Overstock.com, Inc.
Q1 2015 Earnings Call Transcript

Published: 28 Apr 2015

[Operator:]

Good day ladies and gentlemen, and welcome to the Overstock.com, First Quarter 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Stormy Simon, President. Please begin.

[Stormy Simon:]

Thanks Lytoia. Good morning and welcome to our first quarter 2015 earnings conference call. Joining me today are Dr. Patrick Byrne, our Founder and CEO; and Robert Hughes, Senior Vice President of Finance & Risk Management. Now I’ll turn the call over to Rob and he’ll highlight some of the financial results.

[Rob Hughes:]

Thank you, Stormy. Before I cover the financial highlights, let me remind you that the following discussion and our responses to your questions reflect managements’ views as of today, April 27, 2015 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-K that we filed on March 12, 2015. 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 reconciliation to these measures to the most comparable GAAP measures. Please review the Safe Harbor statement on slide two. Turning to slide three, Q1 2015 total net revenue was $398.3 million, a 17% increase from last year. Q1 2015 gross profit dollars increased 18% to $75.4 million [ph] and gross margin was 18.9%. Q1 2015 contribution was $47.5 million, a 17% increase from last year. Q1 2015 technology and G&A expenses combined increased 25% to $43.6 million. Pre-tax income for Q1 was $4.5 million and net income was $2.7 million. Trailing 12 month operating cash flow for Q1 was $67.4 million. Patrick, with that let me turn the call over to you.

[Dr. Patrick Byrne:]

Thank you, Rob. Thank you, Stormy. I’ll be taking folks through the slides to began with. Welcome everybody. Slide four, quarterly revenue growth and you will see it sort of as [Audio Gap] high teens, still looking to break that 20 and of course we are still dreaming of ways that might get back into more of a hyper growth phase, but we are happy with this. We think it’s really about 10 points about the industry, the median of the industry. So quarterly revenue growth, next slide, the gross profit growth. Let me go right to the next slide, slide six. The contribution growth, it’s encouraging to me that all of – when those all get tuned in, when we are tuned in as a company, those come together. When you have seen big divergences in our numbers, that’s when things are really out of tune and it’s encouraging to me that we sort of got these all up into that [Audio Gap] and they are tuned in, they are not diverging. 17% on contribution and I’ll guess a make a – we will be getting back to contribution on another side. Seven, contribution is staying at 11.9%. That’s I think 12.0% to 12.5% is this sweet spot for our business as my experience tells me and this was a nice recovery this year. We are figuring some nice things up. All I’m going to disclose is that we are figure some nice things out, places we are still shipping [Audio Gap] point out now and we’ll just keep on passing them on and we like that. Slide eight, let me address this. So slide eight, the red line is our contribution margin, 11.9%. Amazon is somewhere between the black and the blue and Rob, why don’t you take a moment to explain why it’s a range for them.

[Rob Hughes:]

Okay. What we showed here in the black line is just looking at their total net sales and calculating as best we could from their public disclosures what that contribution margin would be. But that includes, for example their Amazon web services and other things that we don’t have, so it’s hard to compare on that basis. So then we also looked at it. Just looking at their product sales and that’s the lower line there and although they did disclose Amazon web services this time around, they didn’t break down the expenses by line item, but you can clearly see that the margin in that business, it looks like if I recall it was around 17%. So its pushing, the part where we show as the black line here [Audio Gap]. So again, that’s why we believe their real comparable contribution margin is going to be below that and more towards what we show here as the blue line without their service business in it.

[Dr. Patrick Byrne:]

