Overstock.com, Inc. (

OSTK

)

Q1 2011 Earnings Call

April 28, 2011 4:00 PM ET

Executives

Jonathan Johnson – President

Steve Chesnut – SVP, Finance and Risk Management

Patrick Byrne – Chairman and CEO

Analysts

Dan Chornous – The Benchmark Company

Nat Schindler – Bank of America-Merrill Lynch

Brent Rystrom – Feltl Co

Glenn Rowland – Private Investor

Presentation

Operator

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Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2011 Overstock.com Incorporated Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions).

Mr. Johnson, you may begin your conference.

Jonathan Johnson

Thank you, Kina. Good afternoon. And welcome to our Q1 2011 earnings conference call. Joining me today are Dr. Patrick Byrne, Chairman and CEO of Overstock; and Steve Chesnut, Senior Vice President of Finance and Risk Management of Overstock. We do not predict the future and we want to stay out of trouble. So, let me first read the legal forward-looking statement language.

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The following discussions and our responses to your questions reflect management’s views as of today, April 28, 2011, 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 and Form 10-Q that were issued and filed this morning. And our Form 10-K filed earlier this year.

During the call, we will discuss certain non-GAAP financial measures. The slides 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 our most comparable GAAP measures.

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

Steve Chesnut

Thank you, Jonathan. Let me give you a brief review of our financial results for the first quarter 2011. Unless otherwise stated, all the comparisons we made during our call today will be against our results from Q1, 2010.

Q1 revenues were flat compared to last year’s revenue in our direct business acclaimed by 5% of revenue from our fulfillment partner business grew by 2%. Gross profit grew by 6% in the quarter to just over 50 million and gross margin increased by a 100 basis points to 18.9%.

Contribution margin increased by 60 basis points to 13.1%, despite the 40 basis point increase in sales and marketing expense. Combined technology and G&A expense increased by 20% largely due to increase in staffing with compared to last year.

During the quarter we retired 10.1 million of our long-term debt, which has 24.4 balance outstanding as we finish the quarter. Working capital increased slightly from Q4 2010 to 15.1 million. So, I would encourage you to review our Form 10-Q that was filed today for more details and thorough analysis of our results.

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

Patrick Byrne

Thank you. Referring to the slide deck, going to start on slide 3, actually into these numbers, Steve has already walked through slide 4. Q1 is of course everyone knows about the Google’s natural search penalty, we disclosed that we’ve put on, when we came out, it cost us about 4% or 5% of sales while it was on, and about 7% or 8% in contribution dollars. That was on for what, six weeks or so.

Jonathan Johnson

For 2 months.

Patrick Byrne

We have introduced O.co as our shortcut to Overstock, it’s getting nice pick up, nice traction, and you may have seen something yesterday about the Oakland Coliseum, where rank number 4 top and by NRF AMX this year we received two Stevie Awards for the best customer service in department and sales department.

Slide 5, growth has come down. Of course we are up against – we had enough 42% growth in this quarter last year. So, we had a tough comp, but we feel okay if it’s stabilized. It has stabilized – we are not, as I have been saying for a couple of years, we are really not chasing the top line growth, it’s nice when it comes. We care a lot about contribution dollar growth.

So let’s go to slide 6, see there’s still site growth in quarterly gross profit. Contribution dollars, contribution percent as on slide 7 is gone up to 13 one, I think that is probably the highest we are going to see it. And do you guys want to add anything to that.

Jonathan Johnson

I would agree with that.

Patrick Byrne

Yeah, we don’t want this taking up to 14 for example. So, we are – slide 8 contribution dollars, 5% growth. Again, we were hit somewhat by the Google penalty, but still it is positive and we think that we have good growth lined up for this year in this number.

Slide 9, cash flow from operations. Trailing 12 months for spinning off $35 million in operating cash flow.

On GAAP, annualized at slide 10, our inventory turns on a GAAP basis are 40 now, and even on a core basis they are 8.3. which is healthy, loved to see at even get up to 10 or so, but we’ve really leaned out our capital, we spent a lot of the last couple of years developing all the pricing in forecasting, and we think it’s paying in different way, and one is we’ve just stripped lot of inventory out of our supply chain.

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