Overstock.com, Inc.
Q1 2013 Earnings Call Transcript

Published: 18 Apr 2013

[Operator:]

Good morning. My name is Laurie and I will be your conference operator today. At this time, I would like to welcome everyone to the Overstock.com First Quarter 2013 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. I would now like to introduce today’s presenter Mr. Jonathan Johnson of Overstock.com. Please go ahead, sir. Jonathan Johnson Thank you, Laurie. Good morning and welcome to our first quarter 2013 earnings conference call. Joining me today are Dr. Patrick Byrne, Chairman and CEO; Dave Nielsen, Co-President; Stormy Simon, Co-President and Robert Hughes, Senior Vice President of Finance and Risk Management. I would just like to say that we are so happy that Patrick is back from his medical leave of absence, he is hale and hearty and back in the captain’s chair. It’s good that he is there. I’d also like to say that Dave and Stormy are able and capable, could do the job of president better than I ever could and having them both in that seat should leave best investors assured. And Rob Hughes is our new CFO, he is capable, been with the company for quite some time. So I think we have got a good team in place. To begin, let me remind you that the following discussion and our responses to your questions reflect management’s views as of today, April 18, 2013; and may include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial result is included in the Form 10-K we’ve filed on February 21, 2013. During this call, we will discuss certain non-GAAP financial measures. The slides accompanying this webcast and our filings with the SEC, each posted on our Investor Relations website, contain additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures. Please review the safe harbor statement on slide two. With those legalities out of the way, I’d like to turn the call over to Rob to highlight some of the financial results.

[Robert Hughes:]

Thank you, Jonathan. Please turn to slide number three of the presentation. Q1 total net revenue was $312 million, a 19% increase from last year. Q1 gross margin improved 80 basis points from last year, 18.9% gross profit dollars increased by 24% to $58.9 million. Q1 contribution was $40.2 million, a 22% increase from last year and contribution margin improved 30 basis points to 12.9%. Q1 technology in G&A expenses combine increased by 9% to $33.2 million, net income for Q1 increased 5 million to 7.7million, a $0.32 per diluted share. Patrick, with that, let me turn the call over to you for the balance of the presentation.

[Patrick Byrne:]

