Overstock.com, Inc.
Q4 2016 Earnings Call Transcript
Published:
- Operator:
- Good day, ladies and gentlemen. And welcome to the Overstock.com Q4 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to turn the call over to Mr. Rob Hughes, SVP of Finance and Risk Management. Sir, you may begin.
- Rob Hughes:
- Thank you. Good afternoon. And welcome to our fourth quarter and full year 2016 earnings conference call. Joining me today is Dr. Patrick Byrne, Founder and CEO; Saum Noursalehi, President of our Retail Business; and Jonathan Johnson, our Chairman and President of our Medici Business. Let me remind you that the following discussion and our responses to your questions reflects management's views as of today, January 31, 2017 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 in the Form 10-Q we filed on November 3, 2016. Please review the Safe Harbor statement on slide two. During this call, we'll 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. Patrick, with that, let me turn the call over to you.
- Dr. Patrick Byrne:
- Thank you, Rob. I will be walking through the slides. First, I would like to open this, by saying I intend to give you a deeper briefing on what is going on in the marketplace and how our company and some other companies are evolving in response. Then I have for a long, many years ago I use to be extremely wholesome and bringing the shareholders in, understanding real choices and dilemmas we were facing, I felt that at some point when I got in that fisticuffs with Wall Street it led to giving people a lot of fodder to misrepresent, and anything I said and say, yeah, that’s an excuse or something, not excuse, I am just letting people know what’s going on in the marketplace and how we are responding. So, with that preamble, let’s go to these slides. Slide three, Q4 results, now remember this is blended retail, Q4 results we did keep 10% growth. And remember this is Retail and the Medici business. So I'm not sure that it makes whole a lot of sense for detail financial metrics walking for when we smashed to unlike businesses, we got our. Let’s page four, page four, you see our Retail business actually ended quite healthy, 19% growth on the gross profit dollars, contribution up 16% and so on and so forth, $6.8 million in pretax income. We did have quite a big hit to that and a number of things we'll talk about. Let’s go to slide five, so I am focusing on this Retail business only, because Medici, there is a whole different set of a frame -- a whole different framework within which we want to talk about Medici investments. Slide five, quarterly revenue growth, you see we came out of our low, there is a tick down and I was disappointed in this. I am going to tell you why this happened. I'm disappointed, although, I think, we have played this correctly. I would have like this -- have seen this data 15% to 20%. What's going on in the market, while I will be getting to -- I will be getting to shortly. So slide five, there is -- I view that this tick down is a -- we -- I believe we’ve played this correctly, but there's a real -- there is a couple real shifts going on in the marketplace that I want to be discussing. So I just note that tick down and then I move on. Slides six, even given with our new pricing algorithms and analytics like all these PhDs and theoretical nuclear physics literally kind of folks walking around here. They are doing a lot of great optimization and we are moving farther and farther into the world of Big Data. So even on that growth we were able to grow gross profit 18%. Next the contribution which is what we really like managing to is at 15%. So I view that the -- I view the downturn we have once again turned things out, we tend to have a history of getting growing 15% to 20% and something happens that knock us into a tailspin and then we figure out new things and innovate and climb our way out of it. So I -- we have pass the past one, now it’s for just the time of the future. The slide eight, this is a telling graph, in that even though our margins were unusually high for Q4, typically in Q4 margins dipped, because there was a big shift away from high margin products to low margin commoditize products. Our state high, our marketing cost increased and yet still we have this 10.3% on contribution, which is not -- which is has been where on Q4, typically where Q4 is better than last year’s Q4 and I think the Q4 is our always going to have a lower contribution margin then we run through the other part of a year. Slide nine, very interesting graph, so people who, so when I talk to analysts, people who trying to deconstruct our income statement, this is made for them. We can now say very clearly what's going on. If you just look at our G&A and hard dollar cost you see how that's gone flat. We are really in terms of corporate infrastructure we had maintained real discipline. On technology we have -- we have been shifting, sorry, and so, as a result of that, as result of maintaining real discipline on corporate infrastructure expense we dropped from 4.9% of sales to 4.1% of sales. So I think that's a lot -- we speaks of a lot of financial discipline from my colleagues. On technology spending we've gone from 5.0% up to 5.5%. That's acceptable. That represents on a dollar basis a gradual swelling of our technology expenses and I think that I wanted to -- I think that we probably under invested in technology for a long, long time as we got Retail stuff sorted out, but now we really are turning into -- we have turned into a real tech company and I hear this all the time from vendors who deal with us and very high profile, large internet advertising companies who tell us for example that your -- I know we have pockets anyway where we are well ahead of the competition. So as a percentage of revenue we see this nice trend that has come down 9.5% for the year. So our expense control is I think very solid and it’s even -- it gets -- it’s hard to manage expense control as a percentage of sales when the sales growth itself is so lumpy. But if you just look at in terms of hard dollars and so we do manage the hard dollars of expenses very, very accurately. We are up to $50 million in our quarter of total corporate expense. And we manage that -- that we come spot on and manage our expenses, now it’s not always what we anticipate as a percentage of sales, because it’s harder to predict sales growth quarter-to-quarter. Slide 10, annual results, $1.8 billion won't run through everything. The contribution dollars were surprising 8% increase over last year, that was a -- that was pleasing to me given where it started the year. Tech and G&A expense grew 8%. Pretax income, I want to point this out, you really have to look at our business as two different wings now. Our Retail business made $32.3 million pretax last year. Now, in my view, pretax, I look a lot of pretax amount as we don't actually pay cash taxes because we are burning through an NOL. But to me that was -- that's healthy, we have get a nice healthy core Retail business. Medici cost $11.8 million. We hoped at the beginning of the year Medici costs zero or maybe a few million on to the negative. It cost $12 million. I don't regret any of them. I think it's the -- I think that we are -- we are really epicenter of this blockchain revolution in so many ways and I think these peanuts compared to the opportunity. So put all together $12.5 million of net income and operating cash flow is $39.6, that’s $54 million, there is something odd about the quarter, which you should be aware, this is going to affect all retailers. Rob why don’t you explain about the timing issue?
