? Is there anything you would like to add on the quarterly operating expenses slide?

Stephen J. Chesnut

Yeah. I mean I think the big takeaway on this, Patrick, is that Q1 of last year we were at $50 million for total operating expenses and we brought that down to just under $45 million. So a $5 million decline. A big piece of that was attributed to compensation, and some reduction in legal costs. So as a percent of sales, we’ve gone from $89 million down to the $71 million.

Patrick M. Byrne

Okay. On next slide, my favorite in the deck is the return to quarterly net income, and as I think as I said after the first time we had a GAAP profitable first quarter, a couple of years ago, I told the audience, that Jason Lindsey and I at the beginning of the company had agreed with each other that the Holy Grail was to get a profitable, GAAP profitable first quarter, because if we can be GAAP profitable in the first quarter, then everything else becomes fine-tuning in Management. So this is of course a healthy and fun slide to look at.

Operating free cash flows, next slide stayed in the, to the good side. I have good expectations about this year, Steve Chesnut do you want to say anything else on this slide?

Stephen J. Chesnut

Yeah I mean, if in spite of obviously this is a TTM basis, so despite three quarters of net loss coming through last year, we’re still positive on both operating cash flows and free cash flow, and I think the other piece is that we are continuing to optimize the inventory level that we have in the business and trying to move, and we’re strategically moving some of our inventory-based business, apparel and footwear from a direct business to a partner-based business.

Patrick M. Byrne

And having good success of that and actual out of that is due to Jonathan and Steve Chesnut themselves.

Moving to the next slide, GAAP trailing 12 months inventory turns. The core business is running at 7.1 on a GAAP basis, we’re at 43. I think that’s an all-time high. But the 7.1 is another good measure. I still think that that can be and it should be significantly higher than 7.1 and…

Jonathan E. Johnson

Yeah.

Patrick M. Byrne

Go ahead Jonathan.

Jonathan E. Johnson

I agree with you, Patrick. I think the good news if there is any in that 7.1, is that most of our large portion of our business is now in the partner business, and so it’s not affected by the 7.1.

Patrick M. Byrne

Right, 85%. And the next slide, GMROI, I think this is an all-time high for us we’re at 872% that’s satisfactory. I’d love to invest more capital with that GMROI. Customer service net promoter scores they will still stayed very high. This is the next slide. Stayed high, but it still is a little bit of a drop. We think that we have addressed this. Stormy is on this, and Jonathan or Steve, did you wanted to, did I recall you wanted to say something else about this.

Stephen J. Chesnut

I think part of if that is we’ve managed our costs well out at the Customer Care Call Center. We do have a goal to keep it up above 50 and we’ve done that, but there is a cost management piece to this.

Patrick M. Byrne

It’s still an incredibly high number compared to other company, and we recently won yet again the, yeah, we showed up in the Top 10 in the NRF/American Express poll. Okay, so next slide.

Jonathan E. Johnson

Patrick, don't undersell us. We were number four.

Stephen J. Chesnut

Yeah.

Patrick M. Byrne

Okay. Okay. And that’s all Stormy and Brian of course are doing their customary job there, and in fact we’re finding new uses for Customer Care in fact, we’re sort of expanding the field of vision of Customer Care.

Going to the next slide, unique customers basically says exactly what you would expect. The (inaudible) basis points decrease pretty much matches the revenues. New customers in CPA, still it’s holding in the range where it always – where it has been for years, maybe down a little bit versus the same time last year, but we might have ways, have found ways to bring this down even more. To bring this down, we might see a merge this quarter. I think we’ve discovered some profitable new marketing opportunities.

Next slide. Customer orders and average order size, again really no change. Gross profit per transaction, again, slight dip down.

Next slide, corporate employees and this is significant. We’ve fallen from 849 corporate employees. We divide our world into the employees who work at corporate and who generally – their numbers don’t vary with sales versus people in other parts of the Company whose numbers vary linearly with sales. And, well, this reflects a tightening up of our expense structure in response to what was going on in the topline. Steve or Jonathan, would you like to add anything under this slide?

Jonathan E. Johnson

Yeah. I just note that from the fourth quarter these numbers come down from 793, almost 300 people and it feels like we’re at a right size, and this is the number we’d like to hold at.

Patrick M. Byrne

Right. And in fact if anything there is couple of areas where we’d like to hire, always like to get the developers, for example. Okay. That’s the end of the slide deck. Do you have anything else, Jonathan or Steve?

Jonathan E. Johnson

I don’t, but let me read some questions that we’ve had emailed in, and Patrick you can answer them, or assign someone to answer. One is from an investor with a hiring of Tim Dilworth, could you elaborate on what his duties will entail in terms of marketing, and any new initiatives he is working on that we should watch out for?

Patrick M. Byrne

Well, his duties are CMO duties, Chief Marketing Officer duties, and I would say he is primarily, he has only been with us a few weeks or a month, and he is probably really just coming up to speed, and we are doing a lot of testing of some areas in marketing, where we have not been active before and Tim gets all that. By the way, he is a total quant, his background is as a quant, and he gets all of this, and is already pushing it to new levels. So I think that we will see some fairly quick results, and we just have things moving inside there are a lot of metrics moving in the right direction.

