Overstock.com, Inc.
Q2 2015 Earnings Call Transcript

Published: 7 Aug 2015

[Operator:]

Good day ladies and gentlemen, and welcome to the Overstock.com, Inc. Q2 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] I would now like to introduce the host for today's conference Stormy Simon, President of Overstock.com, Inc. You may begin your conference.

[Stormy Simon:]

Thanks Tia. Good afternoon and welcome to our second quarter 2015 earnings conference call. Joining me today are Dr. Patrick Byrne, our Founder and CEO; and Robert Hughes, our Senior Vice President of Finance and Risk Management. Now I'm going to turn the call over to Rob, and he will highlight some of our 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, August 06, 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 we filed on March 12, 2015 and the Form 10-Q we filed April 29, 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 2. Turning to Slide 3, Q2 2015 total net revenue was $388 million, a 17% increase from last year. Q2 2015 gross profit dollars increased 18% to $73.7 million and gross margin was 19%. Q2 2015 contribution was $45.6 million, a 17% increase from last year and contribution margin was 11.7%. Q2 2015 technology and G&A expenses combined increased 17% to $43.5 million. Pre-tax income for Q2 2015 was $3.3 million and net income was $1.7 million. Trailing 12 month operating cash flow for Q2 2015 was $62.3 million. Patrick, with that let me turn the call over to you.

[Patrick Byrne:]

Thank you, Rob. Thank you, Stormy. I have more slides than as normal for a little bit over 30 slides and so I'm going to run through this basically because I know most people read this in transcripts. So Slide 4, revenue growth is offset we've backup stabilized in a mid-high teens. I’m happy with that, well comfortable with that it’s good place to be we can do better. Next slide gross profit growth same sort of story 18% and the next slide the contribution, growth of 17%. By the way, the similarity of those numbers for now given our business models general means things are fairly tuned, we know they will reach equilibrium. As we introduce other lines of business that may not stay tuned. Next slide, running at 11.7% - so Slide 7, we are on contribution margin of 11.7%. And versus wafer we feel ourselves as a contribution margin, the way we're looking at the number seem significantly better although they have broken through deposit territory or not, higher number that’s an exciting day certain regulations. Okay Slide 9, tech and G&A now you will see - you are seeing this growth here and you’re seeing growth here where we’ve always said look at our share, we're looking at ourselves on an annual basis and these kinds of questions and so forth. And in addition, you are - if you read the news you’re seeing the kinds of innovations we’re bringing to market and we think that that really represents to me the delta in growth over what we could manage it too, we're just trying to manage out from that and from now we’re not happy to be in the position that we can be income net positive - net income positive and still funding the kinds of efforts we’re funding. Slide 10, quarterly pretax income 3.3 as I say two are paying cash income, I have said this number - and two were paying taxes in cash. Now we recognized there is really large and well a few years ago. So to me we manage our business generally on the pre-tax net income. Also because of certain operations we have entered into, our tax rate is going to look like it varies and Rob - Rob would you like to explain that or let them pick it out of the footnotes.

[Rob Hughes:]

I'm happy to make a comment there, yes. Some of the Crypto initiatives that we’re working on or in a subsidiary that we can't consolidate for tax purposes. So we’re not yet recognizing a tax benefit on those expenses until we see the revenues come and the income come. So that’s driving up our effective tax rate for the consolidated Overstock in a day as a whole for the time being.

[Patrick Byrne:]

Well said, okay, Slide 10, so as well that is $3.3 million for the quarter. Cash flow - operating cash flow you’ll see how dropped since last year $27 million to $17 million. Don't forget we’re building a large new unified campus headquarters. And we will – I will be discussing the economics of that shortly. But just remember that's when you look at the cash flow that’s what we’re showing on, Rob would you like to add anything to that again.

[Rob Hughes:]

No nothing to add that covers it well.

[Patrick Byrne:]

I’m sorry, I said operating cash flow – it went from 50 to 62 free cash flow, that's the difference on the free cash flow. And when do we - I won't get to that on the - let me get to the building. Okay, next slide, GAAP inventory turns. We decided to consolidate this inventory turns of 50 on a GAAP basis and GMROI of 1159%. Unique customers and cost for customer were up to $16 this way measuring and we do have growth in new customers. Again the type of customers we're getting are much more - or different type than we’ve got in the past they’re changing. Slide 14, new customers again 760 to 805, so reasonable growth there. Customer orders and average size order, so here we got from 21 to 2400 and the average size 177 to 185 that's interesting, that's a 4% per year it’s a little bit above inflation report inflation, there is some mix shift going on with our customers, and we’re getting where we’re shifting more towards the type of customers we like, and who are profitable for us and who will like us a lot and care about the kinds of products that we’re especially good at brand. Slide 16, gross profit per transaction up margin from 29 to 30, $0.50. Our corporate employees some growth again this growth is we can shut off this growth lots of growth in the expenses and how the business as you know it was you knew it a year ago or six months ago, but we don’t think that’s the way it would operate and we think it gives us a really nice edge frankly that we can stay here and grow profitable GAAP net income, profitable growth, while funding these kinds of initiatives. New corporate campus people have asked for a couple of quarters for more information about this new corporate campus. Let me tell you I think this setting aside the intangibles, I think it ends up saving us sort of roughly $2 million to $3 million a year once we move in which should be August of next year. So now I’m on Slide 18, we broke down on these cost in on October last year construction is well underway actually should be moving furniture in sometime next summer and occupy in by the end of August 2016. The total campus cost since everybody wants to know this. The total campus cost that’s the land, the buildings, parking, landscaping equipment, furniture everything is $90 million net of tax incentives of 10. Truth is our numbers are coming out in $99 million for this campus and original design was $96 million. So we’re coming in and I probably had a little bit of stuff so we’re coming at $99 million, but it’s really $10 million of incentives and net present value and this and that looks like roughly $90 million. The financing terms, we have a $46 million real estate loan fixed and was swapping entered into that 4.6% interest rate from 9 years. We’re funding the first $38 million that includes the $11 million we spend for the land before we can start drawing this 46. So we should be hitting that in September or October this year so the strain on our cash flow - please understand that now you will understand where some of it’s going but that range should be closed by October we should be through our $38 million and starting to be into there $46 million. The debt surface of $3.2 million on the loan is $3.2 million. And the net rent of everything that we’re replacing by moving in here is 6.2. So actually it looks like if we actually didn’t do if we didn’t do this you can see the size of the transition what this transition like we’ll model that up separately. But when you get to study state and we collapse into this and our datacenter has collapsed into this, we don’t forget we have a expensive datacenter downtown. We’ll be awarding $6.2 million worth of - we’ll awarding $3 million worth of expansion year once this is all - once the transition is complete. And if we had stayed, we get - we end up with the total of 210,000 of total office space where we have now and if we move we have a total of 320,000, 330,000 something like that. So we’re getting 50ish percent more space and we’re saving $3 million and you’re getting all - we’re getting all the intangibles of having our company not split down the middle in 15 miles apart. So to me I know I have seen and heard had that up to various analogies there always there’s some crazy project. This is hard economics this is a no-brainer and I’ll tell you I can substitute my friend in Omaha about this before we did and said how do you analyze your cost of capital studied, just think so think about whole thing as if you had a loan from the entire thing what that would cost you and what the interest rate would be, and compare that and you get all the other stuff as a hedge. But and if you look at it that way this is – this ends up costing saving us $3 million a year on the cash we have to put in. And you can look at as the ROI in that cash and that sort of the conventional way but I actually think that the two economic savings are much higher than that before you even get into intangibles and actually before you get into the tangibles. Tangibles are economic savings derived by just people not having to physically drive back and forth. And mistakes not been made and things like that and getting people who work on the same project together in the same building. I think those hard economical tangible or advantages as well as and tangibles. So, moving on - and we got a $10 million working capital revolving around. Rob, would you like to open on this before I move on?