- Rob Hughes:
- Sure. That decrease in operating cash flow year-over-year was primarily due to a timing issue at year end with sales on and around Black Friday and Cyber Monday occurring several business days earlier in November in 2016 and in 2015, our suppliers had more days to ship orders by November 30th, which is our cut-off for supplier payment we make in December versus paying in January of the next year. We estimate that if we normalize 2016 for the timing pattern in 2015 we would have paid $24 million less in 2016 paying it in January 2017 instead, that was the largest single factor effecting operating cash flow year-over-year.
- Dr. Patrick Byrne:
- Good explanation. So there is sort of a weird timing issue that shifts $24 million in payments out of first two days of January into December of 2016, and I guess that means Q1 has, what, $24 million better cash flow than others, so it all evens out, that just has to do with the shipping cut-off. So cash flow just fine. Let’s look at slide 11, the annual results for Retail only, we’ve just walk through them, but $1.8 million on the top, $32.3 million pretax on the bottom. Next slide 12, again you see our corporate employees and this is a combination of tech and non-tech. Although, Rob seems to have reversed the colors, tech in the previous two slides ago, tech was the dark blue. But I just want to be sure in this page, does this blue actually mean tech or does [Inaudible] (11
- Rob Hughes:
- Yes. It’s tech.
- Dr. Patrick Byrne:
- Okay. So, anyway, I believe in terms of corporate infrastructure we are stable and if anything kind of hollowing out the G&A costs and moving into tech. Slide 13, operating and free cash flow, operating free cash flow trailing 12 months, again that $39.5 million, but really need to add or count back $24 based on this end of year thing. Setting that aside, we go from the $39 million -- $40 million to the minus $32 million, a big chunk of that is, we just built a -- finish building our business -- our building. Jon what else you want to say for that?
- Jonathan Johnson:
- That’s the real explanation, in addition there was the normal, I’ll call the normal CapEx for software developers and IT infrastructure, but that the building is now done, we had about $8 million in CapEx for the building in Q4 and that finished it off at $99 million in total.
- Dr. Patrick Byrne:
- So in the absence of building a new building and the absence of $24 million you had $47 million, $67 million more, at over $100 million of operating cash flow, although we would have to pay rent of the building, so anyway.
- Jonathan Johnson:
- Not operating, the building reduces free cash flow.
- Dr. Patrick Byrne:
- Got it. Sorry, free cash flow. Okay. Slide 14, GAAP trailing 12 months inventory turns and GMROI again is just outstanding, not much else to say on slide 14. Customer orders -- slide 15, customer orders and average order size, here is something quite interesting. You will see how our average order size -- the number of orders is the same, but the average order size moved very quickly from $162 to $181. That represents a mixture shift. Saum, do you want to add anything to that?
- Saum Noursalehi:
- We’ll just point out, yeah, it is a mix shift in categories and while orders remain flat, they are focused on our more profitable customers, which are in categories like home are and we are shutting or moving away from categories like electronics and books. And so, while orders remain flat, there was significant growth in customers and are valuable categories.
- Dr. Patrick Byrne:
- Right. So there is $19 more per average order. Slide 16, unique customers have stayed just about constant. Cost per customer has gone up, that’s we are attracting these more valuable customers.
- Saum Noursalehi:
- Right, because these customers have a higher lifetime value, we can spend a bit more to acquire them.
- Dr. Patrick Byrne:
- Now we get into what's really going on in the marketplace and this is not a complaint, this is not anything but a statement of fact. I know there are people listening who are professional, analysts of the -- of e-commerce, interesting thing to look at what's going on. Slide 17, let’s start with the bottom, Wayfair visits versus Overstock visits. Now this is out of thick bars, a data source that I know many folks on Wall Street have, so this is third-party statistics, their traffic versus Overstock. See they caught us pretty much in 2015, they got close in 2015, 2016 they surpassed us here and there. On the other hand, how much are we spending and this is right out of each of our 10 Qs. They are spending far more than we have. Now they have not yet reported how much they spent for Q4. But they are spending a lot more than we are. How much more? Turn to slide 18. Our ad spend per visitor is roughly a third of Wayfair. And so this is and again we don’t have Q4 yet, but I can tell you this is how Q4 unrolled. Q4 and this was industry-wide. So there is all kinds of ways we can sort of see what’s going on for the whole industry in terms of traffic and to a less degree conversion, to a less degree conversion. November was surprisingly weak for everybody. It was got up to real soft start, it sometimes happens when those things going on for the whole nation, like an election this happens. We look back and it goes each -- every four years, the November opens, we -- everyone is focused on electric. It did start to come back in sort of late November and we were having a bang on Christmas season. Wayfair came up and just started their spending, they are bidding three, four, five times what we are bedding and what we think is the appropriate economically corrected for all kinds of terms. I think that they, in fact, we had seen a slowdown, a short slowdown in their traffic that they seem to made, my guess is something just made the strategic decision there, they can’t accept that and so they just decided to firewall their spending on internet marketing. And we decided not to chase it. We decided not to chase and play our hand path and this is where we get to, well, let’s go to slide 19. Wayfair had, I think, there were, so Wayfair’s visit growth versus our visit growth. There was a point they were 60% ahead. I think there was a month where they were closer to 100% ahead of us in terms of visit growth and that has narrowed considerably. That’s down to 27%. So the visit growth is narrowing. Meanwhile, we’re -- they are spending three times what we are spending. If we go to the next slide, you see, and the result of this is, as they have made this move, they lost $150 million last year, I think, they lost $150 million through their first, two years ago, with the first three quarters of 2016 they lost another $150 million. I won't opine, I have no idea what Q4 is going to look for them. But they -- what -- they can imagine that marketing spending, I know they made some predictions a couple years ago about Q4 2016. I would be surprised if they came true based on what we saw been doing internet spending and it is continued through January. They have a history of -- they typically continue this very high this pattern -- very high bidding up through the end of January of each year. And so that, I think, in a nutshell, let just say, really where we are. We have a great business model -- we have a great business model. We have a competitor now who doesn't -- has very similar business model, doesn't have, I believe doesn’t have a lot of the things are now that we do, but are making up for it by just spending three times we’re spending to get a visitor. And that they have made a strategic decision suggest that they cannot afford let