Okay. Thank you very much, Mr. Hughes. I will go to page four. Quarterly revenue growth, I’ll just point out that we would now been spinning up for one, two, three four, five quarters, we are happy at 19%, where we continue to accelerate and we are happy. We think of the industry as 15% or even less and in fact if you separate the tier plays, there are couple of that are well above that, Amazon of course is heavily weighted. But most of the tier plays are actually, if you go into internet retailer and you see their breakdown as I recall at our site, you see the most of the tier plays are single digit and so we are very pleased with 19% and that’s accelerating briskly. Page five. Quarterly gross profit growth 24%, nothing else to say about that. Page six. You noticed, well I have said over and over that our contributions, how I measure and how I really think of our growth? Contribution dollar growth is what we are focused on here and all our thinking in economics analyses around, that it’s up at 12.9 that’s the high end of the range, that I think it’s healthy. Last I checked it’s actually about the same as Amazon, when you take they do some book keeping different way than we do. But when you take everything together basically the gross margin minus marketing and logistics cost, and I think they come up at the same place and this is about where, this is the higher, I think about as higher as we wanted to go. I think 12.0 to 12.9 even that is par with our range of 12.5 to 12.9 in terms of healthy and long term models. Page seven contribution and growth. We are running at 22%, again that’s what I really think of it’s the growth number, that’s the number we are trying to drive. And that’s been positive for over a year. We come out of the doldrums in Q4, 2011 and I am really quite happy with 22%. I think that we might be able to do better than that. But I am quite happy at 22%, if we grew the contribution this business 20% for years and we can easily manage our tech and G&A now or such that we gush fast, that this is a very profitable business. Even 15% contribution growth is easy, say keep going forward, as you stretch that out a few years and then you just model it, say well, assume about half of that sticks to our red and half could be up in new expense, all the time, which I think is a reasonable goal. You see how quickly our earnings growth occurs. Slide 8; we broke this out a little bit differently than last quarter. What you see is corporate expense, is the non-sales and marketing; the corporate expense is the combination of red and green bars. You see that where it is now, it’s 16.7 is, that were expense slightly higher than it was for a few quarters when we went through a large headcount reduction. But what’s key is actually looking at just a red, which is the G&A, that’s really nicely in control. What we have done is swap dollars, where we took non-Tech G&A dollars and moved them into Tech G&A dollars. You see what we have done. And I think that’s really healthy. We have a very strong technology group now. We are able to innovate very quickly. We have all kinds of algorithms and things coming live, which make a big deal, which collectively make a large difference and is responsible for much in improvement you’re seeing. And what we really have gotten is a rhythm, where we are innovating and developing things that improved the customer experience and it’s paying on, and stripping cost expense dollars up. Slide 9. Net income $7.7 million, that’s basically has been positive since the beginning of last year. And we are very happy with that, up from 2.7 this time last year. I think people’s understanding of what the earnings potential of this company are, it’s quite different from what my understanding is, that course of time will tell. Free cash flow, cash flow from operations $48.7 million, $32 million. That’s a healthy robust business, lots of cash flow. Page 11; GAAP inventory returns at 44.6. Off course that’s fantastic. 6.7 on just our direct business. I think that we are stable to get that. I am still not happy with that, but I am happy with the 44.6. GMROI, slide 12, 997%. That is our total gross margin return on invested capital. That’s fantastic. Once again I would say our direct business can do better but we are doing 18 points better than last year, and we think that we are going to be able to push this well above this year. Slide 13, unique customers, no, basically the same as this quarter last year. But slide 14, new customers and CPA; again I think this is quite healthy. It looks like we are spending few dollars more for getting a new customer. However, if you look at slide 15, you see that the average order size for us has grown really in six quarters from, I think it was a 110 or so in Q4 2011, now going to a 153 and up from a 126 Q1 last year. That’s great. We are getting the same number of customers. Yes we will are paying a little bit more for them, but, they are much better customers. And slide 16, the gross profit per transaction you see is up, 26%. So there are much more valuable customers who we have been acquiring now. And that’s all credit to our marketing department and our sourcing; corporate employees have a 9% increase which I think is healthy, that’s half our gross. And yet the truth is we have so many projects we can do. It’s just amazing. Every week some projects come out and we can see that they are giving us at 1% less or 1.5% less. It’s just a matter of how many of them can we grind to the machine. If we’re getting more tech employees, I’d love that. Slide 18, before I turn to your questions I just wanted to say, first, thank you Jonathan. I went through a medical situation last quarter, as we announced, Jonathan did yeoman’s duty stepping in on about 12 hours’ notice, took over and ran things beautifully. And long been my plan anyway but it made me see the time was really right to promote Jonathan to the Board. Now, this is all subject to shareholder approval in a few weeks, but Jonathan should be nominated to the Board and actually be Executive Vice Chairman of the Board and manage much of the Board business for me as well as the executive part being he is keeping some large numbers of executive duties within the company. So, Jonathan, shareholders owe Jonathan a big round of applause for the last two months. Stormy Simon and Dave Nielsen have stepped up as Co-Presidents to fill Jonathan’s shoes and have already made me feel like I don’t know what I am needed for here. They are so large and in charge and have the different parts of the business that they run working together better than we’ve ever experienced. It’s really a thrill, in fact, I came back expecting to have a lot of work piled up or something and the fact is I’m wondering I even have a job. And lastly, Rob Hughes has stepped as CFO and has done exquisite bookkeeping for the last few years and has been the solution not the problem inherited some small problems, but has been a great solution in keeping our books drum tight. And he is going to make a great CFO. So with those points let’s turn this over to questions. Jonathan Johnson I think we have one question which has been emailed in by a shareholder so before we open the phone line let me read this question and we can give it an answer. It is from a new investor says, why does Overstock have lower revenue in the second quarter than in the first while Amazon has higher revenue in the second than in the first?

[Patrick Byrne:]

It’s a great question, great question. I’m going to pop that over to Dave. As Dave runs all our sourcing and marketing, why don’t you take that, explain Dave.