[Rob Hughes:]

No. I have nothing further to add.

[Patrick Byrne:]

You as CFO, is green eyed shaved guy, is penny pension green eyed shaved guy, how do you feel about this?

[Rob Hughes:]

I’m really pleased with how our team has managed the project and kept it very close to budget. And the progress so far and we’ll get to that in a moment, seeing some of the photos, the project is going really well, so I'm really pleased overall.

[Patrick Byrne:]

Stormy Simon, you are -- what you want to say about this?

[Stormy Simon:]

I think its something that had to happen. We're currently spread thorough three buildings, our employees can spend an hour a day commuting back and forth, we need to be under one roof. So that kind of efficiency is there. To know that we're moving into a space that where we can continue to grow and we're doing it Overstock style, we've always pinched pennies, while this may look elaborate and it is a fun design and it is going to be a great space to work in. We still pinched pennies to get there. The overall saving and efficiency of the organization, I can't even imagine, when I signed the expense statements of people driving back and forth I know there is all these little other pennies that we're going to put in our pocket from it, so I'm happy the Company will be under one roof, it is needed.

[Patrick Byrne:]

Thank you. Look at the design in the lower right hand corner of Slide 8. I want to point out some of these other values. So we have $100 million payroll now. So we can look at hard economics savings, it looks like $3 million a year, but just what we would pay in rents versus what we're going to pay in this place 6.2 versus 3.2, and we have roughly 50% more space. But we have $100 million payroll. So think of the friction cost or the kind of commute, Stormy is talking about. If we pick up 2% or 3%, what's that worth. In addition, this campus is really quiet and it props to the entire team that has worked through this. There is a peace sign from above, it looks like a corporate collection, as you can see in the picture there, Slide 18. Looks like a corporate collection steeled version of the Coliseum from the side. There in the hub of the peace sign, it's community dining hall. Over in the far right, is the parking garage, and as people walk, there is green house in this – they'll be walking by where we're growing food, organic food that is served there in the cafeteria, really healthy choices, exercise track around the place, healthcare facility, child care, daycare, extra stuff there. So, what does that do to our retention rate, we have a $100 million payroll. I don’t want to tell you our, I don't think we disclosed, its good, it's better than General Corporate America. I think we can do better, but just any few points of savings there is worth an additional millions of dollars, but again won't show up if you just compare to rents. In addition, so I’m going to switch quick to Slide 19, there is a couple few pictures of the building itself, it is this round, an enormous concrete building. Slide 20, we just walked through this, benefits. Our 207,000 to 310,000 unifies, central location in Salt Lake, which I want to show you. The data centers end up in one location, all these great amenities, fitness studios, yoga studios, et cetera. Its really cool place to work. There is housing, great housing nearby. We've already made announcements about the special type of glass we're using, the LEED gold certified. And there is the beautiful -- Salt Lake has a great LiteRail system track, and a spur runs right through the front door of this place and there is nobody out there using it yet, but it's already there, there is a station there, the tracks runs right to the front door of this place. So we phenomenally will be able to start drawing on people as far North and South of Salt Lake itself, probably 30 miles or more because there is beside the LiteRail system there's a very let out from, what we call front run?

[Stormy Simon:]

That's right.

[Patrick Byrne:]

Yes. So, people would literally live 60 miles away and commute on a high speed train to LiteRail stops away from the front door of this place. So, the talent pool we can drive from, there's likely a path right after the airport, 15 minute trip with that to the airport on a LiteRail. So, this has unbelievable advantage and if you are Slide 21, it shows you the physical layout, where the current headquarters is there at the South East corner of 215, and our warehouse in the North West part of Salt Lake. We call it Castle. And that's a 650,000 square foot warehouse of which about 100,000 is now taken up with office in an office setting. And Peace Coliseum, it is sort of almost the midpoint, very easy for both to get to the airport is out by Castle now, so it's just an unbelievable location, intersections of I-15, it's within the mile or so of the intersection of I-15 and 215 on Salt Lake. And again, the rail line, the tracks line, so the commuting to the place is great and there's always wonderful these new apartments that have been built out there. So, I think our employee satisfaction is going to be phenomenal putting quite a bit into this, we wind up saving all the visible kinds of money that the green eye shade guys believe in. On the rent, on the electricity, in consolidating data centers and things like that, but to me, well it's just like $3 million on that, that sort of ends the discussion, but to me I look at the intangibles, I think it's going to be practically multiples or at least as much as that $3 million. So before I move on from Slide 21, Stormy and Rob, would you like to say anything more?

