Overstock.com, Inc.
Q3 2017 Earnings Call Transcript

Published:

  • Operator:
    Good day, ladies and gentlemen, and welcome to the Overstock.com Q3 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Robert Hughes, Chief Financial Officer. Sir, you may begin.
  • Robert Hughes:
    Thank you. Good afternoon and welcome to our earnings call. Joining me today are Dr. Patrick Byrne, Founder and CEO; Saum Noursalehi, President of our Retail business; and Seth Moore, Senior Vice President. Let me remind you that the following discussion and our responses to your questions reflect management’s views as of today, November 8, 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 also filed today. Please review the Safe Harbor statement on Slide 2. 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.
  • Patrick Byrne:
    Thank you, Rob. Thank you for that glorious introduction. Patrick Bryne here, so happy to be speaking to everybody. Today is going to be the different - it's going to be an unusual call in several respects. For one thing, this – there is a non-negligible possibility that this is our last earnings call together, as you will come to understand. Secondly, there are far more people on this call, 743 or about 850 on as far as we know now. I suspect this has something to do - I know Marc Cohodes, my new friend Marc Cohodes talked about us in the Grant's Conference, we've been deluged with emails and we have been informed there are going hundreds of people who are really new to this story on today, so that's another reason it is going to be different. But it's because we've been – we are going to be providing may be a different angle on – we're providing an explanation of the overall structure of our business that will help people. I used to be an equity analyst and I'm – our structure today is called to be extremely fulsome lots of information and to help newcomers to this story sort of think about how to value a disparate collection of assets. So here's the short version and a few slides that is – here is our GAAP operating income. As far as I'm concerned of our retail business 1% been 1% for years had a dip in 2011 and even before that we were operating 0.5% down or something. That's about as rare as a leprechaun to see that. I'm happy that Amazon has got to the 1% range. There is Wayfair losing 5%, 10%, 12%, a year. So people I think haven’t often remarked on this fact of how rare this is. And on the next slide you see the capital that we have raised compared to our competitors and that's what it looks like. We have raised $200 million odd in capital and by this same calculation which Rob can explain, yes we're up against people who have raised so much more than we have, and have had so much more capital burn through I think our losses to date after 18 years are $160 million. I'm embarrassed about that. I can look back and see where there were $80 million, $100 million mistakes. But I also look at -- we're up against folks who spilled that before their morning coffee. And yet, on this rather de minimis amount of capital compared to everyone else we've built this $2 billion business with this earnings history. I don’t think that we've often gotten the – that's been noted as much as it might have been, it's a result of really one thing and that is technology. And with – if I'm talking about technology, I'm sitting here and I just Saum Noursalehi who has really been responsible for what's happened here. The explanation is this. When we started off we were proud of saying we're not a tech company, we're a lemonade stand with a computer in it is what I used to say, that's because we couldn’t really afford anything more. And I worked for six or seven years. We had this nice little niche in being a jobber an online jobber and doing jobbing and closeouts and bankruptcies and such. That only took us so far. Up until or through that period when we really did do a lot of integration of third parties. But what happened about 11 years ago we started building our own technology internally in area after area and refining it until it got better than any commercially available product and then cutting away. And we've really done that across our whole site and that is why we've been able to go so far on so little capital. Lest you think that I am just flattering myself here and Saum, let me give you some examples. These are the kind of technology awards we've won over and over, Best of the Web, Fastest Retail Site on the Web. Our apps for android and Apple iOS have for five years been winning almost quite consistently, sometimes first, sometimes second, first in one year iOS, second on the android or verse versa. But our retail app is the best there is out there over and over, and our recommendation engines all of these things that we used to integrate and have third parties provide we got starting really 11 years ago, thanks to the man on my right, the ability to do better internally and build this technology. Saum, why don’t you talk a bit about this?
  • Saum Noursalehi:
    Sure Patrick, thank you. Yes I really see our core competency is technology and product development and as Patrick mentioned, we test against the best out there the best third parties and consistently we win on things like search, recommendations or marketing technology. So I really think we're the best in the industry in those technologies. We’re always open to test new third parties and we try them and when we noticed that we're training the third party on how to build their product that is usually a good indicator of taking that in-house.
  • Patrick Byrne:
    I would also say Saum has been a fantastic partner in that we share this vision of how we can make – the company should be a team of teams and that sounds very familiar from agile development and without approach and he not only remade our whole technology department that way, has made our whole management structure agile. Going on, so again this isn’t just us saying, McKinsey ran a study some - it was about four years ago looking at very scientific study it was actually about all of this stuff, usability, lots of measurements and such and they came out saying, Amazon had the best website in the industry for ease-of-use, intelligence, and all that kind of stuff all mixed into one, we were second. What I've learned is, well I'll continue a little bit, besides just the straight technology our customer care, we've won all kinds of awards for years. The National Retail Federation, surveyed 10,000 households and say "Who blows you away with customer service?" We're always first, second, third or fourth
  • Saum Noursalehi:
    No.
  • Patrick Byrne:
    Seth? Seth you've got something smart to say, you always do.
  • Seth Moore:
    Yes so, we think there is a lot of promise in the business, but like Patrick said, as we continue to see pressure in the digital marketing space, not from a single competitor, but from multiple VC backed competitors, everything in digital marketing is an auction. And so if that pushes the auction prices up, there's an inevitable contraction until our competitors run out of runway. And if VCs keep stepping in with new start-ups behind that, it just keeps compressing even as old competitors flame out, which several on that list of competitors have flamed out, and their history is well known.
  • Patrick Byrne:
    Yes, many of them. Okay, so that's kind of the strategic overview and look at the past and now let's look at the future. What we are doing. People are writing me, saying, "What the heck are you guys even making?" Oh, I see we're up to 1,000 people on the line. This is quite - I'm used to about 4, not 400, 4. Okay, this is what we're doing. We are building a tech stack for civilization between Overstock and Medici. And let me show you what that - Medici is of course our venture capital arm focusing on blockchain. Let me show you what I mean. And I'm going to - since this is such a smorgasbord of assets, I'm hoping that if you bear with me for this 20, 25 minutes, it will save you hours of trying to understand what we have inside OSTK. First, so a tech stack for civilization begins, I think, with money, you need money. You need capital and a capital market, identity in voting and commerce. Everything we are building fits in this structure. So for example, on money - there's a slight lag. Okay, blockchain meets money. We have a wonderful investment in a Barbados company called Bitt. Bitt is the leading company in the idea of digitizing fiat currency from - for central banks, creating digital wallets for citizens - for people, essentially frictionless payment system, including remittances, which incidentally are a $500 billion industry globally, remittances alone, on which the vig is about 15%. So $75 billion is being taken out of the world's poor and from guys who are driving a cab in Brooklyn and sending their income home to Azerbaijan, 15% of what they send is taken out in fixed cost. We can essentially eliminate that. Financial inclusion, this is a huge issue for 30 years. Economists had been talking about the problem of the unbanked, banking the unbanked. 85% of the world doesn't have a bank account, isn't even tied in to the modern world as we know it. That can all be accomplished without actually them having to go and build the banking - copying the west and building the banking systems we built through these digital wallets on your cell phone. We own 11%, but with options up to 35% of Bitt. This is a - it's based in Barbados, and it is earliest possible soft launch. I've learned to think in those terms. If everything goes right, you will see in December a - we will do a soft launch. It's dependent of course on the Central Bank letting us digitize their currency, having us digitize their currency. We're in discussions with a number of them. And if all goes as well as it can go, you could see this happen in mid-December. Soft launch of the world's first digital currency. The opportunities for this, the global ramifications for the poor for financial inclusion, for changing economies, are just mind-boggling. Next, blockchain and blockchain meets money, there are - we have some other investments. Ripio, which is another digital wallet, payments, credit lending. It's based in Latin America. It's live. They have a product in the market. Medici under Jonathan Johnson, who's the - runs Medici, is - has made this investment, 2.25%. There's also Spiro - which we are very excited about. Spiro is a payments and invoicing system run by a fellow who has built successful payments and invoices - payments companies. Very interesting fellow. He's building this on the blockchain. This may have a real kind of crossroads position emerge between a couple worlds. Seems to be quite far along. We own 18%. And then PeerNova. PeerNova is out in Silicon Valley. It's a banking compliance - basically, back office system for banks. We own 12%. We did take a big write-down here. They are in discussions with someone that - a