And then also there’s Wayfair. In Q4 we had it at minus 3%. Let me take a moment to explain why I spend so much time talking about contribution margin and I have to give credits, where credit is due. This actually came from a conversation 10 years ago with our Herb Allen folks who pointed it out to me. Say I got under that I have something an adverse relationship with Wall Street, but I got some good pointers too. Somebody pointed there out to me about 10 years ago that the value of measuring this will be like a media station, measure itself by contribution margin. I’ve always been surprised at how Wall Street looks and various companies in our industry and to be honest how little logic is involved. People talk about the price sales ratio at Amazon versus eBay, but $1 of sales is quite different for the two companies; one is a 68% margin, one is much lower. So to me multiples of sales don’t make any sense. Multiples of gross profit start making sense, but you got to remember how different companies book the components of cost of goods sold differently and in some cases rather imaginative I think. So you have to true up for that. But ultimately where the rubber meets the road is I think that looking at internet businesses as a multiple of contribution margin. It has a lot of rationality behind it. You certainly don’t want to look any higher up the income statement than contribution margin. So that’s why I spend so much time on this. And so I look at a competitor in one case who, yes their sales grew 35% in the fourth quarter, but they spent 88% more on marketing and you can get all excited about it. I mean we were there once too. We’ve been in that place 10 or 12 years ago and at the end of the day of course no amount of sales helps you. If you’re at zero, in fact if you are a negative, it hurts you. So no amount of scale, that’s a business model issue not an operational issues. So to me that’s why I spend so much time and I’ve spoken for so many years about contribution margins. Okay, let’s go on slide nine. Total technology and G&A expense, this is going up, but I have to tell you we are sticking right to our strategy. We have a strategy; we have spoken about it in the past of dropping half of the increase in contribution margin to the bottom line and I’ve surrounded that with different caveats about well, just don’t look at anything – we don’t do anything quarter-to-quarter. We are budgeting and planning on a year by year basis. So that’s not going to hold true quarter-by-quarter. Then I think about a year ago, I said to folks, I’m not even – I’m going to back off that commitment, because we just see so many things we should be doing and that we are funding and doing it, and of course in the long run it’s a whole question of does it payoff. But for example, I used to say 10 or 12 years we are not a technology company, we are lemonade stand with a computer. I wanted to emphasis within the company how we were focused on old fashioned retail principles and I mean that’s how we thought of ourselves. We have become a tech company and we are seeing places for expense and develop stuff that’s better than anything out there and some of it, most of it is right in our core business. A lot of it is stuff Stormy can talk about that she has been designing and nobody is more in touch with our customer than Stormy, both the consumer customer and the supplier customer. But beyond that there is some other things that you hear about out there like project Medici, this thing to take on to change Wall Street and you may have noticed that Friday afternoon we filed something with the SEC that has some mention of this. So anyway, we are not – we don’t talk part in the internet strategy of lets lose $0.5 billion a year or $100 million a year. I mean there was a brief period where we had to do that, but we think it’s a – I think it’s a – for me it’s a fine goal if we can be growing this much faster than the median of the competition out there and really laying down the foundation for a big future. This is the right strategy play. If it means we are keeping our pretax operating income sort of around the $15 million to $20 million range as we explore these different things, that’s our strategy. So people shouldn’t be surprised at it for now. Okay, slide 10, quarterly net income. So again, do want this $2.7 million and again, we don’t worry. I know that a lot of people in Wall Street worry about this number quarter to quarter. First of all the quarterly numbers don’t make any sense. It’s an annual number for us. Because as I think I’ve mentioned a number of times, we really are managing the business to make – I want to keep it positive each quarter. I think we’ve now been positive 13 quarters. I think we are the only pure play out there or eBay or somebody I can think of that’s doing that, but to us its matter now at how much do we grow Q1 GAAP net income versus last year. That’s not where we are in the game yet. We are up against people who are spending 88% on marking to grow 35% and comfortable loosing hundreds of millions of dollars and it would be too conservative of a strategy to be focusing and just trying to grow this account, especially quarter to quarter. So I’m very comfortable with our growth and expenses. Operating Q3 cash flow, we have $25 million free cash flow and $67 million trailing 12 month operating cash flow, we have a nice healthy business spinning off a bunch of cash. Okay, GAAP inventory turns, page 12. Of course we get the benefit from all this drop shipment, so this number always looks fantastic. I’m a little discouraged that we are not getting our inventory turns up. However, I should let folks know that there’s quite a big factor in here that kind of washes out the normal analysis of this and that is Partner Returns. Would you like to explain Mr. Hughes the affected Partner Returns on this number.

[Rob Hughes:]

Sure, I’ll comment on that. So part of our business model and our agreement with our partners is when we get returns of their merchandise we will restock them and so when we restock them, then that becomes part of what we call our direct business and becomes direct inventory. So that’s weighing a bit on the lower line here in the GAAP TTM inventory. So the total and we think it’s an important element of our business with our partners to do that, but it does weight on this a bit.

[Dr. Patrick Byrne:]