[Stormy Simon:]

Just one on Slide 21, is we did have to open up another remote near our headquarters here. We have another small bit of office space where we have about 120 employees, that is what I mentioned, we were in three locations, so I just wanted to make that clear.

[Patrick Byrne:]

I want to give you one more intangible benefit there on Slide 21. That location is for, go back to Slide 18. That at 18 in the lower right of the slide is the picture of this from above, the round, the peace sign. That is how it looks, underneath the right-wing on the final approach path for the traffic that lands North bound in Salt Lake, and by the way that's the normal unless the wings are quite on, that's the way that all the Jets land. How many people here visit Salt Lake, land at the airport? 22 million. Well, they may look out the right wing jet, those 22 million that's what they see below it, below the edge of the right wing path. And believe me, all these things factored into the decision. So, I know that there are various normal - with these conjectures about what the economics of this is, and everything, they are surely they don't know anything. I'm most amazed with these people write these things, on top of that, on top of all the economic benefits, I think the intangibles - the economic benefits are no brainer and then the intangibles are just unreal. And we get something with that more space for growth. So, I'll stop there and move on to these announcements we've been making in the last week. Stormy, does that sound right?

[Stormy Simon:]

That sounds right, and maybe just making clear that this why we moved our conference call a week later.

[Patrick Byrne:]

We think what was such big news that we did on Friday, last Friday and then the big announcement was -the other big announcement was just Tuesday, we had such big news that - we did a conference call last week or the week before, people might have a legitimate reason to be, and if they say well, we had all that big news keeping it just have the contact so, so we delayed things, the conference call. We made quite a few announcements about this crypto initiative in last week and it seems that -it seems to me that Wall Street three months ago has finally gotten what they've gotten the joke. The Wall Street is a bunch of FinTech companies, frankly. Financial technology, it's not Jimmy Stewart looking across the table, somebody deciding if they can get a second mortgage, it's financial technology mostly, and quants as such. We do technology well, Silicon Valley does technology well, Jamie Diamond, CEO of JPMorgan, did sort of a freak out letter to shareholders three months ago, where he said, Silicon Valley is come to eat our lunch, Wall street our lunch, blah, blah, blah, blah, and since then it seems like every three days there's another announcement, Goldman Sachs is throwing $50 million into initiative. The UBS, Deutsche Bank, DTC, NASDAQ, et cetera, all these institutions in the last since really the last time we've spoken I think or about the last time we've spoken, they get how disruptive this technology is. Well, if you look back in May of 2014, I was on stage in Amsterdam, if you look at upon YouTube, Patrick Byrne talking about bad intersections, and we've been working since then, and there's millions of dollars of cost washed through our system to build what we've built and we unveiled that to the world Tuesday night, and I think that -- it's different than people were necessarily, and I think it's quite different than people were expecting, and I think if you're concerned about shareholder value, you should probably looking up that even which was streamed. Stormy do you know where -- I know it was streamlined and I know there is a recording of it somewhere, do you know where?

[Stormy Simon:]

I do not, I'm sorry I do not know that.

[Rob Hughes:]

I believe we have it on our Investor Relations website and more other places and YouTube as well.

[Patrick Byrne:]