contract that would buy them, say, 18 months or 2 years of - I mean, they - they're well in discussions with one of the big banks in New York. Don't know if they're going to get the deal or not. It's actually a great product. I'm actually a bit surprised. PeerNova, I would say, 2 or 3 years ago, was technically maybe the best we could find. I'm surprised they have not gotten more traction. Okay? Next, we move to capital. Blockchain meets capital formation is the next area that I wanted to have us have strategic investments. We do have an investment in Factom. It's now doing mortgage loan compliance and digital asset verification. We own just 2.5%. I will alert you that there may be another investment coming here, but I won't say anything more about it. Capital markets. Now this, of course, capital markets is tZERO. And I know a lot of people are on because they're - they've heard about us because of tZERO. Blockchain meets capital markets. The advantage of it is instant trade clearance and settlement. We have an SEC-compliant exchange for ICOs. I believe it's the only one in the world, the only exchange in the world or an ATS that is technically - technologically blockchain and SEC-compliant. Who would have thought my old nemeses at the SEC would be so cooperative. I have to say I kind of want to take back a lot of things - well, I was talking about a different SEC 10 years ago. This SEC has actually been very farsighted and professional. And we have the only - they let us get this through. The only SEC-compliant venue in the world where you can trade blockchain. We have these things called digital locate receipts I'll be talking about at length. Our ownership is 81% in tZERO. Overstock's - or Medici's ownership is 81%. And Overstock owns 100% of Medici. So here, I'm just going to - Symbiont as well. Symbiont is a company we have. It's smart contracts for digital securities. This is another blockchain meets capital markets company. They have a deal going in Delaware where they're digitizing corporate ownership. We have - basically, I think the two leading companies in blockchain meets capital markets are tZERO and Symbiont. I think those are the two companies to watch. We own 81% of one and own 1% of the other, run by Mark Smith and Caitlin Long, who's quite a philosopher of this stuff. And you see her name more and more in the press. You'll - she knows what's going on in this space. Next, Digital Locate Receipt platform. I'm going to talk about this at length. I've glossed through within the last conference call and explained roughly what we were doing, but it is over these 13 weeks since then the monster has gone from twitching his fingers and twitching his toes to standing up and walking and as of five days ago I would say walking and as of today actually really moving, literally running and wait till you see the numbers as of today. Here I have to just without harking back to any old bad memories for anyone, as people know we were in this horrible fight with Wall Street some years ago and it was really classy. I want to thank this guy Marc Cohodes. He spoke at Grant's Conference in sometime a month or two ago in front of thousands of people he said a lot of really nice things about us. And given what enemies were once were that showed a lot of class. I should point out our lawsuits discovered this guy Marc had done nothing wrong with us, but he inherited a problem. A guy named David Rocker had been running the hedge fund. David Rocker started a fight and when he was gone, Marc inherited and was actually quite professional with me. I look back, we probably should have shaken hands four years earlier and settled and gotten out. But he is a – he got in touch with us, me, anyway we've actually developed a distant friendship through the years and he came to start seeing us this summer I think because he was sure of Wayfair and started looking at our numbers and figuring out how efficient our retail business is and realizing we don't get credit for it. But all that said, thank you very much Marc for the kind words you said about us. Now as a function, be it what that fight was about with his boss and stuff 10 or 12 years ago doesn't matter other than I do want to mention one thing I've never disclosed publicly. It was I actually took, I brushed off a bunch of bad things that were said about me. Things were starting to get said about a guy named Gordon Macklin, a 79-year-old man on our Board of Directors. What the world didn’t know was Macklin had lived down the street from me when I was 13 and he used to drive me to school and we were friends and I took my four or five bad reports about me. But when the reports came out, when I started Overstock out of respect to this old man I invited him on the Board. When people started slagging him is when I got in that fight with Rocker and then that all turned into this big thing. The point of all this for you who are trying to understand the value of our company today is in the process of all those fights we got a piece of paper, we learned something. I'm going to show you a piece of paper that cost you the shareholders $20 million dollars to see that's how much it cost for us to get this piece of paper. This comes sometimes it's slow I'm told. Okay, this is a, I can legally show this, this came out of that lawsuit. This is from Goldman Sachs. How much of Goldman Sachs prime brokerage actually comes from this thing called securities lending? The answer turns out to be 75% of American prime brokerage revenue, not 75% I thought it was 5% or 10% but it turns out its 75% which is why when I started getting in a fight with David Rocker about this thing called make a short selling the whole world fell on me. It's because it turns out I was talking about 75% of the revenue of Goldman Sachs. So this is why it's so profitable. And let me point out this is the revenue not the profits, because the profits of the securities lending desk are relatively, I mean the expenses are relatively tiny, so I suspect it may be a 100% of the profits at Goldman Sachs. This is what's going on. This is securities lending and how it's supposed to work. The pension fund has some stock that custodian of the prime broker, the prime broker finds a short seller who will pay $20 for a locate and then the locate takes the $20. That's how it's supposed to work but how it really works is things like this. There is very little to keep the prime broker when he sees there's a short seller willing to pay $20 dollars for that locate nothing to keep him from telling other prime brokers. Oh, I mean other short sellers oh I will give you locate too. And we have all kinds of data. I mean it all turned out this was all - we have all kinds of data that even when the government, the SEC - we have or they want to in tried to do audits on this stuff in like 2007, 2008 they were telling Goldman, you - we do these audits, well they were telling the industry, we do these audits on your locate trails and where you are supposed to record whose stock you're lending, your guys are running things like Mickey Mouse and Daffy Duck and stuff. And that's why they over lent much more stock than they had which is why a couple other things happened. One, is one of the reasons, and this has been sort of forgotten history, if this slide comes up, that one Alan Greenspan when the world was collapsing in October, 2008 and Greenspan came out of retirement and talked to Congress he identified it as a partially as a settlement crisis, but that sentiment crisis came about because of that over locating and the sloppiness in the - just a slop in that whole locate system. In addition, it has led to I believe a pension, the pension crisis. There's a recent actuarial report that what the pensions have been doing is assuming a 7.5% return on an actuarial assumption and they've been earning a 4.5% for years and that difference is 3% is what's bankrupting them. Well a group of pension funds have just sued the prime brokerage industry over collusion in the securities lending market and what they're suing is to recover that 3% out of which they have been deprived. Well, we have, I mean I think this could become the first $1 trillion lawsuit in American history, a class action suit I think you'll see and by the way I had nothing to do with this suit. As soon as it was filed I found out that people were trying to - private detectives were figuring out if I was behind this. I'll save you guys the money, no I had nothing to do with the suit. However, I do now believe that there will be other pension funds joining us. So at the heart of all this is that issue I was talking about, and it all goes to the securities lending desk, which is also 75, responsible for 75% of the revenue. So the answer to that has had - has tZERO has the answer to this and in tZERO's system role of those six prime brokers is significantly reduced. We have this system where we have a SEC compliant venue that can trade blockchain we run, we're not the, we're taking the stock running an overnight auction generating a locate, but is not even a locate, it's better than the locate it is a pre-borrow, we call it DLR, Digital Locate Receipt. We believe that because we're taking an opaque over the counter market under an exchange you'll see prices, price discovery work much better. So let's say the short seller is going to get it for pay 10 instead of 20, that 10 goes in and an 8 goes to the pension fund and we keep 2. Doing God's work and what we're basically doing is we have found a pipe, we found through this crazy lawsuit that you shareholders indulged all these years, we found the pipe that was really the pipe of 75% of the revenue of Goldman Sachs' prime brokerage in the United States. And what we have invented is a thing that can basically re-plumb this piping and have it go back to the pension funds thereby lessening the pension fund crisis and we make a couple shekels in the process. This -since I spoke with you last, this is really moving. And I mean in the last five days is finally you could basically say the wheels are off the ground in the last five days on the supply side starting five days ago and now as of today on a fixed base with $80 billion to $120 billion of lendable securities. We do the math and the math on what we think we can make of lending these securities while providing fair service to both sides as opposed to the current system is, I hate to tell you how much, but we'll see time will tell, but we have another somebody just offered us another $6 billion in hard to borrower, specifically hard to borrowers and so on and so forth. We have 2,000 traders as of last Wednesday. Actually, the integration went - the integration was only signed off on yesterday, that you have 2,000 traders, active traders on systems that can use it another 3,000 come on within another week. But really, what's more important is that we have - I mean, who knows how much they're willing to actually how much demand they can absorb. We are in the