the growth, if you back the slide you see their growth is compressing, they can't afford to take that, so they have just chosen that their company losing $150 million, maybe $175 million for the year. Well, we are company that made, our Retail business made $32 million pretax. I would have once said that we live in a universe where we can make $32 million a year longer and they can lose $180 million a year. I'm not -- given that this is the internet, I'm not sure that's true anymore. But I know that we can lose $180 million and we can have a $4 billion business overnight. We can do this overnight. That's not the, but we are not going to do that. We said years and year ago, we will find the structural business to be profitable once we reach the $1 billion, or reach the $1 billion, I don’t know how many years ago, but since then I think this, yeah, since we reached the $1 billion, we have been consistently profitable and here they are at $3 billion or something and they are still losing $150 million, maybe $180 million a year. So I don’t know what to tell you that. Like I say strategically I would have once said let’s just rope a dope, let’s just sit back and these folks will burn themselves out, like everyone else. I -- it’s -- I won’t lie to you, it competing against somebody who has copied your business model and then it’s comfortable with losing $150 million or more per year is a tough, not. But what it means is that it drives us to further innovations, further -- we are spending smarter and I think you have to look at how we do things and you can already see that we do things smarter. We do -- we -- our spending is smart. We -- and that’s why we are spending a third less, I mean, a third of what they are spending to get visitor. It -- which I had like on the pockets, I guess, Goldman and Bank of America behind that a lot. But they just have pockets that say go ahead and lose this kind of money. I'm not sure I see a way out of it for them. But we'll see. What it means for us though is, it puts a primacy on being smart, innovating and being smart. We are already, I mean, I think, that everybody, all in facts are clear, we are on our marketing spend how precise we are, right, we are up against somebody who just does it your mind who having this on the losses. We have got to be smarter and it means that we have really and innovate faster. We see lots of places I have got a whiteboard in front of me. The 10 or 12 things we need to do this business this year innovate in our business. Some of it represents real evolution in our business model and you will see more change in our business model over the course of this year than you have had seen in I think any year in our history. We are evolving in response for this. The -- to me it’s all raise to see who can evolve quicker and who can get smarter, faster and come up with these innovations. We've done, I think, a very good job on the minuscule amount of capital compared to the guys where we come up against but we have reorganized the business along this principle. We -- Saum and I have spent the first month of this year, organizing the Retail business in the teams with highly incentivized pay structures, where we're pushing a lot of authority with the teams and ask them to innovate faster, putting, pardon me…
- Saum Noursalehi:
- Bless you.
- Dr. Patrick Byrne:
- Thank you. Technologists on the teams and really reconfiguring the company into a group of about 40 teams that each have highly incentivized compensation structures for their team success and we believe this will accelerate, are already pretty dominant innovation cycle. I mean, again, I hear all the time, I mean, attires that who work with us to tell me how ahead of the other folks in the internet our teams are and we had because we didn't have the same kind of capital, we had to be I think very smart and how we do things. But now we have to be innovating and getting smart and even faster pace and that is what has driven this move towards a quite a decentralized and highly incentivized organizational structure and Saum was a really led the way on that and was perfect. So now, did you want me to, let me break Saum, would you like to add anything to what I just said.
- Saum Noursalehi:
- No. I think that was spot on, we are, yeah, again, heavily invested in analytics and technology and automating functions throughout the business. We are getting unbelievable people, people, so far above anything we've ever attracted. Sometimes people from senior positions from our competition, but a lot of time as real scientists and not from our competition but we’re just getting an unbelievable, we are attracting a strain of talent like we have never been able to reach before.
- Dr. Patrick Byrne:
- Next slide, Medici, you can see, each of the investments in Medici. Jonathan runs this. Jonathan well Chairman of Overstock is President of Medici, sooner hope to be CEO once we spin this off out of the nest that it flies on its own. Jon has done a fabulous job, frankly, in the last four months. My gosh, what an executive, my old general counsel has turned into. He and Steve Hawking have done a fabulous job in getting this corporate structure organize, correct the corporate books done, getting these investments, setting up real procedures for vetting new investments. And the real theory of Medici, I think, is starting to already show, the theory is, this is somewhere, I am not sure what the right name for it is. It’s just not a DC, maybe kind of an incubator. But we are getting, we have this, now this stable of six investments. Jonathan might -- says might take it up to about a dozen investments. There is a few more processes that we might want to have a stake in. But we are having all kinds of synergy emerge. This is and the work we have done in t0 is world historic and I think in 10 years the security market will all be blockchain. The world’s first private/public security has got, let’s go to slide 22. Jonathan please?
- Jonathan Johnson:
- Let’s just come slide 21 for a second because we have a similar slide quarter, but there are some new entities on here. Toward the end of the year we invested in Factom which is using the blockchain to develop mortgage compliance and land titling solutions. We think that’s an area of right for growth with the blockchain. This month we have closed the deal with SettleMint, which is a company based in Belgium that’s using the blockchain for both voting and land titling. And then you will see underneath t0 our fintech company. We have made investments in two companies since we last talk, Blue Ocean Technology and the other Fusion iQ, we think those are going to be particularly useful not just for t0 but in doing things integrated into Overstock and providing…
- Dr. Patrick Byrne:
- Overstock Retail.
- Jonathan Johnson:
- Overstock Retail, thank you, providing growth there. So we continue to see blockchain as we get the first look all the time. I think there are three things that blockchain companies find a feeling about Medici Ventures, one we're investing in space, two, we have unique human capital that we can provide to help companies that we invest in. These are very good, stable developers, a development team that works on different projects at company’s that we have in, that’s a feeling for these star-up companies. And third, the synergies that we see among this portfolio of companies we've invested in. It’s just fantastic. We have three of them out. Earlier this month we will be having all them out at different during the year. This is such a greedfield of opportunity that when the bright minds get together good things seem to always happen.