Great. And we had a demonstration of that on NASDAQ, and which was very precious to let us demonstrate there. Slide 22, I'm giving a abbreviated version, highlight seven slides or so of that talk. Alan Greenspan, when everything melted down in 2008, Alan Greenspan was asked to testify Congress about what caused this and he jumped on the statement he said, sorry, he valued Greenspan but he admits that Wall Street that capital investors were fair regulations. More carefully what he actually said was just from regulatory changes that the competitive markets requires and that is fraud settlement and securitization and this concept of settlement I had to explain quickly, but the big message here, the big joke here, people were 1.5 year, how could bit corn be taught about stock market and buying stocks and, was all crazy, they didn't get it. It's the mix not about bitcoin at all, it's about the mechanism that's underneath that coin, that mechanism that's underneath that bitcoin is an amazing invention, it will go down as one of the great inventions in human history and that mechanism can be applied to many other things but money. One of the things it can be applied to is settlement, the same settlement that Alan Greenspan is here telling the congress, why did things melt down last month, the melted down because of fraud, I say burning me off type guys, securitization, debt obligations and [indiscernible] and settlement, there were problems in the settlement system. Alan Greenspan was testifying to congress in October 2008. Those problems to which he's referring that were part of according to Greenspan here, part of that meltdown that turnover event of 2008, those problem can be addressed by using that technology that underlies bitcoin. And that seems to be finally what people are getting in the last few months. So these deep problems in our system that Greenspan is referring to can be fixed with crypto technology, and fixed in a way that eliminates even the possibility on the occurrence of mischief that means that mischief or however one wants to characterize it, that Greenspan is referring to here in October 2008. Again, a very quick version of this is, if you think you own stock in America, you don't. All the stock is owned by a Company called [CD &] [ph] Company, and I know on Wall Street there is a saying, on Wall Street whenever talk is about politics, religion, or CD & but legally the profits rights of America, capitalism is all held in a company called CD & Company [ph] and this was all set up and I walked through the real history of this back in that conference call we just referred to, that you can find online. But this really all got set up in 1971, and there was the DTCC and CD & Company and what has happened is that the shares get turned into share entitlements and share entitlements are what bounce around the system. And it really just changed the contractual claims against the set of actual legal property rights and might be if 10 years ago was, those systems were settling those claims had much more sponge in them, much more rubber in them than they ought. The rubber was put in there to create salt tolerance, and I can understand why a system needs salt tolerance but some bad people figured it out how to manipulate those loopholes and they created a systemic risk. That’s the short version, and going to the next slide, a number of the kinds of scandals one has read about over the years, how does it become denominator fuzzy property rights. It offends me aesthetically and philosophically, we’ve lost our whole history at civilizations like Soviet Union who try to run without property rights, but we’ve taken our property rights and done this hyper financilization to them that I believe the system loses track under some kinds of conditions the system can at least track the property rights. And they turn into a great goo and that’s an enormous error for us to make as a society. And that’s a common denominator of a number of different scandals and number of different issues, I think I just read the other day on zero hedge, there’s like 124 contractual claims on gold, for every ounce of gold, and all that kind of stuff. I think that that's interesting. Let’s move onto, and there is another besides just the latent derivative risk that can go off if people make a mistake. There’s a vulnerability to our country and that’s absolute -- the FBI just arrested some folks in Russia -- some Russian guy here in, January. Who was evidently like investigating how to crack the U.S. system, more capital markets through ETS. There is -- and if you read , I got another blog, probably shouldn't mention it’s name, I know you would start call, but if you look at Patrick Byrne blog, you can find it. And it’s about these kinds of issues and I do believe the. I think that my sense is the national security community, and the regulators, I'm reading what I read in the press. People have figured out this is the truth, it’s a real economic vulnerability for our country. So, the next slide. The common denominators here, the really the original sin, so to speak is net settlement. When you have net settlement, you have to shear property rights and turn them into these financial contractual claims and on a good day it doesn’t make a difference, on a good day everything cracks each other and such. But you don’t want to -- there’s a concept in material science called shear strength. The shear strength is the point at which in a metal ,the molecule will stop flowing smoothly past each other, it shears. We think it happens in a marketplace. And I think this makes us a more frangible society, and is also the original sin that opens the door to various kinds of mischief. So, we believe moving to the next slide, that one can create a ledger. A cryptographic ledger that just like the ledger on any Bitcoin, which is called the block chain, but there are other commercial ledgers being developed, in which one could track money and share ownership. And we’ll increase the sort of augment or enhance or improve or replace depending on how this all plays out. The pluming at the center of the U.S. capital market and I think this was the original vision of NASDQ, it was peer-to-peer electronic exchange, the world's first electronic exchange. You could have that, but without all the meshugas of what we have now which has these different dangers that I have been sensitive to for a decade or so. We call this product, next slide, the product we're launching is T0, it's a platform called T0, and, t0.com. The motto of which is to trade is the settlement. Here is the big idea for people trying to unscramble what should the core of this vibrant Crypto to Wall Street, is in the United States the trade and the settlement got divorced by these different systems. So there is some systems for the trade by the exchanges, there is another system for the settlement, the DTCC and CD& Company. That can be reunited when the trade becomes, when all you're doing is writing a ledger entry in a book, in a public ledger, cryptographically protected and so and so forth. But a ledger, the active writing, the entry is both the trade and the settlement. Now, Congress has mandated 34 securities Act amendment 17A, it was amended sometime in the early 70s, saying that Congress signed, it's in the interest of the United States capital markets that the SEC provides for the prompt clearing and settlement of trades. You don’t get any more tops in making them identical. So we think the regulators should love this. Moving to the next slide, they use other kinds of the benefits -- the amendment of transaction settlement, it can be just as transparent as the government wants it to be. They have total tracking trades when there’s a flash crash and who did what and they're supposed to be able to call, ping them, blue sheets but they can’t face or -- the blue sheet these trades and that’s -- these trades are not traceable to law enforcement through the system. Well, so again I would think that they would prefer that it’s transparent to the degree that the world wants it to be transparent. We can make it as private or as paper transparent as the world wishes. It not reduces frictional costs, it's probably nothing but we think at least 80% maybe 90% of the friction cost that’s drained out of the system eliminate first one is a market regaining activity. They’ll have to expand on those, but various kinds of front running and such cannot be done in our system and make it short selling, short selling it will, it's a different matter but make it short selling. Averse kinds of front running, and mischief is going to get cleared on Wall Street, that we read different books about, can’t be played within the system, details to follow as we start exposing it more detail to the world. It’s highly tested, and we’re on -- we have just given one application to the SEC back I think around April, it's a matter of public record to trade a crypto security. They have come back with questions, we gave them another response, they came back with more questions, last Friday we gave our third response, which details not just our crypto security, but how this platform itself works, how T0 works. So it’s in a filing, our S3 that we filed in some amendments -- to that, it is all laid in great detail, the S3, a mandate that was filed last Friday. Okay, and for the really good news, and this is the end. People are sharing tokens. You folks may remember we had for the Wall Street regarding short selling and the loosey gooseyness involved with the stock located in the underlying short sell, I believe it’s an extremely profitable part of the industry. And I think we can fix it and how we’re going to do that is, as a long beneficial owners are really given the run around only after refer to the court you may find your own court cases involvement there, different institutions that how badly they rip the face off of their own clients. And this is one of the areas they do it. So beneficial owners, we've build a system so that they can give us the files of their positions and we tokenize them. And when we tokenize them, so somebody is 400,000 long in number, liquidator, they’ll be able to short, that turns into a huge tokens. The right to short sell 100 of those shares for tomorrow, for the next day, for the next day. So all gets tokenized, each night we run a reverse auction like Bill Hambrick runs for the Hambrick, a reverse auction and auction his token off. And we take the stock owned business out of the shadows into the onto an exchange, where they get exchange credit, and what happens when you take a market in the shadows, where the buyer and seller have to go through an intermediary and no one can see each others prices. When you take that out of shadows what happens is a significant -- the margins compress, to say the least. So that’s what we've built into the system, we have been working actually throughout this, I should mention, the last Friday we issued a $5 million bond with First New York, very innovative folks. There’s lot’s of things that can be done, it’s really been interesting developing this top technology finding, these sort of innovatively inclined people here. And the people reaching out to us, and we’ve made another -- I would say it was over described in the newspaper, what I said Tuesday night, we have a – there is a far sighted innovative group of sellers and a bank, that we are working with on just that types of proposition I described to you. Now the Prest-O-Fit and call it a partnership and that we are trying to up in Wall Street and that’s not that all attribute. But we are collaborating with a bank and developing the systems that would support the activity I just described, regarding that Preborrow Assured Tokens. And again, my hats off to the innovative people at both places who sort of – who got their life hold on initial a long time before the rest of folks in Wall Street. So that’s the end of – that’s the concise version of what we put out Tuesday night, the value of it, both as a trading platform and for something to make exchange trade to this platform business. Slide 32, these are the – some of innovations we've been bringing to work on and bringing to market of late. We've got to launch our channel loyalty operations. Our Club O silver is – we have introduced Club O silver. We are migrating millions of people over to it as we speak or to our new Club O silver program supplier Oasis got launched in May. We are signing up lots of people on that and filling up the warehouse and nice demand for that. Farmers Market were covering all that 45% of US population, but filling in - one filling majority and then all this Medici. stuff. So we think that while we could be reaching out, another $10 million, $15 million, $20 million a year, we think that these innovations are - by math doing these kind of innovations we think that that’s short sighted and being in the position we can both do it and stay and sort of have nice annual profits. And now our 14th straight quarter of gap profitability we think that’s a good place be in. So, I know that was a lot more information to this phone call in most, but I am told to some people that we've under informed in the past, so we over did this time. With that I'll stop and we'll go to questions.