Jonathan E. Johnson

Okay. I would add, Patrick, that as our investors and our customers look at the site, they can see changes to home page and product page and these are all things that Tim is managing and testing, being very analytical, but he also has a nice creative mind, and a good creative team working with him.

So another question we’ve received, Patrick, is any color on marketing, especially related to the conversion would be great. I like that unique visitors, went up 10% those conversion seems to be lower it should be?

Patrick M. Byrne

Two comments on that. One is that when traffic does surge, and times when we have found some new things in traffic surgeries, it’s often the case that the traffics has the surge for a while before the sales pick up, but there is this initial lag, as there is a new group of people coming to your site who have not come before as you have found some new way to attract people, you are attracting people who have not been before they visit for weeks before they purchase, and so there is a lag in any case, and in addition, in our case there is a mix issue. Yes, our overall traffic is up 10% or even more and anyone who has [hit-wise] or any of those public services can see this. But there is a mix issue in the traffic of where it could be for example, that some of the increase in traffic is coming from a source, which has historically low conversion. So that’s going to give you an increase in traffic, but a decrease in conversion.

Jonathan Johnson

[Jonathan]. Patrick, let me add that also this quarter, we lapped the period where we began the Google penalty. And then last year when we were in the Google penalty box, we did goose more expensive and higher converting channels. So we spent more on areas that converted higher. We’re not having to do that this year since we are not in the Google penalty box, and I think that’s where we have seen visits up, but I think it’s also affected the year-over-year comparable on conversion.

Patrick M. Byrne

Yeah. And the Google penalties, anyone trying to model, it was actually less. Well, the actual effect of the Google penalty on us was more ambiguous than you would have thought, because, yes, it did eliminate or suppress something that were in the single-digit percentage of our revenue, but it meant other things changed. For example, our conversion and clicks on paid search went up. It’s as if, so people must, I mean, the interpretation would be that people went to Google Search, and since they didn’t see the natural results, they would click in the paid, there was a lift there. So there was some, it wasn't as, it’s a complex relationship, the relationship of natural search to other channels, it’s not as simple as one would think, and so the effect of the Google penalty was more ambiguous than people might have expected. Okay, I will stop there.

Jonathan E. Johnson

And then the last question we’ve had e-mailed in, and Patrick you addressed this a little bit in going over the slides, but when can we get some color around revenue growth, what will cause revenue to accelerate, and when should we expect to see this?

Patrick M. Byrne

Well, our first priority was to get the earnings number back into the black, but then I think that you will see revenue accelerating this quarter.

Jonathan E. Johnson

The other think I would like to add to that is, first quarter revenue is largely driven by how high fourth quarter revenue crests, and while we shrunk 10% in the fourth quarter, in fact that I think the fact that we shrunk just 1% in the first quarter, means even though we didn't come off such a high crests, it feels like we’re running it much better now. Misty, those are the questions, we’ve had e-mailed in, can you open it up to callers if they have any questions?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Justin Ruiss with Sidoti.

Justin T. Ruiss – Sidoti & Company, LLC

Good morning.

Jonathan E. Johnson

Good morning, Justin. How are you?

Justin T. Ruiss – Sidoti & Company, LLC

Congratulations.

Jonathan E. Johnson

Thank you.

Patrick M. Byrne

Thank you.

Justin T. Ruiss – Sidoti & Company, LLC

I just wanted to ask, I guess a lot of cost has been taken out of the Company so far. Is there any more room to takeout any additional costs, or is this kind of bottom that we are looking at?

Patrick M. Byrne

I think this is, well, I think that this is the bottom. If we are not actively stripping G&A costs, well we are always looking for small things, but no, we certainly don't plan any 100 headcount reductions, and I think that we have right-sized although it is always possible. It is always possible to, we want to be disciplined, and if we go into periods of shrink, we have to be very disciplined with our operating expenses, but no we don’t have any plans to reduce from here.

Justin T. Ruiss – Sidoti & Company, LLC

Perfect. Thank you.

Patrick M. Byrne

Steve Chesnut, you probably want to add on that?

Stephen J. Chesnut

No, I think we looked at it in December and January, took the appropriate measures where we needed to have the expense structure, we executed on that, and then, I think we are pretty comfortable with where we are.

Justin T. Ruiss – Sidoti & Company, LLC

Sounds good. Thank you very much and congratulations.

Jonathan E. Johnson

Thank you very much.

Patrick M. Byrne

Thanks.

Operator

(Operator Instructions) At this time there are no further questions. I would like to turn the call back over to Jonathan Johnson.

Jonathan E. Johnson

Thank you, Misty. Well, we appreciate those that have dialed in. We appreciate our owners for trusting us to manage their capital. We invite any of our shareholders to come to our Annual Meeting in Salt Lake on May 3, and if we see you then, that would be super. Otherwise we’ll talk to you in a quarter. Thanks, Misty.

Operator

This concludes today’s Overstock.com quarter one 2012 earnings conference call. You may now disconnect.

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