Overstock.com's (OSTK) CEO Patrick Byrne on Q4 2015 Results - Earnings Call Transcript

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Overstock.com, Inc. (NASDAQ:OSTK) Q4 2015 Earnings Call February 9, 2016 4:30 PM ET


Stormy Simon - President

Patrick Byrne - Chief Executive Officer & Director

Robert Hughes - Senior Vice President Finance & Risk Management

Mitch Edwards - Senior Vice President, Legal and General Council


Good day, ladies and gentlemen and thank you for your patients. You’ve joined the Q4 2015 Overstock.com Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. For the Q&A on today’s call, all questions should be emailed in. [Operator Instructions] As a reminder, this conference maybe recorded.

I would now like to turn the call over to your host, the President of Overstock.com Incorporated, Ms. Stormy Simon. Ma’am, you may begin.

Stormy Simon

Thank you, [indiscernible]. Good afternoon and welcome to our Fourth Quarter and Full Year 2015 Earnings Conference Call. Joining me today are…


Patrick Byrne

Hello [indiscernible]?

Stormy Simon

Our CEO and Founder.

Patrick Byrne

That was not me on the violin by the way. [Indiscernible] I think, by the way, go ahead.

Stormy Simon

Robert Hughes, our Senior Vice President Finance & Risk Management and Mitch Edwards, Senior Vice President, Legal and General Council. And with that, I’ll turn the call over to Rob.

Robert Hughes

Thank you, Stormy. Let me remind you that the following discussion and our responses to your questions reflect management’s views as of today, February 9, 2016 and may include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results, is included in the press release filed this afternoon and on the Form 10-Q that we filed on November 9, 2015.

Please review the Safe Harbor statement on slide 2. During this call, we’ll discuss certain non-GAAP financial measures. This slide is accompanying this webcast and our filings with the SEC each posted on our Investor Relations website contain additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures.

With that, Mitch, let me turn it over to you.

Mitch Edwards

Thanks, Rob. We’re going to conduct a question-and-answer portion of the call today slightly differently that we have in the past. In order to do it in a more orderly way, due to the volume and the overlap of questions we will be taking all questions today via email. If you have any questions during the call, please email them to ir@overstock.com and that’s the letter I, the letter R, at Overstock.com and we will try to get to you as many questions as we reasonably can.

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

Patrick Byrne

Great, thank you Mitch, thank you Stormy, thank you Rob. So, slide – let’s just go to slide three. Q4 results are as you see we did have a slow down to 2%, a lot of things are going on in the market both in competitors and in our own business. We did not change growth this year when we saw what our competitors were doing and sort of a massive amounts that they were spending, we roped it out a little bit. That assortment that we had to radically adjust our – not radically adjust, we had to adjust our expense structure not late for the end of the year, well once we saw what was going on in the market. So there is some things get out of tune when you make sudden reception in your strategy like that, the expense structures you expected for one side of business you – is inappropriate for different rate of growth, but led by Stormy Simon, the management team responded beautifully and turned things up and kept things honest to god, positive net income with no happy tricks.

We had really came out at an $110,000 and that’s what the accounted said and that’s really where it is. So I’ll be talking more about Q4 and what’s going in the market place in response to productions I’m sure.

Slide four, overall $1.7 million in GAAP revenue closed just under $2 billion I think in GMS – oh no, could we actually, just within [indiscernible] $2 billion in GMS. Net income was $2.4 million.

Let me go on to slide five and I’ll start walking through the numbers and then we can start talking about reasons and the questions. Slide five, annual revenue growth you see the growth numbers on the bottom, we did keep – I’ve always wanted to keep this double digit. I want to keep, and I’ve said you before, growth – gross profit – sales growth, gross profit growth and contribution or net of growth in the double digits. We succeeded on slide five and keeping annual growth in the 11% for the year, but slide six you’ll see our gross profit growth for 9% and 7 – our annual contribution dollar growth slide to 8%.

