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Executives

David Chidester - SVP of Finance

Dr. Patrick Byrne - Chairman and CEO

Jonathan Johnson - SVP of Corporate Affairs & Legal

Analysts

Scott Devitt - Stifel Nicolaus

Dom LaCava - Canaccord Adams

Shawn Milne - Oppenheimer

Overstock.com Inc. (OSTK) Q1 2008 Earnings Call April 22, 2008 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2008, Overstock.com Incorporated Earnings Call. My name is Shaquana and I will be your coordinator for today. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call Mr. David Chidester, Senior Vice President of Finance.

David Chidester

Thank you. Good morning and welcome to Overstock.com's first quarter 2008, conference call. Joining me on the call today is Dr. Patrick Byrne, Chairman and CEO; and Jonathan Johnson, Senior Vice President of Corporate Affairs and Legal.

Before I turn to the financial results, please keep in mind that the following discussion and the responses to your questions reflect management's views as of today, April, 22, 2008 only. As you listen to today's call I encourage you to have our press release from April 18, 2008 in front of you. Our financial results, detailed commentary, and the CEO'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 meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

These forward-looking statements involve certain risks and uncertainties that could cause Overstock.com's actual results to differ materially from those projected in these forward-looking statements. Overstock.com disclaims any intention or obligation to revise any forward-looking statements. Additional information concerning important factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in documents that the company files with the SEC including but not limited to its most recent reports on Forms 10-K, 10-Q and 8-K and S-1.

I will now review the financial results first for the quarter ending Mach 31, 2008. Please refer to our earnings press release for the full financial statements, and further details regarding our results. All comparisons will be against our results from Q1 of 2007 unless otherwise stated.

Total revenue for the quarter was $201 million, up 27%. 27% revenue growth was a combination of direct revenue growth of 13%, and fulfillment partner growth of 33%. Our revenue deferral at the end of the quarter for order shipped but not delivered was $12.8 million, compared to a deferral of $13.7 million at the end of Q4 2007. Therefore, the reversal of the Q4 deferral into Q1 was approximately 900,000 more than the revenue differed at the end of Q1, resulting in an increase to our Q1 revenue of 900,000, which you accounted for approximately one-half of 1% of our 27% growth.

Our total gross margins were 17.3%, up 130 basis points. Gross profits grew 37% to $35 million. Note that, above that net effect of the revenue deferral just discussed at the end of Q1 was incremental the revenue by 900,000 as gross margins were higher this quarter than in Q4, the net effect of the deferral was $100,000 reduction of gross profits.

Our sales and marketing expenses were up 33% to $15 million, and technology and G&A combined were down 6% to $24 million. Total operating expenses were down 9% to $39 million, partly due to $6 million of restructuring in Q1 of last year. Excluding restructuring, total operating expenses increased 6%.

Our operating loss for the quarter was $4.3 million, compared to $17.7 million and our net loss was $3.9 million or $0.17 per share, compared to a net loss of $21.4 million or $0.91 per share.

Note that we repurchased 1.1 million shares or approximately 5% of the outstanding during the quarter for $12 million reducing our shares outstanding to approximately $22.7 million.

We generated positive EBITDA for the third consecutive quarter. EBITDA for the quarter was $3.5 million and EBITDA over the last 12 months was $6.5 million.

Given the seasonal nature of our business cash flow was negative in the first quarter. We pay down partners and suppliers following the holiday season. Cash flows from operations were negative $41 million this quarter, versus negative $58 million last year, a $17 million improvement while on a trailing 12 months basis, cash flows from operations were positive $27 million versus negative $12 million, a $39 million improvement. We ended the quarter with $90 million in cash and marketable securities, again after using $12 million of cash for share repurchases.

And with that, I will turn the call over to Patrick.

Patrick Byrne

Thank you, David. Nice job. Before we go through the slide, I'd like to start off by saying that the corporate finance department of SEC sent us a comment letter. This is a standard event all public companies get it rolling. I am going to tell the story at my level David and then you dive in clear up any detail if I got wrong.

David Chidester

Sure.

Patrick Byrne

The SEC wanted to review half a dozen or more different aspects of how we do our accounting. I think there were eight questions in all. They did yeoman's work. By the way this is not a disclosable event, it's a normal process. The SEC ends up disclosing it when it's all over. They disclose the event and what came out of it in such a way you know it's going to happen soon.

Jonathan Johnson

It should happen, it could happen as soon as 45 days after their final letter to us to whenever the SEC gets around to us. So it could be soon from here (inaudible).

Patrick Byrne

Okay, but they have given their final letter Jon?

Jonathan Johnson

Yes, they have.

Patrick Byrne

So they have reviewed the whole bunch of things. For example, they reviewed our treatment of the way we handle partner revenue recognizing as gross versus net and unsurprisingly they agreed with it. They agreed with our treatment and of course which to me it's kind of silly that it was iterating down. Amazon has 70% of its titles, last I knew we're actually drop shipped by [Inkling] Book.

They reviewed a number of issues and signed off on a number of issues. They ask for a couple of changes in disclosure. One of the changes was they want us to break down our revenue in more detail than we have been in the past, and so we're starting to do that.

Secondly, they asked us to recognize revenue on estimated to stop recognizing it on actual ship date and turn it to estimated delivery date.

I have my own opinion about. When we started the company and chose our accounting principles, we looked around that how other people did it, and of course the at the time we said we're going to recognize the ship date because that's date certain and there is no slop or estimate in it. Rather than estimating when people get it and at that time the technology which is not a very accurate idea of exactly when people were shipping their packages.

What we see is over the last couple of years some other companies have shifted to estimate a delivery date and the SEC. Dave can give more color on it, but we made these arguments that it's better to go with the number that you know in any case it did come out. We're changing to estimated delivery date.

At first, I think David estimated that was five days after we shipped. Now to be Delta's vendors, is we've agreed on eight days after we shipped. The net effect of that is it took eight days of revenue off of the end of December and slipped it into January it also takes eight days of revenue bookings as in when people have ordered the product.

Well, Dave, you are going to have to clear that up, because that's going to be more precise, but it took eight days of the end of March and it's going to slip it into April. The difference between those two numbers is less than $1 million. And so it actually has its less than a $1 million in revenue. It actually hurt us about $100,000 in terms of earnings because we took we got added from December moved into Q1, revenue at a 16% gross margin and we lost revenue in March, that was at a 17.3% gross margin.

So it actually hurt our earnings a $100,000. It helped our revenues more than that but less than a $1 million. So, people are wondering, gee, this 27% growth rate they are surprised by it, they are wondering was it caused by something like this. No, this is an insignificant factor and responsible for less than half of our percentage point that's changed and is responsible for less than half a percentage point in our growth rate.

David, would you want to add to that?

