Overstock.com Inc. Q1 2008 Earnings Call Transcript

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 |  About: Overstock.com, Inc. (OSTK)
by: SA Transcripts

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. (OperatorInstructions).

I would now like to turn thepresentation over to your host for today's call Mr. David Chidester, SeniorVice President of Finance.

David Chidester

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

Before I turn to the financialresults, please keep in mind that the following discussion and the responses toyour questions reflect management's views as of today, April, 22, 2008 only. As you listen totoday's call I encourage you to have our press release from April 18, 2008 in front ofyou. Our financial results, detailed commentary, and the CEO's letter toshareholders are included and will correspond to much of the discussion thatfollows.

As we share information today tohelp you better understand our business, it is important to keep in mind thatwe will make statements in the course of this conference call that state ourintentions, hopes, beliefs, expectations, or predictions of the future. Theseconstitute forward-looking statements for the purpose of the Safe Harborprovisions under the Private Securities Litigation Reform within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934.

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

I will now review the financialresults first for the quarter ending Mach 31, 2008. Please refer to ourearnings press release for the full financial statements, and further detailsregarding our results. All comparisons will be against our results from Q1 of2007 unless otherwise stated.

Total revenue for the quarter was$201 million, up 27%. 27% revenue growth was a combination of direct revenuegrowth of 13%, and fulfillment partner growth of 33%. Our revenue deferral at theend 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, thereversal of the Q4 deferral into Q1 was approximately 900,000 more than therevenue differed at the end of Q1, resulting in an increase to our Q1 revenueof 900,000, which you accounted for approximately one-half of 1% of our 27%growth.

Our total gross margins were17.3%, 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 Q1was incremental the revenue by 900,000 as gross margins were higher thisquarter than in Q4, the net effect of the deferral was $100,000 reduction ofgross profits.

Our sales and marketing expenseswere 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 dueto $6 million of restructuring in Q1 of last year. Excluding restructuring,total operating expenses increased 6%.

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

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

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

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

And with that, I will turn thecall over to Patrick.

Patrick Byrne

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

David Chidester

Sure.

Patrick Byrne

The SEC wanted to review half adozen or more different aspects of how we do our accounting. I think there wereeight questions in all. They did yeoman's work. By the way this is not a disclosableevent, 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'sgoing to happen soon.

Jonathan Johnson

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

Patrick Byrne

Okay, but they have given theirfinal letter Jon?

Jonathan Johnson

Yes, they have.

Patrick Byrne

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

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

Secondly, they asked us torecognize revenue on estimated to stop recognizing it on actual ship date andturn it to estimated delivery date.

I have my own opinion about. Whenwe started the company and chose our accounting principles, we looked aroundthat how other people did it, and of course the at the time we said we're goingto recognize the ship date because that's date certain and there is no slop orestimate in it. Rather than estimating when people get it and at that time thetechnology which is not a very accurate idea of exactly when people wereshipping their packages.

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

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

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

So it actually hurt our earningsa $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, theyare wondering was it caused by something like this. No, this is aninsignificant factor and responsible for less than half of our percentage pointthat's changed and is responsible for less than half a percentage point in ourgrowth rate.

David, would you want to add tothat?

David Chidester

I would just add, I think theprocess with the SEC was a good process. The accounting is probably moreaccurate or more appropriate. Once again, we go from using an actual number to anestimate. 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'reusing 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 fineand we'll move forward from here.

Patrick Byrne

So, is it fair to say that allthese other issues that the knuckleheads keep on raising as issues, the SECexaminers, looked at and sprinkled holy water on?

David Chidester

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

Patrick Byrne

Yeah. And I can confirm that theSEC guys were super professional. I don't think this was a result of anythingother than their normally scheduled, well, I am not going to opine on theirmotives. But they were very professional and cool to deal with. So, anythingelse 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 ofhow we treat partner revenues. That was an important piece for us.