We had structured things around I think nearly twice as much growth as that on contribution. So, we didn’t make adjustments and like I said, Stormy hold the trigger, let an army and scrubbed through all our expense structure and pulled out millions in the fourth quarter and for this year and it was quite an effort that she engaged in starting couple of weeks in the fourth quarter with fantastic – adult supervisor from CFO Hughes and participation from the executive team.

And so slide eight, growth contribution margin at a 11.2% for the year, 30, 40, 50 dips under what I think we should be performing and I think that this should really be I said many times before, around 12%, maybe in a 11.5% to 12%, not much over 12%, bad things happen when it gets over 12%. We stalled the wing. So I think that this was on the low 30 to 40 dips lower than we should have done [indiscernible].

Slide nine, tech and G&A as share revenue. It’s falls from 10.6% to 10.9%, again it would have come under 10% as the revenue here as we imagined it would but also this is including quite a spin up in other efforts like the efforts related to our Wall Street efforts. And so we’ve unlike that we have more tech expenses than we have in the past.

Slide 10, we still have a very strong $55 million operating cash flow, our free cash flow dip to minus $5 million but of course, we’ve built – we’ve put basically $50 million into a building. Is Rob 50 ish, is that what we’ve…?

Robert Hughes

Over the last two years, something like that.

Patrick Byrne

So we’ve – so I’m at building its proceeding right on budget, right on pace, we’ll be moving into it this summer. So, we have a great underlying cash flow, $50 million and we’re not building – planning on building anymore building, so our free cash flows start looking closer to that again.

Slide 11, we’ve – under Stormy’s [ph] total edge gotten very tight on inventory and inventory management, freed up some nice cash out of that. We have a wonderful giveaway running at 53 terns, but the giveaway is what I really care about and that’s a 1,200% a new record for us. And thanks to some new techniques, they have found ways to just shrink and shrink and tighten up that inventory control.

Slide 12, cost per customer, about the same as last year. Slide 13, number of new customers is down a little bit. Slide 14, unique visitors is also down about 10%. This really reflects a strategic decision on marketing. Certain errors on marketing and by certain competitors we’re getting big way up and as we’ve made the decision previous years when this happens, we don’t chase it, we like profits. And when somebody comes in and is suddenly starts bidding a key word to three times the level it was, it’s been for a couple of years and they don’t mind what they’re losing, that’s not we have found, I think when we hear because on the many other – half a dozen another occasions, we’ve come up against competitors like this. We say, we’re not going to get in that fight and we let them go ahead and over bid. And so there are literally terms in such that are suddenly getting three times what they were getting before and so we did not follow that, and we kept out margin expenses quite tight.

Slide 15, customer orders, average order size again has the normal Q4 dip in average order size, number of orders was at the same as last year. Gross profit for transaction at slide 16, basically the same story, stable in that respect. Corporate employee, 17, what Stormy has done as focused this year on really building out parts of the company that were then understaffed and building very solid, attracting solid experienced leadership from other companies. We have people that we’ve never dreamed of being able to get the kinds of people we have now has joined our company, very premier people from large, large companies, I guess I don’t want to name any of them but not detail companies necessarily. Some of them are, some of them are old mind, I mean very remarkable the kinds of people we’re now attracting into management.

So, I feel this has been a good investment, Stormy has built up the team to I think for the first time, I really feel like we’re adequate across the board without a huge gaps.

Slide 18, my Mitzvah is over. Now in all my nemeses I always referred to this as my Jihad, but I would point out that that was their term. My term was Mitzvah and my – which is Hebrew for an obligatory good deed as in – we don’t have that in our language. In our world, western word good deeds are supererogatory but in Judaism there can be obligatory good deeds, there are mitzvahs like the 10 Commandments or the 10 Mitzvahs. So I felt that this was an obligatory good deed I had to do. When I saw the stuff that was going on in 2004 or 2005, I mean I didn’t get the big picture, I just knew that I was that [indiscernible].

