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Q2 2010 Earnings Call Transcript

August 9, 2010 3:00 pm ET


Jonathan Johnson – President

Steve Chesnut – SVP, Finance

Patrick Byrne – Chairman and CEO


Paul Bieber – Bank of America/Merrill Lynch



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My name is Taprika and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2010 conference call. (Operator instructions) thank you.

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I would now like to turn the call over to Jonathan Johnson, President of Sir, you may begin.

Jonathan Johnson

Thank you Taprika. Good afternoon and welcome to our second quarter 2010 conference call. Joining me on today are Patrick Byrne, Chairman and CEO of the company and Steve Chesnut, Overstock's Senior Vice President of Finance and risk management. Because we can’t predict the future let me first read the legal forward looking statements.

The following discussion and our responses to your questions reflect management's views as of today, August 9, 2010 only, and will 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 we issued on August 05, 2010 and second quarter 2010 Form 10-Q we filed with the SEC on the same day.

As you listen to today's call, I encourage you to have the press release and the Q2 form 10-Q in front of you since our financial results and detailed commentary are included in those documents and will correspond to much of the discussion that follows.

During the call we will discuss certain non-GAAP financial measures.

Our press release and the slides accompanying this webcast and our filings at the SEC each of which are posted on our Investor Relations website contain additional disclosures regarding these non-GAAP measures including reconciliations of these measures to the most comparable GAAP measures.

With that out of the way, let me turn the call over to Steve to review some of the financial results.

Steve Chesnut

Great. Thank you, Jonathan. Let me give you a brief review of our financial results for the second quarter which ended June 30, 2010. Unless otherwise stated, all the comparisons we're going to talk about on today's call are against our results from the second quarter of 2009.

For revenue, revenue grew 32% to 231 million in the quarter. Growth was distributed broadly across all major categories of the business and we believe that our focus on pricing and marketing initiatives was a key driver for this revenue growth.

Surrounding gross profit, gross profit increased 15% to 42 million while gross margin declined 270 basis points to 18%. While the revenue growth benefited from our overall pricing initiatives, gross margin is lower as a result of these pricing initiatives.

Contribution grew 9% to 27 million in the quarter and contribution margin was 11.8% and contribution margin contracted primarily from gross margin compression offset slightly by a 30 basis point reduction in sales and marketing expense.

Combined technology and G&A expense increased 15% to 29 million though as a percent of revenue and this is important, these fixed costs fell 180 basis points from 14.2% to 12.4% due in part to the expense controls we have in place and the leverage from the higher revenue.

And during the quarter we also retired 9 million of our long-term debt and invested 10 million on capital expenditures.

We believe our balance sheet is sound, and we have cash of 76 million and working capital of 37 million.

Like Jonathan said, let me reiterate that I would encourage to you review our Q2 earnings release and our Form 10-Q filings for a detailed and thorough analysis of the results.

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

Patrick Byrne

Thank you very much, Steve, Jonathan. I will be going through the slide deck. To begin with starting on slide 3, well, all these numbers are essentially what was just read, so let's go to slide 4 quarterly revenue growth. It did decelerate from 42 to 32. Still ample and several multiples of the industry.

Slide 5, quarterly gross profit growth, we have decided – we have decided to – that we had a little much starch in our pricing on a couple – in some areas and this is to me a strategic move that we were squeezing our prices – we're squeezing costs out of the supply chain and passing on those costs, those savings to customers. Still, all that said, this was maybe a – I will stop there.

Slide 6. This is our contribution margin. I would say that 11.8 is a little light. I think this should be running 12 to 13 as now I think I have said that before. Under 12 is a little light. So we would like to see this back in the even 12.5, 13. It has been high, as high as 14.4, but that was probably having a little bit too much starch in our pricing, and well, you should understand that we're – our model expectation here is really to run 12.5, 13.

Contribution dollars, slide seven. 27.4million. We have mentioned before that's how – that's really I think – we pay a lot of attention to this number, and we manage around this number, and we managed around this number using one set of techniques, and we're managing all the corporate expenses using another. So we pay a lot of attention to this internally and recommend you might as well.

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