[Dave Nielsen:]

Thank you, Patrick. In the first quarter, the promotional schedule and you look at Presidents Day and some of those events Valentine’s Day in our home and our jewelry businesses. We have a lot of different promotional opportunities there and it’s a great time for our customer base as our mix shift continues to move in those areas, towards those areas we continue to grow, so it is a good solid quarter for us and has been many years.

[Patrick Byrne:]

Good. Yes, it’s really been like this for most of our history other than we were growing 100% rate, it’s just been like this, the first quarter is big and the second quarter is a stepped down, the third quarter goes back to being pretty much like the first quarter and then we get a nice big increase in fourth, but as observant of that new investor to catch that. Jonathan Johnson So, thanks Patrick. Glory with that can you open the lineup for questions from those who have called in.

[Operator:]

(Operator Instructions). Your first question comes from the line of Nat Schindler of Bank of America/Merrill Lynch.

[Nat Schindler:]

One big congratulation and two I’m going to ask question that’s going to seem a little softball because quite frankly this everything really worked. But my question is, what specifically worked, was there any particular categories that were successful or was there any particularly marketing programs that were new that really caused this pretty substantial increase in revenue growth relative to a pretty minor increase in marketing spend as a percentage of revenue on a year-over-year basis?

[Robert Hughes:]

Yes, I’m going to start off with the answer, I’d love to say it was because we really figured out the shoe business or something but it isn’t, it’s we have just gotten all of the bolts tightened down so nicely throughout the system. I’ve always been, I've thought we were here since about Q3 2008. I thought we were about to just gush a river of profits Q4 2008 took a very bad turn for us. We started coming back, ’09 we made money, 2010 we made more money. 2011, I screwed up with my O.co decision, but we bounced back in 2012 from a not even a standing start, from a ending 2011 on a really, really solid oath. So, to me there is this, if you look at sort of the platonic ideal of our earnings history, you can see that from ’08 we were kind of at this point, but we kept on having except wars; my fault. But the underlying business was getting stronger and now we have, really the big difference is we have all the right people in place, we have all the right executives, all the right senior executives, all the right junior executives. I don’t see a soft flat spot on the wheel. We have fantastic information. So there is no one thing that was a big home run. It is just we have, we’re working together better than ever and the different parts of our business are working together so well. We built a lot of enterprise 2.0 systems which are a collaborative system inside the enterprise which have been very successful for us.

[Nat Schindler:]

Well that actually brings up the next question actually. You really saw a big step up in marketing in technology spend starting in the fourth quarter. This quarter it was down a little from last quarter, but still a lot more than it had been through most of last year and I also see that you guys spent a reasonably large amount in PP&E which I assume are largely computer systems I am guessing. What are you doing there that has helped the rest of your business so much and obviously it’s working even though you’re spending more you’re dropping it to the bottom line?

[Jonathan Johnson:]

Do you mind if I jump in real quickly?

[Patrick Byrne:]

Please do.

[Jonathan Johnson:]

So, I think part of what we’ve got going on that is where our systems gathers so much information and we’re able to mine that data to market more efficiently, to market to what people want, and so some of that spending is just to improve the systems and that helps us market better. I’d also say that anytime we grow in the fourth quarter our first quarter tends to have, even there is a nice tailwind to it. And so in fact the last year’s fourth quarter was back on an upswing I think led to the blocking and tackling of the first quarter paying off better than usual. Patrick?

[Patrick Byrne:]

Yeah, I would agree with that I’ll also turn it over to Dave to marketing now reports. I will mention that we have found arbitrages. Now that we have really good information better than we’ve ever had and I’d say in the past we, really we have been spending a lot of time building the systems but they were still at the point where they spit out reports and people looked at the reports and tried to make decisions. But now it’s so much, much of it has become real time, the big data driving without almost without human intervention. All kinds of things, that’s having close that loop is a big part of this as is just the data has gotten so good we are finding arbitrages in the system maybe not like we found 10 years ago where you could just find these big gaping holes of things being mispriced out there and another advertising. We’re back finding the other things mispriced and we’ll back find them. Dave?