David Chidester

I would just add, I think the process with the SEC was a good process. The accounting is probably more accurate or more appropriate. Once again, we go from using an actual number to an estimate. But again, all it's doing is shifting revenue forward, a few days. And again it's not completely simple, it's based on what type of carrier we're using has different delivery dates, but you basically summed it up correctly, and all the issues that they had have been resolved, and I think we are fine and we'll move forward from here.

Patrick Byrne

So, is it fair to say that all these other issues that the knuckleheads keep on raising as issues, the SEC examiners, looked at and sprinkled holy water on?

David Chidester

Yeah, I mean they took a deep dive they do that every three years or so. And again they are very good to work with. It is not adversarial at all and we've got all the issues resolved and it's nice to know that we could move forward.

Patrick Byrne

Yeah. And I can confirm that the SEC guys were super professional. I don't think this was a result of anything other than their normally scheduled, well, I am not going to opine on their motives. But they were very professional and cool to deal with. So, anything else on that, Jonathan, do you want to add anything?

Jonathan Johnson

I just think it's important, particularly given our litigation. But the SEC has now approved our accounting of how we treat partner revenues. That was an important piece for us.

Patrick Byrne

Yes. To me, it was never really a very legitimate question, but here we go. Okay. Let's go to page 3, highlights, page 3 of 33 in your slide deck. Exceeded industry growth rates, 27%. Depending on who you listen to, the industry is growing around at 17%. Some people say even less. Positive EBITDA, third quarter, consecutive quarter, $3.5 million. I know EBITDA isn't the same as GAAP net income. I like GAAP net income better as a measure. We have not reached GAAP net income. But EBTIDA is important, especially because in our case, it's a pretty close approximation to cash flow, over a 12-month period.

Positive operating and that's only because we don't really have to spend much any more on CapEx. Positive trailing 12-month operating cash flow is positive $27 million. We bought in 1.1 million shares for an average price 10.81; 5% of our outstanding. Wish it were more, but there it is.

Page four, revenue growth. You see rather brisk acceleration there. No further comment.

Slide 5, gross profit growth. We told you a long time ago that this was going to turnaround first by the nectar, the contribution number, then by gross profit, then by revenue. Gross profit growth is at 37% and then slide 6, the contribution number, coming as meaningless, because at one point it was growing 1300%, but that's because we had a quarter where it was a very small number. And that's growing at 41% and that's the number we really are managing to. That's where we want to see high rates of growth or hyper growth return. I consider anything over 50%, a hyper growth and I am good with.

Okay, slide 7. This is a recap of the last few years. Our descent into the inferno. This was our revenue growth contracting pretty briskly after running around 80% to 100% for years.

Slide 8, of course, we cut our expense growth, once we saw what was going on with revenue growth, we tried to do tame our expense growth. And in fact, we had just really built up on the operating expenses when the revenue growth collapsed. And as you can see, we weren't able to get our operating expense growth to cross, to getunder the revenue growth at first. Then the next slide, 2006, you see that was basically our year in the inferno, where eventually revenue was shrinking and we still had this growth in operating expenses. Then slide 10, we finally exited the inferno, and the lines crossed, and revenue growth is now outpacing operating expense growth. And I will note that that's excluding restructuring. I mean, if you do all these lines again with restructuring we just have great big noise in it. This is the underlying business, but if you do this again with the restructuring, I think the differences would just be exaggerated between these two lines and then the crossing would look even more significant.

Dave, anything that you want to add at this time to these lines?

David Chidester

No. It's just nice to see those lines cross. We are in a situation now where we can really start to leverage the business. We don't anticipate tech and G&A really increasing over the next couple of years. We're going to start seeing depreciation dropping after the next couple of years and at the same time, we are investing back into the business and so we can do that without actually increasing our overall expenses. So, any growth at this point is really going to start to leverage.

Jonathan Johnson

And we are investing. It doesn't show up to the outside because we do have so much depreciation rolling off. But, we are slowly turning into under the leadership here of Sam Peterson on the tech side, we used to always be proud that we were not a tech company. We said we were a stand with the computer in it. We now have some pretty good technology and we have a very strong technology team who are able to get projects done that order of magnitude faster than anything we've ever had before. We're just cranking through projects, some of which have been waiting for years, so we actually have a good development and tech team now. But again it doesn’t show up a numbers, because lot of it is just replacing the depreciation rolls off.

Next slide, gross margin and contribution, slide 11. Sales and marketing expense was running versus gross margin and the difference is where the red line is of course the contribution, I'm sorry the top line is the gross margin and then the red line is contribution after marketing expense. That of course turned negative by the end of '06.

Next slide, slide 12, that is bounced back to a robust especially hit 9.8% just short of 10% and that was, I remind you in a quarter where we did a couple Super Bowl commercials.

Slide 13, contribution dollars, again negative slide 14, we bounced out of it. We actually generated almost as much contribution in the first quarter this that just ended as we did in last Christmas, so again, we're all about generating the contribution dollars.

David Chidester

What's nice to see Patrick is that growth and contribution dollars comes on essentially the same revenue.

Patrick Byrne

Yeah.

David Chidester

And it really just doubled our efficiency in gross margin and marketing.

Patrick Byrne

Yeah. Okay, slide 15, operating expense. The blue line is the sum of our sales and marketing G&A and tech, go to slide and as you can see this is where it got very high because we were already been making some investments, where we'd made decisions that were basically not something we could change on the dime and when the growth came to a sudden halt, we were caught offside.

So next slide, slide 16, we got it back under control, turning at 19.5 now. And of that Dave, how much of that is to depreciation?

David Chidester

We're potentially going to have about $22 million to $23 million this year, and that's dropping $8 million or $9 million from where it was last year and then again we anticipate another drop of $8 million or $9 million next year and that's not spending. I think that's spending $10 million to $15 million CapEx each of those years. We do anticipate, we are going to start spending of CapEx more than the $3 million we spend last year.

Well even spending something which we do anticipate probably at least $10 million this year, don't know about next year yet, but even assuming that depreciation is going to drop $8 million or $9 million range this year and next year.

Patrick Byrne

So, but in this past quarter what was it, $7 million?

David Chidester

Yeah, our depreciation was $6 million range or total non-cash charges including stock comp is closer to $8 million.

Patrick Byrne

So it's still even just the depreciation is about 3% of that 19.5. Okay, next slide 17, EBITDA, again now we are descent into hell. I said at the time, we're spending a lot of time trying to profitable we're willing to make some trade offs so forth.

Next slide, slide 18, you see that we've done pretty much just what we said. We structured what I said in the perceiving call which I didn't read aloud. Once we got into that trouble we said we've got to restructure our expenses. Even at $800 million company we're fine, we'll survive and can make a little cash. I think we have comfortably done that, we have even done in the first quarter and actually just project what would the whole year look like.