Patrick Byrne

Yes. To me, it was never really avery 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%. Dependingon who you listen to, the industry is growing around at 17%. Some people say evenless. Positive EBITDA, third quarter, consecutive quarter, $3.5 million. I knowEBITDA isn't the same as GAAP net income. I like GAAP net income better as ameasure. 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'sonly because we don't really have to spend much any more on CapEx. Positivetrailing 12-month operating cash flow is positive $27 million. We bought in 1.1million shares for an average price 10.81; 5% of our outstanding. Wish it weremore, but there it is.

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

Slide 5, gross profit growth. Wetold 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 profitgrowth 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 quarterwhere it was a very small number. And that's growing at 41% and that's thenumber we really are managing to. That's where we want to see high rates ofgrowth or hyper growth return. I consider anything over 50%, a hyper growth andI am good with.

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

Slide 8, of course, we cut ourexpense growth, once we saw what was going on with revenue growth, we tried todo tame our expense growth. And in fact, we had just really built up on theoperating expenses when the revenue growthcollapsed. And as you can see, we weren't able to get our operating expensegrowth to cross, to getunder therevenue growth at first. Then the next slide, 2006, you see that was basicallyour year in the inferno, where eventually revenue was shrinking and we stillhad this growth in operating expenses. Then slide 10, we finally exitedthe inferno, and the lines crossed, andrevenue growth is now outpacing operating expense growth. And I will note that that'sexcluding restructuring. I mean, if you do all these lines again withrestructuring we just have great big noise in it. This is the underlyingbusiness, but if you do this again with the restructuring, I think thedifferences would just be exaggerated between these two lines and then thecrossing would look even more significant.

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

David Chidester

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

Jonathan Johnson

And we are investing. It doesn'tshow 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 onthe tech side, we used to always be proud that we were not a tech company. We said we were astand with the computer in it. We now have some pretty good technology and wehave a very strong technology team who are able to get projects done that order of magnitude faster thananything we've ever had before. We're just crankingthrough projects, some of which havebeen waiting for years, so we actually have a good development and tech teamnow. But again it doesn’t show up a numbers, because lot of it is justreplacing the depreciation rolls off.

Next slide, gross margin andcontribution, slide 11. Sales and marketing expense was running versus grossmargin 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 iscontribution after marketing expense. That of course turned negative by the endof '06.

Next slide, slide 12, that isbounced back to a robust especially hit 9.8% just short of 10% and that was, Iremind 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 asmuch contribution in the first quarter this that just ended as we did in lastChristmas, so again, we're all about generating the contribution dollars.

David Chidester

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

Patrick Byrne

Yeah.

David Chidester

And it really just doubled ourefficiency in gross margin and marketing.

Patrick Byrne

Yeah. Okay, slide 15, operatingexpense. 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 werealready been making some investments, where we'd made decisions that werebasically not something we could change on the dime and when the growth came toa sudden halt, we were caught offside.

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

David Chidester

We're potentially going to haveabout $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 anotherdrop of $8 million or $9 million next year and that's not spending. I thinkthat's spending $10 million to $15 million CapEx each of those years. We doanticipate, we are going to start spending of CapEx more than the $3 million wespend last year.

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

Patrick Byrne

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

David Chidester

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

Patrick Byrne

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

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

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

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

Next slide, GAAP annualizedinventory turns. This is slide 21of 33, I think I actually said in the previousconference call that normalized in this around 25, sounds right to me, maybe30. There is a flush effect as we flush through this tremendous amount ofinventory it actually got it up to 35 or something, but then as that washesout, I think stabilizing about where it now, sounds right.

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

David Chidester

I would justadd that at 6.8, you can see that back in '05 and '06 we were running betweenaround 3, so we're really turning inventory more than twice as fast as we usedto and that's why I think we can start growing that business without growingour inventory. And I think 6.8 is great, we can probably do better than thatthough, and again its nice to be able to grow that business without requiringmore capital to do it.

Patrick Byrne

Great. It's ahuge 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 is140 to 160 and turn the next slide on a trailing 12-month basis is actually695.