process of rollout with 12 brokers. And some of these brokers may have 1,000 clients, say 3 admins and so what these brokers are doing today, and I mean, today, literally, November 8 they are saying, "Okay we got 1,000 people I'll let 50 of you use this. Let's see how it goes. Next week or two weeks, if it works, we'll go to 200 people." So we have these kinds of rollouts. Today is going to be a big magic day for this platform. It's the first time we're really considering it - I mean it's not loaded up with $800 million or $3 billion. It's got - well, each day for the last five days, $80 billion to $120 billion of securities to lend, including lots of hard-to-borrow, thousands of stickers, lots of hard-to-borrow, billions of hard-to-borrows in there. So for further information, just visit these addresses. So if it isn't - I have to take a moment. I just have to take a moment. There is certainly irony here if anyone who has followed the story of me of all people coming back with this, but we basically have found well as I say the pipe, I mean I almost can't say this without laughing, the pipe that is 75% of Goldman Sachs prime brokerage revenue we have a better solution, it’s based on the blockchain. No SEC audits and finding Daffy Duck and Mickey Mouse. Everything is one to one rigid blockchain, immutable, secure, transparent to regulators, it's such a brilliant I mean it's such an invention. And the idea that we have this basically is short. I'm telling you we have an invention we're going after 75% of Goldman's revenue. We're going after directly after and the market has learned all about this. They really have. We are hearing from so many clients of prime brokers I love this, I was just in New York and can't believe that people who were reaching out to me because I am reminded I thinking about these prime brokers I'm reminded of who was it, Oscar Wilde said of George Bernard Shaw that Shaw doesn’t have any enemies but he's intensely disliked by his friends. These prime brokers may not have any enemies because they weren’t afraid of them and we already know that they are trying to do something about this already hearing or they want afraid of him and we already know that they're trying to do something about this but already hearing that they're threatening people, but who were trying to want to use this system. They don’t have any enemies but they're intensely disliked by their clients and now that we have a $100 billion dollars on the supply side it's I think who knows if this gets off the ground or if the whole industry collapses into our laps like a thunderclap. I don't know, but you now know everything I know. So you really do. I mean that's information current as of a few hours ago the last update. So this is really just in the last five days really sort of on the track. Okay, next the other thing that they have at tZERO that is so powerful that is getting a lot of attention this quarter, is a venue for trading ICOs and it comes about from this, around the last time I spoke to you the SEC came out with a ruling regarding the Dow and it basically moved the line and the understanding of what's a security and what isn't. Although, one could also say a lot of people had been issuing ICOs, kind of dancing around the edges of things. Anyway they clarified in this July 25, decision and because of that report anything that is a security, any token that is a security has to trade on an SEC compliant register or exchange that can trade this stuff. Well, like I say there is when it comes to having an SEC compliant ATS year to trade blockchain, there was precisely one of those in the world as far as I know and we own it. I'm not gloating, it's the humor of this. So after all these years it just seems too funny to me just wanting to believe, but here we are. So the solution is an approved ATS, trade blockchain instruments as I say is SEC complaint. Just because it gets a little confusing for newcomers to this field to explain, to understand what's going on, think of the taxonomy as in our world people who work in a blockchain are thinking of things this way. There's fiat currency, stuff that some government makes up like fiat, like a dollar. There is cryptocurrencies such as Bitcoin and Ethereum. Then there are these tokens, these ICOs that have been getting issued like mad this year. And there are utility tokens and security tokens. Everything I was just talking about, our security tokens, they have to trade on again SEC compliant venue that handles blockchain. But there's a whole of universe of these other utility tokens have been issued that are not going to be considered securities. I think that going forward the blend is going to go from probably 90-10 to 10-90 it's probably been 90-10 utility versus security or maybe even more extreme and it's going to go the other way now in the other direction. Those utility tokens those that both have been issued then that are still issued, still produce an exchange to trade on and there are, we can use our ATS to do that. I mean technically it can - technologically it can do it. Here's the problem and this is an example of how you'll notice, there are some things sliding here and there, dates and stuff, this is a very active, I mean this space is developing very quickly and here's an example. We don't have regulatory clarity. Can we take our SEC compliant ATS, trade securities on it, blockchain securities on it and also trade these other utility tokens? One could say why not, but the SEC might say, hey don't bring that unregulated garbage onto a regulated exchange. For that reason we'll probably take in the safe strategy of a dock off and we would love regulatory clarity from the SEC on this. Oddly enough we don't have it, love and it might take a year or something to get that. Well we can create a mirror of our ATS that will trade those utility tokens and it will be distinct from all the other ones in the world. Why? Because we're in negotiations with a nation-state who are saying put in our country and we will embrace it and we will say, now there's a government. That there is a government looking out for this and making sure it's honest and stuff so it's not - no malpractice kind of thing and it's a legitimate, it is a great country. It's a country with a very respectable legal system and such and they have made that offer and there's another offer. There's another conversation has started or another contact has been made for exactly the same thing today. So we can take this technology we have and not only trade the security tokens in an ATS, SEC overseen ATS in the United States, but we can put the technology in the hands of another nation and they will have the only utility token exchange in the world that is being regulated by a government and overseen by a government. So lot now - the thing is each of these projects are only like one or two months or a couple months work, but they are - and in particular total security tokens I think you'll see us we're aiming for January having listings as such, but each of these, we have so many things going on each of which look like one or two months, but collectively they don't look like one or two months. What do you say Saum, Saum has to do so. Okay.
  • Saum Noursalehi:
    [Indiscernible]
  • Patrick Byrne:
    Identity and voting. Blockchain meets identity and voting we have investments in identity mine digital identity and compliance, risk management and we own 5%. I think that was just recently named like one of the hottest 50 star companies in Silicon Valley or something. We also have settlement. I'm especially proud of settlement. We made an angel invest - does secure and auditable voting, document authentication and also started its ICO this September for Internet of Things. A really interesting idea what they've built there very classy guys from Belgium and Canada. We owned 33% and this is a one of the leading companies in Europe on blockchain. They have some. Okay, so moving on that's Medici ventures. Jonathan Johnson runs this. Steve Hopkins is present. Steve Hopkins is the General Counsel. They have had this for a year and have done a marvelous job of taking what has been what may have started off with me dashing around the world and throwing term papers and checks at a few different young entrepreneurs and saying we should build this and that too. They've turned this into a real enterprise and very well managed and they're bringing not only a lot of value for Medici ventures to these portfolio of companies, but we've had a couple symposia here at Peace Coliseum in Utah and the benefit people are getting, ambassadors come from each of these companies and the benefits they're getting by sort of all getting to know each other and such is validating the model. We thought we could really bring something to this space. We said set out three years ago. We've been hearing people gripe about it for three years. I'm very happy that the world has kind of caught up with this idea that blockchain is here to stay. So now we go to the top layer Commerce. Of course that brings, that is Overstock.com. At this point may I borrow a bottle of water please? Overstock.com before I go on do you want to say anything Seth or Saum?
  • Saum Noursalehi:
    On retail, well lets go to the slide and then we can comment.
  • Patrick Byrne:
    Okay. The overall results - the $1.1 million retail net income is nice. We missed - we're not - we missed by $786,000 on the bottom line. That doesn't mean much together. Let's go to retail results only. What's going on here is our gross margin is getting significantly better. But the contribution dollars, which is to say gross profit minus the marketing cost, is getting worse. And that's because this digital landscape has just been distorted by - beyond belief. But I mean, we have to take it as a given now. I can't just complain about it. We have to take it as a given that this may be permanent, but there are people who just don't mind losing $200 million a year in exactly the same business. Kind of hard to run a lemonade stand when there's a guy next to you with his own lemonade stand and he loses $200 million a year and doesn't seem to care. So I'll move forward. But- I'm sorry.
  • Robert Hughes:
    I was just going to comment, yes revenue and contribution is down, but nice to see gross margins getting better and primarily that's attributed to improvements to our supply chain operations which are getting really tight, as well as really smart algorithms in our pricing and that are really starting to pay off and so the tech…
  • Saum Noursalehi:
    The really remarkable thing is that in most companies when you see a stair step in gross margin like we've had the last couple of quarters, there's usually a bunch of price increases behind it. And the beautiful thing about this is, that we have actually decreased prices over the same period of time even while increasing our gross margins because we've generated such a surplus out of our supply chain.