Even at this kind of a growth rate and this kind of expense structure you can see, we've done what we said have to do. We restructured the business and we don't want to get off side to get in, we don't want to get in position where we have to grow to make the numbers work, although growth is nice coming back.

Next slide, cash flows from operation, this is slide 19 on a trailing 12-month cash flow, of course we were in a deep trouble there, going back a couples of years, and in slide 20, we've come out of it now we're trailing $27 million of our cash flows from operation.

Next slide, GAAP annualized inventory turns. This is slide 21of 33, I think I actually said in the previous conference call that normalized in this around 25, sounds right to me, maybe 30. There is a flush effect as we flush through this tremendous amount of inventory it actually got it up to 35 or something, but then as that washes out, I think stabilizing about where it now, sounds right.

Slide 22 there is the big inventory liquidation and were very comfortable with the amount of inventory we have now, I we can probably shrink. Anyway we are very comfortable where it is now. There is a little bit more we can do there. The flush effect that I described did drive it up to 12.1 or something. It's now stabilized. It's now at 6.8 and I think that we can maybe that's a good number for us and this is on a direct-only basis and Dave what do you want to say about this?

David Chidester

I would just add that at 6.8, you can see that back in '05 and '06 we were running between around 3, so we're really turning inventory more than twice as fast as we used to and that's why I think we can start growing that business without growing our inventory. And I think 6.8 is great, we can probably do better than that though, and again its nice to be able to grow that business without requiring more capital to do it.

Patrick Byrne

Great. It's a huge improvement from down, a course just about two, three years ago. Okay, next slide 23, GMROI this is on a quarterly basis. Our GMROI on a GAAP basis is 140 to 160 and turn the next slide on a trailing 12-month basis is actually 695.

Slide 25, in 2005 National Retail Federation and American Express did the survey with (inaudible) household and says, who gives you great customer service. We were not listed. We were not in people's answer, I think in the top 150 or 200.

2006 next slide page 26, they asked same question. We showed up number four. And this isn't just dotcoms, this is all retailers, Amazon, Nordstrom, LL Bean and Overstock.

And then slide 27. They did again last year and they announced, its LL Bean, Zappos Amazon and Overstock. So we are still number four, but now we're above Nordstrom, which I always thought of as the gold standard of this. This is Stormy Simon, oversaw this great turnaround. She has had emphasis from Steve Tryon, and now Brian Popelka, has moved in and is managing this on a day-to-day basis reporting to Stormy.

And Steve Tryon, I am just going to take a moment to describe. Steve is an old friend of mine, he was an army colonel after he left the Pentagon, moved to a really hard charging organization, I am kidding, at Overstock and he has been with us four years and has jumped it and fixed a number of different things. He has now taken over Human Capital Development. And I actually think that's one of the greatest long-term investment we could make in the company. And we were giving him lot of resources and he is really developing that. And certainly, you'll probably hear about Steve more over time.

Next slide, Net Promoter Score. It's now at an all time high. It's at 73% overall. Again, if you want to know what this means, go to the book, 'The Ultimate Question' by Fred Reichheld. He has the all stars listed in book, we hold ourselves against. We're at 73% now and even people who contact customer service, rate us at 28 in fact. And that number is going up briskly. And the according to Reichheld, the average American company for all customers gets a score of 8%.So apples-to-apples where they score 8%, we score 73% and it's just getting better. Our customer satisfaction is unbelievable in our customer service. Even people, who call customer service with an issue, just have a fantastic customer experience.

Page 29, Cars we launched Cars. I hope you check out this site. This new tab is very cool. It has some features that other people don't. For example, this scatter plot diagram with the best fit curve that you can click on any dot below that curve is presumably a good deal. So you can find the good deals very quickly using this tool. And we have over 3 million vehicles in stock.

Slide 30, Cars we talked about it. Auctions, is adding some tailwind in earnings. It's got this expense structure straightened out and I actually expected a little bit more to start happening out of auctions over the next six months. But Auctions is doing just fine. International, we still expect to launch maybe in June or July. We’ll be launching to a number of countries.

The Community tab. We have a Community tab live. Some cool things have rolled there in last couple of weeks. I think a few more things will be rolling this quarter, and we have a new tab coming live this quarter as well. Keep a look out for.

Slide 31. Oh legal update. Let me go to Jonathan Johnson.

Jonathan Johnson

Well, it has been a busy three months in legal. I want to talk about the two cases that people ask questions about, and that they seem interested in. And our Prime Brokers suit out in San Francisco. We began discovery, in fact we're in the middle of the discovery and we’re trading documents and data with the prime brokers. And that case moves forward and we're pleased with how it is progressing.

In our suit out in Marin County, with the Rocker and Gradient defendants. There has been progress there too. The judge has lifted the discovery stay, and so we will begin trading documents this week with them and that's important for us.

The judge also has allowed Gradient to bring a LIBOR definition suit against the company and Patrick. That's a motion that Gradient filed, they were slow off the dime to do that, and we did not oppose that motion. We think it is a bogus case. One that we will win and so we are not overly concerned about it. But we have disclosed that information to the public.

We're in a good place on our litigation. We have got a Board that is supportive of this. I characterize it as a wartime Board that is helpful and involved and we are moving forward and I think that's my summary Patrick.

Patrick Byrne

Good summary. I had forgotten, the judge lifted the stay of discovery.

Jonathan Johnson

That's correct. In Gradient and Rocker.

Patrick Byrne

How about discovery in the Prime Brokers?

Jonathan Johnson

That's going forward. We are in our second round of discovery there. The judge is managing that and doing it in an iterative process and we have been pleased with what we have gotten so far from the Prime Brokers and have asked for all of their trading data in Overstock and that's the next round of information that we expect to get from them.

Patrick Byrne

That's kind of the keys to the kingdom, as these guys have spent eight years fighting various companies to try to avoid turning over. Just want to point out that if you go to YouTube and Google, the words SEC Bear, you will see the Chairman of the SEC telling the US Senate that they are investigating whether Bear Stearns was brought down by naked short-selling. And Dick Fuld of Lehman and Dave Schwartz from Bear Stearns got up to this out and said pretty much the same thing. They used the phrase illegal manipulative short-selling or something. So a lot of the folks who have been saying that this is all a segment of my imagination, seem to have gotten laryngitis in the last few weeks. Jon?

Jonathan Johnson

And In fact, an interesting note the government accountability officers have been asked to do an investigation and prepare a report on why the SEC has not been prosecuting, make it short in violation. So, we're looking forward to seeing what the GAO finds and has to say.

Patrick Byrne

And that was Senator Carl Levin, right?

Jonathan Johnson

That correct.

Patrick Byrne

Didn't Tester also ask for different kind of investigation at Barney Frank?