It does, it does and since 90% of our sales are now drop shift, but the returns associated with those 90% all count against the capital of the 10%. It’s really a great big chunk in there. So I think that our real, setting that aside our real terns our closers to six on what we are ordering, which is always what I want. I think it attracts 21 points of our core give away. If you go to slide 13, our giveaway is all time high on a GAAP basis, 1,095%, but on a direct basis its 64%. But again of that 64% there is about 21 points I believe that is tied, that if we didn’t have, count it without counting our partner returns it’s at 85, it’s about six turns. It’s still not acceptable. I think we should be clearly breaking 100 and maybe doing significantly better. But you just ought to be aware, when you looking at these GMROI numbers, we should probably report this actually, even setting aside Partner Returns. And then there was these very large purchase late last year of bids.com. We haven’t – its bids.com inventory. We can’t disclose how much it was, but we got it for a real song. But that has swelled our inventory too. But we are working through that, comfortably in facts its adding, its improving our – its margin is so good its improving our GMROI. Okay, slide 14. You need customers, cost per customer, again slight 14.72 versus 13.90. Let’s go to slide – the number of new customers, I know Stormy would probably want to point out, decreasing slightly, 1.77 to 1.9 – oh, that’s unique customers, sorry. Slide 15, new customers. Again, a slight improvement; however, the value of our new customers is going up. So slide 16, our average order size, now an all time high for Q1, $174 up from $165 up from $153, so it’s kind of 8-ish – averaging about 8% growth. Some of that is mixed shift and we are also just getting there. Those areas were I think really, really good and then areas that we’re still felling our way around and it’s so funny when we find one of those areas. I don’t want to disclose for completive reasons the area I am thinking of. We dig in some areas and realize, gee, there’s a whole lot of low hanging fruit and we can still make nice improvements. Slide 17, gross profit per transaction, same story. Again, this creeps up a little bit each year, all time high for Q1, 28.69. Slide 18, we have finally broken the barrier of 1,000 corporate employees. Stormy, would you like to describe how we kind of think corporate employees versus…

[Stormy Simon:]

Corporate employees is everyone minus customer service and warehouse.

[Dr. Patrick Byrne:]

Right, and non-customer service and warehouse, because those employees scale linearly with scales. If sales double, you need sort of twice many people at the warehouse, twice many people in customer care, but the corporate employees, theoretically not. So in general I would worry about this, except I look at the individual projects people are working on and we are doing so much interesting creative work that is adding to the overall enterprise, that I wouldn’t want to lose any of them. And we actually – our HR function has become – we’ve installed work day, which is a great system. If you want to say – and Stormy has been…

[Stormy Simon:]

I would just say on the corporate employee, I think that we ran lean a few years. Actually I think that we might have hired a little more a little earlier, but we have brought our recruiting efforts in house. It’s been good culturally to do that and to find the right employees for the right place and we are highly focused on that. This number makes me happy even though I know it’s a big increase. We are undertaking a lot and competition is stiff and we need the talent and the bodies.

[Dr. Patrick Byrne:]

And we are really attracting talent. We are attracting really high caliber people from all over the country are coming in, technologies, sourcing, marketing.

[Stormy Simon:]

Turns out Utah is not so bad.

[Dr. Patrick Byrne:]

Yes, well we are attracting a lot of great people to Utah and finding a lot of great people in Utah and we have a really – we’re going to see spectacular hires. Slide 19, these are just innovations we worked on last year and I told you about. Farmers market is – I mean Farmers Market is, it’s a negligible amount of business. It’s something that may – I’m not sure how much I did this like Pets and then it cost me a few hundred thousand to do is a social service or how much I think this can actually work. I do think that Farmers Market can actually be something. We’re currently covering 33% of the country with local home delivery. So there’s these things called CSA’s around the country, Community Supported Agriculture. We built a platform into which they can all integrate. There’s a lot of reasons for them to do so, but you have to live in an area where you have local farms working with CSA. With the 33%, another week or two we should be crossing 40% and its going a little bit slower. We have lots of people. It isn’t a problem getting the people come to us, getting the people integrated, but we should be fit, probably by the time we are speaking on it, it could be at 50%. Overstock, I’d like to turn over to Stormy to talk about the fulfillment servicing and the Supplier Oasis.

[Stormy Simon:]

Sure. On the past call we referred to supplier oasis fulfillment services and as we have continued to build the business, we see reason for the buyback. Now is a great time to explain it to everyone. So we have overstock fulfillment services where it’s really just exactly that. You can put your products in our warehouse. We run the warehouses and we run them really well. We have a few dozen folks that are currently in that. Still, we are just exiting a beta with it, but its successful and its true overstock value to put your products there. The second part of that equation is Supplier Oasis. Supplier Oasis is a technology platform with which our suppliers will transact with overstock, as well as potentially through other channels should they choose to do so. So they are really two businesses; the Supplier Oasis business is our internal technology. We’ve rewritten the partner platform and made it much more agile, very much an inventory management tool and its pretty slick. So those are two different things our partners are transitioning over and it’s a great technology.

[Dr. Patrick Byrne:]

Yes, and the overstock fulfillment competes with Amazon head on with the exception of…

[Stormy Simon:]

Well, Amazon gets you in their fulfillment service and then they will give you these benefits on site. We’re running a fulfillment service, because it turns out we’re really good at logistics. We’ve been doing it a long time, we have some real talent in that area and so our fulfillment service is agnostic to whether you’re fulfilling an overstock order or you can fulfill an Amazon order through it. We hope you fulfill overstock orders, but diagnostic.