  • Patrick Byrne:
    It's amazing, there's a medical word they use in Japanese manufacturing of you've got a reservoir and you're draining the water out. And after a while some rocks emerge out of the water you drain it. They stop the draining and you blow up the rocks and then you drain some more water shifting there's no bottom to it all. We'll these guys have institutionalized this process where every year, they are scraping dozens of basis points out here and there and in return is logistics and now found logistics in it where although we do think, we think we've had a sort of conceptual breakthrough this quarter, Seth team and Carol [ph] and Vidhya, and we do see ways where we could drop another point out to me. Anyway it's a continuous process, you never drain it to the bottom. You just drain it till you find another rock you can study and figure out how to blow up. Club O I'm so glad I'm finally seeing this paid memberships up 30% and its accelerating this is our…
  • Saum Noursalehi:
    Top three loyalty programs out there.
  • Patrick Byrne:
    Yes, it was us, Amazon Prime and I forget who the third was, so these are the three worth joining and it's finally catching on and we have finally figured out how to market it. I should mention that these improvements, I'm going to be showing you some improvements and then the big problem. It's a case of well, these improvements are being driven by - the kinds of things I was just talking about in supply chain but also a lot of machine learning, AI, big data kind of work and we're really attracting people from the coast, people with PhD's and machine learning kind of folks. I mean we've - well like I - just a matter of technology earlier. Anyway, Club O is doing fabulously. We think in 2018, we're going to introduce a new level that for more money that has very interesting set of benefits for joining and different. Go ahead Saum.
  • Saum Noursalehi:
    Oh I would just add, yes so we're going to introduce a new tier, but the reason this is so powerful it's a lot like what I hear about Prime which is the lifetime value of customers that join this program significantly increased and so the more we can get that to grow the more it's going to pay off long term.
  • Robert Hughes:
    And the really remarkable thing is that in the home goods industry there are sort of two types of really valuable customers. There's the decrease those people who decorate for fun and then there's the automation customers. People who just moved or had a baby or had their in-laws moved in they have to wipe out their furnishings and start over. Club O catches them at the start of that cycle and once they're in they keep boomeranging back to spend their rewards, but as they do they accrue more rewards and so we end up capturing the entire wallet cycle on these customers and it's just immensely valuable. And so this hook and this rise is letting us capture more of the wallet share of those most valuable of home customers.
  • Patrick Byrne:
    And it’s taken I would say five years, probably two years longer than intended of, but far to both know how to promote this, but really fine tune the offering and fine tune we give 5% back on every product, but that's really just a minimum. There are some we're giving 20% to 25%. We have found this is a wonderful way to clear inventory. I mean it just took some fine tuning and data scientists and such to study it, but really this category is strong and as you'll be seeing it's now over 25% of our revenue. So, okay moving on. Last quarter Saum you remember we brought up, you brought up that e-mail was challenged with broader migration.
  • Saum Noursalehi:
    Yes, that's right we were in a big platform migration as I brought up a quarter ago. This channel has really rebounded. We're starting to spin out campaigns faster than we ever have. And we're building a lot of personalization. I think over the next quarter or two you'll really see, yes but it's already doubled in growth and it is nice to see.
  • Robert Hughes:
    Yes and again this has been - there's been all these different approaches to doing digital marketing and if its recommendations was collaborative filtering and then there was this Beijing, Holy Grail, and this and that, there's been all of these different statistical modeling approaches but machine learning and I'd say this has probably been say five generation of approaches in the 18 years and some of them we were the first people in the new approach. I think that I brought kind of Wall Street arbitrage techniques to digital marketing when people were just not even, it was amazing the spreads, that used to exist 15 years ago, but we're not too different iterations and some we caught the wave and couple mid waves we missed. The new wave is machine learning, the newer wave. It's here say a few years.
  • Patrick Byrne:
    Saum, why don’t you take it for a minute and explain why our machine learning is so - has become so powerful?
  • Saum Noursalehi:
    Yes, so one of the beauties of machine learning is that it lets you move on and understand well it lets you act on think data signals that are so complicated that humans can't understand them and so much of what happens in retail lives in that world of too many interaction effects to be understood and that's the beauty of neural networks is that you don't actually have to understand the cause of variables. Now a lot of companies will never get there because they don't reach the trust level to say let the machine make a decision. We all say and so many of the companies out there especially in the brick and mortar world say you know my buyer report and let my buyer make a decision. And if that human layer sits in between those thinking data signals that can't be understood by humans never get acted on and so the fact that we've been digital from the ground up and the machines make the decisions in the company means we're culturally able to leverage machine learning in a way other companies are too distrustful to do.
  • Patrick Byrne:
    And I have to mention we are, so when I talk some regular in Silicon Valley with some of the biggest firms whose names you can imagine out there and they worked with all kinds of e-commerce companies like ours and they've gone from telling me, I think there may have been a point where we slipped so we were only in the top 15 or 20 companies in terms of our sophistication some years ago. I'm comfortable now we're in the top three and I regularly get told, hey look there's you guys are doing this and there's Amazon and sometimes we're not being told you know Amazon hasn't even got to this thing yet, but you're doing. We have these and it is not just Silicon Valley but it's just it's kind of a small community and we know we hear where people are working and we actually I feel that good about our technology. Another example of that is all that same stuff applies for all the other large channels paid digital marketing channels. You taught us new conducts, all those same things go. It's we have, we have gotten past it used to be we were competing with the sophistication of our models. We’re now competing with the sophistication of our machine intelligence or our machine learning and AI. And in fact it has been disruptive within the company but it's great because it's freeing up really, really smart people and analytics that who we are then shifting to be what we are finding is this great model these super quantitative people end up often being the people who can run channels it isn't knowing necessarily a whole lot about the purses or something. I'm just saying that we're not talking about any individual, but it's somebody who can just look at data. For years in the early days I used to say dream someday would be that decisions were not getting made about what got put in an email by lobbying, but just by some person who didn't even understand English and could understand any lobby and any question like what you go in the upper left hand corner of an e-mail would be somebody who could look up and some table. Well we have finally found that person and it's an artificial person and he doesn't, she doesn't it doesn't it doesn’t speak English it's a neural network and that's exactly what we dreamed of so many years ago. Saum?
  • Saum Noursalehi:
    Yes, I'll just comment so 32% year-over-year growth in these digital channels and we also spoke Patrick about our big investments in marketing tech, our in-house marketing tech and that's really starting to pay off and you can see that in these results. And I'd also add that we're often featured with a lot of the top partners that we work with. With Google for example on showcase ads, PLAs for our campaign structure, Facebook for the tests that we do with incrementally, so we're really cutting edge on the digital side.
  • Patrick Byrne:
    Yes, our marketing tech that's, what I'm saying when I'm, when I get so much feedback in the field not about me. I don't know what an of this plugs into a toaster What about our engineers or other engineers work with and the scenes that the frontiers that we are actually breaking through I really am comfortable saying I know we're in the top three in the industry in terms of the sophistication of our marketing tech and again that all shows up that's why we have a company that has raised a fraction of what everyone else raised in their field and we got to profitability and were able to defend it for seven years against this craziness going on. Now we've got to this is a case of other than that looks like and how did you like the play here's and in one picture what's going wrong. SCOS since May has been a real problem for us. We - the graph on your left is Google organic rankings. We are the red line. Amazon is the yellow. Wal-Mart is the blue and Target is the grey. So we've always I thought have been very strong on and we pay a lot of attention to Google and what they say they want sites to do and then we do what they say is they want people basically, they want to - they favor sites that have good information and all kinds of stuff, so we did that. It's been very strong. This is the first time in years we've had a cycle like this that we've not, it's plateaued now and but in a nutshell, even though everything else, all these other systems are just running as like as I dreamed of for years we have this problem and it's especially perplexing because Google is about site experience. And on your right as they and their algorithms are supposed to favor and I'm not alleging at all anything like Google is anything inappropriate, I’m explaining why this is a conundrum to us and it has been a conundrum since May. Our site experience per say Bizrate or all these other things that measure it is better than our whole field against – in the home furnishing category. We're better than them, so you would think that the Google algorithm if anything would favor us. But something happened in May. Now they believe nothing happened in May. It's been quite an interesting revolving kind of puzzle. Well I'll stop there now. Saum, Seth to you the masters.