Jonathan Johnson

Senator Tester of Montana has asked for the SEC to look into weather there was manipulative the trading involved in Bear Stearns short terms.

Patrick Byrne

Good. So, by the way this, I got this woodcut. This is a Albrecht Dürer woodcut, I just loved that. A friend of mine wrote a book, David Luban wrote a book, put this on the cover. It's a woodcut of blind justice, having a blindfold tied on. But, it's being tied on by the fool. It's kind of cool.

Okay, slide 32, I want to thank all vendors, I probably don't do this enough. We don't have the resources, we haven't ever done like what eBay and Amazon does, which is they develop a lot of their own technology and it's great technology even they have huge teams developing it.

We haven't approach the business that way, we basically integrated a lot of leading-edge technology. You can see on the left column that's a stack of technology, which is all tided together. Right now has been instrumental. I won't go through each at once. And on the left, that's just big stack that is costly but is working well for us.

Right now it's a big part of our customer service success. I had mentioned Omniture, SiteSpect, PayPal, we did something with UPS, been a great partner for us. I feel like at the Oscars. I know I am leaving people out here, they will be mad. But anyway these are the people who have been a big part of what got us here and have helped us turn things around.

Okay, next slide 33. Okay. These are the highlights; revenue growth has returned robustly, the trailing 12-month cash flow is doing nicely. EBITDA were positive and our customer satisfactions are at an all time high. So I feel good about things.

Let's go to questions. Shaquana?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of (inaudible) with Merrill Lynch. Please proceed.

Unidentified Analyst

Yes. Hi Patrick. Couple of quick questions. One, marketing spend was obviously high in Q4 as you did the big brand build, and looking at contribution margin, it went down there and then it went back up a lot this quarter. Do you see that at a blended level that it should have been in and that you've kind of pre-bought some marketing in fourth quarter that flowed into first quarter. Basically what's the lag on that brand marketing expand?

Patrick Byrne

I do. Now that's a great question. I mentioned I think and after our Q4 that we had really goosed some branding that probably didn't have the payoff in Q4 we hoped it but would do more for us in Q1. And I think that that did generate some benefit for us in Q1. I wouldn't explain the 27% by any means by that way. I would say it gave us a nice launch in the Q1. I hope that is a good observation.

Unidentified Analyst

Another thing on that is then going back for that marketing. A quick point is, if could you break that down on kind of brand traditional marketing spend versus online spend that's more direct response, just by percentages?

Patrick Byrne

Well, I can tell you that we spend, we actually don't disclose that in general. We have disclosed that the brand is less than the branding is significantly less actually than the online spending. And it's all shifting around, I'd say that we're reconsidering and reevaluating a lot of our online channels and we're discovering areas that we were probably over spending. And we have discovered areas that were really relatively untapped that are paying back well for us. So this is more of a reflections, it's seems to me of changes we're doing in how we spend the money online than in the big shift between one bucket and the other. Dave, do you want to add anything to that?

David Chidester

Well, I just think going forward, last year we really cut back branding and I think that's why when we spend a lot in the fourth quarter it did have the lag effect into the first quarter. But I think going forward, I think we found better balance of spending where we need to spend on TV, where we need to spend online, and now we're just making slight adjustments one way or the other based on which is more effective.

Patrick Byrne

I think more than anything to be honest or as much as any thing is our website. We made a lot of changes in our website and implemented and enrolled some good technology that is increasing the amount we get out of each visitor in revenue. And I know that this quarter there were some concerned people saying, oh! their traffic was down, in fact they have said that for several quarters but you have to divide revenue or if you divide revenue by traffic you will see pretty decisive changes and how much revenue were actually extracting from the traffic. And so a lot of this is actually in my mind being driven by technology and site changes as much as where we're spending our money. But then where we're spending our money, its still as most of the majority is in the online but it is shifting within our mine, we're reevaluating channels.

Unidentified Analyst

My next question was, how much was the kind of the growth driven by better conversion rates? And I know that you implemented Omniture, you have analytics running on the site, so you probably or as you say, your sites are much better at deriving revenue from each customer. When did you fully implement on maturity? And how much of this do you think this is in kind of stepping up the technology platform versus getting it to where you should be on conversions or getting through where you are in conversions versus really long-term driven growth which is, in the end its going to be customers. You can monetize the things, people coming to your site only to a certain degree, you need to get people coming, right?

Patrick Byrne

Well, to a significant degree this is and as the first part of your question, to a significant degree this is our site getting better, our technology getting better. We actually implement an Omniture year and a half ago. They are only about 20 miles away from us. But what we have done is, build a team who can use it and get actual insights out of it. And what we're actually doing, is pretty leading edge things, tying together Omniture and other vendors in ways that no one has done before, and they tell us it is pretty leading edge. And I don't see an end to that. I think well, things that Omniture and the other vendors tell us we're doing; they say no one is even talking about doing this stuff we are doing. And we have a long laundry list that we are just at best 30% or 40% of the way into the laundry list. But Omniture helps and I shouldn't really tear that out, a big part of this is driven big part is driven by Omniture, big part is driven by Teradata, because now we can do just really fine grain analysis and understand. We just peeled out one layer of the onion after another and we understand what's really making things happen and what isn't. So although a lot of this was driven by technology, I sense maybe half or more than half, I don't see that as something that's going to end quickly. We have a good year or so and work through this laundry list.

Unidentified Analyst

Great. Patrick, sort of monopolizing questions. One last quick one and thank you for answering me. This is maybe more for a derivative [call] than anything else, but did you see any real change in online advertising pricing during the quarter? People are making comments about the economy coming more into the March than they did at the beginning. So is there been any general change that you have witnessed on the macro front?

Patrick Byrne

Yeah, I hear two different things. People are cutting back, but I also hear that they are getting better. I know they are getting better. I know that the competitors are getting better at figuring out what the value of different real estate is in online advertising. So, basically it's not a unique skill set anymore or even semi unique. It's a very widely disseminated skill set how to analyze the value of different places in online marketing. So, in that sense the markets got more efficient, and in another sense I do hear that there is some cutbacks. And we're starting to see it from vendors of online advertising calling us and sort of willing to make some good deals. We're actually seeing that on both ends. It's really been more of I would say in April that with the bankruptcies going on in the retail world, we're starting to hear from other retailers or the suppliers, to retailers with lot of excess inventory. And maybe to some extent that's happening with online advertising as well. But I think that's getting offset by the fact and more than offset by the fact that people are just better at our online advertising and they were couple years ago.

Unidentified Analyst

Great, thank you very much for answering my question Patrick.

Patrick Byrne

Thank you, Ned. Any time.

Operator

Your next question comes from the line of Scott Devitt with Stifel Nicolaus. Please proceed.