I was going on Wall Street, people were trying to get inside information out of me, there were a whole lot of different conversations over the form of, hey kid, we could make a lot of money together. And I started digging into it and figuring out what was going on and it’s just – in my family there is, the church, the constitution and capital markets those were the three sacred things. I found out what was going on 12 years ago and it just blew my mind that people thought it was acceptable the way business was being conducted.

So I did not know quite when I was getting into – at the end of the day, we have $33 million in settlements, now some of these were secrets, some of them were public, some of them – but what they call come do is $33 million. We are from the very beginning anticipating not quite the battle as would be, but anticipating it would be a battle. We kept the chartered accounts where we measured each trip we took, each hotel room, of course, each legal bill, etcetera, etcetera that all came to $31 million. So it looks like we made $2 million, however there are tangibles and intangibles.

So for example, in the tangible expense we had spent $6 million in 10 years on government affairs. Some portion of that that people involve with a less than half, somewhat less than half was really involved in dealing with Washington and vis-a-via Wall Street, and that all pretty much came to an end by 2009. But in 2006, 2007, 2008 we were trying to convince powers that’d be that settlement failures and those failures in the settlement system were not a good thing for America, and there were government relations. So yeah, to say some portion of that $6 million went to that, so less than $2 million to $3 million.

At the end of the day – and then you can also say there has been intangible benefits, we’ve certainly gotten known as the people who stood up for one – we were kind of the one company occupy Wall Street before it was occupied on 2004, 2005. And there had been intangible costs too, I know I’ve kicked off a lot of powerful players on Wall Street and that’s time for them to put on their big fully pants, don’t regret a minute of it, they do first blood, they weren’t of all. Anyone who has been living under a rock since 2008 knows that you guys were the wrong, I was correct, there was massive collaboration to point us inside the trading, there were stock manipulation going on, the SEC was asleep at the switch, the financial press was too close to the sources, all these things I said in 2005, 2006 and 2007 turned out to be true.

So I don’t regret this, in the process we’ve also learned an immense amount about the plumbing of Wall Street that we think is working quite to our advantage and in terms of our efforts with the blockchain. And since probably the last time I spoke with you since a year – since two years ago when we first took – we were first taking bitcoin and people are saying, why are taking bitcoin in stock, because we knew that this technology and the blockchain was going to change the world and we wanted to experience working with that. We have that and I think that you combine that with what we learned about Wall Street and the course of my Mitzvah and we’ve got a real tiger by the tail.

So, with that, that was – that’s the final verdict on my Mitzvah, maybe $2 million, when you encounter the intangible non-direct cost, you probably say it’s a wash, giblet to one way or the other. I know that it’s a rare that you can do the right thing and I think have a quite an enormous effect on global capital markets and kind of have breakeven for it and in the process, learn a bunch of things that I think will be a benefit to this company to learn.

So with those as gone through the slides, we’ve got some questions that have already come in. Mitch?

Mitch Edwards


Question-and-Answer Session

A - Patrick Byrne

Okay. Let me start with maybe that one. Okay, let me start with this one. Given the news with the $20 million settlement with Merrill what cost to Overstock is settled out and go to trial? Was it an effort for Overstock return a new pace with Wall Street by offering all of brands, whether it’s a hopes for tracking potential licensing partners with two zero?

That’s a fair question, Mike. And it’s hard to always know one psychology. That thought did not – that thought did cross my mind. I did not mean it as a – there is another story here, just economic calculation. So first of all, I want to say, I just got to say this, I feel very badly for Merrill Lynch and Bank of America, we got really nothing to do with this. Merrill Lynch was in the position of – when you have a group of kids and one is basically the nasty kid and there is a group of kids who grow along and then there is one kid who is kind of the slobby kid who just wants to join the group that was Merrill. They were not the originators of this. The bad kid in the group was Goldman Sachs.