[Dr. Patrick Byrne:]

Let me explain what that means for the people who are not that – if you’re a candle maker and your selling your stuff at Amazon and you’d warehouse, they are supporting your sales, but suppose you have a sale on eBay, they change – they’ll let you send the order to the Amazon warehouse and they will ship it to your eBay customer, but their fees go way up, that’s called out-of-network.

[Stormy Simon:]

Yes.

[Dr. Patrick Byrne:]

We build our store as agnostic and that’s what Stormy said and our fees are what, about half?

[Stormy Simon:]

Yes, maybe even a little less, but they are fair fees. I mean it’s not a – we’re not doing this for free, but they are fair fees and I think people will join the service and…

[Dr. Patrick Byrne:]

I think Amazon has been extracting sort of monopolistic rents here frankly and we’ve…

[Stormy Simon:]

We’re disruptive.

[Dr. Patrick Byrne:]

We’re disruptive there and well actually I think it’s better in the sense of – well, its – no one else can really do it like Amazon is doing it until we came along. We can’t have channel advisors like that, because they don’t have the customer facing website. Because we have the customer facing website, we give a lot of information back to our suppliers that is of value to them. So this is a program, as long as its dreamed up and built in the last few years and we had to upgrade our supply chain technology. It has been rebuilt to support this whole new business line.

[Stormy Simon:]

And with that came an international support as well. So we are globally making up the print. We will be live in China with the fulfillment center selling within China on the market places there in May and that’s exciting.

[Dr. Patrick Byrne:]

That’s really exciting. And we scaled back our plans to expand elsewhere this year in another part of the world, but we want to get this right. We think we have something pretty special coming together here and we just want to get it right before we spend too much hitting the world with, but getting China live and selling products through their marketplaces is – there’s a whole team that’s building that.

[Stormy Simon:]

Yes, but once we get it right there I think we’ll be able to take on other countries a little more easily, but the technology that supports the fulfillment service, our Supplier Oasis was needed to support our international effort.

[Dr. Patrick Byrne:]

That’s what we’ve basically been putting – well, I’ve been telling the accounting people who would fully burden everything, we’d probably be saying $5 million to $ 20 million a year for a couple of years and do building out the Supplier Oasis and Ops, would you go along with that Rob on a year-over-year basis?

[Rob Hughes:]

Yes, I mean fully burdened and where we kind of generally say lets double the cost to cover everything else, so it’s been substantial.

[Dr. Patrick Byrne:]

Maybe even a little more than that. So it’s – on that basis $20-ish million a year and it’s just starting to pay off. What’s nice is – do you want to say anything about what’s happened? We’re having a lot of people – I know you mentioned how many people signed up, but our warehousing, as we were taking down warehousing capacity, we’re filling it up with these kinds of suppliers.

[Stormy Simon:]

Yes.

[Rob Hughes:]

And what Stormy has overseen the rebuilding of in the last two or three years supports all three of these things, overstock human service supplier raises and it was all built internationally.

[Stormy Simon:]

And let’s give everyone peace of mind to know we had great technologists.

[Dr. Patrick Byrne:]

We’ve gotten so much better at the management of these kinds of projects. Its why we’ve shifted our strategy to being really a tech company. We’ve seen these errors. We can jump out and do things. No one else is doing that. Loyalty; so we released publicly the percentage of the quarter sales that were Club O, okay. Well let me – a little more detail of what happened on the quarter [Audio Gap] a bit of a slow start on the quarter. Things were a little bit soft for us at the beginning and then we accelerated in the second half, but it’s now for the quarter, it’s just under 20%. But its accelerating wonderfully and its now running in the 20’s and 20% of our sales and like I said, its accelerating rapidly. We love our loyalty program and while it may look that some of these different things we’re doing seem a little bit distraught, the truth is the master plan is to tie it all together with the loyalty. And last Medici. Medici is our internal name for the project of using crypto technology to reconstruct some financial technology. We basically have a subsidiary that’s a FinTech subsidiary that is developing some – well, not even sure at this point. Is a legal or is that just more of a stick in the IP, I don’t know, do you want to comment on that, the legal structure, the subsidiary, but so far it’s just been expensive. But we do have stuff that let us follow, we have reason – yes, we didn’t file as a large on Friday when we filed something in our amended S3 that says we’d like to issue a cryptosecurity, but the truth is we want to issue, we don’t want to waste capital. We’ve got plenty of capital, we’re generating capital. I think the price, I wouldn’t want to raise money at anything like today’s price, but purely as a small proof of concept, you might see well, because we follow the S3. We follow the S3 and that speaks for itself. But we think this technology – there’s Jamie Dimon. You may have seen last week it was reported, about two weeks ago, reported all over Jamie Dimon out of JP Morgan. He had a devoted space in his annual letter saying we are – basically they are freaking out the Silicon Valley guys who are coming into the world of FinTech. Well if you read between the lines, not even between the lines, it sure seems like he’s talking about some things I’ve said in some of those lines. We think we have some very interesting patent supply for it. Two very interesting patents that could be of real value and some real financial technology that we’re developing, but it goes to our – Mark, do you want to comment on any of this.