Scott Devitt - Stifel Nicolaus

Hi, good morning.

Patrick Byrne

Hey, Scott.

Scott Devitt - Stifel Nicolaus

My question just relates to the increase in the selection are the SKU account in the side over the past year. How much of the growth you would attribute to that increased selection, maybe if you could articulate it in terms of changes in product mix, year-over-year? That's all I have. Thanks.

Patrick Byrne

Well, it certainly helps, the selection is certainly helping. I am wondering, if it is helping better in repeat rates than just in the most obvious way that pay out more stuff and more, so it helps in conversion, but I think it helps, the broader selection we get, the more like it is that people start saying after they bought once or twice. Well, I am going to check with Overstock first to see what they have. So I think it helps, but may be just in the most obvious way I don't think it helps quiet as directly as I had hope. But I think it does help more in creating the sense of Overstock as a place that you want to always check first. And Scott, does that answer your question.

Scott Devitt - Stifel Nicolaus

It does, yes. Thanks.

Patrick Byrne

Do you have any others? Feel free.

Scott Devitt - Stifel Nicolaus

Well, I guess somewhat related to that were there any movements in product mix in the quarter, just relative to last year? I noticed books, music and video in the 10-K, last year on a full year basis was down. Fulfillment partner revenue, which actually has been the less volatile of the two revenue streams that you have, essentially doubled in the quarter and so the question earlier I think was interesting about the pre-spending on marketing, but it seems like there is something more to it and trying to get my hands around. You kind of glossed over it in the presentation. You pointed to the revenue growth acceleration and no further comment, but do you have thoughts as to the specifics of what caused such a dramatic acceleration.

Patrick Byrne

I do. I am not going to go into too much details on them, but I don't think this is a blip. Well, first I'll go to Dave Chidester. Do you want to address Scott's question first, Dave, about mix or anything?

David Chidester

Well, I don't think there was any significant mix shifts.

Scott Devitt - Stifel Nicolaus

BMMG did drop. Didn't it?

David Chidester

BMMG did drop. That would probably be the only thing I would point to that helped our margins was the BMV shifted from about 8% of our business to about 5% compared to last year's first quarter. So, it is shifting down, which helps margins a little bit. We are adding SKUs, sort of feeling in areas where we didn't have SKUs, but there are not any new categories that have become material enough to move to growth number, I don't think.

Patrick Byrne

Yeah, I can say as far as growth goes, I don't believe this is a blip. I don't want to get anybody's hopes up. Well, I'll tell you what I'm thinking and Dave and Jonathon can do what they do, but I think you can expect sort of the growth to stay here or even have a modest bias upwards for Q2 and Q3. And then, I think it inflects again in Q4.

If I had to call where I think growth runs, that's how I see it. I might put it this way. I might say there is, in my mind, a 40% chance that our Q2 growth rate starts with a two and there is a 30% chance it starts with a three and the remaining 30%, I would split it between the other two. And then, I think we're sort of back in the groove and I see that the flywheel is spinning up. But, I'll all stop there and turn it over to Dave or Jonathon today…

David Chidester

Well, I would put it a little differently.

Scott Devitt - Stifel Nicolaus

Okay. But more conservatively by any chance?

David Chidester

Probably.

Scott Devitt - Stifel Nicolaus

Put it more conservatively.

David Chidester

Yeah. Surprisingly, I don't think this is a blip. We are seeing trends that tell us it's not. I do think we can sustain the growth number with a two on it, then depending on other factors with some of these things we're working on these projects to pay off, we don't have some issue with the economy that changes things dramatically. I think we can sustain a growth number with the two on it for the year.

Scott Devitt - Stifel Nicolaus

Yeah.

David Chidester

How it plays out in the quarter, I'm not sure exactly.

Patrick Byrne

Okay. And I should say upfront that was all setting aside any exogenous factors, dynamics like, okay, if the economies implodes, consumer spending will be down. On the other hand, we get people offering us more products, and people who required a taste for luxury start, maybe they've started shifting there the way they handle with reduced income as they shift their consumption to Overstock.

So a bad economy can hurt us and help us, but if you set aside those kinds of dynamics and just say fundamentally what's going on, I think nothing changed in the economy. I still stick by sort of, okay, growth rates staying about flat and maybe with a modest buyer's efforts and then inflecting another notch in the fourth quarter.

Jonathan, do you want to add anything?

Jonathan Johnson

No, nothing to add.

Patrick Byrne

Okay. Scott, any other questions?

Scott Devitt - Stifel Nicolaus

That was all I had. Thanks for your time.

Patrick Byrne

Okay.

Operator

[Operator Instruction]

Your next question comes from the line of Dom LaCava with Canaccord Adams. Please proceed.

Dom LaCava - Canaccord Adams

Thank you. Good morning, everybody.

Patrick Byrne

Good morning, Dom.

Dom LaCava - Canaccord Adams

So, I may have missed it, is there a slide deck with customer metrics up there as far as average order size unique customers?

Patrick Byrne

There is no slide up there, Dave, what do you have in that you want to say?

David Chidester

Not up yet, but it will be up shortly.

Dom LaCava - Canaccord Adams

Okay. Anything worth noting, I mean do you have new customer account, average order size? I can certainly look at it later.

David Chidester

We did see some new customer growth I think somewhere in 18% to 20% range which is nice, but we haven't seen growth in new customers for a while. So that was definitely helpful and we did increase in average order size.

Dom LaCava - Canaccord Adams

Okay.

David Chidester

And again, I think that goes back to some of the technology and the things that Patrick is talking about that will help to drive that average order size up.

Patrick Byrne

Yeah. I was going to say that that is the technology doesn't show up just in improvements and conversion, SO improvements and conversion and in the average order size. So it really comes to the revenue per visitor calculation. So we will drive something from them.

Dom LaCava - Canaccord Adams

Okay. But I should see that data coming out soon, so I could…

David Chidester

Yeah, definitely you can see that. Definitely, we did see an increase in average order size this quarter.

Dom LaCava - Canaccord Adams

Okay. Okay, great, I'll take a look at that and I can certainly follow-up on those. And then, on the sales and marketing spend, I know you touched on it a little bit, but when we look at it from the perspective of percentage of sales it looks like it was around 7.5% of sales versus 7.1% a year ago. I know that's kind of fluctuated up, up and down. I'm just trying to get a feel for whether you believe you are at a point now where this is going to start to normalize or we can sort of forecast that out a little bit more efficiently, I mean, where does this go from here given the fact that's been kind of up and down?

Patrick Byrne

I think it goes down 100 to 150 basis points. I think this quarter had some Super Bowl advertising, which is of course is not going to happen in other quarters. And there is a one technology project that we're doing I think is good for 50 to 80 basis points itself to drop out of this, and that's something we hope to have finished sometime this summer.