- Dr. Patrick Byrne:
- Yeah. Exactly. It's -- we are getting this people together from different countries, a different companies, even different continents and they have somebody saying, in that module we plan on building this model next month, and someone else say we just build ourselves. And so there is real advantage emerging in this group. And we do have a change in terms we have first look, I think, any blockchain investment. I am at all because of our sort premier low in the block and bid point community. We -- I just had a group of gathering the entrepreneurs in this field called the situation around table and we frequently told that people would rather have investments from than NBC we bring so much credibility in so many way along with this great support is really working out beautifully to have when somebody at one of these companies needs an expert on data architecture or something. We have 700 people in our company who can -- who are technologist. Who can support -- who can offer support. So it’s really work very nicely having this incubated within the Overstock Retail structure. And on the next page, you see they have -- they -- this was the March the history. Jonathan why don’t you…
- Jonathan Johnson:
- I just really have to -- have people focus on the bottom boat. In December we have the first ever digital equity offering to trade under blockchain. Overstock has preferred share OSTKP which trades in exchange on the 30 platform and settles immediately or the same day on the t0 blockchain. It’s a big deal and the offering went well. We raised about $12 million between the two different preferred stocks, we were pleased with it. We kind of build it as a proof-of-concept to show that this could be done, but frankly, the way it’s performing, yeah, we see it as something that works and has not just a proof-of-concept.
- Dr. Patrick Byrne:
- Right. And I am going to go back to slide 21 for just a second. Just to point out how I am thinking about this, if you set aside, so there are synergies, by having Medici house right here in Overstock, having kind of first call on tech assets and being part of this culture. There's a lot of good value that is created by that. You also have the possibility of synergies between Overstock Retail and some of the stuff in t0. If we set those values aside, those are pebbles on the scale, you set that aside, what the gods of economics want to have happen as Medici gets spun-off. Probably the right way to do it is a -- we have opportunities to capitalize. I believe we have opportunities to capitalize t0 in the near future. There are other people who are interested in capitalizing at the Medici Ventures level. The reason is, they -- people who want to invest in the blockchain but who themselves are not going to be picking investments and working to level with them and they are giving a money to a venture capitalists. But what we have here is sort of the venture capitalist plus we are putting some capital in these companies and really helping them. And some of that -- some of this people are real startups and just having a professional HR Department that can stand up their HR Department and lawyers and accountants who can step in and show some of these startups are on the blockchain both for young revolutionaries and they don’t -- maybe know exactly how to keep a chartered accounts and so it's been -- we are think that Overstock headquarters has provided lot of structure and help it out. But all that said, so there are people who want to invest in blockchain and who have talked us about Medici Ventures being something to invest in. And I think -- Jonathan I think it was general strategy, we probably want to focus on getting investment into t0, but there is somebody else that more targeted that might put something in the Medici Ventures level, of course, it’s kind of funny, the cheapest thing which is be buy Overstock stock and that gives a mistake in it. But, so I am closing on that, I am quite open, if we set aside the values of having an invest in Overstock Retail and the value somebody said that Overstock Retail might do business with a couple of this, setting that aside, Medici Ventures probably does belong being spun-off on its own.
- Jonathan Johnson:
- And we are exploring that and that’s something that we will find the right way to build, yeah, it’s good partners while they invest in Medici Ventures we are going to look at that. We think we have got a great portfolio and portfolio that will expand into the areas that we are focusing on, but it’s nice to be part of Overstock today. There are a lot of synergies at some point I do think will be a little bit more at time.
- Dr. Patrick Byrne:
- Yeah. And I favor cash free spin-off. However, the IRS, we have to do the analysis, can we get the IRS to let us do a cash free spin-off, everybody has share at Overstock gets a share in this or something.
- Jonathan Johnson:
- We are doing work, we will get there and we’ll keep our shareholder posted as we get more info.
- Dr. Patrick Byrne:
- And that may not be possible, what I just said, may not be possible. So people with law degree are working through it.
- Jonathan Johnson:
- So we had another questions, we had a time. Let me kind of emcee those who come in and have them put out for answer. We have been in the headquarter for not less than half a year but the near-term and long-term financial benefits that we are experiencing those that thought, Patrick tell us about the headquarters.
- Dr. Patrick Byrne:
- Well, certainly the cultural benefits are enormous and having these departments which have been in buildings 15 miles apart now all together and working together. There is benefit there. The company is so much happier. There is all kinds of climate and cultural benefits. Financial benefits, I think, we are going to show up in the stability of that number on that -- stability of that bar -- on that bar graph showing what our corporate G&A costs are. I think that it’s going to buy a several more years of being able to grow the company I mean relatively flat G&A structure. We won’t really know, we made some gambles on things like healthcare, we make -- we improved the quality of our healthcare offerings substantially and we also through another couple million dollars in to things for employee welfare on this new campus from daycare to gymnasiums to healthy food and all kinds of things like that. We will take a couple years of experience before the actuary on staff can tell us, do that in fact the fray expense. So we probably relatively modest in that, but we have like a couple of million dollars, we have -- we have had for three year, number of year a higher voluntary attrition rate then I would have like. We use to have to the lowest I had ever heard of. We had like 5% or 6% voluntary attrition rate. It went up to several multiples of that, is now on its way back down. The real cost of attrition, the attrition consultants will tell you about the real cause of attrition is in our company might be $15 million or $20 million a year, of course that your own barber telling you that you need a haircut, but as well our attrition comes down, that you have other solitary effects throughout the income statement. Jonathan?
- Jonathan Johnson:
- I would also say, I think, our employees by and large are happier, more productive, more creative in the new space. It’s remarkable for simple things like having direct access to sunlight in every office, conference room, working space, you go every place has direct access to sunlight. The collaboration that I see in our open spaces happening every day is really quite impressive. So I think the building is been a great investment.
- Dr. Patrick Byrne:
- I was going to let me hit these next questions because they are for you.
- Jonathan Johnson:
- Yeah. There are some that related to the building is coming here.
- Dr. Patrick Byrne:
- Okay.