[Operator:]

Thank you. [Operator Instructions]

[Stormy Simon:]

I have a couple of questions, I am sorry, Tia.

[Patrick Byrne:]

Yes. Stormy, do you wanted to ask some question first, because I know people have mailed in you?

[Stormy Simon:]

Yes. We got a couple of questions. And I think the easy one, as we did receive some questions about Club O, our members, the percentage of Club O members that convert and things like that, Patrick if you just want to talk about Club O in general?

[Patrick Byrne:]

Yes. Club O is great. Its growing beautifully. Its growing rapidly, but we don’t want to give out exactly how to model it to people. But its really quite a product platform. Amazon has done a nice job, building a product platform obviously with time and with more, with their website. Actually somebody has asked about Amazon Dash, so I am going to set the website, but anyway that’s fair. They still are very good. They've been thinking of their engagement as a product platform on which to drop in things. We own Club O and we've introduced this Club O Silver that like I say, when migrating by the end of this month we should millions more, what's 8 billion people into Club O Silvers, Club O silver. We got Club O and I think that there is more levels. I think that we can maybe talk about introducing a higher level, as well with additional benefits. Other than that, and its growing extremely rapidly. Don’t have plans to introduce Amazon Dash. We're not going to review how many people convert. I don’t know. And then the question on Amazons Prime day event, my understanding was it was not - some articles I saw suggested it was so well received, but I am not going to comment any more than that. Its not a bad idea though and Stormy will – Stormy came up with this idea about Overstock October Fest some years ago when we make Overs. We make October sort of an Overstock back product. But Stormy do you want to say anything else about that?

[Stormy Simon:]

Sure. just in regards to the prime day event and the question was would we consider doing something similar and especially with our Club O members and the answer is I think we do those type of events every day. However the perfect point in our October we do celebrate the entire month with Overstock October. It’s been an annual event that we've had for at least five years and at that time we ran really steep, discounts, steeper than before like another Black Friday, but it last about three weeks. And we tend to do events every day, I think that we differ from Amazon greatly there.

[Patrick Byrne:]

Yes. Well, I think that’s a good way to put it. I mean, that’s a good way to put it. And in these other questions, would you like to ask alone and I'll address?

[Stormy Simon:]

Well, just in regards to the dash button and that’s a function that’s happening offline and we are expanding our assortment for instance by now by my [indiscernible] on Overstock getting paid for count. So we've expanded our assortment where that – the Amazon Dash button it doesn’t make sense for Overstock and we are building a subscription model in conjunction with our Farmers Market. So we will be progressing our technology, maybe not exactly as, but we'll continue to do it the Overstock way, while expanding assortment with technical variety. And another question that we have Patrick is on a previous call you mentioned that you are open to an MBO and for those of us who stayed with us with Overstock through formative years, rather than being paid a premium, even that be allowed to continue and participate in what I believe to be family like growth?

[Patrick Byrne:]