So, I just think normalized is probably somewhere in the 5 to 6 range on a GAAP basis, Dave, do you have a thought on that?

David Chidester

No, nothing to add.

Dom LaCava - Canaccord Adams

Okay. So that was on the sales and marketing. When you were talking about tax spend, were you referring to overall OpEx?

Patrick Byrne

No. I was referring to sales and marketing.

Dom LaCava - Canaccord Adams

Okay, got it.

Patrick Byrne

I think that we can drop sort of -- overtime, you'll see 100, 150 basis points come out of that. You really have to factor in, if we got, say, 5.5%, you would not see us accelerating. Every point of acceleration cost a disproportionate amount on the sales and marketing line.

So if we really do accelerate, if it turn out to be wrong, and it doesn't drop to 5.5% or something or 6%, then one thing that would keep it from doing that is if we did keep accelerating.

Dom LaCava - Canaccord Adams

Right. Okay. So you're saying that given the fact revenues are going to be growing faster that you'll still be spending more, but on a percentage of sales basis it will be driving, okay. So I guess then looking at the 27% growth, now I know part of part it -- if you look at '07, revenue came down almost 4%. I guess if you look at this Q1 growth versus '06, you could say for the two year CAGR it was around 7%. I'm trying to get a handle for once we come out of putting 2007 in the rearview mirror where will growth normalize as far as going to 2008?

You just answered some of it with your handicapping the first number of the growth. But, I guess I'm just trying to get a feel for how we can get comfortable knowing that this is sustainable growth versus just favorable comps versus '07?

Patrick Byrne

Is it a 14% CAGR if you combine a 4 and a 27?

Dom LaCava - Canaccord Adams

I'm just looking at March quarter, 200 versus…

David Chidester

Actually, we're down 11%.

Patrick Byrne

Okay. Well, I do think this is sustainable. I think that this is, like I say, I think that something in the 20s feel sustainable to me. And I feel like we're only conservative with that. And I think that there is a chance as these different technology products hit that projects are completed. Some of them give us 2%, 3% gain, some of them give us a couple of times that. And we have a whole laundry list we're getting through. And so, I think you now know everything I know.

David Chidester

I mean, we have a lot of things that are coming together, our product selection is better, our search is better, our site is better, customer service is better. There are a lot of things, this isn't. And that's why Patrick says this isn't just an effect of, oh, we had a bad first quarter last year. I mean it is a better business in a lot of ways. Our technology has never been this good. Our rate has never been this good. There is a lot of things that are coming together now. And so that's why we think it's sustainable. It's not we didn't have one good marketing campaign, we have a whole bunch of things that are working well.

Dom LaCava - Canaccord Adams

Right. No, I understand. In 27% growth is 27% growth and there is no getting around that. I'm just trying to view that against what you said in the past, as far as 2007 being kind of a difficult year, and now how to normalize it going forward. I mean I just, I guess there are two things going on, I just want to make sure that going forward, and that answers a lot of it. So, I guess going back to revenue, as far as the direct side, last year it certainly wasn't business that was seeing great growth. So what's changed on a direct side?

Patrick Byrne

Well we certainly know, I said that last year we learned what not to buy. Now we're learning what to buy. I'm not saying learning, we are heavily debt driven and have a team of really serious clients who are doing work, who work with the buyers and they frame the buyers decisions, and they constrict the buyers decisions in some ways. And they also direct the buyers to opportunities where the number say there is a lot -- there is opportunity for us and we're not buying there. So I wouldn't actually be surprised to see direct come charging back, I'm not saying it is now, it isn't now, right. There is some chance that direct comes back in a big way, maybe sometime this year or maybe next year and it isn't like we're making some ideological decision to be more direct, but then if it comes out of this organic process, you could see that happen.

Dom LaCava - Canaccord Adams

Okay. Then just shifting to gross margins, I know that having the two different levels to look out for direct and fulfillment, gross margins were up year-over-year, but we've seen them up at 17.7% recently. It looked like they are bouncing, I mean Q4 looks or Q1 looks to get lower for direct and that's the seasonal thing. But I'm just trying to figure out how to look at gross margins going forward for each individual business, which would help an abandoned end of it?

Patrick Byrne

Dave do you want to comment?

David Chidester

Yeah, I will comment. I think as far as the partner business is concerned, we have seen improved margins and a part of that is, I can say we've been at 17% before, a lot of that is operationally customer service, warehouse. Both areas we've gotten much better and it really kind of kicked in last year in the second quarter and that's why you saw us jump over 17% in the second quarter last year. The first quarter we didn't do as well, you look at our overall fulfillment, expenses dropped, went from 7.5% last year to 6% this year. So lot of the improvement that you're seeing is the fact that our operations are just much more efficient this year. And that's something I don't see changing or coming down at this point. I think it won't get any better.

Dom LaCava - Canaccord Adams

Oh yeah, okay, coming down. I think there is a little room for improvement there?

David Chidester

Yeah, so that's going help margins. So I do think most of what you are saying is sustainable now, there are mix shifts like we talked about that can't affect the overall margin. But I think that partners the improvement we've seen is something that hopefully is sustainable. On the direct side, we did see it come down a little bit in the first quarter and I think that's more of a reflection of we're becoming more disciplined in how we price inventory and we don't allow inventory to get past its season.

Our inventory came down $9 million, inventory and prepaid inventory this quarter. So we're definitely adding more discipline, requiring more disciplined pricing. And it may have had a little bit drag on our direct margins. I think you will see those improve and get back closer to where they were last year, where it was running in the 16% and hopefully better range, We still want to get that business up closer to where our partner margins are, its the ultimate goal.

Patrick Byrne

For us it's not just the margin, it's the margin on our direct businesses, the margin times to turn and we want drive that number higher and its okay if that gets higher by the actual margin number coming down little bit, but our turn is just getting significantly faster.

Dom LaCava - Canaccord Adams

Sure, Okay. So as they are looking at Q2 of '07 and then going forward from there that's a good place to start as far as looking at a trend, when modeling out. I mean you are seeing Q2 of last year when you started to see the benefits of your initiatives, so looking at Q2 and beyond is a good place to start, its kind of what I am hearing.

Patrick Byrne

Q2 of last year.

Dom LaCava - Canaccord Adams

Yeah.

Patrick Byrne

Yeah.

Dom LaCava - Canaccord Adams

Okay.

Patrick Byrne

Okay. I think so with actually Q4 being a bit of, you almost want to blend Q4 and Q1 together for some things like marketing.

Dom LaCava - Canaccord Adams

Okay.

David Chidester

I think we've found kind of an area in the 17%, where I think we will sustain and again like Patrick says it’s a combination of growth and margin. We don't want to maximize margin and then hurt our growth, so it’s a balance. And we do think margins have settled nicely in that 17% range and again we think that we can improve them, but there is balance there between our growth and our margin.