- Jonathan Johnson:
- There is someone asked that do we see our technology hiring being done or have we hit a place where our G&A and tech expense lines are flat?
- Dr. Patrick Byrne:
- The G&A line is flat. We want more technology.
- Saum Noursalehi:
- Yeah. I think, while we are running lien, there is still areas we need to invest a bit more in technology, so I think, we are going to continue to grow there.
- Dr. Patrick Byrne:
- But I think this maybe a race to who can hire and integrate the most and the best technologists.
- Saum Noursalehi:
- Right. Let me just try and move on to a different…
- Jonathan Johnson:
- Yeah.
- Dr. Patrick Byrne:
- There is a question -- a couple questions have come in regarding crypto and syntax, let me give you to Jonathan. One I will combine the first two, would the crypto stock and bond offering complete, have you been able to generate interest from other companies and leveraging their technology for their own offerings, can you discuss the economic to Overstock of such transactions and can you give us your update and your thoughts on monetizing these Medici efforts including license or technology and spinning off in your holding?
- Jonathan Johnson:
- Sure. There has been interest, we have several companies reach out to t0 to use their platform. The platform works well, companies need to do a filing with the SEC, so that they can issue digital shares summering the process of that, but there has been a lot of interest. So I think, breaking the speed of sound so to speak and getting this done. There was a sonic boom that many heard. We continue to have people overseas in particular interested in using the technology we are developing within t0. So the economics to Overstock as far as t0 and Medici being rolled up into Overstock’s financial statements, anything that t0 and Medici can do better will help Overstock. I do think we are probably at least a year away from Medici being profitable in -- of itself but I could be surprise, the interest that coming from others has been significant. Yeah, as far as spinning out, Patrick talked about that we are looking to raise money, we are going to do at…
- Dr. Patrick Byrne:
- Medici.
- Jonathan Johnson:
- Medici, Medici, I am sorry, Medici Ventures is looking to raise money and if we can figure out how to spin it out in a good way for the company, Overstock shareholders and Medici Ventures we will.
- Dr. Patrick Byrne:
- Yes. I will point out, if you go back to slide 21 and you look at our investments in these business, it roughly comes to $50 million and some giblets. I believe that our ownership of this stable of assets and these are some of them are the real, t0 is the world leader. I have to emphasize something. I go to this blockchain companies on Wall Street and all the stuff and what people are always point out and it’s nice to hear, they say, other folks are at these conferences and they talk about what they are going to do and their big dream is up every conference we show up and we have done something, we have checked something off from a private fund offering to a SEC approval to our [inaudible] (41
- Jonathan Johnson:
- Yeah. So PeerNova is also involved in the fintech space there developing great technologies that let banks use the blockchain for their compliance needs. Bank spent hundreds of millions of dollar on compliance. They can be so much cheaper on the blockchain. They finish proof-of-concept for bank or two close to having a first in production fees. We like or not, we invest in that originally, they are originally miners than they become the hardware play, to do business is more to solving a problem that banks need solve and are willing to pay for it.
- Dr. Patrick Byrne:
- It’s really like the consolidated audit trail that the SEC is supposed to be developing. It kills me. They are going to be spending $1.5 billion I think I heard on this solution and the blockchain-based capital market all of that comes out for free, an audit trail, because blockchain is immutable and transparent and everything you get all that, so a great application are these PeerNova applications there they're pursuing. Bitt is the world leader on blockchain meets central banking. Factom is the name and blockchain meets land titling and blockchain meets, while it’s kind of pivoted into blockchain meets mortgages, mortgage appliances and they see land titling I guess is the next step. Identity Mind, just one, it’s not blockchain, it is fintech and it just was named like one of the $50 hottest young tech companies in America or something. SettleMint is the only one that people wouldn’t know. It's a group of very fine blockchain people in Europe and we are really, really attracted to them as people. They came out of the banking industry. Very good technologist and I mean, we know everybody in this field. They come to our offices, everybody in this revolution we are on a first name basis well I think. And we selected these people just really on their really quality, technologist and people. We made an angel investment. But you set that aside, and so we have $53 million or something invested across this stable of assets. The value of this stable is a lot higher than $53 million.
- Jonathan Johnson:
- Other question.
- Dr. Patrick Byrne:
- It sounds it is creating a lot of value for this already.
- Jonathan Johnson:
- Of course, let me…
- Saum Noursalehi:
- Let me go one more from outside, somebody asked what was the rationale between your acquisition of Blue Ocean?
- Jonathan Johnson:
- So Blue Ocean is a very interest technology that fintech company that’s using, there is a lot of people trade in U.S. equities, aftermarket, overseas. There are Chinese investors who are eager participate in the U.S. equity market, aftermarkets and this Blue Ocean is doing that and we think it's a nice deal within fintech. We have got a great deal along that and made the investment.
- Dr. Patrick Byrne:
- And it leverages the assets that we acquired within SpeedRoute.
- Jonathan Johnson:
- Yes.
- Dr. Patrick Byrne:
- Because it requires an ATS which we have a license ATS. Okay, so next, why don’t you.
- Jonathan Johnson:
- Sorry, in our investor call at the end of November we suggested Retail sales could grow a step function prior to the first quarters of the year. How performance deviate and why?
- Dr. Patrick Byrne:
- Once we -- it did not grow the step function of anything it took a step down and that really came about, because in December, because of this phenomena described from Wayfair that you just saw this radical and our -- what would in our view the overspending on marketing, where they are spending way beyond and literally bidding four or five times what we bid for keyword. They were really, really chasing growth, they are really clearly afraid for those to come down and they are going to keep growth up at any cost, although that cost is going up and up. So once we saw, Saum has said, when the enemy advances I retreat, when he occupies the high lands, I occupy low. I don’t want to go up against Goldman Sachs that venture on who can bid more for barstools, the keyword. So it just means we're having to there is other places for us to focus our efforts and Saum why don’t you add to that.
- Saum Noursalehi:
- Yeah. I would say, to your point, we are focused on profitability and we did see a step up in October, but this as Patrick mentioned, the elections, we saw a decrease in growth during the election period and then again, we marketed our profitable categories, which saw, you saw the 132 basis point an increase in gross margins, that’s result of that, but this hurt us in topline growth, because those categories became a larger percent of our mix.