Okay. Well, thank you. Let me now let - sort of this is on the table. I can - I am under huge, I have the numbers, hugely conflicting moral duty to change anyway I guess. Gosh, you didn’t think that when this thing was at 5 bucks I was drilling over pulling together a group of people, we didn’t have that many million shares to buy, to buy this out. I actually, we didn’t do it because for just the reason you the shareholders just driving here, it didn’t change right. There are people who have stuck to us through all kinds of tough years and when we - we were really a battle for lies. So there is a large institution and it just didn’t change, like people change, like I've been heard much. I think myself has work for 6000 little old ladies among every now. I know that myself and another organization speak for a lot of stock, but that doesn’t really enter the equation I always thought it would be wrong they doing are management bias While it was two people or buy something that I thought was extremely priced and sort of forced it to happen or forced transaction from a bunch of people who would have stuck with me. So having said that, I think that if we almost release too many people in the deals, frankly then its no longer a buyer is it. So its hard to - how do you balance that. And in addition I don’t think its right until we do have some news on the suit. I don’t think there is anything wrong with me saying, was that a case management conference yesterday that we do believe our suit with now Bank of America only is going forward, I believe early next year, it will be in a court room. And I think that we've - the evaluation is too weird until we get through that. So I don’t think it be right. And the truth is now that now that everything is exposed its - I would have been wrong at me six months ago work on this kind of technology to try to sort of buy from the public without knowing. But now the general direction of our syntax efforts is been exposed, I think there is been nothing ethically wrong with letting the market it is mined around it an put value on things and I mean already well - so nothing as if to wrong, we are doing it now that I don’t think there is major secret of the direction we're going with that syntax and the opportunities there. But still I think I'd be more and hardened to get through this lawsuit, along that front I mentioned and this is very important and somebody asked this question what gives you Goldman Sachs, you once said that settling them would be like negotiating with Hitler, actually you're saying warrior such a bit Well the – so this in the sense it’s a category mistake to think for me that that there is a number you are going to understand why in amount of weeks. I believe that the end of this month the case, the documents are actually going to be delivered and as people may or may now know that case - our case against Goldman Sachs and Merrill Lynch there was a parallel or I guess it was nominal case filed by some Dutch journalist at near times for Rolling Stone, the economist and Bloomberg. And they have fought for years. They have joint case to get the stuff un-sealed and the California Supreme Court made a ruling over this year and they said we said we find now how that’s good their language, but basically said it although Goldman Sachs was elected to part in this scheme, the way took part in such did show a way we don’t have don’t jurisdiction over them in New Jersey, I think New Jersey or Chicago So the California Supreme Court said we could no longer go forward in California. However they did give a ruling that should all be unsealed. So I can't go into the handling between us and Goldman, I did disclose in the press release we filed on the last possible day a legal action against Goldman in New Jersey, and that’s matter of the public record and that was in the press release that we put and in any case this things worked out immediately after that. And so the - more of which I will not say, other than I can say because I believe our understanding is as of yesterday there was a case management conference which is established at the documents while we unsealed and we entered the day what I think really has to happen and I am just being front centered. I think Uncle Sam needs 12 citizens to sit and look at these guys and in a jury box. I think its going to be a consorted moment for America, I am sorry that were the vehicle of that, but we can settle in such. But when you will understand better, and at end the new shareholders will understand why at the end of this month I have take the line I have at Goldman Sachs up more which I won't not say but the documents will be in the hands at the end of this month, I believe over the rolling stone the economist Bloomberg and the New York Times and then you can read and then you will understand perhaps why I says as a matter of principal we've got get this story into court and 12 citizens couldn’t look at these characters and say what they think of them So that’s with on and I took the Goldman case as far as I could and the California Supreme Court said truth as we persuaded in New Jersey it would have the dunce on a way that would undermine the main case of San Francisco. It could have reached the possibility of it and that was felt in the trade-off I had to make, to get somebody into court in San Francisco Okay, I when we'll pay dividend, I suspect that we're one of stock buyback kind of company that is dividends. It’s just from a tax efficiency point of view in general, I would prefer to bash back and pay dividend What is the value proposition for concern - continuing as a shareholders, value proposition generally think o f its something concerning a consumer growth or goods that you purchased and in the case of the stock let say well how you should be valuing is based on your expectations of the future cash flow of the business discounted to the present value added for the rate and make your investments. Why spin off strategy, why not keep in house and the spin off would be in a new exchange, Stormy do you want to add anything back on the previous question or anything to previous ones I've had.

[Stormy Simon:]

No, you're fine.

[Patrick Byrne:]

Okay. Spin off strategy, I am actually thinking we're not going to spin that off. I have decided people – and first so, I am not going to disclose who and who we met with and the kinds of people we met and the kinds of things that are being told us about the value of this. And I just heard the new number today and people what ask what are we going to do few days I mean with all respect I am not trying bearish anybody or say any names or anything. I've been sort of delaying for about six weeks, I've been kind of ramping to array, as the old timers may remember the expression, and not giving an answer and trying to decide my own answer to this question and I guess my own answer is who ever ask this question, who asked this question Stormy, do you want to say

[Stormy Simon:]

It’s the last name, but I cannot pronounced, but the person is Rick [indiscernible] shareholder since 2003 why spin it off, you know I think you are right often people been asking for six weeks and what are you going to do with Series A and package this often and sell to the public or whatever and I think the answer is now immediate plans, that’s my answer. I have been waiting sort of two months to figure out what my answer, my answer is you don’t have to wait you can – 9

[Stormy Simon:]

Great. I think there are a couple people in the queue.

[Operator:]

Our first question comes from the line of Scott Tilghman from B. Riley. Your line is open, sir.

[Scott Tilghman:]

Thanks, good afternoon. I had a few questions. First off, the direct channel seemed to grow this quarter after not really having much growth over the last few quarters, anything different going on there?

[Stormy Simon:]

And by direct channel?

[Scott Tilghman:]

Direct segment.

[Patrick Byrne:]

Stormy, we have there. You want to take that?

[Stormy Simon:]

Well, and we have to explain something. So, Patrick is not on location, so if there is any awkward pause, it's because we're in different states right now. So, I apologize.

[Scott Tilghman:]

Yes. Sorry I should have said that. Do you want to take that, we've done some bigger liquidation buys but what else do you want to say?

[Rob Hughes:]

It grew a little in the quarter versus for the six months on the revenue side of strength but it's still in that 9% to 10% range of our revenues. I think we've done some liquidation buys but other than that, I don't see anything fundamental that's really different in that business right now.

[Stormy Simon:]

We did have some of the - some of them got stuck at port, but it was not this quarter where –

[Rob Hughes:]

Yes, the port delays did hurt that business a bit and I've announced long back.

[Stormy Simon:]

But outside of that I think we're okay.

[Scott Tilghman:]

That's helpful. Second with respect to the headquarters and thanks for providing all that detail. What are you thinking CapEx will look like this year?

[Patrick Byrne:]

Including airport?

[Scott Tilghman:]

Yes.

[Rob Hughes:]

Scott, if you saw the numbers in the slides there in our 10-Q, we've explained, we've got to put our equity so to speak in first, we've got another 14 million to 15 million we put in and then we can draw on the loans over the balance of this year and into next year and eventually again we'll get to that total 99ish million that Patrick mentioned between us and the bank.

[Scott Tilghman:]

Yes, I wasn't sure how much of that 38 had already been funded.

[Patrick Byrne:]

About 21 or 22, something.

[Rob Hughes:]

Yes, 23ish.

[Scott Tilghman:]

Third, you mentioned China quickly in passing but I'm curious with what your early read there is?

[Stormy Simon:]

Sure, I'll take this one. We're very, it's a very local launch in China. We're very excited to be there, we opened up some space, we are selling our product there through marketplace at [jd.com] [ph] and we plan to expand it, but we're really just kind of keeping - putting our toe in the water and making sure we don't do anything large and drastic too quickly. So right now we're learning a lot, we've gotten some orders, we've started to gain a following there at social following, but it's too early for us to say we've played our hand or done a great, a large move. We're really just in a learning mode right now, but we're there.