Patrick Byrne

I think that just in our fulfillment cost, I don't know, there might be 50 basis points to 100 basis points improvement we can make, that actually affects both partner and core. And that something I hope we could have done by some time in the third quarter So there is that and there is just by spying smarter and being smarter at pricing and such we might be able to squeak a little bit more out.

Dom LaCava - Canaccord Adams

Okay, I just had another one or two questions.

Patrick Byrne

Sure. Go ahead.

Dom LaCava - Canaccord Adams

So, you made some comments in the last call, just as far as the liquidation model versus whether were in a boom or bust, I guess with the point being that in a lackluster economy as long as you're not in the beginning or the end of it, the business might be little unpredictable. I'm just trying to get a feel for how you're viewing that now versus where we are in a recession, because my interpretation of those comments was that you should see an acceleration of business at the front end of recession and then, may be at the tail end of it as we head into better times, but then in the middle segment business might be little more challenging, is that safe to say?

Patrick Byrne

No, that's not actually how I meant to say. I can see why that might have been a reasonable interpretation. What I thought I was saying was in the recession, throughout the recession, it's actually a good business where in a boom it’s a good business for us. Its one where we are in an economy that has been sluggish, but not a recession that is actually bad for us, because manufactures get very conservative about what they spend and about what they build and consumers are not really spending a lot, so that's actually the toughest time for us. But, during I would think the whole length of this recession is going to be a favorable time for us, but I can understand why you would have interpreted what I said.

Dom LaCava - Canaccord Adams

Okay, I just wanted to make sure I understood that, and then I guess as far as GAAP profitability, I know that that's certainly a long-term goal, but is there any guidance or any sort of directional comments you can make on when to reasonably expect to hit that breakeven point and GAAP profitability?

Patrick Byrne

Dave, what do you want to say?

David Chidester

Again, I think 2009, we believe we can get there and we would hope that even in 2008, again we're real early in the year to be making those predictions.

Patrick Byrne

Yeah, I am certainly looking for driving for the year 2008.

Dom LaCava - Canaccord Adams

Okay.

Patrick Byrne

That’s not a promise by any means, but that's certainly where my target is.

Dom LaCava - Canaccord Adams

Okay. Understood and then just last one is more of a housekeeping, how much is left on the buyback?

Patrick Byrne

There is $8 million left on the buyback. Jonathan, do you want to add anything?

Jonathan Johnson

No, that’s correct, that is $8 million left, and just the way we think is best.

Dom LaCava - Canaccord Adams

Okay. Thank you very much.

Patrick Byrne

Thank you, Dom.

Operator

Your final question comes from the line of Shawn Milne with Oppenheimer. Please proceed.

Patrick Byrne

Hello, Shawn.

Shawn Milne - Oppenheimer

Yeah, Good morning, Patrick. Just one quick housekeeping and then one question for you. There is something some talk about higher monetization, but can you just tell me if traffic was up or down in the quarter?

Patrick Byrne

I know it on a week-to-week basis, but I don't I know it on the whole quarter basis.

Shawn Milne - Oppenheimer

We can follow up on that one.

David Chidester

It was up.

Shawn Milne - Oppenheimer

Okay. So you had slightly better traffic, higher AOV and better conversation rates, so a good mix of all three.

David Chidester

Yeah.

Shawn Milne - Oppenheimer

Okay. And then just kind of following-up on the last question, I mean, it seems like you are putting forward the thesis that the trade down by consumers is good for your platform, which certainly could make sense, what part of your business would benefit the most from excess inventory and from retailers, would that be your partner business or your buyers getting better access in your direct revenue?

Patrick Byrne

Good question. Let me go back for second, Dave and I am just kind of correct you, if you are absolutely sure that our traffic was up for the quarter so be it, but if you are not sure I would like stick a pin in that, are you absolutely sure?

Shawn Milne - Oppenheimer

The way we look at internally. Just, yeah.

Patrick Byrne

Okay. I am sorry I look sort of week-to-week. It's a good question Shawn, as far as the consumer spending, let me explain there is one dynamic, which is general value shoppers are either lower income people or more affluent people. The middle class are not value shopper, middle class pay for retail. When it could be, but now I have an observed effect, now I'll give you my hypothesis. I know it's just business in general for us, and for eight years it's been better, when there is kind of a lot of volatility in the economy, when things have been either just gotten bad suddenly or good suddenly and there was boom that's when thing been better. I have kind of put it down to when things get, and this is just a hypothesis, not sure of this, but that when few things get bad suddenly some of those middle class people who are use to paying for retail don't want to really change their consumption pattern in what they consume. And so they shift to becoming value shoppers. That's just my sort of pet explanation, I am not sure if that's correct, but I am pretty confident that in general things get better for us when either we've hit the wall or suddenly things that were booming.

Shawn Milne - Oppenheimer

And just to interject on that, so if that thesis is true, how does it play out mechanically, is it the fact that you are just seeing better buying opportunities from your buyer base, so that will fuel your direct revenue, or is it that you have more partners trying to join your platform, which therefore broadens your selection at lower prices, which becomes more of a virtue of circle?

Patrick Byrne

In the past, I would said overwhelming the former that was we had all these calls all of a sudden to unload ships, and there was one when that dock's strike occurred in LA and then we certainly had all these calls from people that their orders were being refused and then they dumped on us. So, in the past, I would have said it will translate purely into improvements in the core business. At this point, we have such a tight relationship with someone, and by the way I will give you two more points on that. One is, that has started to happen now, it didn't happen in any degree that would have affected the first quarter, but I think by late March we were starting to get calls, I know now, we are getting lot of calls from suppliers, but I wouldn't attribute any of the results of Q1 to that effect.

In addition, we are better positioned now to that even if there is this flood of inventory, we don't have to take it ourselves. It may show by our partners taking it for us. We have such a good relationship with our partners and sort of turned into this network with them that we're comfortable. In some cases actually hitching those offers to our partners and letting them sort of do the work and do the buys. So in the past, it would have translated purely into a benefit for our core business or direct business, but I think this time I can't be so sure. It may translate into a benefit for our partner business.

Shawn Milne - Oppenheimer

Okay. Thank you.

Patrick Byrne

Thank you. Okay. I have questions here that have been mailed. And I'm sorry, Shaquana, did you have another person.

Operator

No, sir.

Patrick Byrne

Okay. I have questions mailed in from Doug Griffin and John J. Allen. Let's go to Doug Griffin. Why did Overstock release its earnings report on Friday without prior notification of the scheduled released date, has been the pattern of the previous quarters and what should investors expect in the future?

I'll turn this over to Jonathan.