[Stormy Simon:]

I don’t think he does.

[Mark Griffin:]

I will agree with you, it is interesting. But the S3 that was filed allows for the possibility of the digital securities offering, that was the S3 that was filed on file and that’s about the only thing that’s different in the S3 except to where they are offering amount raised to...

[Dr. Patrick Byrne:]

Yes, we did raise the – so my dear departed father instructed me to always keep the universal shelf on the shelf. Always keep it there, because if the day comes that you do want to issue something and you don’t want to have to go filing and so forth. So it’s quite a hassle to keep it updated, but we’ve had a universal shelf for a decade or something. We did just raise it from $200 million to $500 million and that has no significance. I don’t think we’re doing anything like that, but it’s always going to have a universal shelf. Why not have it cover anything you can think of. But we added on Friday some language that says crypto, that maybe digital security and I see Wired Magazine just picked up some of the – there’s going to be a Wired Magazine where they picked up on it. So I think that this technology has some extraordinary potential. Next slide is questions. Was that brisk enough for you Stormy or did I dawdle?

[Stormy Simon:]

No dawdling, we’re not dawdlers.

[Dr. Patrick Byrne:]

Okay, let’s go to questions.

[Operator:]

[Operator Instructions].

[Dr. Patrick Byrne:]

I see that we have had some questions emailed. Stormy is going to walk through it before we take any. Stormy, why don’t you go ahead and ready it?

[Stormy Simon:]

Have you learned about the economics of shifting large largess to Club O members. Does it have any impact on contribution margin and growth? At what pace do you plan on making that shift?

[Dr. Patrick Byrne:]

Yes, we have. I see he was using my language. I must have said this in the previous call, but it is largesse. We are shifting our largesse to the people who gave us their patronage, their loyalty. Its having an amazing effect; it makes them far more valuable and at what pace do we plan on making that shift? Much faster. It is mine and Stormy’s bete noire that we are sitting here. I want us off the crack pipe so to speak, I want us off the wince, I want us off using coupons. I don’t like this using coupons, although we’ve pioneered it, we were really good early on in email marketing. I don’t want to keep using coupons. I want to make Club O more – shift more and more of that largess to Club O and I want it to happen faster, but all that said, Club O contribution margin is growing at the same pace as Club O overall, which is growing at a very brisk pace. Over three, closer to four times our overall sales rate, just roughly give it three or four times overall sales rate. Anything else come in?

[Stormy Simon:]

There are three more questions that I have.

[Dr. Patrick Byrne:]

Okay.

[Stormy Simon:]

This is the hard question, but I’m going to ask it, because Tom sent it in. It says, hi Patrick. Why are you investing $5 million of our money into a risky Bitcoin VC investment? If people would likely see exposure, then they will invest in a VC firm. Our money must be spent on projects in which you have direct control.

[Dr. Patrick Byrne:]

That’s a very fair point and I know I think myself as the steward of your capital. In this case there is an opportunity that’s come our way. There is a number of opportunities coming our way that we’ve actually missed for year, and I’ll tell you my honest to God thinking. We are on the forefront of so many new companies with new technologies. For years we have known about emerging technologies before the world seemed to get known and we’ve had partnerships and we provide a lot of value. We’re basically – I’m not sure if this is true anymore, but at one point we were the largest pure play who was integrating with third parties. You got bigger than us, you just built everything internally. We integrated with a lot of third parties and in the process we got to find out whose technology worked and whose didn’t. In addition, Stormy being quite the demanding customer raised a lot of value to some of these relationships. For example, there’s a partner who had some great customer service software that worked with us for years and I would say Stormy drove a lot of the development of their technology and they ended up selling somebody for $1.5 billion a couple of years ago. There are more stories in our rear view mirror like that than I care to think of. That’s why I do want to start – we finally are going to monetize this front row seat on a lot of technologies now. At this point things are a bit different and it’s not directly tied to our business and you have a fair complaint, but I’ll put it this way. An opportunity came to me it’s with some of the leading lights in Silicon Valley, we’re behind a company that and some names I know and some people I know and I would have sure felt if I had taken this investment myself, which I could have, it would have been a usurpation of corporate opportunity, because I think this is a… But this $5 million bet is a bet on a portfolio. This is a very high – really fancy folks in Silicon Valley who were in the crypto revolution, were thinking about it the same way that I have and this is what has made sort of one broad spectrum of that on the crypto revolution, so that’s why.

[Stormy Simon:]

I respect your question Tom and I think it’s really fair that you asked it.

[Dr. Patrick Byrne:]

Which Tom is that may I ask, Mr. Obmin?