[Patrick Byrne:]

We're being careful and we didn't go in here when somebody takes $10 million of capital, we get the amount of capital $100 million in very careful, we're being patient just like they can be, we can be, we're being very patient about this. And we want to get this right without making the big mistakes.

[Stormy Simon:]

That's right.

[Scott Tilghman:]

Do you plan to launch a Club O, type offering there as well?

[Stormy Simon:]

We would like to, we really would. We would love a global loyalty program, and that's something that we're exploring internally.

[Scott Tilghman:]

Yes. I know you called out the million contract exit sponsorship exit in the quarter, if you look through the balance of the year and knowing that case may start early next year, any thoughts around non-operational expenses that may be hitting in 3Q or 4Q?

[Patrick Byrne:]

I think that you can probably expect by non-operation I mean, operational losses?

[Scott Tilghman:]

Yes. Legal.

[Patrick Byrne:]

I think that you can expect a mild ramp in legal of a million or two a quarter, would you -- Stormy and Rob, your thought?

[Rob Hughes:]

Yes, and I think we probably should comment that we also part of the Meliti initiatives we have a lot of lawyers engaged there and helping us get through the regulatory process and so forth and those cost have been ramping up as we fore gone that S3 and other activities on that front?

[Patrick Byrne:]

Those cost have been huge those cost have been multi-million dollar cost of which I’d like to share a Bracewell has done a same cashy job and sort of a team quarter back and leave aside Perkins Coie has done the work associated with the S3 and the intellectual property around all this and so Perkins closed in great and Jones Day right here in New York perhaps you know. They’ve been a terrific partner they’ve been handling the legal work associated with ATS and the actual crypto aspect of this as well. And so we’ve got we had three great and Bracewell has acted sort of bizarre it’s been our that counsel for years. So if we’ve got a terrific legal team but more expensive and this is sort of the this is the birth of expense through the system building not only this building the technology but getting holy water sprinkled on it from the regulators.

[Scott Tilghman:]

Any sense is to how long that persists?

[Patrick Byrne:]

I would think persisting through this quarter through Q3 as is and I don’t if everything goes as plan I would expect a drop off after that.

[Scott Tilghman:]

And then the last one from me for now as you look at Meliti and T0 what ultimately is the revenue plan. Is it a selling of technology, is it a licensing, or is it some sort of T based system?

[Patrick Byrne:]

Well there’s an incredible number of businesses that can spring off this incredible and incredible number of businesses. So let me just take for example look at the metro capital world. We seize investing companies impart of their risk profile as they put money and it takes eight years or 12 years whatever to get liquidity on average of the numbers. That those series As and Bs, and such can be tokenized and traded on the exchange. I know there’s been a couple of companies that have tried this, but this has a lot of advantages this crypto exchange will do including that is build on top of the national market system. We can create deposit market for venture capitalist or qualified institutional investors limited in whatever kinds of ways they want it among themselves and all kinds of investment that have they made and will be made. And Silicon Valley that’s just one little in those whole enterprises that are out there trying to do that this also with latent essentially for free now and our technology. Whereas and it harnesses, because this was build within the national market system it harnesses the connectivity it’s already this is all fixed compliance what we built. The Internet service http to each other to reach out the financial systems speaks fix this all built within the fixed compliance standards. That’s just one of the businesses we can have an exchange where people launch new stocks. Just we have filed to do with the SEC there are people we can do exchange or we can be pre-borrow business looks healthy other people say we’ve been announce in Tuesday night they can’t believe the phone call and the people who have ideas and want to do things with us that plug into this. It could be that kind of transact could be transactional could be on the through though basic deal is we’re taking 20% and they beneficial owners take 80% and we think we can collapse with market so much on exchange that it’s going to say the short selling hedge funds a ton of money. My old friend is a short selling hedge funds will save a ton of money they were not going to have their faces with gauze and the lot of the beneficial owner who want to have their faces with gauze either friends and work with it. So that model is a 20% cut but believe me given you a just a few of the businesses that can grow on and what we have bet. And in addition what I’d really like to do I mean my first shows would be Wall Street would get to that not the enemy I’m not I think that this will make a lot of people happy on Wall Street. And if it eliminate a lot of things I would license it to Wall Street and there are all kinds of people very important people who have reached there to meet this quarter to talk about how the ways this we could work together I have been trying to signal all those nations I could this quarter as far as – I think they’re expecting to come through the side door with an axe. As far as I am concerned the past is the past is the past for them. We got this technology we are hearing from international players who want it, this is going to happen. As it’s not going to by stopping us who are trying to call all the rest to make him stop with this international players who want this there’s domestic players there’s international, governments who are very interested in this and this thing brought to those countries. So we have it I would obviously developed here in the United States, I’m not going to accept that we don’t develop it. I will move to a different country to develop this, because this solves all those thing I was -- I can’t imagine the regulators trying to stop this, just because that would be in my mind you all understand what I would think would be the what would be the motive force behind such a decision. And the other countries who want to just develop with more demands I would obviously develop in United States. So we can well my first choice is the license is mostly and I would love to hear. I feel like I have been rude frankly in the last six weeks or eight weeks, the number of people on Wall Street on conditions who reached out to me and I’m being trying to rude I have been so that three months in the sense of giving a court’s order or finding excuse not to me such that, because I didn’t want to meet with nobody until we have this that was it was almost nobody I met with, or I really didn’t want to meet with anybody, because I put the conversation from me and it cannot be a bunch of deflection and a weak stuff until we have this exposed and I got sometime to decide what’s the right corporate structure. Should we spinning this off et cetera. But I think that the answer is no, I think that this should just be it’s a division with an over that and finally having sort of been not taking the phone calls or minimizing the number of those conversations to have, because I thought I was being somewhat just disingenuous not to now I let it have the conversation as the people have been asking for the last couple of months I think that matters. So and I had my first choice to pose out, would be fee income or should it be royalty income just license this, the people but I got to take my hat again to a couple organization one I mentioned, Tuesday night and one I mentioned I think I mentioned earlier this phone call, oh no and we put the press release out on Friday, that we are very innovative and far excited and they have got before Jimmy Gordon wrote the letter to the world and they got what this is how, how disrupted this technology is and we’re not sitting on their hunches, they want to be part of it. And so we don’t have any partner s let me clear that up, there is no partners, there is no formal agreements but there are innovative people I mean as the people reach out to us who want to be involved in this but we are looking for the people who really want to innovate and use this, and not the people who are trying to figure out how to stop it ultimately. So, and actually even within the time or even with the large banks, there are large banks who get the other part of this than stop it so, anyway I will stop there.