[Dave Nielsen:]

I would say that I would call out also Patrick, Saum Noursalehi who has come on as our new Senior Vice President of marketing. And his approach is fantastic with probing and testing and taking all of his big data and developing some of these strategies to be able to speak directly to the customer and their individual cases. He has brought yet another element. So as Jonathan said, the blocking and tackling and the promotional change has been very well but it’s nice to have also that addition of technology and innovation.

[Patrick Byrne:]

I’ve mentioned, I know last year, I’ve mentioned publically probably about nine month ago that we’ve started a group called OLabs. Steve Tryon, Colonel Steve Tryon, my great friend, build it and it was really just, well it was just what it sounded like. Well Saum was a developer actually a job encoder and then a directive of development stuff, and he came into OLabs, and got a lot of things done under Steven Tryon. So it was kind of a strange move, Saum’s part to move him into SVP of marketing, but as today’s point I just brought just what we have been looking for. Now real, he is still open to the soft stuff but unable to conceive and implement the tech solutions. So, okay. Okay, next question.

[Nat Schindler:]

If one last one if I can jump right in on that is just a final question on gross margins. You have kind of found your sweet spot on the gross margins on your partner revenue. So I think your take rate is beginning to, you stabilized there and it looks nice at these levels. You continue to bounce around on your direct business and I know it’s a small part of your business now just 13% of revenue. But where should that settle. Where do you think and I know it has seasonal fluctuations but that’s why I am looking out on a year over year basis but it looks up quite a bit this year, year over year is that, is this is a new level or was that something particular to the quarter?

[Patrick Byrne:]

Well we are not, I will start and then Rob if you want to jump in or Dave. First of all and Nat well you get into the details quickly in 30 minutes, you, after release you figure this out. One things that’s happening is because of the better information we are not making the mistakes at least as large mistakes as we used to but another big thing that’s happening is we just keep stripping out, we are stripping out expense dollars and supply chain dollars with information. We know that your friends in Amazon have said they are going to make there, making capital (inaudible). They are putting in all these warehouses and they think that that’s going to be the mode around their business that nobody can get over. We think that we can substitute information for capital and that we can, so we are doing things like we opened this return facility in upwell.

[Nat Schindler:]

Hebron Kentucky?

[Patrick Byrne:]

Hebron Kentucky. And it took the entire process sort of two thirds of the people in the Mississippian their goods now better than Hebron Kentucky. It took 2.7 days out of the average return or 3.7 I forget.

[Robert Hughes:]

Over three, always over three.

[Patrick Byrne:]

So you do that they handle it very efficiently it means that for this 70% or 75% that we are able to save that of what comes back and reship we can now ship that back. When somebody in New York returns something and we accept it and make sure it’s tap this locations and flow the words that we can just send it from the Kentucky facility. So it saves time on that side both so, on the return and send again. In addition by saving those things you have less of a window where customers can call and say why is my return processed for something and every call you see is worth some number of dollars. So, there are so many things I think over the 18 months we have some extraordinary things coming in the supply chain and we really I do think we have had sort of a four or five year history of every year shaving out, I don’t know how many basis points, but I would not be surprised that over five years we have shaved out about 400 basis points out of our supply chain cost. That’s an estimate Rob would you like to?

[Rob Hughes:]

Well I will comment on maybe just one other factor there as we have talked about before the other thing that’s going on in the direct business is we nearly moved out of the direct apparel business and the department business and our jewelry and in more home and garden in the direct business but just more profitable for us. And also, I sit in the weekly meetings with Dave’s merchandizing team and they are very disciplined about where they buy inventory, they monitor relentlessly every week with the buying team and are just very-very disciplined about where we spend dollars on inventory.

[Patrick Byrne:]

Dave was the general, joined as a VP general merchandizing manager four years ago. Then became SVP and now President but all of this is under his belt. So go ahead Dave.

[Dave Nielsen:]

And I would just add now to that that shift that Rob just talked about. We actually carry more product in that category of apparel site today than we did before. It’s just that we just shifted the model a little bit and that’s the business that as the internet and the direct consumer grows which is our model. It fits more in our warehouse, lots of that comes into our own warehouses but it’s directly filling right out the brand’s warehouses right to the customer.