[Stormy Simon:]

It just says Tom.

[Dr. Patrick Byrne:]

Okay, well they didn’t put it on.

[Stormy Simon:]

And then the second question from Tom is, I’ve been an investor since ’04, which we really appreciate and it’s no secret that many professional investors disapprove of you. Well, I take offense to that Tom. Why not offer us a healthy premium to an MBO and never have to deal with such questions as this again?

[Dr. Patrick Byrne:]

Well, fair enough. My first thought is our job is the company. My job and Stormy’s job is the company, is the company’s results, stock based stock price and I know some people feel that way. Other people tell me they are behind us 100% and they understand that why we do some of the things we’ve done, but we don’t get excited about the stock price when it goes up. When it goes down we focus on the results and we say gee, we’ve built it a close to $2 billion company this year that’s running at a positive 1%, growing twice as fast as the industry, the median member of the industry at large and I’m like just about everyone we’re up against. We’re not gushing red ink and we’re funding it. So we’re playing out our strategy, the market. I mean we’re flabbergasted how the market value, some of these are our competitors. So I actually – I’m happy with the results. I think that we can do better and that we have. We’re making some big long stock bets, but I’m super excited about the business. Now why not do an MBO? It’s not the dumbest idea. It’s not the dumbest idea I’ve ever heard. In fact I think of it all the time, but I’ve often felt like it wasn’t until we wrapped up certain things, I would fear I was taking advantage of my fellow shareholders if we did a MBO at anything like the current pricing and so that’s why until enough things that we’ve worked on got public I would feel – I have felt that way. I guess I am feeling less guilty about it now. Most of the things we’re working on, including the Medici stuff, which will be apparent over the course of this quarter. I think right after we get through this quarter, I won’t feel like there is any big secret strategies in the bag that I’d be taking advantage of people if we then were to discuss an MBO. I would have felt anytime in the last year or two when that idea started bouncing around the community, both yours and my own circle, I would felt like I was taking advantage of people until certain things got public. But if they get to the public yawns about them, then that is absolutely something. Yes, we would need a capital partner I think, but it’s that. Rob, do you want to say anything about it. First, have I given our general council any – okay, I’ll stop there. Rob, anything?

[Rob Hughes:]

Nothing yet.

[Dr. Patrick Byrne:]

If there were a capital, what kind of capital partner will we be looking for in that role like that?

[Rob Hughes:]

Somebody who shares your philosophy about the company and Stormy’s I think. Exactly who, I’m not sure.

[Dr. Patrick Byrne:]

General council, do you want to add anything other than just pulling the reins on me?

[Mark Griffin:]

No, I’ll just pull the reins.

[Dr. Patrick Byrne:]

But I feel Tom, at the end of this quarter, bring this up again when we talk in July, because I actually feel this quarter there is some significant things that will be revealed to the world and if we reveal these and the world yawns, then no big deal and we could actually start to think about something like that.

[Stormy Simon:]

There is one more question. Sorry, we just have one more written in. When will the previous goal of dropping about half of contribution dollar growth to the bottom line become a possibility again?

[Dr. Patrick Byrne:]

Well, I mentioned, I touched on that earlier. It’s a possibility now. We could anytime we want. There’s probably $20 million of expenses plus or minus or maybe plus $20 million to $30 million of expenses that we could take out as a business anytime we want, without really hurting the business as you see it. The truth is there is only about $10 million or $12 million of expense that are associated with if project expense are not – that are outside our fairway or that don’t have a payoff sort of in the next year or so. So there is – let’s say we could take $10 million to $12 million out instantly, but again we are just making – so I don’t think this year, I don’t think you will see that result. What you might see is those foreign companies that turn out to have a great deal of intrinsic value. That’s where you – I don’t think you see it showing up as an operating income thing, it’s that do you generate, do we spin-off a company or develop some financial technology for example that has some tremendous value. I think that’s the way you will see it.

[Stormy Simon:]

That’s the end of the questions I have here Lytoia.

[Operator:]

All right. I do show we have a question from Scott Tilghman of B. Riley. Your line is open.

[Scott Tilghman:]

Well thanks, good afternoon. I actually have a few questions here. I'll just lay them all out upfront and then we can walk through them. First, an easy one

[Dr. Patrick Byrne:]

A lot of great questions Scott, a lot of great questions. Let me hit, let me get – it goes through the SG&A increase, how about we hit that first. So it’s a total $5.2 million increase. Of that $1.9 million is sort of directly building out the business as you see it from outside the company. There was a quite a legal, while there was a legal increase of $1.5 million related to a number of lawsuits or such marked, it’s all right and Mark can comment on it. We also have a – we have a relationship with the outside consulting service at this point I’m not going to name, but they have been very useful to us and they are adding about $1.25 million, a $1.25 million per quarter, but we think that they are paying for themselves, likely to pay for themselves sort of 20 times over. So those are the increases, but as they sort of core rubber meets road of the $5.2 million only $1.9 million is in direct – is in headcount increase, our internal expense structure.