Slide 25, in2005 National Retail Federation and American Express did the survey with(inaudible) household and says, who gives you great customerservice. We were not listed. We were not in people's answer, I think in the top150 or 200.

2006 nextslide page 26, they asked same question. We showed up number four. And this isn'tjust dotcoms, this is all retailers, Amazon, Nordstrom,LL Bean and Overstock.

And then slide27. They did again last year and they announced, its LL Bean, Zappos Amazon andOverstock. So we are still number four, but now we're above Nordstrom, which Ialways thought of as the gold standard of this. Thisis Stormy Simon, oversaw this great turnaround. She has had emphasis fromSteve Tryon, and now Brian Popelka, has moved in and is managing this on a day-to-day basis reportingto Stormy.

And SteveTryon, I am just going to take amoment to describe. Steve is an old friend of mine, he was an army colonel afterhe left the Pentagon, moved to a really hard chargingorganization, I am kidding, at Overstock and he has been with us four years andhas jumped it and fixed a number ofdifferent things. He has now taken over Human Capital Development. And Iactually think that's one of the greatest long-term investment we could make inthe company. And we were giving him lot of resources and he is reallydeveloping 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' byFred 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 infact. And that number is going up briskly. And the according to Reichheld, theaverage American company for all customers gets a score of 8%.Soapples-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 customerexperience.

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

Slide 30, Cars we talked aboutit. Auctions, is adding some tailwind in earnings. It's got this expensestructure straightened out and I actually expected a little bit more to starthappening out of auctions over the next six months. But Auctions is doing justfine. International, we still expect to launch maybe in June or July. We’ll belaunching to a number of countries.

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

Slide 31. Oh legal update. Let mego to Jonathan Johnson.

Jonathan Johnson

Well, it has been a busy threemonths in legal. I want to talk about the two cases that people ask questionsabout, and that they seem interested in. And our Prime Brokers suit out in San Francisco. We begandiscovery, in fact we're in the middle of the discovery and we’re tradingdocuments and data with the prime brokers. And that case moves forward andwe'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. Thejudge has lifted the discovery stay, and so we will begin trading documentsthis week with them and that's important for us.

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

We're in a good place on ourlitigation. We have got a Board that is supportive of this. I characterize itas a wartime Board that is helpful and involved and we are moving forward and Ithink 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 PrimeBrokers?

Jonathan Johnson

That's going forward. We are inour second round of discovery there. The judge is managing that and doing it inan iterative process and we have been pleased with what we have gotten so farfrom the Prime Brokers and have asked for all of their trading data inOverstock and that's the next round of information that we expect to get fromthem.

Patrick Byrne

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

Jonathan Johnson

And In fact, an interesting notethe government accountability officers have been asked to do an investigationand 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 differentkind of investigation at Barney Frank?

Jonathan Johnson

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

Patrick Byrne

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

Okay, slide 32, I want to thankall vendors, I probably don't do this enough. We don't have the resources, wehaven't ever done like what eBay and Amazon does, which is they develop a lotof their own technology and it's great technology even they have huge teamsdeveloping it.

We haven't approach the businessthat way, we basically integrated a lot of leading-edge technology. You can seeon 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 theleft, that's just big stack that is costly but is working well for us.

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

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

Let's go to questions. Shaquana?

Question-and-Answer Session

Operator

(Operator Instructions). Yourfirst question comes from the line of (inaudible) with Merrill Lynch. Pleaseproceed.

Unidentified Analyst

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

Patrick Byrne

I do. Now that's a greatquestion. I mentioned I think and after our Q4 that we had really goosed somebranding that probably didn't have the payoff in Q4 we hoped it but would domore for us in Q1. And I think that that did generate some benefit for us inQ1. I wouldn't explain the 27% by any means by that way. I would say it gave usa nice launch in the Q1. I hope that is a good observation.

Unidentified Analyst

Another thing on that is thengoing back for that marketing. A quick point is, if could you break that downon kind of brand traditional marketing spend versus online spend that's moredirect response, just by percentages?