[Patrick Byrne:]

Yes, so we have great partners, and things we can buy, we still want to buy although we share (inaudible) in the symbiotic relationship with our partners, we give them a lot of information to make them smarter and if they can be smarter than we are, nothing would make me happier. Nat, you are great analyst and thanks for following us and I know you have seen us followed us through dark days and good days. So do you have any other questions?

[Nat Schindler:]

Just finally on that direct business, what percentage of that revenue now, it’s gotten so small and you are obviously not taking that ton of going out and finding your own stuff and selling it, a lot of it seems to, I know you do to resell the returns that come from partners as part of your service for partners. How much of that is reselling return?

[Patrick Byrne:]

Good question, only out of the 13, it’s probably about 3% to 4%, 2% or 3%.

[Nat Schindler:]

Great. Thank you very much.

[Jonathan Johnson:]

Laurie, are there questions?

[Operator:]

(Operator instructions). The next question comes from the line Ali Rafi of IT Solution.

[Ali Rafi:]

Good morning guys and congratulations for your outstanding quarter. I have just one question. Now, as most of the analyst out there obviously like compare you guys to Amazon and eBay. And they say all eBay and Amazon have like plans to increase their revenue within next few years. And there are not that many plans out there for your guys. So is there any way you guys could enlighten us on what’s on your agenda in order for you guys to increase your revenue pretty much?

[Patrick Byrne:]

Yes, very good question. We think that this kind of growth rate or even more, may be you knew normal for us, until there is some exogenous shock. When there is a recession or something, we get affected like everybody else but this is in a (inaudible) this is not because we had a bad Q1 last year and something like that this is really just culmination of, the flywheel is spinning up. If we have the flywheel spinning in the right direction and everything we add now is just another push on that flywheel. So, we do have a lot of plans for increasing growth, some of them are outside, a small number of them are outside what we are doing now. But most of them are just doing, what we are doing now, better and better and we see a lots of ways to keep doing it better and we see new product lines to go into. We are also going, you will see in the second quarter, we are going to start doing some things internationally and they are quite, we are going about international in a different way than other people. So, you put a lot there, I think there is a lots of opportunities for growth. Dave, do you want to add to that?

[Dave Nielsen:]

I think the international piece for us is definitely all lead to that question that is, that’s the big future for us and we are excited what’s coming.

[Patrick Byrne:]

Yeah and most pure plays are the big pure plays basically half their business is domestic and half borne and in our case it’s about, I think 98 and 2, so if we were able to get through just the same ratio as the other pure plays that would essentially double the business. Jonathan, do you want to add to that?

[Jonathan Johnson:]

No I think that’s a fulsome discussion of it. Ali thank you for the question.

[Patrick Byrne:]

Any more Ali feel free, any other questions? Ali?

[Jonathan Johnson:]

Laurie?

[Ali Rafi:]

No I’m good, thanks. Thank you. Thanks for your help.

[Operator:]

At this time there are no further questions. I’ll now return the call for management for any closing remarks.

[Jonathan Johnson:]

Patrick, do you want to say anything?

[Patrick Byrne:]

You go first.

[Jonathan Johnson:]

I just want to thank our shareholders for sticking with us through thick and thin. We feel like the business is running well, we got a good management team and ready to get back and keep working hard in Q2.

[Patrick Byrne:]

And I would add to that, yes, you have seen us through seven fat years and seven lean years roughly and I think seven fat years from here on now would be a very profitable seven years, so more cash. Rob, do you have anything you want to add?

[Robert Hughes:]

Just to add that in the near future we will be filing our 10-Q and encourage everybody to read that as well.

[Patrick Byrne:]

Yes, there is an expensive management discussion in the 10-Q, including there's a lot of stuff about the CEO. So thanks to all our shareholders for sticking with us along and we hope you see starting to pay your trust, is be getting to pay off.

[Jonathan Johnson:]

Thanks Laurie, you can turn the call off.

[Operator:]

Thank you all for attending the Overstock.com first quarter 2013 earnings conference call. You may now disconnect.