[Scott Tilghman:]

Okay. So just to be clear, nothing unusual in the commentary around the staff and travel related costs; it's just normal growth?

[Dr. Patrick Byrne:]

Yes, that’s correct, that’s just normal growth. That’s $1.9 – that’s about a third of the 34% increase. So it’s been a11 point increase there.

[Scott Tilghman:]

Right.

[Dr. Patrick Byrne:]

On mobile, so let me hit some other questions, unless you want to follow up with that first.

[Scott Tilghman:]

Nope, that’s good.

[Dr. Patrick Byrne:]

Okay, let me go to your preparedness on mobile. On the shift to mobile, we’ve been way in front the shift. In fact, we were innately way too in front of the shift. We build out a mobile thing in ‘02 and Americans didn’t show up and we discontinued it in ‘07 and what you know, the iPhone got introduce in ’08, so. But our mobile app has in the last couple of years won, I don’t know how many awards it won.

[Stormy Simon:]

It won a couple of awards and I would say, as a Head UR of Mobile, you always want to be further ahead, because that’s where everybody in going and spending their time.

[Dr. Patrick Byrne:]

We are over I believe 50% of our traffic mobile and whenever we’ve reported that number and I’ve reported over the years, it’s always well above where the industry is, and when the industry was at 10% of their traffic mobile and 3% of their sales, we were 20% of our traffic mobile and 10% of our sales and such or something like that, and its continued. Now we are – we were at 52% of our traffic mobile. Was that just for – that I don’t remember the time period and I don’t know if that’s for the quarter as a whole, but it’s pretty representative, right.

[Stormy Simon:]

Yes, it’s close and being so heavy with home sales, it’s a hard place to make a transaction on your little phone if you’re buying a big couch. So the traffic goes there and they tend to buy on the big screen, because they want to make a more educated decision. But I think the traction with the apps, we’ve been very pleased with it. Our search on mobile is where we get a lot of the traffic, because we are very relevant there and I would say we are prepared as any home retailer can be, but we will be increasing our content in engagement there this quarter heavily.

[Dr. Patrick Byrne:]

Right. And so we’ve – my point in reading off those stats is we have been I think ahead of the game on mobile. What you are referring to is Google recently came out and there is a whole bunch of sites that are not mobile friendly, and they basically said – and they give you a ranking. They tell you whether you’re mobile friendly or not and then they give you a score. And what they did for the first cut is what they’ve said is if you don’t count as a mobile friendly site, we are going to radically devalue. Well, we made that cut, and there is a number of other large guys who did not make that cut. Those sites are not considered – it’s a binary thing with Google; mobile friendly, not mobile friendly, you can look it up. We got the flat, we are mobile friendly, we made the first cut. We are not as good as we can be and think we can be in another three to six months, but we are still sort of way ahead. But what Google is asking people to do to get mobile friendly, we’ve don’t a lot of, but there is a still a lot of runway in front of us, a lot more improvements we can make. So that’s what happened with Google and you ought to look up and see who didn’t count as mobile friendly. Okay, do you want to address the thing with DEMs, this whole change everyone is…

[Stormy Simon:]

Yes, I mean of course we are always concerned with the shipping pricing. But I think what gives me peace of mind is that it affects everyone is our space. It’s not just going after over stock, it’s something everyone has to be aware of and address.

[Dr. Patrick Byrne:]

Right, so Rob.

[Rob Hughes:]

Nothing to further add at this point. We are in constant discussion with our carriers, we are an important customer to them. We have historically been able to negotiate very competitive rates with them.

[Dr. Patrick Byrne:]

And this is really going to be a function. Who wins that game is a function, who has the most granular data about their expense down to the skew level, because then you can price in where you have more expenses. If you just peanut butter spread your shipping expenses across a bunch of items, then you can’t price them correctly. So ultimately this thing about the shipping DEMs, that concern is going to be the companies, that benefit are the ones who have the most granularity and their expense management down the skew level, where again I think we are good, but have ways that we are getting better. I mean significantly this quarter, I’m so proud of how the team reacted to some things in the first four to five weeks in the quarter and how Stormy directed a very significant Stormy and Rob sort of dug in and got our granularity another level down and how they – the more granular you can have your data related to the expenses right to the skew level, of course the better you can do, so we keep pushing the boundary there. Potential investments are going forward. The $5 million investment was quite an unusual investment. I see investments more in the $0.5 million line. We did recently make and I’ll be able to describe in the next quarter, the nature of the investment, but we recently did make $1 million investment in something and but the other ones you are seeing – just a moment. Okay, so you will be seeing reported eventually two $1 million investments and even that is I think at the upper edge of – I mean I think in terms of a $0.25 million to $0.5 million. But two nice opportunities came along and they are related to technologies that we are users off and they look like the right people and a great pedigree of the people and the other investors in the round. So again, we feel like we are monetizing our front row seat on where a lot of the technology development is.