And when any reporter decides to have the story of the life time, they can dig through the banker’s [indiscernible] about this. Goldman Sachs did something a very deliberate, unbelievable scheme and they at the end of the day as the French guy closed them, they brought Merrill Lynch and so in the past they balled it out. Just as the vague reason of our legal system that it was Merrill Lynch who ended up paying us $20 million, but actually feel quite bad for them. Not bad enough, I’m not going to cash the check but I actually have no irony at all towards Merrill Lynch.

All that’s said, with costs to settle the economic calculation that came overwhelming, and I’ll walk through it. I thought that we – we thought that if everything worked out we could be winning $40 million to $50 million, plus interest, it turns it to sort of $85 million, $90 million maybe a $100 million something like that. We did do mock juries, we found that we were getting $25 million to $50 million and then Fab but as the cost but really what’s really at the end of the day was the cost of this – of another five to eight years, when I was learned at the appeal process would likely be another five to eight years with the clock ticking. We’ve been spending $3.5 million a year on this.

Five to eight years, and then we’re counting what the expected value is and what if things go wrong here, here, here, here, here. The U.S. Supreme Court heard this fall a lookalike case, enrolling a staler. And so New Jersey naked short selling case that has made it to the U.S. supreme court and they were going to rule this June on whether these can even be brought in state courts. There was all federal preempted and if they rule the wrong way on that it means that our case would disappear.

So ours facing some non-negligible risk of whole case disappearing this June or the supreme court rules and then if we press forward, $6 million to try it, $10 million to $15 million assuming we won to then appeal five to eight more years, on and on and on or the court had pointed what our lucky draw was that after years of this kicking around the California legal system with not anybody really seeming they want to try it. I don’t want to say anything more about previous courts, but this was finally given to a judge who seemed to have the courage to do something about it, and she started moving the case forward.

And once she started moving the case forward and setting trial dates and telling Goldman Sachs or telling other players involved, no more delays, this has been kicked around for eight years, we’re going to trial this. The other side filing at shares, about having serious conversations and a court appointed mediator, after hearing everything, came to both sides around New Years and said, I recommend $20 million. And I did all the math, it had reached the point where there was no straight case argument for me but I could just keep on pursuing this on the shareholder dime. When I thought we might be pocketing a $100 million a year from now, I was really keep spending $5 million to $10 million to get there. Well it looks like I started looking like spending $15 million in five to eight more years, I said, hey I’ll take $20 million right now.

So that was the thinking, thank you for your call and thank you for your question.

Patrick Byrne

Next question. How can you defend, I always like questions, open minded question as you start. How can you defend keeping your bitcoin capital markets, other external operations together with the core business? The latter is a huge drag on an otherwise widely profitable into that retail business, nothing wrong with your new endeavor, just spin them off, let investors oven in your shelf have the same no matter what’s holding you back, why punish investors who stuck with you?

Good question, there is only one thing hear that would be appropriate to spin-off, arguably the second thing which would be an effort to commercialize some of our technology, that’s something I’ve never – I don’t think I’ve ever spoke out in these calls about. There are – we’ve developed some really cool technology we could license to other – that would be a different possible spin-off, but what I really think right within our businesses that could be spun-off on its own is would be the blockchain capital markets.

Now, that’s a nice [indiscernible] Medici. Medici owns SpeedRoute which is this company that we bought for $31 million back a few months ago, that’s doing I think about $35 million or $40 million in revenue, growing nicely, has a nice probably – has a nice bottom line to it. Its bottom line I think, its bottom line is $3 million, maybe grown to $4 million, $5 million this year. The other part of Medici is the T-Zero efforts. The T-Zero efforts are caught which is the whole crypto capital market. And then there is a third part of Medici which is we’ve made, and this has been disclosed, standby just a moment.

We’ve had $7 million of investments in private companies that were sort of related to this business, I wish I had adopted this years ago because we had brought in other companies and working them and help them develop products. It went on and they got sold for $1 billion, I think we were the ones who were sort of called them exactly what we needed them to develop.