Patrick Byrne

Well, I can tell you that wespend, we actually don't disclose that in general. We have disclosed that thebrand is less than the branding is significantly less actually than the onlinespending. And it's all shifting around, I'd say that we're reconsidering andreevaluating a lot of our online channels and we're discovering areas that wewere probably over spending. And we have discovered areas that were reallyrelatively untapped that are paying back well for us. So this is more of areflections, it's seems to me of changes we're doing in how we spend the moneyonline than in the big shift between one bucket and the other. Dave, do youwant 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 alot 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 weneed to spend on TV, where we need to spend online, and now we're just making slightadjustments one way or the other based on which is more effective.

Patrick Byrne

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

Unidentified Analyst

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

Patrick Byrne

Well, to a significant degreethis is and as the first part of your question, to a significant degree this isour site getting better, our technology getting better. We actually implementan Omniture year and a half ago. They are only about 20 miles away from us. Butwhat we have done is, build a team who can use it and get actual insights outof it. And what we're actually doing, is pretty leading edge things, tyingtogether Omniture and other vendors in ways that no one has done before, andthey tell us it is pretty leading edge. And I don't see an end to that. I thinkwell, things that Omniture and the other vendors tell us we're doing; they sayno one is even talking about doing this stuff we are doing. And we have a longlaundry 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 isdriven big part is driven by Omniture, big part is driven by Teradata, becausenow we can do just really fine grain analysis and understand. We just peeledout one layer of the onion after another and we understand what's really makingthings happen and what isn't. So although a lot of this was driven bytechnology, I sense maybe half or more than half, I don't see that as somethingthat's going to end quickly. We have a good year or so and work through thislaundry list.

Unidentified Analyst

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

Patrick Byrne

Yeah, I hear two differentthings. 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 betterat figuring out what the value of different real estate is in onlineadvertising. So, basically it's not a unique skill set anymore or even semiunique. It's a very widely disseminated skill set how to analyze the value ofdifferent places in online marketing. So, in that sense the markets got moreefficient, and in another sense I do hear that there is some cutbacks. Andwe're starting to see it from vendors of online advertising calling us and sortof 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 goingon in the retail world, we're starting to hear from other retailers or thesuppliers, to retailers with lot of excess inventory. And maybe to some extentthat's happening with online advertising as well. But I think that's gettingoffset by the fact and more than offset by the fact that people are just betterat our online advertising and they were couple years ago.

Unidentified Analyst

Great, thank you very much foranswering my question Patrick.

Patrick Byrne

Thank you, Ned. Any time.

Operator

Your next question comes from theline 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 theincrease 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, maybeif 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 selectionis certainly helping. I am wondering, if it is helping better in repeat ratesthan just in the most obvious way that pay out more stuff and more, so it helpsin conversion, but I think it helps, the broader selection we get, the morelike it is that people start saying after they bought once or twice. Well, I amgoing 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 asdirectly as I had hope. But I think it does help more in creating the sense ofOverstock as a place that you want to always check first. And Scott, does thatanswer your question.

Scott Devitt - Stifel Nicolaus

It does, yes. Thanks.

Patrick Byrne

Do you have any others? Feelfree.

Scott Devitt - Stifel Nicolaus

Well, I guess somewhat related tothat were there any movements in product mix in the quarter, just relative tolast year? I noticed books, music and video in the 10-K, last year on a fullyear basis was down. Fulfillment partner revenue, which actually has been theless volatile of the two revenue streams that you have, essentially doubled inthe quarter and so the question earlier I think was interesting about thepre-spending on marketing, but it seems like there is something more to it andtrying 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 doyou have thoughts as to the specifics of what caused such a dramaticacceleration.

Patrick Byrne

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

David Chidester

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

Scott Devitt - Stifel Nicolaus

BMMG did drop. Didn't it?