  • Saum Noursalehi:
    Yes, I would just add, so yes Bizrate did this survey comparing us to the top 17 home furnishing competitors and you could see we rank better than them. But you also saw that in the earlier slide that Patrick showed which shows on the Mckinsey slide that also reaffirms our ease of use of our website. But our strategy is to just continue to focus on building the best user experience in our space and we think that's going to be reflected in the Google rankings.
  • Patrick Byrne:
    Seth ?
  • Seth Moore:
    Yes and I would add to that. Part of the reason when we discussed the decline in contribution percentage it is a double whammy of the two variables we just talked about. It's actually a story of both the health of the paid channels which have a positive contribution rate but a lower one and of the decline in SEO which is a virtually free channel and has very, very high contribution rates. And so that shift in mix is what's accountable for the change in contribution margin. But masked within that is the fact that we have a very healthy paid digital business that's growing nicely and offsetting in terms of revenue much of the loss in this one free channel.
  • Patrick Byrne:
    Yes, so I would say that Seth just summarized it perfectly, here we do have you should know that since May we've done about probably two years of normal projects of SEO and without really well we can never know what would have happened if we hadn't responded, but we've done about 60 projects. Now we are working on the mother of all projects. We're working on, go ahead Saum.
  • Saum Noursalehi:
    Oh I was going to say and like by SEO really and if you've been reading how Google's algorithms work is what that really means is customer experience and the experience on the site so, it's been all focused on the page speed, mobile experience and how to optimize conversions.
  • Robert Hughes:
    Yes what's that, Google has this new technology called AM, Accelerated Mobile pages. I believe we're the first to have implemented it.
  • Saum Noursalehi:
    Yes, so widely I think across this board we've launched it and we were featured by them.
  • Robert Hughes:
    Checkout our mobile how the speed it's kind of weird because the pages load in about a quarter of a second and it just seems kind of strange. Anyway, so we here we've had this great relationship with Google and this is not about cheating Google spiders or something this is about doing having the best customer experience. They want faster pages, they want better pictures. Their AI can now read whether a picture is good or not and so you have to have better and better pictures. So it drives good behavior out of websites like ours but this one has been a real conundrum. We've done 60 projects in five months. We are now working on the mother of all projects. It deals with site experience. Unfortunately it's not going to be able to roll until about December 15 to 30 for somewhere in that in the last couple of weeks of the year. So I write that's - other than that Mrs. Lincoln how did you like the play? I've never been so proud of all the other departments just like we have finally reached this Nirvana state that I dreamed of over a decade ago in terms of our marketing technology, our sophistication, our mathematicians and so forth. Way for comparison I just have to point out even with that, even with that one terrible slide I just showed you we are significantly our customer acquisition cost is far below there’s and that's a function of how brilliant all our other marketing technology is frankly, how brilliant these guys are sitting next to me.
  • Saum Noursalehi:
    Yes and the reason even but that is important is, as you know, Google organic search is a free channel, so it's free acquisition.
  • Patrick Byrne:
    Yes. Okay, moving on. There is, I see four likely outcomes. Most pessimistic, throughout optimistic, pessimistic is absent SEO improvement. We would get to profitable growth anyway in May once we lap this stuff just because everything else is so strong. That's not very optimistic, but that's sort of what I think as a base case. Next the mother of all site experiences occurs December, January. Next this Club O now that it is 25% over 25% of our sales and moving like this and I think it's actually going to accelerate I am really looking for 80% growth out of these guys, but that can in itself just make an enormous difference. Let that run for another few months and it doesn't matter that comes back this is replaced. If we can keep this accelerating and running at 50% or growth 80%. Next we have a new, I have to give credit. There's an entirely new paradigm of an approach to this stuff that JP Knab, our SVP of marketing and Nariman Noursalehi, younger and wiser brother of Saum here, but another fantastic maybe the single smartest guy in the company if it's not Seth, they had a brilliant idea. I can't, I've always been honest always been honest with the public about warts and all, bad things going on, good things going on. This idea which will be live I believe in January involves another large company through and a partnership that showed no one has thought of this paradigm of a partnership before nobody and it is somebody who can bring us a tremendous amount of business and it's a partnership that works well for both of us and that should work well for both of us while it's been Seth and Saum without giving away everything.
  • Saum Noursalehi:
    This is a teaser. I would just say it’s a massive source of new customer acquisition.
  • Patrick Byrne:
    Yes, a massive source of new customer acquisitions.
  • Saum Noursalehi:
    I am going to leave it at that.
  • Patrick Byrne:
    Okay, moving on and we're nearing the end, I should warn you folks up front we expected that it might actually be as much as an hour of I expected only maybe an hour of getting through all these slides, but I want to give a good comprehensive view to everybody of what's, what you have in your business. We're almost at the end you're. We have a tab that's up in beta, it's Overstock cars, it's course quite small 32,000 visitors a month versus people with 14 [ph] 26 [ph] is have one pushing it yet hard bringing no attention to it, it has only got a million four cars everyone else has 3 million or 4 million. We will have in Q1 and maybe even before the end of the year it will have this 3 million or 4 million cars too, so it's much smaller now on traffic and inventory but it's a really new take a car site and it's monetization model and I think it's a much better monetization model where people are getting not just new and used cars but their online financing, their warrant and the warranties their financial side of the car equation through us. I think we're essentially the only site that does that auto trader does online financing but doesn't do warranties we are the only guys offering warranties. Once we get this right and we're still tinkering with the experience of the search experience as such, which is this thing we got up six weeks ago I think, but once we get this right, this is a real little gem and I'd to keep within our business or maybe even combining with someone else. Seth?
  • Seth Moore:
    No, absolutely there's a lot of interest in it because it's an unorthodox method of monetizing cars traffic and it's rather than trying to extract a pound of flesh out of dealers it's trying to work together with them.
  • Patrick Byrne:
    So okay, now to the last end of slide here we are. I'll show you this one more time and say it’s time given what the strategic picture this tells me is we've struggled to defend a 1% operating margin against people who just come in and with a tiny amount of capital versus guys who just come in and just throw crushed us with their ability and willingness to take losses that we have to look honestly at the strategic situation and say I just don't want to do that forever and we see it at Wayfair, somebody turns off the oxygen for them and they don't get new capital and let's imagine they did go under if that happened like some of these other folks in our rear view mirror. There's going to be someone lined up a week later there's going to be a year later doing the same thing. I would feel like we're not and as we are going to be able even when I will just as we are we're not what, I don't want to run a 1% margin business forever. So for that reason we have a number of options. There are in boardrooms across America we know people talking are about their Amazon strategy and freaking out about the disruption Amazon's brings. Some of those are brick-and-mortar companies and we've been, Seth has been doing work and analyzing the kinds of synergies that are available between us and large brick-and-mortar companies without naming names could you describe what you're finding in general?
  • Seth Moore:
    Yes, there's a number of places throughout our supply chain where there's huge potential with an alignment with bricks and mortars hundreds of basis points of gross margin to be unlocked in line with what we've already been achieving but they can put it on hyper growth in terms of saving those basis points out and with that expansion in gross margin and in sort of supply chain surplus comes greater growth, greater ability to win digital marketing auctions. And more fuel to drive the business.