So of that $7 million in other businesses, $5 million is invested in a crypto related business and it’s a very good one. And we sort of put all those together, that’s Medici, we could spin that off. I think the truth is it should be spin off with one exception, there is a synergy possible between our current retail business and that business. It’s a wonderful synergy I’m working around it all the time now. If it works, they’ll stay together, if it doesn’t work and if doesn’t work we will – yes, if there is not a synergy between the businesses, I think the right thing to do is spin Medici off. In fact I think the right thing to do, I’d love to dividend it out but there is tax consequences because it’s not business five years.

The right thing to do with Medici is to find a partner and I’m talking too many of them, but global partners in the world of FinTech or [indiscernible] FinTech in financial world who want to be our partner. And right now we own a 1% of Medici, the SpeedRoute people of 19%, the truth is a partner who came in at – the right partner I’d let in at a reasonable valuation, these businesses now have quite large – the other people trying to get in this space have generally quite - nice valuations and we think a good bit ahead of everybody. I’d love to have the right, large partner come in, make an investment and even I could turn this over and they’re stable that $1 million or multibillion dollar company could take the Medici product and introduce – and integrate it into their current operations.

I’ve had a number of conversations over the last six weeks along those lines, I’m going to New York this week for a couple of more – there is a number of large, probably if you read the financial press, the world has figured out since [ph] Mr. Dimond of JPMorgan who happens to be a guy I’ve known since my 20s, I knew him by 20s came out and said, what do you said about this, this stuff is going to come eat Wall Street’s lunch, he said last May in a letter to shareholders. The whole financial world has figured out this is the biggest innovation in our life times in FinTech, maybe in 600 years. And there is a lot of very – people many, many times our size who want to jump in and be part of this. And by getting involved with T-Zero, Medici they can jump right to the front of the line.

So there is all of those kinds of conversations going on, I’m flying back to New York tomorrow and to continue them. And we really are in the point I’ve been having them for two months, it is the point that we make a decision.

And so the questions are fair one, and my answer is, there is – I doubt the premise or I don’t know if the premise is true or not, that there is no relation between these businesses. We’ll be discovering within single digit months whether there is or not, if there is not, it absolutely should be spun off separately.

And wait a second, I’ve got second. I have a couple of more things there on me. Okay, questions are total operating expenses for Medici were $8 million directly. Now that includes all the salaries and things like that, and the outside legal bills and so forth, but you can argue it doesn’t include any of – Rob, here is his time, our CFO or Mitch’s time or my time, maybe it’s good for the company and me have something get out of the place. So you can find intangible expenses, but everything associates with traveling to New York and traveling around for these meetings and all the developers and stuff is baked into that $8 million. And why – and I would say that in the eyes of gods of economics if you count everything else it might be $12 million or something like that. In the sense of – if we had decided not to do this at all, we would have saved at least that $8 million and maybe $12 million, I mean the seconds in estimate. One will it be spun out so that we can focus on the core business, I just need to satisfy myself first that there is not this one synergy lurking that I think might be a wonderful synergy for Overstock. And if there is not, we will spin it out, and we already are had all kinds of conversations with people who would like to invest or own or own 20% or things like that.

So there is no hurry there, I mean I don’t want to – I’m not toddling but I need a couple months to figure out what the right – we’re narrowing off one of our dollars here, we got to find the right shooter.

Patrick Byrne

What are the revenues for Oasis?

Oasis is more of a – we sunset a bunch of old technology that has grown up over the years. And Stormy dove in and has a very deep understanding, actually much deeper than mine at this point of how the plumbing of all these things work. And she just designed Oasis and had supplier relations and it is the foundation for all these other things we’re doing, for international business we’re doing one, for the way we’re having – we’ve described before that you’ll probably see a large increase in the number of skews on our side and so forth. So Oasis is the – there are a while an Oasis as you get to stay in business against a bunch of people who bring in, spending much more on technology.

So, it’s not a sort of an independent revenue thing. We are shifting strongly one of all of our partners envy over to Oasis.