David Chidester

BMMG did drop. That wouldprobably be the only thing I would point to that helped our margins was the BMVshifted from about 8% of our business to about 5% compared to last year's firstquarter. So, it is shifting down, which helps margins a little bit. We areadding SKUs, sort of feeling in areas where we didn't have SKUs, but there arenot any new categories that have become material enough to move to growthnumber, I don't think.

Patrick Byrne

Yeah, I can say as far as growthgoes, 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 theydo, but I think you can expect sort of the growth to stay here or even have amodest bias upwards for Q2 and Q3. And then, I think it inflects again in Q4.

If I had to call where I thinkgrowth 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 isa 30% chance it starts with a three and the remaining 30%, I would split itbetween the other two. And then, I think we're sort of back in the groove and Isee that the flywheel is spinning up. But, I'll all stop there and turn it overto Dave or Jonathon today…

David Chidester

Well, I would put it a littledifferently.

Scott Devitt - StifelNicolaus

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 thinkthis is a blip. We are seeing trends that tell us it's not. I do think we cansustain the growth number with a two on it, then depending on other factorswith some of these things we're working on these projects to pay off, we don'thave some issue with the economy that changes things dramatically. I think wecan 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 upfrontthat was all setting aside any exogenous factors, dynamics like, okay, if theeconomies implodes, consumer spending will be down. On the other hand, we getpeople offering us more products, and people who required a taste for luxurystart, maybe they've started shifting there the way they handle with reducedincome as they shift their consumption to Overstock.

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

Jonathan, do you want to addanything?

Jonathan Johnson

No, nothing to add.

Patrick Byrne

Okay. Scott, any other questions?

Scott Devitt - Stifel Nicolaus

That was all I had. Thanks foryour time.

Patrick Byrne

Okay.

Operator

[Operator Instruction]

Your next question comes from theline 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, isthere a slide deck with customer metrics up there as far as average order sizeunique 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 upshortly.

Dom LaCava - Canaccord Adams

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

David Chidester

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

Dom LaCava - Canaccord Adams

Okay.

David Chidester

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

Patrick Byrne

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

Dom LaCava - Canaccord Adams

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

David Chidester

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

Dom LaCava - Canaccord Adams

Okay. Okay, great, I'll take alook at that and I can certainly follow-up on those. And then, on the sales andmarketing spend, I know you touched on it a little bit, but when we look at itfrom the perspective of percentage of sales it looks like it was around 7.5% ofsales 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 nowwhere this is going to start to normalize or we can sort of forecast that out alittle bit more efficiently, I mean, where does this go from here given thefact that's been kind of up and down?

Patrick Byrne

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

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

David Chidester

No, nothing to add.

Dom LaCava - Canaccord Adams

Okay. So that was on the salesand marketing. When you were talking about tax spend, were you referring tooverall OpEx?

Patrick Byrne

No. I was referring to sales andmarketing.

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 haveto factor in, if we got, say, 5.5%, you would not see us accelerating. Everypoint of acceleration cost a disproportionate amount on the sales and marketingline.

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

Dom LaCava - Canaccord Adams

Right. Okay. So you're sayingthat given the fact revenues are going to be growing faster that you'll stillbe 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 youlook at '07, revenue came down almost 4%. I guess if you look at this Q1 growthversus '06, you could say for the two year CAGR it was around 7%. I'm trying toget a handle for once we come out of putting 2007 in the rearview mirror wherewill growth normalize as far as going to 2008?

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

Patrick Byrne

Is it a 14% CAGR if you combine a4 and a 27?

Dom LaCava - Canaccord Adams

I'm just looking at Marchquarter, 200 versus…

David Chidester

Actually, we're down 11%.

Patrick Byrne

Okay. Well, I do think this issustainable. I think that this is, like I say, I think that something in the20s 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 hitthat projects are completed. Some of them give us 2%, 3% gain, some of themgive us a couple of times that. And we have a whole laundry list we're gettingthrough. And so, I think you now know everything I know.