- Jonathan Johnson:
- Okay. Another question that came in is congratulation on a resurgence in sales to what extent if this being helped by the significant ramp up in SKU counts in the fourth quarter, what we are see in 2017?
- Saum Noursalehi:
- So we realized some of the benefit in Q4, but we are still at the early stages of testing this and you'll -- you can expect to see revenue accelerate from SKU growth in the coming quarters.
- Dr. Patrick Byrne:
- Yes. We are and I will jump on that with, this is one of the evolutions in our business model. You will see radical expansion of our assortment. For years we were focusing on being the curated assortment and we were up against people with who were also trying to own curated assortment and so forth. At the end who is it that said quantity is his own kind of quality, some Greek scholar or some patent, I don’t know, quality is a lot more.
- Jonathan Johnson:
- There is a two very different people…
- Dr. Patrick Byrne:
- It was a military leader who wish saying that at the end of the day we can curate all your wine with your 50,000 products, if somebody and do all the best selection of the products and matching everything with the curtains and all that stuff that you want, somebody comes along with 6 million products. They have got, quantity is it own form of quality. So we are radically expanding our SKU count we are also be approaching I think, 6 million, 5 million, 6 million over the next and that’s up about five times from a year ago.
- Saum Noursalehi:
- Right.
- Dr. Patrick Byrne:
- By the end of this year, by the end of Q3…
- Saum Noursalehi:
- End of this year.
- Dr. Patrick Byrne:
- So and it gives us a different ground to compete on. Anyway, we will be get -- we will be talking about that.
- Jonathan Johnson:
- So are you still discounting or promoting to drive sales, so is it helping and what impact does it have on operating profitability gross margin?
- Dr. Patrick Byrne:
- Yeah. It is part of our strategy. We are Overstock.com which is a discount retailer, but our spent was in line with other Q4 and which help drive a lot of that improve gross margin mix that we talked about. We are focused on offsetting these costs, however, with supply-chain efficiencies and partner subsidies and more intelligent part.
- Saum Noursalehi:
- Yes. I think that we have, this is an example of how we pivot as we see it an opponent doing what they're doing on the in the digital marketing and just radically spending what they are willing to pay to get a visitor rather than fight them there we have other places we can put the money. We have other, a little [inaudible] (49
- Jonathan Johnson:
- There are number of questions that if come on Club O, some of which we may ask for information we don’t provide, but let me ask them. What’s our subscriber account -- what’s our subscriber count for Club O as a percentage of sales or percent of Club O sales and just update us on the trends with Club O members including Club O Gold, are we happy with the way that Club O program is performing?
- Saum Noursalehi:
- I will give a quick note, not happy, it didn’t kind of install for year, we introduced Club O Silver and that gave a -- that probably hurt Club O Gold. We have now changed Club O Silver and Club O Gold is back doing nicely.
- Dr. Patrick Byrne:
- Yeah. It was a free for email signup program that earned 2%, we ended that, we set it back at the beginning of Q4, late Q3, and we are focused on our Gold program, which is a significant part of our business, I don’t know if we want to talk about the exact amount, but we are currently, I think, there is a lot of opportunity here and we are currently exploring a premium tier of the program that I think will be great value to our customer.
- Saum Noursalehi:
- Yes. And it will be premium tier device in a way or set benefits that nobody else has brought anything like that at the end of that. So it will really pick out a nice subsection of the markets that we want to have as our customers, the benefits we will be offering in the next Club O program that we introduced.
- Jonathan Johnson:
- Next question, Patrick, has to do with international, how did international sales performed in Q4 and give us some thought and your mix on international going forward.
- Dr. Patrick Byrne:
- I think, we finally have the right constellation of people in international. We did write down the Middle East, we have found a couple places to focus that we think we can and we have brought the technology live, like last night we made a -- we switch something big on and I think if you'll continue, it actually international is growing nicely fashion than the rest of our business at this point. And I would expect you will see international this year start contributing enough percentage points for the business that people take notice. Saum do you want to add anything?
- Saum Noursalehi:
- No.
- Jonathan Johnson:
- So a question about Q4 2015 when the questioner says we had strong sales of hover board. Once that created a tough comp for 2016 hover period?
- Saum Noursalehi:
- No. Not really, although, we didn’t saw. Well, I think, we talked about this last time, it was a significant impact in sales and if anything you have high returns that were catching on fire, so it actually hurt our margins quite a bit, yeah. This year we are focused on the Samsung Galaxy 7 instead. I was kidding, I was joking.
- Jonathan Johnson:
- Yeah. You get on the plane you are allowed to carried on the plane. Here is a question about did we use special promotions on the Black Friday and Cyber Monday and in the past we have ramped up promotion up and down based on concerns about types of sales. How was our Q4 promotions and what do we think they did to help us going forward?
- Dr. Patrick Byrne:
- I think we had really strong promotions during those peak shopping periods like Black Friday, Cyber Monday. But again our strategy was more on profitability and we saw competitors just significantly overspend in Q4 and if anything, I think, Q4 this year we actually may dial back a bit.
- Saum Noursalehi:
- Yeah. I don’t want to chase, yeah.
- Jonathan Johnson:
- So another question came on Wayfair and this has sent before you run over the four first slide you did that. Patrick, you want to say anything more about how we compete with Wayfair?