  • Patrick Byrne:
    Yes, so and the synergy goes both ways. So for example, if we were combined with a large chain, these large chains have similar logistical footprint. They typically have a hand a dozen or so mega distribution centers each of which are feeding a couple dozen distribution centers each of which are feeding ten to fifteen stores. If we were integrated with such a company we could over night, I mean you would have a system that was competitive with Amazon, so some would buy Amazon or even nicer than fulfillment by Amazon in several ways. We built this thing Saum and Stormy [ph] actually built some years ago, Sauce, this thing we call Sauce. This soup is a software logistics system for an agile network supply chain. We've only had it hooked up to our three distribution centers, but it could be hooked up to thousands and it was actually built to be hooked up to as many as we wanted. You don’t need thousand, you need a dozen. So just by for example if we were part of a large brick-and-mortar chain that itself looks like $200 million, $250 million of varies logistics costs fall right to the bottom line. Seth was looking at a large brick-and-mortar website the other day and it's quite slow. We having the fastest one over and over we win this award like the fastest Internet retailing website. We know how much it improves sales to be that fast. If we were made their website as fast as ours its immediate billion dollar increase for them and on and on and on. There are so many synergies in that direction that they bring us and that we’re in both directions that they bring us and we bring them. There are other kinds those possible companies with lots of traffic but have not - don't have the right monetization model. Basically if you look at our monetization per visitor whether you're looking at gross profit or what we call nectar, contribution margin compared to any anybody else. It's so much higher and that's a function of basically that’s a simple, that's the simple measure of the intelligence of the site. That's the rubber meets the road matter how many dollars of economic value or pennies are you squeezing out of each visitor and the more granular you're getting the more in your analysis the better you can do. So there's opportunities like that. There's other kinds of companies that not aren’t even ones people are thinking about. There is that see themselves getting disrupted by Amazon and what we're hearing is for all these kinds of companies. A large club I'm dying about thinking of the possibilities of us with a large club membership kind of company. If they have 10 million people and a million in their club and a million started shopping with us that alone would double us which I think, I just gave away enough variables that you can solve the equation of how much of exactly what called Club O does for us. There is - so the possibilities are overwhelming and this summer it's become apparent I think a lot of people have the same idea at the same time. We also but a different direction we could go and I'm being very honest with you folks I don't know which of these directions I am going to go. I'm used to a lot of Monday morning quarterback. I'd love to hear from people who want to tell me what they really think is the right solution. Here's a different alternative recapitalized with a large partner who wants to think really big. We hear that there are some folks over in Asia with sort of who want to write some billion dollars checks they're looking for someone who will think really big and they're looking and there's a number, there's a new fund with I won't even tell you how many tens of billions it has and my understanding and some of them have been here is to be frank that they're looking for somebody to whom they will write a billion or multibillion dollar check who can think really big like take on Amazon big. We've shown the world what we can do with burning a $160 million of your capital. There's a piece to me that would love to show the world what I could do with a billion what we could do with a $1 billion. That's a lively possibility. And we could also capitalize up from Medici. I think Medici we didn't even talk about today that ICO the terms of it have been put in this press release this is such a moving target. And now we've learned today the fork that we just postponed everything for the fork I don’t think that some of the folks know this before this got cancelled today here. So we just postpone everything and now the sportsman cancelled this today or so and so there is between regulators and things like that it's kind of its like, it’s kind of hard say exactly what we'll be doing in two weeks. But anyway Medici is we think has phenomenal, frankly just ridiculous value and it will be possible at some point to monetize up from assets like tZERO. So with all said, it’s time I have been hinting at this for 18 months and more or less told you a month ago, this time to tell you or I mean a quarter ago we've engaged Guggenheim Partners, a wonderful fellow there and Andy Taussig. Ken Langone introduce me to Andy and Ken as used them for a couple decades and I've grown quite fond of Andy and he's now they've been officially engaged and on this project and that's that. So we need some help always working and thinking through these alternatives and executing on them on them on our decision. So with that as fulsome exploration for the 936 people who gosh, we've never had a call with that kind of attendance, it's time to go to questions and we're going to stay and take, I know we've already gone over an hour and ten minutes, let's go to – but I'll stay on until we get through all the questions we have really.
  • Unidentified Analyst:
    The first question, will the ICO tZERO do ownership of the company or will the coins just be used to transact on the exchange?
  • Patrick Byrne:
    The coins as, the terms that are described in the press release that went out, they will be security tokens think of them as utility tokens but these are going to have a novel feature utility tokens that have a cut of the top line revenue of tZERO. So that is what makes them a security, so they will be utility tokens, but that have a, actually have an interest in the revenue not the profit but the revenue of tZERO.
  • Unidentified Analyst:
    All right. Any thoughts of having tZERO partner with an existing exchange, Nasdaq et cetera?
  • Patrick Byrne:
    That’s one strategy, I'd love to, there's also exchanges. Yes we could book or we could partner with the exchange I would love to, we’re ready to do that, tell them to call collect.
  • Unidentified Analyst:
    All right. How much of a lead does tZERO have to the likes of Goldman or R3?
  • Patrick Byrne:
    Well, frankly R3 have already distanced themselves, they've gone from being a Blockchain company to being a “Blockchain inspired” company. So I’ve even heard more recently by couple of days ago that they’ve even distanced themselves from that. So I don't worry about them. Goldman is a black box, Goldman is behind but they want to catch up, they don't want to lose what they have. They, I can tell you a funny story if you go on YouTube, you can see you look for my name and the word Amsterdam and you'll see a speech I gave three or four years ago at the world’s, the keynote of the world's first global conference on Bitcoin. And I got up and I talked philosophy for an hour, but I also talked about applications of Blockchain, I said the main event of Bitcoin isn't Bitcoin folks, it is a single Blockchain that we’re going to be able to do this and that the other thing. Goldman Sachs was there, I remember I met the fellow and that was say 9 AM in Holland and at 4.55 PM on the East Coast United States that day they filed like four patents for the things I've been talking about upon stage. So there must be - just telephoned it back, had lawyers work on it. Anyway Goldman is but, so we don't see them, I mean it's a black box, we don't see them and they’re on the industry trying to learn but they haven't yet really revealed anything of what they have to the marketplace. So that's what I have to say about that. And I feel like once even if they do this time it will be a fair fight, this time it will be a fair fight. Remember there's an old, there's an old Irish what do they call Irish Alzheimer's. It’s when you forget everything, but your grudges.
  • Unidentified Analyst:
    All right. Will Overstock.com apply Blockchain technology to its delivery and logistics network?
  • Patrick Byrne:
    That’s something great question where are you on that? Say that? Yes. One of the opportunities that we lose and for example one of the things that let’s say look at those options, one of the options is splitting off that top layer, the commerce layer selling just that to the brick and mortar and creating lots and lots of capital to pursue all the Blockchain stuff, you give up one possible synergy, Overstock is a wonderful test bed for developing Blockchain supply chain technologies and there are a couple companies in that field, we're talking about investing in and I would love to invest in them and have them if we don't just do it internally, invest in them but be a platform for them as we've been for so many other companies frankly would make you sick if you know how many companies we've been a platform for and they don’t want to get sold for $1 billion. Anyway, but we now we know better, we'd like a piece of them but I'd love to have the Overstock logistics I mean it would be such extraordinary value to be able to scale up A if someone were building a Blockchain supply chain and logistics company to be able to do it on our platform.
  • Unidentified Analyst:
    How many dollars has Medici deployed into Blockchain investments?
  • Patrick Byrne:
    Rob why don't you take that?
  • Robert Hughes:
    I'm going to answer this, defer or 10-Q largely on that, so I think you’ll find nine companies that Medici has invested and described there in footnote 10-Q started with the largest of course which was around $28 million as I recall.
  • Unidentified Analyst:
    And $10 million as stock right?
  • Robert Hughes:
    It is combination of stock and cash, nearly $30 million in total and then the others are much smaller but they vary from little as several hundred thousand dollars to $5 million or $6 million.
  • Patrick Byrne:
    And but we’ve also had just sustained losses fund the losses capitalize the losses, I would say we’re probably getting I’m sorry I have not looked at it of late but I would if I said $50 million-ish would you feel that sounded about right, Rob?
  • Robert Hughes:
    Yes.
  • Patrick Byrne:
    To improve the losses? Sorry I don’t have the exact number in the 10-Q, go ahead.
  • Unidentified Analyst:
    Well the tZERO ICO be used for any of Medici’s expenses or they solely used by tZERO?
  • Patrick Byrne:
    Well it’s great question, I will ask somebody asked what percent of Medici do we own? We own 100% of Medici, well the tZERO proceeds be used for Medici’s expenses, well now the tZERO they proceeds I anticipate keeping the bulk or all of them within tZERO, we do have a there is a note from tZERO to Medici for how many millions Rob?
  • Robert Hughes:
    There is two notes, one from [indiscernible] acquisition and one for the operating cost which already $6 million or $7 million probably in total there.
  • Patrick Byrne:
    Well by the way that’s $46 million in total than the total capital committed has to be closer to 60-ish and everything we've invested in 50.
  • Robert Hughes:
    Yes, correct, sorry. On top of tZERO was the other one.
  • Patrick Byrne:
    Yes. So we have invested about $60 million in capital when you include the losses, we have absorbed as we've spun some things up and what do you feel that answered or?