Stormy Simon

Sometime this year we will have sunset it probably by Q3, we’ll be operating fully from Oasis.

Patrick Byrne

And Oasis gives so much more functionality to us and the partners and makes us so much more competitive. So that’s the way I think but not in terms of exactly what the fees are. Although by the time we move everyone over to it that will be okay to have. The operating expenses relating to other initiatives like pet adoption, insurance of formers market, another question are pretty – the grand scheme things are pretty small. People pet adoption few hundred thousand dollars to build probably half of that for year in operating expenses. Rob, is that fair?

Robert Hughes

Something like that, not – it’s clearly not significant, a worthy effort but not financially extensive for us.

Patrick Byrne

Same with insurance. Formers market is – I’m sorry, formers market probably took us $4 million to build or something, but in the process we build a bunch of technology we needed, we’ve wanting to build for the site itself. So for example, we built subscription service with formers market, so it’s in that $4 million but part of the real reason for doing it was, we had that subscription service which we turned on in the fall and there now are people ordering toothpastes and soap and things like that delivered from us on that subscription basis.

So, going forward I think formers markets starts looking like an annual operating expense of mid six sacred numbers, and we’ve gotten that technology out of it but the other thing is insurance and pet adoption, you’re talking about things that orders low – just couple of hundred thousand dollars per year.

Patrick Byrne

Let’s see, next question. Given a deceleration in revenue growth, are you – likely had the slower growth in the future, are you considering reducing expenses in some of the areas you’ve invested in the past two years?

Yeah, we already have. We got – we already did, Stormy in October, Stormy and Rob got a wonderful project together and went through – and really between letting some attrition happen and just scrubbing through all of our contracts and all of our suppliers, and doing that thing you need to do, I mean idly you do it continuously but the truth of the matter is, if you do it continuously you never trying anything new, you got to take some risks. So we used to have a thing more annually where we went through and cut 5% to 10% of expenses at the end each year and then let them just sort of get build up over the year and do it again.

We haven’t done that ruthless thing for about five or six years, we went through this time. And to be honest, I thought, this was going to be something that at the end of the year I’d be talking to my colleagues into and in fact, Stormy took the ball away with it. I came in early November and they were ready for me just a green light and they just pulled the trigger which I did and they stripped well over $10 million out of the system and it’s already been done, it’s not pie-in-the-sky the last 60 days of the year. There is some more giblets in cost to dribble out through this quarter, but there has been a real reduction in expense.

Patrick Byrne

So, next question. What was the CapEx for property related to the new facility? Standby a moment. Okay, what was CapEx for property related to the new facility, $34 million in 2015 and another $15 million, $20 million for the year before that but from October of this year forward, we’re now just drawing down on our line which has been gracefully provided by…

Robert Hughes

U.S. bank.

Patrick Byrne

U.S. bank and the other line too, the $20 million line the [indiscernible].

Robert Hughes

Yeah, we both have a – the real estate loaners from U.S. bank and by yearend we borrowed about quite $10 million on that and then late in the year we ended into a leasing facility with U.S. bank as well.

Patrick Byrne

And I’ll even given you some more numbers on that. The board authorized, and these numbers off the top of my head there may be a million off here or two. The board authorized a couple few years ago $75 million for this project, that was $74 million non-including the price of the land and the architects. And we found – anyway it all comes to basically the board authorized about $98 million, $99 million. There was a $100 million debt made between me and Jonathan back, this would never touch a $100 million and he was sure it’d go to $120 million, this is coming in now. All in, seven done at $98 million, so right on budget, we’re at hundreds of thousands one way or other of what the original expectation was. Great value engineering and that’s not including about $10 million of various tax credits we’ve gotten.

Now there is tax credits extend over seven years and things and the net present value isn’t $10 million, it might be $7 million or something, put it all in a bag, shake it up, it’s coming out like the real net present value, this project was about $90 million and $91 million which I think is great, we’ll be moving furniture in June, certificate of occupancy in early August and we’ll be moving ourselves in through the rest of August and September. And I think that the benefits of this are setting side, we get rid of the colocation facility where we paid $2 million a year, and we get rid of our current corporate headquarters which were going to $5 million to $6 million a year.

