Overstock.com, Inc. (OSTK)

Q3 2011 Earnings Call

October 27, 2011 11:30 a.m. ET


Jonathan Johnson - President

Steve Chesnut - Senior Vice President, Finance

Patrick Byrne - Chairman & Chief Executive Officer


Daniel Kurnos - The Benchmark Company



Good afternoon, my name is Bonny, and I will be your conference operator today. At this time, I would like to welcome everyone to the O.co also known as Overstock.com Third Quarter 2011 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions)

Thank you. I would now like to turn the call over to Mr. Jonathan Johnson. Please go ahead, sir.

Jonathan Johnson

Thank you, Bonny. Good morning, and welcome to our Q3 2011 earnings call. Joining me today are Dr. Patrick Byrne, Chairman and CEO of the company; and Steve Chesnut, Senior Vice President of Finance and Risk Management of the company.

To begin with, let me remind you that the following discussions and our responses to your questions reflect management’s views as of today, October 27, 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 this morning, and our Form 10-K filed earlier this year.

During this 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 the most comparable GAAP measures.

With those preliminary warnings out of the way, let me turn the call over to Steve to talk about some of our financial results.

Steve Chesnut

Thank you, Jonathan. As we review our financial results during the call today keep in mind that unless otherwise stated, all the comparisons are going to be against our Q3 2010 performance. Revenue in the quarter decreased by $5.7 million or 2%. The primary reason for the decrease in revenue in the quarter were, while our visits to your website were up slightly, we had lower conversion rates and a decrease in new customers, which each resulted in fewer orders. Gross profit decreased by 7% and gross margin decreased by 90 basis points to 16%, primarily due to competitive pricing initiatives that we instituted.

Contribution margin fell by 30 basis points to 10.2%. Combined technology and G&A expense increased by 12%, largely due to increases in IT related staffing and depreciation expense and higher legal expenses in the quarter. Declining revenue, declining contribution, rising operating expenses resulted in a net loss of $7.8 million for the quarter, this is an increased loss of $4.4 million compared to last year.

On a positive note in the quarter, we retired the remaining $24.5 million of senior convertible notes. We funded this through a $17 million draw on our U.S. Bank line of credit, and $7.5 million of operating cash. We ended Q3 with $79 million in cash, cash equivalents and $18 million of working capital. I would encourage you to review our Form 10-Q that we filed today for more detailed information on our results. With that let me turn the call over to Patrick. Patty?

Patrick Byrne

Good morning. I am starting on the slide deck slide five. We have arrested the fall or the deceleration but we are basically flat, have been for a few quarters. That is disappointing. And we know exactly what it is. We know what channel it’s in. The brand morphed to O.co. We are measuring the responsiveness to those dollars spent. And that has dropped significantly our branding -- or branding responsiveness.

Some customers are getting the O.co, some are finding it confusing. So you will see us decelerate that whole brand morph and keep -- maybe it’s going to take two or three years to get people to understand what O.co is but you will be seeing Overstock -- we will be reminding people more of Overstock and just shortcut O.co for the time being until we can get more people shifting.

The early shift to O.co surprised us by how quickly it happened and then there seems to have been some confusion emerge. And so we know that’s exactly the marketing channel that’s been having the problems. The other online channels are generally healthy other then the affiliate channel, where of course we were hurt by all this affiliate tax nexus stuff. But hopefully that is -- or that seems to be reversing.

Slide six. Gross profits have come down a little bit with the 2% decline. Slide seven, this is problematic. We really think, as I said before, I think 11.5%-12% is the right contribution, and maybe it’s 11.5%-12% is what, or I think now. And this is obviously too low and this is a function of us having to gun marketing harder than we would to support this level of sales were it not for what I have just described.

Page eight. Quarterly contribution to growth, basically falls out of the previous two numbers. Slide nine. We remain -- cash flow from operations are basically $32 million, trailing 12 months are $32 million. That’s where it’s been for a while.

Slide ten. GAAP inventory turns, 31, it’s more like six on a real basis, but on a GAAP basis it’s 31. GMROI, slide 11. This actually, on of course the total basis it counts the partner program which is not infinite, but very high. We do have some partner inventory due to returns, but this 650% is acceptable. The 58% isn't. It's really an expression of overcapacity. We have overcapacity in our logistics, and that's what the actual -- the overcapacity hits us and hits this number hard. The actual -- on a product basis, things are doing much better than this, but it's the overcapacity that weighted this number down.

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