  • Unidentified Analyst:
    Yes. Can we expect…
  • Patrick Byrne:
    No actually I want to mention that so we do have that note, we could conceivably dividend I mean if dividend and have to pay off the note, I wouldn't anticipate dividend anything more than that, it is nice we own 81% actually wouldn’t be a dividend, if we just paid off the note, it would just be paying off the note and because we own 81%, we actually can pay dividends from tZERO to Medici without paying taxes in our company tax exclusion. However my guess is that 81% is going to drop to 80% as a function of this the ICO we go through depending on assuming that they get their security ICO and so will drop to 81%. Anyway if we rate but know we do not anticipate the capital that comes into tZERO, is there my view to build tZERO which means there's actually a couple nice acquisitions we have our eyes on and to build out the eco system, I know I said there was an unfortunate article frankly where I thought that I was speaking under embargo to a journalist and I was having a social conversation at the end of an interview about something else and there was some confusion between us, no signing on him, it was some confusion between us and he understood the embargoed part to be part to be the thing he could rather store up. And so a bunch of that stuff got out that was to me a social conversation, hey we I don't I said might raise $200 million to $500 million, I don't think the five the upper end of that is likely now especially because the ICO market is starting to get a little puddy [ph] and we don't need anything like that, we don’t need anything like that to accomplish all of our dreams and tZERO. I would say someday when it's a nice established company you could see us moving capital out of it, but since you have to - I think it’s more it is at least as equally likely that the way we draw capital out of tZERO so to speak is not to have it pay us dividends although I would like that note paid off some day, but not have it pay dividends but as it gets bigger and it’s more established we just start selling off percent or two here or there. We will sell, there will be other investors who will want some and we will start selling small parts of our stake. I think I'm also learning that the market doesn't want to see [indiscernible] own 81% of this which is okay by me, okay by me and there will be other investors come along that let us take our interest down to 50 or below them. And in that process that's how we draw capital out of tZERO rather than direct payments with the exception of - yes of course I'd like the loan paid back when it's comfortable for them to do so.
  • Unidentified Analyst:
    Can we expect to see more cash flow from the OSTK parent next year presumably with less expenses related to Medici and tZERO?
  • Patrick Byrne:
    Well yes, you will certainly see, yes you will certainly not see the cash strain at Medici tZERO had been this year, you may see cash come back the other direction and you may - I would expect just straightforward operating results to be better next year. I mean I'm so – for those reasons I showed you few slides back and so there are four possible outcomes, although that's stepping aside the possibility of if we do something strategic then this whole cash flow picture gets much better. In addition to that, we've been in this position before with Google organic search several times. We always stick out a bit and we're going to figure it out again. It might take another quarter or so, but we'll get out of it.
  • Patrick Byrne:
    And like we say the mother of all of the site improvements that I think were like the Google spiders, Google bots happy is coming to the end of the year.
  • Unidentified Analyst:
    This person is asking I think OSTK e-commerce is being unfairly valued by the market due to low EBITDA and cash flows. Can we expect to see that improve in the future? So very similar question.
  • Patrick Byrne:
    Similar question, similar answer, same answer. It is kind of yes.
  • Unidentified Analyst:
    Will the majority of ICO proceeds be held in cryptocurrencies or converted into U.S. dollars?
  • Patrick Byrne:
    Well as – I will defer it to our CFO who had an opinion on that, oh Anthony would you look to?
  • Unidentified Company Representative:
    I don’t know Patrick because under the terms of the offering that it was all going to come in, in U.S. dollars, but I'm not deeply involved in that.
  • Patrick Byrne:
    I believe it's – I believe that's not the case. I believe that you can pay in U.S. dollars or bitcoins or lawyers [ph]. That's what it was at one stage. I have to visit the terms again. Literally folks this is where we're doing so much deal making right now on so many different fronts that just the amount of lowering we can put it in a week, we've like that, call that the pike that is the constraint. We've got lawyers staying up all night, night after night working on different things. So various aspects of what you saw today in our release we're determined 11 minutes before we got on we sent the release out finalized today.
  • Unidentified Analyst:
    A couple retail questions. What is the time for additional international expansions and what are the plans there?
  • Patrick Byrne:
    Excited about international guy named Ali El Husseini is running this, Vice President. It is growing about 40%. I think it is 32% year-to-date and 40% now and we are about to hit way above the hip waist there right where it – we know they were taking all about your open stock but they are actually their big success has been in Canada and we are very close, like you guys on days or weeks before we are hitting those sort of a big store making several big enhancements to our experience in Canada. Canada is all ready growing very nicely sort of north of 50% year-to-date and with these changes we expect that to accelerate. And we have a large digital marketing campaign about to snap out all over Canada. Using all of this sophistication we brought to what we have in the U.S. So we actually know Walmart and Wayfair to retirement what they are doing in Europe but it is a big misdirection. It is what – Canada is where the big source is.
  • Unidentified Analyst:
    Sort of two questions about mobile, comments on mobile conversions and more specifically how has your new AR functionality improved your results?
  • Saum Noursalehi:
    I can take that. So we've invested heavily in mobile over the last year particularly on the experience and page speed and we've tied into the same recommendation engines as desktop side is but we're seeing massive conversion lift year-over-year. And you have in mobile, desktop conversion is up as well but mobile is on another level.
  • Patrick Byrne:
    Yes, Saum is so modest here and here is a good way you can check some of what you've heard tonight. If you have an iPhone, go – you don’t even have to need the new article and just download the system, the updated systems here on system 11. Beyond 11 you can download our Overstock retail app and you can see our augmented reality and check it against the other guys. Is it really good illustration of how good our tech is, it is unbelievable. Just allow it a couple of weeks it's the first one again on Apple iPhone to use this I forget the first involved in this, all the first, but as you know I've been bragging about our technology in this company and bragging about Saum and Seth and what they do. Here is a quick way you can check right now at your desk, pull out an iPhone, update the system get on our retail app and start using our augmented reality. It makes everything else in the market look kludgy and cartoonish. Saum why don’t you?
  • Saum Noursalehi:
    Yes on AR we are investing a lot there. We think we have the best experience out there in particular the models that we have, the 3-D models that we use we have really strict quality check and so we think the experience and the lighting that you see, the textures that you see on another level and it AR in general I see as a game changer particularly in the home furnishing space where you really need to see these bulkier items in your home and the dimensions and how they fit with the style in your home.
  • Patrick Byrne:
    So for those who thought that much amount of what you see tonight was a bunch of self congratulatory nonsense. Just check it out, just download our app and see what we've done along with it's like no one else in the market. It has, I mean there is another, the other guy has introduced something just compare it too.
  • Saum Noursalehi:
    3-D cartoons versus…
  • Unidentified Analyst:
    So there is another question, has the new iPhone had a positive impact on the results.
  • Robert Hughes:
    I can take that. Usually model to model we don’t see material changes. There was a material stair step when sort of the larger format of phones came out. It just made the mobile world more shopable but model to model we don’t see the big differences.
  • Unidentified Analyst:
    Last quarter tZERO generated modest revenue from its store selling effort and how did 3Q operating performance compare against 2Q and how should we think about it going forward?
  • Patrick Byrne:
    It is how you are thinking about it going forward it has gotten somewhat better. Yes it had a tougher start to the year. The reduction in – everybody I see down 27% or something in trading revenues these big banks well SpeedRoute has that at the core of its business, but that's really a nonevent. It has come back it is profitable, it is in the black, the SpeedRoute business. But really the main event is this thing, they've got cold fusion. These guys have invented cold fusion. If you want to talk about how it's - I think that you are going to see the revenues and value export [ph]. I'll tell you that I wouldn’t sell tZERO to day for $2 billion, but what I think, I want to know what they have. I know what they have and what they are on the edge of. I'm not sure, I would sell it for $10 billion. I think we've got, we're going after 75% of Goldman Sachs' revenue, and no one likes them.
  • Unidentified Analyst:
    So when considering Medici's other investments besides tZERO I presume, which ones have the most potential to generate future shareholder value?
  • Patrick Byrne:
    Besides tZERO, I'd say Bitt.com and Bitt.com blockchain meets central banking. I mean this thing has a global application and when I think the first to market the kind wallet we're bringing to market, I just saw a -- I mean, it's all in testing. It's all done. It's all being tested for another 4 weeks. It's really slick. It's really better than anything I've seen in the market. That's a potential enormous business. We're working on another investment but basically - I'll say this. I'm working on something else that's bigger than anything else. It's bigger than tZERO. It's bigger than Overstock retail. I'm working on the idea of my lifetime. I was actually hoping to be able to announce it today, and the fellow I want to announce it with is sitting in the next room. But we had too much - but I'm hoping in a week or two, you'll hear an announcement that is sort of a - I mean, it will have global significance.