David Chidester

I mean, we have a lot of thingsthat are coming together, our product selection is better, our search isbetter, our site is better, customer service is better. There are a lot ofthings, 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 alot of ways. Our technology has never been this good. Our rate has never beenthis good. There is a lot of things that are coming together now. And so that'swhy we think it's sustainable. It's not we didn't have one good marketingcampaign, 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 toview that against what you said in the past, as far as 2007 being kind of adifficult year, and now how to normalize it going forward. I mean I just, Iguess there are two things going on, I just want to make sure that goingforward, and that answers a lot of it. So, I guess going back to revenue, asfar as the direct side, last year it certainly wasn't business that was seeinggreat growth. So what's changed on a direct side?

Patrick Byrne

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

Dom LaCava - Canaccord Adams

Okay. Then just shifting to grossmargins, I know that having the two different levels to look out for direct andfulfillment, gross margins were up year-over-year, but we've seen them up at17.7% recently. It looked like they are bouncing, I mean Q4 looks or Q1 looksto get lower for direct and that's the seasonal thing. But I'm just trying tofigure out how to look at gross margins going forward for each individualbusiness, which would help an abandoned end of it?

Patrick Byrne

Dave do you want to comment?

David Chidester

Yeah, I will comment. I think asfar as the partner business is concerned, we have seen improved margins and apart of that is, I can say we've been at 17% before, a lot of that is operationallycustomer service, warehouse. Both areas we've gotten much better and it reallykind of kicked in last year in the second quarter and that's why you saw usjump over 17% in the second quarter last year. The first quarter we didn't doas 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 thefact that our operations are just much more efficient this year. And that'ssomething I don't see changing or coming down at this point. I think it won'tget any better.

Dom LaCava - Canaccord Adams

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

David Chidester

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

Our inventory came down $9million, inventory and prepaid inventory this quarter. So we're definitelyadding more discipline, requiring more disciplined pricing. And it may have hada little bit drag on our direct margins. I think you will see those improve andget 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 towhere 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 wantdrive that number higher and its okay if that gets higher by the actual marginnumber coming down little bit, but our turn is just getting significantlyfaster.

Dom LaCava - Canaccord Adams

Sure, Okay. So as they arelooking at Q2 of '07 and then going forward from there that's a good place tostart as far as looking at a trend, when modeling out. I mean you are seeing Q2of last year when you started to see the benefits of your initiatives, solooking at Q2 and beyond is a good place to start, its kind of what I amhearing.

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 Q4being a bit of, you almost want to blend Q4 and Q1 together for some thingslike marketing.

Dom LaCava - Canaccord Adams

Okay.

David Chidester

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

Patrick Byrne

I think that just in ourfulfillment cost, I don't know, there might be 50 basis points to 100 basispoints 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 quarterSo there is that and there is just by spying smarter and being smarter atpricing and such we might be able to squeak a little bit more out.

Dom LaCava - Canaccord Adams

Okay, I just had another one ortwo questions.

Patrick Byrne

Sure. Go ahead.

Dom LaCava - Canaccord Adams

So, you made some comments in thelast call, just as far as the liquidation model versus whether were in a boomor bust, I guess with the point being that in a lackluster economy as long as you're not in the beginning orthe end of it, the business might be little unpredictable. I'm just trying toget 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 anacceleration of business at the front end of recession and then, may be at thetail end of it as we head into better times, but then in the middle segmentbusiness might be little more challenging, is that safe to say?

Patrick Byrne

No, that's not actually how Imeant 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. Itsone where we are in an economy that has been sluggish, but not a recession thatis actually bad for us, because manufactures get very conservative about whatthey spend and about what they build and consumers are not really spending alot, so that's actually the toughest time for us. But, during I would think thewhole length of this recession is going to be a favorable time for us, but Ican understand why you would have interpreted what I said.

Dom LaCava - Canaccord Adams

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

Patrick Byrne

Dave, what do you want to say?

David Chidester

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

Patrick Byrne

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

Dom LaCava - Canaccord Adams

Okay.