- Dr. Patrick Byrne:
- Sure. When I think of, a lot of people are started on the internet with a model that has lose money and grow and just get so big that at some point it becomes impossible to lose money. A lot of business went bankrupt with that model. I can think of one that took that and made it work, Amazon, they got, when they were multi-multi tens of billions of dollar, they got to the point they were possible. I haven’t anyone else make it work and we have had a lot of people make runs with us over the years that are sort of road kill now, people probably barely remember the names and I won’t bring them on, but who had that strategy. We think the discipline that we show back on slide, it was 20, 20 that discipline of keeping the Retail business nicely profitable is a good discipline. We can turn around and do what Wayfair is doing in heartbeat. The trick is, is getting, is having growth without losing $200 million or spending three times we are spending and marketing is 8% to 10% of our -- on a GAAP basis I guess somewhat over 8% of our costs. We triple that and have another -- we can triple that have the -- have this 24% and growing like crazy two. But this is not -- that’s not how we are going to run the business and we have taken this, we have made the structure against opponents many times and with respect to our principles and over time we have yet to see anyone but Amazon pull off what Wayfair is trying to do which is just grow like crazy, loosing much money and someday you are going to turned down the marketing and you are going to have a great business. We've modeled their business and we -- I believe we have the same retention rates and such as they do, I think, that that strategy if they dial their business down, their growth down, if they dial their marketing down to the point that they were not losing this much money, I think, that would see the growth over. They are -- so that’s is the fray train, yes, it’s a fray train but…
- Jonathan Johnson:
- Anyway, I -- we have the more questions coming during the call, you mentioned companies that have gone bankrupt in the past, someone asked it appear some retails have very hard fourth quarters? What kind of opportunity does this present for Overstock to purchase excess inventory at potentially attractive terms.
- Saum Noursalehi:
- I just sent a link to my some colleagues and my who were that side of the business about just this. I mean retailers who are struggling and we want to reach out to them. However, the truth is in the past, so the right thing to do once goods are in the Retail distribution system and they have made their way all way down to the store at -- some department store, generally the reverse logistics of working with us make it prohibitive. It’s better if you are working with the manufacturers. And the -- so the -- at this holiday season did crushed retailers and I think that this will go down as we have been a historical Christmas season, it really was the death knell for brick-and-mortar -- old-style brick-and-mortar, and add much our hand then you will. But really -- the real opportunities come in at the manufacturing level, not so much buying from these retailers themselves, although, where if they already have the inventory, what the gods of economics want to have happen is that they put in work on our site and handling the ship -- handle the shipping themselves. So there will be opportunities if it’s somewhere in the supply chain because of this and I think, it is, I think, [inaudible] (58
- Jonathan Johnson:
- Not too badly.
- Dr. Patrick Byrne:
- Yeah.
- Jonathan Johnson:
- Anything more you want to say on North American expansion, we talked about going in Canada at, question came in one can we say on the progress there?
- Dr. Patrick Byrne:
- Well, that was actually the big thing we roll last night, whole new check out process, it’s been in test for couple months with Canada, we have now roll it across Canada. You will see a lot more of activity from us and Canada this year and that’s where I think you will see very significant international growth.
- Jonathan Johnson:
- And there is a question came in and I fully expected because we have heard about when you will repurchase share quarter-after-quarter, did you explain how you are able to buy back stock that you announced earlier week?
- Dr. Patrick Byrne:
- Yes. We bought back $10 million worth from Fairfax. I'd like to buy a lot more back. I would like to buy a lot more back. We have because of our buildings mortgage, we have bank covenants that somewhat shackles us. So there is ways around that. One will be a sale leaseback and take out the mortgage and then use the capital. But believe me we have a board meeting in two days and its hot topic on everyone’s list is the buyback or other such strategic decisions. Rob, you opine about our constrain if you want to go ahead.
- Rob Hughes:
- Oh, yeah, I would just add we are in discussion with the number -- early discussions though with the number of parties including our current vendors who I think now understand what we want to do. Also some parties that come to us with interest in sale leaseback possibility and we are also in discussion with some bankers about on raising possibility. So that’s the backdrop to accomplish, the objective and we are having discussions with them right now and we will see that goes and where it wants to go.
- Dr. Patrick Byrne:
- Yeah. I would love, only if we have, how much cash did we reported at the end of the quarter?
- Rob Hughes:
- $183 million.
- Dr. Patrick Byrne:
- And that was after we did extra $24 million that’s, so where do you think cash let’s say stabilize by the end of this quarter, we will say within the?
- Saum Noursalehi:
- That’s somewhat hard to predict, I would rather not predict that.
- Dr. Patrick Byrne:
- Okay. Well, we have ample cash and I would love to go out and splurge and buy another 4 million shares frankly or 5 million shares. We currently which and maybe do it to buy that and you try, either we do it. It was nice thing if we do this with Fairfax aftermarket. We did it aftermarket and that’s a nice convenient way to buy stock in but we can also do things, we have talked to bankers about conducting a Dutch auction tender for us which will be another way to buying stock, but if we have somebody who will sell us this at the market that’s may a preferred plan.
- Jonathan Johnson:
- I mean, frankly to be able to buy 10 million shares without moving the market, because it’s in the single block was unique opportunity and we are pleased to execute on it.
- Dr. Patrick Byrne:
- Yes. $10 million worth.
- Jonathan Johnson:
- Yeah. $10 million and so, yeah, thank you for correcting me.
- Saum Noursalehi:
- Can you standby just a moment, standby, I am putting on mute, hang on.
- Jonathan Johnson:
- Yeah. I would say, if there are shareholders on the call, they are interested in purchasing a large block, you may want to talk to Fairfax.
- Saum Noursalehi:
- Yeah. Whenever I talk the hedge funds and investments fund which is in so often, one other things people invariably say is we like this but we can’t develop any position, we can’t weigh any position, your stock trades 50,000 shares a day, we can’t. there is a chance for -- here is a chance for anyone who wants to develop the large position, I think, you probably Fairfax and [ph] Feduity (01
- Dr. Patrick Byrne:
- Yeah. You are talking about newly created stock, a question came in, there has been very little liquidity in market pricing in our Overstock Series B Preferred. This is the non-digital preferred and the months it’s been traded. Well, we consider converting them to common so the shareholders start some liquidity in market pricing. Let me answer, if you are working with several market makers that have filed what are called forms 211 with [ph] Finrock (01
- Saum Noursalehi:
- But why would someone do that, if they are giving up well this year?
- Dr. Patrick Byrne:
- If there is very little liquidity and today we have the market makers they isn’t much it might look…
- Saum Noursalehi:
- Liquidity discount on B.