You’ll also have the two halves of the business, a thousand people on each side no longer separated by 15 miles. If everybody working together, I think there are great benefits to be had in efficiency there and it’s going to be such a nice property reducing attrition and attracting talent, I think that the benefits of this are going to be wonderful.

Patrick Byrne

You kept those cash flow from operations include settlement proceeds?

No, not yet. The settlement will not recognized until 2016 and here is – there is already accounting. In the two previous years we had legal surprises on around January 10, out of the blue surprises and it’s through our corner of accounting they were counted in the previous year, they were legal bad surprises, big judgments against us, they came in like first 10 days of January. This settlement doesn’t do that and that is because Rob you – Robert you explain, the angels on the head of this accounting panel.

Robert Hughes

The other two were loss contingencies and this one’s considered a gain contingency and so you can’t be recognized until you’ve actually achieved it. And so we’ve recognized in 2016, but the rules are different.

Patrick Byrne

Okay, the world is not symmetrical. However the person who paid us the $20 million would have to recognize in Q4 the cost, right?

Robert Hughes

Yes, I believe they’re different. Yeah.

Patrick Byrne

The world doesn’t analyze. So we did - as of this morning we received the $20 million, wire, so it’s not a contingency or anything, it’s in our [indiscernible] we had to borrow this morning. So that does not show up in the 2016 numbers, however, not only do we had that $20 million, we had budgeted $6 million to try it this year and the thing has been costing us $3.5 million plus or minus for some years, etcetera, etcetera. Some people out there are going to say, well it’s a onetime benefit, to which I say, [indiscernible]. You accounted - you count the expense each year, you count the winnings that’s how it works or you take the expenses out and you don’t count the winnings.

We counted the expenses each year as we went, we get to count this – that $20 million is in our bank account and that’s real money, and that’s what we wanted. So there is that question.

Patrick Byrne

Next question. What was my $22 million mistake?

On the retail, there were some – I have nothing against telling it, chips for competitive intelligence reasons. There is some competitive intelligence reasons and I don’t want to say the area where the mistake was made, but I am earning, I made a mistake, I made a bad call and it really hurt us on the marketing side. And Stormy and team once again stepped in and sort of they make up when I make bad mistakes, and they made about half of it backwards, but it was the mistake in of judgment in marketing, a transition between a couple of programs that I considered sort of very, very important, did not go very well. Well, it went poorly, maybe that transition was – because I was pushing too hard for the transition to happen and the people weren’t ready.

It could be – maybe the people might have understood I’ve been waiting it for two, three years and I was getting really anxious and I pushed them hard. In any case a certain transition, technical transition in marketing did not go as well as expected and that had some repel affects which we identified and had reversed and so forth. So I own the $22 million mistakes, my friends made up about half of it, and we’ve got the ship turning. But it’s also, I’d say not all the mistake, when we saw what was going on with certain marketing spending from competitors, we’ve done this before. We have faced all kinds of people coming at us, they [indiscernible] the world and the Groupons and LivingSocials and other people who – when they did this, and they said, we’ll just lose, we don’t care what we lose, we stepped back, we roped it out and we let them drive up the cost of paid keywords and all these things and will step back until they couldn’t do it anymore.

Now wafer is different, and I respect wafers grown very quickly. We model it ourselves, we can – I think we can have wafers income statement tomorrow. I think we already spent $200 million more on marketing and go back to losing $50 million to a $100 million and they’re growing 80% and 90%. And even maybe do it on a cash flow breakeven basis, on an annual basis but I just – that’s not a place I like to be. So if you’re looking for those fast growing internet companies like you don’t care what they lose, we’re not the guy to talk to, if you wanting to talk to a retailer who makes money year-over-year, we made money six over the last seven years. And by the way, a point on now, where is our balance sheet? Is that handy?