[Scott Tilghman:]

It’s the shame you are not passionate about it?

[Patrick Byrne:]

Yes.

[Scott Tilghman:]

I will jump out of queue and turn it over to the next person. Thank you.

[Operator:]

And our next question, our last question comes from the line of Mike Arnold, a Private Investor. Your line is open.

[Mike Arnold:]

Patrick and Stormy, congrats on nice quarter. I have a couple of questions but I guess I just wanted to say, I really appreciate the cander and the straightforwardness on this call, then I feel like I learned something new every time I listen so appreciate that thanks.

[Stormy Simon:]

Thank you.

[Mike Arnold:]

First question, I have been really excited about the Q2 platform as you guys are and talked about ICBC using the platform 25 international banks surrounded behind them. I am just curious, is there any way to quantify how big the opportunity is and what then I about the business in general is it, is it like a staff business we could see 80 to 90% growth margins?

[Patrick Byrne:]

Let me clear something up because if you go back and look at no so just we have there a number of people willing to do this I know don’t want to say the name of the bank again on this phone call. So there are a number of banks who have been willing to do this we were short of – chose the one we like to like with for now and we got to see if how far they’re going so I don’t mean to say we are going to be integrating, well I know we don’t have anything with partnerships with anybody so we have a collaborative relationship developing and there is a number of people for us that to choose from. But we are collaborating let me say with one, and I find it is extraordinarily innovative that there are sort of people at the bank, at the group that bought our bond, let me go out and let me do this because that an option 12 to 15 years ago. People told me, literally people I think, prime brokerages only if you could serve with tangible handbreadth you will be paraded for life on Wall Street. That's a direct quote, and sure that worked out. So, I saw on the terrific that there are people willing to reach across out and work for this on this, and other than that I don’t want to characterize this as partnerships and I see somebody has wrote a headline about major Asian bank working with Overstock to turn over the Wall Street, that’s not what I said and go back and look at the transcript, that was a huge push by the other folks, not what I said. So, we think the opportunity is ridiculous, the only financial term I can think of. I think that a very significant fraction of the prime brokerage revenue derives from this industry, the industry of securities, and I think that’s because it's okay market and I think that Crypto saw that opacity. So even to get into the numbers, reach in, if we can make this market, the numbers are certainly different, it doesn’t even make any point.

[Mike Arnold:]

Okay. Understood. And can you also come down to the retail level. So if I held 10,000 shares of Overstock for example, and I wanted to issue some paths against those, are you guys focused more on institutions?

[Patrick Byrne:]

You are reading my e-mail. We think the same way, this can be brought to the retail level, this can make a liquid efficient market and security landing.

[Mike Arnold:]

Okay, great.

[Patrick Byrne:]

Just taking them all those paths.

[Mike Arnold:]

All right. I will jump off, it's really interesting in there, and I will just say I've been down there to visit you guys a couple of times, if people have questions about the locations and things like that, I think it makes a lot sense to combine everyone at the headquarters, because I think, aren’t the stocks folks and customer service folks at the Castle and everyone else is at the headquarters. If you friend in Omaha validated for the plan, then I'll take that as a pretty give about confidence.

[Patrick Byrne:]

Well, thank you, Mike. I didn’t say that. Let me be clear. I don't mean that, so he doesn’t, he just tells me how to think about things, and I go validate the plan, and he's told from a financial point of view, how he thoughts it likely to think this way, I saw it that way and even if he follows a more conventional way it’s a healthy return on capital with real intangible kicker. So, did you see the new location, I remember you just drove by, you came by--

[Mike Arnold:]

I didn't actually last time, but if I visit back down, I'll probably take a look.

[Patrick Byrne:]

I look people to welcome together. Is out there is the photos in this picture – okay, thank you Michael.

[Stormy Simon:]

Thanks so much Mike and you were exactly right, on how our organization was spread and we appreciate your feedback and your questions. Thank you.

[Operator:]

Thank you. And we are currently out of time. So I would like to turn the call back over to Stormy Simon.

[Stormy Simon:]

Well thank so much Tia, thank you for all the questions and we appreciate your support shareholders and Patrick I will send it to you for any final thoughts.

[Patrick Byrne:]

Thank you for your long patience and I hope you understand how scripted we've been in various lags and last 1.5 year I have really been saying people who want to hear the details of the building. I actually thought that people – I was surprised to think if anybody would think that regarding waste of bunch of money on just a big vanity project and that wouldn't cancel out and there wouldn’t be some pure economics great deal, that’s how we build the company one a shoe sand compared with lots of our competitors. And I know that we have taken sort of double digit million of dollars out of the system over the years funding various innovation and I hope you see now the scale on which we are thinking. And we think that this is a great use to shareholder money, we're right on the front leading edge of the bunch of different kinds of technology and we see this is a smartly capitalized to monetize that. So, thank you very much for believing in this company. I hope I have a great fundamental business. The Overstock retail business is I think pretty unusual. It's growing high teens. We've been profitable 14 quarters, I don’t know how many straight years at this point I guess I should tally that up. What we are holding ourselves too for now is GAAP net income profitability, to actually think of pre-tax net income sort of around 1-ish percent while reviewing this revolutionary things and growing nicely, I think that’s a beautiful balance of our different mandate. So thank you very much. Bye, bye.

[Operator:]

Ladies and gentleman, this does conclude the conference. You may now disconnect.