- Dr. Patrick Byrne:
- Yeah. There is very little liquidity.
- Saum Noursalehi:
- So what is it…
- Dr. Patrick Byrne:
- Actually there is no market makers and we have get four that have submitted applications if they want to do that.
- Saum Noursalehi:
- Is there bid ask, currently a bid ask?
- Dr. Patrick Byrne:
- I couldn’t tell.
- Saum Noursalehi:
- When last I saw on the A, the digital, the blockchain, there was a significant say 6% to 10% liquidity discount in the bid. So I can see your point. If somebody might want to get out of the bid, bid common and that would be great.
- Dr. Patrick Byrne:
- Yeah. A couple more questions, can we comment on the amount spent in the fourth quarter on fintech and what do we expect CapEx to be in 2017? I don’t know if those are questions we have typically answered, CapEx in 2017 and fintech’s fund in Q4.
- Saum Noursalehi:
- Let’s go ahead, CapEx, Rob, why don’t tell them, what our real CapEx is?
- Rob Hughes:
- Yeah. The CapEx without the building and so forth and on a more normalized year for our software developers and our IT infrastructure typically runs around $25 million each.
- Saum Noursalehi:
- Yeah. Maybe there is some overhaul of our service system and be a little lumpy but on average that’s where it would run.
- Jonathan Johnson:
- Okay. Yeah. That’s basically matches our depreciation.
- Saum Noursalehi:
- Of course, I think, depreciation is little higher than that, but…
- Dr. Patrick Byrne:
- But at least, okay, but I am, yeah.
- Jonathan Johnson:
- It seems like in Q4 there [inaudible] (01
- Dr. Patrick Byrne:
- Fintech.
- Saum Noursalehi:
- Because I mean…
- Dr. Patrick Byrne:
- [Inaudible] (01
- Jonathan Johnson:
- That I guess.
- Rob Hughes:
- We have got the, not sure what that mean, we have Medici results on the press release.
- Saum Noursalehi:
- Yeah. I mean, they lost money in the fourth quarter, frankly, will lose money in 2017 likely unless, some of it interest materialize turns into licensing revenue quicker than we think. We have plans for that to happen, but it doesn't, we raise -- continue to face it and build the business because we think the long-term assets is valued naturally will be significant.
- Dr. Patrick Byrne:
- Okay. I have an email has come in from [ph] Carl (01
- Jonathan Johnson:
- Yeah. There are opportunities in this year of course significant licensing revenue. Some of the investments that we have made on that structure slide, because we are -- we own a silver of them as those companies make money it does not roll-off into our financial statement. There are still great value being created for our shareholders and our owners. Medici investment is a little bit of difficult beast to describe, at some level it’s like venture capitalized firm, at some level it’s like an incubator, a foster of new businesses. We do have businesses that we operate, mostly the money we deployed is in businesses that we are operating t0 and its subsidiaries. I think we are creating dollars for shareholders.
- Dr. Patrick Byrne:
- Yeah. I think the value you are going to see in 2017 out of Medici is that you'll see investments in some of these assets at significantly higher valuations than we are then we are in on a see-through basis, you will see t0 was able to turn around and get the investment at a multi $100 million kind of pre-value valuation then it has created hundreds of billions of dollars of value, it just not turn up on a see-through earnings basis it shows up but…
- Saum Noursalehi:
- And I would also comment that some of the companies that in the Medici portfolio specifically PeerNova and Identity Mind have had up rounds of investment since we invested. So other investors like them. Their businesses are growing. Their value is growing. That does not hit Medici Ventures bottomline today but we think it’s creating value for Medici Ventures and thus the Overstock shareholders.
- Dr. Patrick Byrne:
- Yes. And I will just say, see-through is a substitute intrinsic value. On an intrinsic value basis, we believe we are really, we are on the ground floor of this revolution, and I think, that we are creating intrinsic value in these investments, but, so that's how you are going to see it in 2017. Unless there is a, yeah, there are key areas bringing some very interesting products to market and any one of them being a hit makes all -- make all of these numbers look silly. But in the absence of that I am thinking in 2017 in terms of intrinsic value.
- Jonathan Johnson:
- Well, those are our questions, we appreciate our shareholders and our owners listening in, asking question, holding us accountable. I will say, it’s been six months and I have been back in the Seattle in a new building, I am enthusiast. I love staying with Tom, Patrick are dealing with Retail business citing and I love being in the Medici Ventures space. I think we have done lighting in the fall.
- Dr. Patrick Byrne:
- Yeah. And we really have a unique position on the Medici Ventures side where we get, we are getting first look at this whole revolute. Saum a lot is riding on you, you got a cash card here, putting at $30 million a year pretax income. What do you -- are you fear of this competitive threats because when we talk about everyday.
- Saum Noursalehi:
- No. I think our strategy is clear, I mentioned a little bit about it on the last call, but our initiatives are focused around our pricing, our assortment and the convenience of our experience. I think if we focus on those things we will have a great yeah.
- Dr. Patrick Byrne:
- Yeah. Exactly. Thank you for attending. Look forward to see at the shareholders meeting will be this May here in our new building, so we hope our owners, some of them you will -- many of you will fly out and see the new building we built for ourselves.
- Jonathan Johnson:
- Please call CMS campus is magnificent to behold so come and see it.
- Dr. Patrick Byrne:
- And cheap and under budget.
- Jonathan Johnson:
- Yes. Yeah. Thanks.
- Dr. Patrick Byrne:
- Thank you.
- Operator:
- Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.
Other Overstock.com, Inc. earnings call transcripts:
- Q3 (2023) OSTK earnings call transcript
- Q2 (2023) OSTK earnings call transcript
- Q1 (2023) OSTK earnings call transcript
- Q4 (2022) OSTK earnings call transcript
- Q3 (2022) OSTK earnings call transcript
- Q2 (2022) OSTK earnings call transcript
- Q1 (2022) OSTK earnings call transcript
- Q4 (2021) OSTK earnings call transcript
- Q3 (2021) OSTK earnings call transcript
- Q2 (2021) OSTK earnings call transcript