[Scott Tilghman:]

So it sounds like those will be more cash-flow centric rather than flowing through the operating statement. Is that correct?

[Dr. Patrick Byrne:]

That’s correct.

[Scott Tilghman:]

Thank you.

[Dr. Patrick Byrne:]

As you and others have noted in the past, we have built up a lot more cash that we look like we needed and I think when people see the nature of the two investments we’ve just made – anyway, they’ll understand.

[Stormy Simon:]

Thanks Scott.

[Operator:]

Thank you. [Operator Instruction].

[Dr. Patrick Byrne:]

Are we finished Lytoia.

[Operator:]

We do have one question from Mike Arnold a Private Investor. Your line is open.

[Dr. Patrick Byrne:]

Hello Mike.

[Mike Arnold:]

Hey Patrick, Stormy, how are you doing? Congrats on the quarter.

[Stormy Simon:]

Thanks Mike.

[Dr. Patrick Byrne:]

Thank you.

[Mike Arnold:]

No problems. Hey, I’m just thinking out loud here, I noticed the Amazon press release that they now offering I guess a third party marketplace for services and I think Howells does a similar thing where they sell on a subscription basis, access the customer base, remodelers and home decorators and such. Just curious if that’s another way to monetize your platform given you have increasing flow traffic to decide. Thanks.

[Dr. Patrick Byrne:]

Absolutely. It’s been in our mind, I kick myself, Stormy has been after me for a long time to do this. Perhaps, do you want to comment on this Stormy?

[Stormy Simon:]

You go first.

[Dr. Patrick Byrne:]

Probably not something we had plans to do this year, but it’s been on our drawing board for several years that this I think would be a great place for us.

[Stormy Simon:]

Yes, I think that – as we, the internet environment, the e-commerce environment, e-commerce is becoming content driven and people are looking for services, there is all sorts of things going on and we just have to select wisely and I think what we are doing – so while we may not get into that this year, we will start answering it this year.

[Dr. Patrick Byrne:]

And some of the things you’ve seen us do like Pets, yes there was a social value and service in doing that but also it was to develop experience and skill at doing things like search on a whole new type of product. It’s not anything like a product we’ve ever dealt with. The reason for developing that talent was we expect to apply that. We have actually gotten quite good at internal search. I don’t want to go into too many details, but if you start looking at our site and social stuff versus other sites, we’ve got very good at internal search and we think there’s a lot of areas that we can, but that’s talent that we can apply to other industries than just selling toasters and Pets…

[Mike Arnold:]

Well yes, I think you guys are putting together a lot of interesting, I call it web 2.0 toll bridges or ecosystems. So I think it makes a lot sense and I hope I’ll catch you guys next week down at the Shareholder meet. I think I’m going to drive down from Portland.

[Stormy Simon:]

Come down Mike, we’d love to see you.

[Dr. Patrick Byrne:]

Come down and I think by the time we have our July conference call, the several big things that we are going to be able to have more open discussions of the future strategy on those.

[Stormy Simon:]

And if not they are going to ask us why we don’t.

[Mike Arnold:]

Thanks guys.

[Stormy Simon:]

Thanks.

[Operator:]

Thank you. There are no further questions in queue at this time. I’ll turn the call back over for any closing remarks.

[Dr. Patrick Byrne:]

Thank you shareholders for sticking with us. I’m really happy where things are, although we will see ways to improve and we are super excited about some of this money that we’ve been – your money that we have been spending. We think it’s going to really payoff, so Stormy.

[Stormy Simon:]

Well, we make every decision with the shareholder in mind and so we appreciate the questions, even the tough ones and to those who have invested in us since 2004, thanks for sticking with it.

[Dr. Patrick Byrne:]

And now we have a great board, we really do. We have a board that thinks very much like you folks have. They speak for – while there is 60% of the capital provided there at the board, and believe me, they think of this as that the board represents the owners and the shareholders beautifully here and the interest that we understand that the we are stewards of your capital and that we are taking some risks, but everyone of these risks gets discussed and balanced and so forth. Rob.

[Rob Hughes:]

Nothing further. I appreciate your time.

[Stormy Simon:]

Until next time. Shop Overstock.com

[Dr. Patrick Byrne:]

The more you spend the more save. Bye-bye

[Operator:]

Thank you. Ladies and gentlemen, this concludes today’s conference. You may now disconnect. Good day.