Patrick Byrne

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

Dom LaCava - Canaccord Adams

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

Patrick Byrne

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

Jonathan Johnson

No, that’s correct, that is $8million 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 fromthe line of Shawn Milne with Oppenheimer. Please proceed.

Patrick Byrne

Hello, Shawn.

Shawn Milne - Oppenheimer

Yeah, Good morning, Patrick. Justone quick housekeeping and then one question for you. There is something sometalk about higher monetization, but can you just tell me if traffic was up ordown 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 bettertraffic, higher AOV and better conversation rates, so a good mix of all three.

David Chidester

Yeah.

Shawn Milne - Oppenheimer

Okay. And then just kind offollowing-up on the last question, I mean, it seems like you are puttingforward 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 themost from excess inventory and from retailers, would that be your partnerbusiness or your buyers getting better access in your direct revenue?

Patrick Byrne

Good question. Let me go back forsecond, Dave and I am just kind of correct you, if you are absolutely sure thatour traffic was up for the quarter so be it, but if you are not sure I wouldlike 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 ofweek-to-week. It's a good question Shawn, as far as the consumer spending, letme explain there is one dynamic, which is general value shoppers are eitherlower income people or more affluent people. The middle class are not valueshopper, middle class pay for retail. When it could be, but now I have anobserved effect, now I'll give you my hypothesis. I know it's just business ingeneral for us, and for eight years it's been better, when there is kind of alot of volatility in the economy, when things have been either just gotten badsuddenly or good suddenly and there was boom that's when thing been better. Ihave kind of put it down to when things get, and this is just a hypothesis, notsure of this, but that when few things get bad suddenly some of those middleclass people who are use to paying for retail don't want to really change theirconsumption pattern in what they consume. And so they shift to becoming valueshoppers. That's just my sort of pet explanation, I am not sure if that'scorrect, but I am pretty confident that in general things get better for uswhen either we've hit the wall or suddenly things that were booming.

Shawn Milne - Oppenheimer

And just to interject on that, soif that thesis is true, how does it play out mechanically, is it the fact thatyou are just seeing better buying opportunities from your buyer base, so thatwill fuel your direct revenue, or is it that you have more partners trying tojoin 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 saidoverwhelming the former that was we had all these calls all of a sudden tounload ships, and there was one when that dock's strike occurred in LA and thenwe certainly had all these calls from people that their orders were beingrefused and then they dumped on us. So, in the past, I would have said it willtranslate purely into improvements in the core business. At this point, we havesuch a tight relationship with someone, and by the way I will give you two morepoints on that. One is, that has started to happen now, it didn't happen in anydegree that would have affected the first quarter, but I think by late March wewere starting to get calls, I know now, we are getting lot of calls fromsuppliers, but I wouldn't attribute any of the results of Q1 to that effect.

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

Shawn Milne - Oppenheimer

Okay. Thank you.

Patrick Byrne

Thank you. Okay. I have questionshere that have been mailed. And I'm sorry, Shaquana, did you have anotherperson.

Operator

No, sir.

Patrick Byrne

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

I'll turn this over to Jonathan.

Jonathan Johnson

Well, lot of things we go intowhen we released our numbers. First, we need to make sure that they've beenreviewed by the auditors and that everything is set and that's our number onefactor. Then we look at people scheduled here internally to make sure peopleare available for the call, and we look at some external schedules.

This quarter, Patrick had aspeaking engagement out at the Warden Business Schoolon Friday. And so, we wanted to get our numbers out before that so that Patrickcould speak about the first quarter results with those numbers out. We were notavailable to do the call that day given people schedules, so we gave the markettwo days notice to digest the results and held our call today. I wouldn't thinkyou can expect that in the future, but if the stars align and that's howschedules work, we might do it again as well.

Patrick Byrne

Yeah. And I was at U-Penn, andI'm not sure if it was Warden or U-Penn, but same thing, and doing amicrofinance conference. And I release numbers when Jonathan says too, althoughif I had my druthers, I'd release them by like the 7th. But the chances arethat if we did that, the chances are too high that there would be -- whetherauditors they would come back and want some kind of a change, and then therewould be a slight difference between the numbers we released in the pressrelease 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 iswe have to give our auditors enough time.