Okay, we are – total equity of – standby just a moment. Accumulative deficit of a $166 million, one thing that there is people who don’t mind as they spill that much or twice that much in a year. So we see ourselves as stewards of owner’s capital, of your capital. And to me that means I can’t – I don’t want to change people and do what I just described and spend $200 million more on marketing such. I mean wafer spent, I think had spent about $300 million this year, we spent about half of that. I don’t want to spend the extra $150 million, either steward of your capital I think the right thing to do is keep playing the game intelligently, keeping ourselves profitable. Well it’s a different world strategically when you’re keeping yourself profitable. Anytime we want we can turn ourselves into one of those companies that just jams marketing and we’d be growing so much faster and losing $50 million, $100 million and that’s not the way I was raised.

So I’ll stop there. Any other questions Mitch?

Mitch Edwards

No, that is the extend of the questions that have been emailed in.

Patrick Byrne

Okay, thank you very much. I will tell you that I think we have a – we have a tough one or two quarters. We had last year a tough one or two quarters in terms of getting things growing again, confident we can do it, confident by the third quarter you’ll be seeing real growth of urge. We’re also were up against, last year we did this jewelry – a huge jewelry liquidation. We had – we bought Bidz.com inventory, I think its public when we bought them for $3.5 million. I think they paid about $12 million, I think it may have had two or three times than the normal retail value.

We had a huge liquidation last year, we’re only down – I think we’re only up about $500 million left of that inventory but we were lowering that stuff at 40% margins and more. So it does affect, it makes the numbers for – that’s a very tough comp for February, March but we’re comfortable that we’re making the right sort of realignments within marketing and see some real opportunities to do better, and just started one year upfront though, that that’s how the year looks to me, it’s little tough in the first six months and then you’ll see nice growth emerging by the end of the second quarter and end of the third.

Can I even say, I’m going to even say something, it’s going to make my general council here unhappy. I’m looking for pretax net income for this year, I’m looking for, no promises. I think that we make $40 million, pretax net income that’s what I’m aiming for. And I should say $40 million plus gamma and gamma is the difference between what our SpeedRoute business makes us and what end up investing in the capital markets. So SpeedRoute will basically fund the investment in the capital markets but maybe we spend an extra $3 million or $4 million and the difference will come out of that. But let’s say $35 million to $40 million is what I am – that’s my target for the year, no promises. California highway mileage will be lower, Mitch is going to give you all these reasons – I shouldn’t have said that, but anyway.

Mitch Edwards

Well, it’s certainly subject to the Safe Harbor and there is no assurance that any predictions or projections come true and the risk factors in our 10K and everything else subject to that.

Patrick Byrne

Thank you. And I’ll say one last thing in this, as you folks know, who watch my any public appearances, I think the world is a very unstable place. What we have focused on in the last couple of years is making our system robust. I think we are very robust, people laugh at us, laugh at me that hey, we put – we got out there that we have to walk with some gold and silver in it. We’re all about making this company robust, I’m ready for great depression number two. The world you stay only have one great – the great war because they didn’t know enough to number it, had two world wars. We had one great depression and I think the world is incredibly fragile right now and we have really very consciously in this business for the last couple of years prepared – made it robust financially, so we really ready to survive any sort of downturn that hits United State and I’m not sure that could be set for all of our competitors.

So we’ve given up something on upfront for that but we have a really robust company now. I’ll stop there.

Stormy, anything wise you want to dazzle us with?

Stormy Simon

I have nothing to add. Thank you for your time today.

Patrick Byrne

Sounds like Charlie Munger, have nothing to add. Okay, Mitch, Rob?

Robert Hughes


Patrick Byrne

Thanks very much.


Ladies and gentlemen, this does concludes your Q4 2015 Overstock.com Incorporated Earnings Conference Call. Thank you for your participation, and have a wonderful day. You may disconnect your lines at this time.

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