  • Unidentified Analyst:
    All right, here is another one that just came through. Can you provide any detail on how many credit investors been verified prior to the ICO or on interest from recommitted capital?
  • Patrick Byrne:
    Well, we haven't even opened it up to any of that yet. That's what we are -- we were supposed to be announcing today, finalizing terms for a November 15 ICO. As I've explained in the letter -- and I'm sorry I didn't have another slide or two to my deck to explain. There's a whole bunch of things going on. One of it's being this whole question of the fork, and the fork just got canceled in the afternoon, the fork, the fork. Everything's been about this fork. And so there was all this uncertainty among the big ICO investors. And for that reason - and the reason that we got in the middle of a lot of other negotiations on a lot of other fronts, including the stuff - if you look at our press release today, you'll notice that we just sold warrants on 15% of the company today from two investors who look very high quality. You can read - or are very high quality. I'm really looking forward to working with both of them. And you can read about it yourself in the press release. So go ahead.
  • Unidentified Analyst:
    So there is actually a question specifically on that front
  • Patrick Byrne:
    Okay.
  • Unidentified Analyst:
    It says the warrants they passed for Soros they seemed fairly cheap given the potential for positive news with the tZERO ICO what's the thought, but kind of why now and why those two investors?
  • Patrick Byrne:
    The - first of all, the pricing is Black Scholes if you make an assumption on our volatility of 25%, which seems appropriate, if you set aside their recent craziness. And - but they bring enormous value. I've gotten to know the fellow, John Burbank, at Passport. And we haven't had any roots in - we haven't had any connections to the world of Silicon Valley or the world in New York. I'm looking forward to having them to - we don't have any benchmark behind us, any kind of [indiscernible], anything like that. It's going to be nice working with Passport. And the Quantum fund, besides, of course - they bring a lot - they bring access to - they bring access not only to large pools of capital - we don't need that, but access to - there's a whole shift going on. I don't know how much is sort of filtered out to the world, but the world - the capital market, as you know it, is facing an extinction event. It's all going to shift to ICOs. It's so much more efficient. And this is a chance for these folks to have a pole position, to have part of a company with a pole position in this space. The good that Soros can do in his financial circles for tZERO is, just to me, pricing this at Black Scholes felt - and normally, I hate Black Scholes. Black Scholes thinks I work - I think Black Scholes works and holds maybe over a few hours maybe if you're - maybe over two or three months, but I don't believe in it for the long term. Life has fat tails, as that old Roger Lowenstein book described. It doesn't work but - anyway, this - to me, this is getting them and having - I mean Soros is now - well, I'm not going to speak for them. The press release speaks for itself, but this is - people see the possibility of tZERO. And having people in the financial circles opening up and embracing it and saying, "I've got - we've got nine of these investments to worry about." I'd love having a connection with firms like that, who will take it and lead it to greatness.
  • Unidentified Analyst:
    There are a couple of questions around guidance we don’t usually offer guidance on quarterly calls.
  • Patrick Byrne:
    But guidance at this point, there's a lot happening right now. There is a lot happening in the next eight weeks, four weeks. I cannot tell you what's going to be seen tomorrow.
  • Unidentified Analyst:
    So after the ICO how much equity will Overstock own in tZERO and what would be the financial interest OSTK shareholders and will there be a way to monetize that interest?
  • Patrick Byrne:
    Ownership will be - well, after the ICO, I suspect it will drop from 81% to 60%, 70%, something like that, depends on pricing and such. But to have 60% of a company, I think is worth $5 billion is fine by me, and there's different ways to monetize that without depleting it of capital. I think primarily, it's going to be the markets going - my understanding is the market is going to want to see us get down sort of to 50% or less. And the process of going from 80% to 50%, we'll be able to monetize at different stages.
  • Unidentified Analyst:
    Is it to buy OSTK or to buy in the ICO itself and how does the token depreciation become part of Overstock's profits?
  • Saum Noursalehi:
    I can't tell you what's best to buy into. And so I'm not recommending or buy into anything related to us. I'm just laying - I'm laying our cards on the table. And I used to do this, and they would sometimes hurt me because people would find -- we could say 5 great things, but the 1 bad thing, they'd raise a stink about. But we're laying all our cards on the table because I don't want there to be any tears. No matter what happens in the months ahead and whatever strategic events happen and whichever direction that I've kind of sketched out, I don't want anyone to say, "Oh, if I'd known that might be what you do," and I just - I've laid my cards on the table. There's only one card I'm holding. There's one decision-making thing that I'm holding back, but - that would affect my decision. But you folks know now at a comprehensive level, kind of know where - everything we know about these different possibilities. So whatever happens and whatever we do, no one has the right to have any tears.
  • Unidentified Analyst:
    All right, another one, do you think the warrants will complicate strategic alternatives being considered at all?
  • Patrick Byrne:
    No, I don't. No, I don't. Everything - I don't. It brings so much value. And there's other aspects to this I can't disclose now. I think it brings a heck of a lot of value. But we did consider that possibility. On the other hand, what does it mean to the world, to our value, that George Soros has just bought option on 10%? And obviously, I doubt it has much to do with like the fact that we sell shoes online. People can sort of guess with that, what quantum - what - well, who knows? But basically, tZERO has gotten us a lot of attention. tZERO, by the way, is run by a wonderful fellow, Joe Cammarata. I've got to congratulate - real vision, real fintech entrepreneur all his life. And I think this is going to be his big home run. And he was the one who brought Passport and the Quantum fund and pointed out the advantages, the doors that opens for tZERO in terms of getting integrated and accepted and defended. And the guidance as such is - it's going to be super valuable.
  • Unidentified Analyst:
    Can you remind us of the timeline for the tZERO ICO and the goal post management is setting?
  • Patrick Byrne:
    Well, things are so turbulent. We'd love to get a little bit of guidance from the SEC on some aspects of what we want to design, but that's on - we don't want that to be a gating item. There's also the question of this fork, which we just learned got canceled. But what we're saying is now, November 30, that - I forget how the - whatever the words were in the press release, trust me, some lawyers carefully scrubbed that. So that is our level of expectation, but what we're thinking of is subject to - what do they say in there? Security and regulation and this and that and...
  • Robert Hughes:
    California mileage may vary.
  • Patrick Byrne:
    Where the sun rises, but we're expecting November 30, to have – to be going forward.
  • Unidentified Analyst:
    Can you share some color on tZERO tokens revenue sharing feature, what percentage of the revenue is shared with token holders?
  • Patrick Byrne:
    Oh it depends on how many coins we sell and for how much, but we may do something like the coins may be set up so they are getting 10% of the revenue of tZERO, that's the number we are roughly using. I don’t know if we're using that, because we really plan that or but we're using 10% that's we'd sell off 10% of the revenue stream.
  • Robert Hughes:
    And it will be and the onus of the tokens we will use them to pay fees on the tZERO exchange and the more tokens you own we believe there will be significant bonus. If you own x amount of tokens then as you spend tokens you are getting a bonus of 30% or 50%, something like that.
  • Unidentified Analyst:
    Hang on a second.
  • Patrick Byrne:
    Oh, well, the conference was - I said at the top of the call that this - conceivably, there was a non-negligible chance this is the last conference call. Depending on what happens with those strategic alternatives, it's conceivable that we're not having another conference call. Or if it will, it won't be a - it would be a different kind of conference call. So I'll - you guys now know everything I know. We have a company stand-up I have to get out to. Happy holidays, everybody. Thank you for being - well, I hope you - thanks. It's been fun working for you as - one way or another. I suspect there'll be more calls in the future, but thanks for listening to this long explanation of where we are. I hope that you forgive that it's - it was so long because we know a lot of you were trying to - and haven't looked at us in 10 years, if ever, and are trying to figure out what the heck is going on. It looks like a lot of confusion from the emails I get about all these different assets. I hope - we've been trying - we tried to construct this call to integrate it all into a picture of how it fits together. Thank you very much. Good day.
  • Saum Noursalehi:
    Thank you.
  • Operator:
    Ladies and gentlemen thank you for your participation in today conference. This concludes the program. You may now disconnect. Everyone have a great day.

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