Do you want to say anythingabout, there was a mention in the press release of the Marin Countyletter?

Jonathan Johnson

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

Patrick Byrne

Cut in here. They used the wordadvertise, so Jonathan is. But I think that a better way to put it would bedisplay 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 iswe 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 goforward and be cooperative in our response and we'll move forward.

Patrick Byrne

I'm going to just add some coloron that. There are some guys doing their jobs who want to understand ourbusiness, perfectly fair. But is it, for example, a violation of truth andadvertising 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'redisplaying it as that we're offering for sale, well, if we're violating the lawdoing that then, like I say, 70% of the Amazon titles, which are actuallydrop-shipped by Baker & Taylor and Ingram Micro or Ingram Book wouldviolate the same laws. [Sheers & Robert] which last I heard had 1,000drop-shippers would be violating the law.

So if that's violating the lawthen 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 ownjudgments on that. And then the other ones are things just how do we displaypricing and compare that and so forth. But as Jonathan says, we're justfollowing industry practice. In fact, sometime ago we just adopted Amazon,everything is just so, it's just industry practice, how we do the compare atand what it says in the language and so forth.

So, okay, anything else you wantto say? Any other question? I see. Overstock entered an agreement foradditional warehouse space, yes. Well, is it a sign that plans are to attemptto 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 whetherwe grow or not because we can consolidate various spaces into it. We're goingto be moving our corporate office into it. We're actually building out somecustomer service there this summer, and we'll be -- the corporate office willbe moving over Q2 next year, which also means that we have four contiguous25,000 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 100,000contiguous feet, [cal collect]. So, okay anything else gentlemen?

Shawn Milne - Oppenheimer

Nothing else.

Patrick Byrne

Dave did any other questions oranything we haven't addressed?

David Chidester

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

Patrick Byrne

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

David Chidester

Yeah, and again I would justclarify that the Q1'07 revenue and Q1'08 revenue are comparable, because againthe only effect that Q1 of '07 had no deferral or reversal. Q1'08 had adeferral and a reversal that netted to only a $900,000 difference. So, the twoare 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 accountingchange?

David Chidester

You can, that's exactly whathappened.

Shawn Milne - Oppenheimer

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

David Chidester

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

Patrick Byrne

Which is one of the reasons thatwe were saying to the SEC, we are going with a date cert that we know of. Theday that everything ships to a date that's an estimate, the date that all thesemillions of people around the country receive their stuff. And there is nomaterial difference even when you do all the math. So why go from something youare certain of to something that is an estimate when there is no materialdifference. And I'm certainly not casting aspersions on the SEC, in fact thisgroup. Actually the SEC, I know I’m pretty tough on them, and I've said somethings, but I consider them more political statements than statements ofOverstock.

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 gettheir argument as to why you would go to an estimated date when there wasactually no material difference.

David Chidester

And again it's more literalinterpretation of the pronouncements and its better accounting, but I don'tthink it's more accurate.

Patrick Byrne

So listen, my colleagues here aregoing to get uptight because they are the conservative guys, and they have the sheepskinthat makes them conservative. I think things are, yeah, you just look at thecharts 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 thebusiness is now. I think that we are back. We are back and we had a toughcouple of years. I thank the shareholders who stuck with us. I thank thecolleagues who saw this through. I thank Jason Lindsey who came in, pitched infor two years, which was his original upfront commitment to pitch in for twoyears and help us, he made an enormous difference. And I see a lot of peopleseem to be scratching their heads out there and saying, well how the heck didthis happen and is this just an aberration. Now what the aberration was in mymind, the two years where we got in some trouble. But we've got there and we'vegot our shoelaces tied nicely, and we're back on the field.

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

Operator

Thank you for your participationin today's conference. This concludes the presentation. You may now disconnectand have a good day.

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