Jonathan Johnson

Well, lot of things we go into when we released our numbers. First, we need to make sure that they've been reviewed by the auditors and that everything is set and that's our number one factor. Then we look at people scheduled here internally to make sure people are available for the call, and we look at some external schedules.

This quarter, Patrick had a speaking engagement out at the Warden Business School on Friday. And so, we wanted to get our numbers out before that so that Patrick could speak about the first quarter results with those numbers out. We were not available to do the call that day given people schedules, so we gave the market two days notice to digest the results and held our call today. I wouldn't think you can expect that in the future, but if the stars align and that's how schedules work, we might do it again as well.

Patrick Byrne

Yeah. And I was at U-Penn, and I'm not sure if it was Warden or U-Penn, but same thing, and doing a microfinance conference. And I release numbers when Jonathan says too, although if I had my druthers, I'd release them by like the 7th. But the chances are that if we did that, the chances are too high that there would be -- whether auditors they would come back and want some kind of a change, and then there would be a slight difference between the numbers we released in the press release and the 10-Q and people would wonder about that. The one dynamic is, some of us want to release them as early as possible, but the other dynamic is we have to give our auditors enough time.

Do you want to say anything about, there was a mention in the press release of the Marin County letter?

Jonathan Johnson

Sure. We did mention in the press release that we had received a subpoena from the Marin County District Attorney and four other district attorneys of the Northern California. We got it on the 15th. We included it in the press release so that people would know about it as soon as we knew about it. We've been in communication with the District Attorney in Marin, just initial communication. It looks to us like they are looking at some of our advertising and how we advertise price and advertise core versus partner.

Patrick Byrne

Cut in here. They used the word advertise, so Jonathan is. But I think that a better way to put it would be display on our website, it's not about how we'd advertise that in the world, it's how we display on our website. Go ahead, Jon.

Jonathan Johnson

That's correct. The bottomline is we follow established practices. We don't have any concern about this inquiry, but we like you to know what we know. So we've disclosed it and we'll go forward and be cooperative in our response and we'll move forward.

Patrick Byrne

I'm going to just add some color on that. There are some guys doing their jobs who want to understand our business, perfectly fair. But is it, for example, a violation of truth and advertising laws for us to display at our website a product when it's, in fact, drop-shipped by a partner.

Well, if that's because we're displaying it as that we're offering for sale, well, if we're violating the law doing that then, like I say, 70% of the Amazon titles, which are actually drop-shipped by Baker & Taylor and Ingram Micro or Ingram Book would violate the same laws. [Sheers & Robert] which last I heard had 1,000 drop-shippers would be violating the law.

So if that's violating the law then the fact that we put a TV up that's actually drop-shipped by a partner, and we say that we're offering this for sale, then you can form your own judgments on that. And then the other ones are things just how do we display pricing and compare that and so forth. But as Jonathan says, we're just following industry practice. In fact, sometime ago we just adopted Amazon, everything is just so, it's just industry practice, how we do the compare at and what it says in the language and so forth.

So, okay, anything else you want to say? Any other question? I see. Overstock entered an agreement for additional warehouse space, yes. Well, is it a sign that plans are to attempt to grow direct revenue more in the future? The truth is this warehouse space, which is a great big 680,000 square foot warehouse is make sense for us whether we grow or not because we can consolidate various spaces into it. We're going to be moving our corporate office into it. We're actually building out some customer service there this summer, and we'll be -- the corporate office will be moving over Q2 next year, which also means that we have four contiguous 25,000 foot floors to lease in our corporate headquarters at Salt Lake City. And if anyone out there knows of our place as a company who wants up to 100,000 contiguous feet, [cal collect]. So, okay anything else gentlemen?

Shawn Milne - Oppenheimer

Nothing else.

Patrick Byrne

Dave did any other questions or anything we haven't addressed?

David Chidester

One other question that's come in is, do we think that the Easter holiday shifting into Q1 had any effect on our growth? My answer is, we didn't do any special promoting around Easter that I am aware of. And so I don't think that really had much of an impact.

Patrick Byrne

No. I would not say there is any significant -- this is a true 27%, it wasn't that that 13 million flopped into this quarter and its not apple-to-apples or something like that. The difference from the accounting change is negligible. It wasn't about Easter, it wasn't different things, this is real change.

David Chidester

Yeah, and again I would just clarify that the Q1'07 revenue and Q1'08 revenue are comparable, because again the only effect that Q1 of '07 had no deferral or reversal. Q1'08 had a deferral and a reversal that netted to only a $900,000 difference. So, the two are completely comparable.

Shawn Milne - Oppenheimer

Well, couldn't you be a stickler? Couldn't you say there was a $900,000 benefit in Q1 from this accounting change?

David Chidester

You can, that's exactly what happened.

Shawn Milne - Oppenheimer

So it's less than 0.5% of revenue that came from it. So it's apples to Apples-to-Macintosh Apple's.

David Chidester

And again we went back and analyzed all those previous quarters and made sure that there was no material difference between the estimated deferral and the reversal, and that's why we didn't restate any of the prior periods.

Patrick Byrne

Which is one of the reasons that we were saying to the SEC, we are going with a date cert that we know of. The day that everything ships to a date that's an estimate, the date that all these millions of people around the country receive their stuff. And there is no material difference even when you do all the math. So why go from something you are certain of to something that is an estimate when there is no material difference. And I'm certainly not casting aspersions on the SEC, in fact this group. Actually the SEC, I know I’m pretty tough on them, and I've said some things, but I consider them more political statements than statements of Overstock.

This group in the SEC were fine. Actually the group that is investing here are fine too, and they are (inaudible). But, this group was very reasonable. On that point, I didn’t get their argument as to why you would go to an estimated date when there was actually no material difference.

David Chidester

And again it's more literal interpretation of the pronouncements and its better accounting, but I don't think it's more accurate.

Patrick Byrne

So listen, my colleagues here are going to get uptight because they are the conservative guys, and they have the sheepskin that makes them conservative. I think things are, yeah, you just look at the charts in front of you.

This isn't a blip. This isn't an exception; anything can happen in the future. But I feel really good about where the business is now. I think that we are back. We are back and we had a tough couple of years. I thank the shareholders who stuck with us. I thank the colleagues who saw this through. I thank Jason Lindsey who came in, pitched in for two years, which was his original upfront commitment to pitch in for two years and help us, he made an enormous difference. And I see a lot of people seem to be scratching their heads out there and saying, well how the heck did this happen and is this just an aberration. Now what the aberration was in my mind, the two years where we got in some trouble. But we've got there and we've got our shoelaces tied nicely, and we're back on the field.

Okay. Look forward to talking everybody in a few months. Bye, bye.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a good day.

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Source: Overstock.com Inc. Q1 2008 Earnings Call Transcript
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