Overstock.com Inc (OSTK) 2004 Q1 法說會逐字稿

Good morning. My name is Pam Bass, and I will be your conference moderator today. I would like to welcome everyone to Overstock.com's first-quarter 2004 financial results conference call. (OPERATOR INSTRUCTIONS). The replay can be accessed by dialing 888-203-1112, or internationally 719-457-0820, and entering the access code of 605984.

At this time, I would like to turn the conference call over to the Treasurer of Overstock.com, Ms. Kathryn Huang Hadley. Ms. Hadley, you may begin.

Thank you. Good morning and welcome to Overstock.com's first-quarter 2004 conference call. Participating on the call today are Dr. Byrne, Chairman and President, and David Chidester, Vice President of Finance.

Before I turn the call over to Dave, please keep in mind that the following discussions and the responses to your questions reflect management's views as of today, April 23rd, 2004 only. As you listen to today's call, I encourage you to have our press release in front of you since our financial results, detailed commentary, and the President's letters to shareholders are included and will correspond to much of the discussion that follows.

As we share information today to help you better understand our business, it is important to keep in mind that we will make statements in the course of the conference call that state our intentions, hopes, beliefs, expectations or predictions of the future. These constitute forward-looking statements for the purpose of the Safe Harbor provisions under the Private Securities Litigation Reform within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements involve certain risks and uncertainties that could cause Overstock.com's actual results to differ materially from those projected in these forward-looking statements.

Overstock.com disclaims any intention or obligation to revise any forward-looking statements. Additional information concerning important factors that could cause actual results to differ from those in the forward-looking statements is contained from time to time in documents that the Company files with the SEC, including but not limited to its most recent report on Forms 10-K and 10-Q, 8-K and S-1.

With that introduction, I will now turn the call over to the Vice President of Finance, David Chidester.

Thank you, Kathryn, and good morning to those of you on the call today. Our Q1 results were excellent. We came out of Q4 with strong momentum, and we maintained this momentum through the first quarter and I think the financial results reflect this.

Our total GAAP revenue for the quarter was up 181 percent to 82.1 million, up from 29.2 million in the first quarter of 2003. We think a better indicator of our growth is gross bookings, which were previously reported as GMS, and gross bookings for the quarter increased 79 percent to 93.4 million, up from 52.3 million in the first quarter of last year. And let me just add that this 79 percent growth was in the face of a significant decrease in the Safeway program this year, which went from 12 percent of our gross bookings in the first quarter of last year to less than 2 percent this year as we ended that agreement in February.

Our gross margins for the quarter increased from 9.6 percent last quarter in Q4 to 10.3 percent this quarter, which is a 7.3 percent increase, and as we discussed last quarter, we expect to see additional improvements in gross margins in 2004. Gross profit dollars increased 83 percent over the first quarter of 2003 to 8.5 million. And we have always believed that the increase in gross profit dollars is a key metric for this business. We achieved an 83 percent increase in gross profit dollars over the previous year, while at the same time operating expenses in the quarter grew only 23 percent from the first quarter of 2003 to 10.8 million.

The net loss for the quarter improved 44 percent to 2.2 million or a 14 cent loss per share from a loss of 3.9 million or 26 cent loss per share in the first quarter last year. I think even more telling, our operating loss, which was 7.8 percent of gross bookings in the first quarter last year, was down to 2.5 percent of gross bookings this quarter.

Lastly, I am looking at the balance sheet. We ended the quarter with 20.3 million in cash and marketable securities, and we maintained working capital at 45 million, which is right at the same level that we ended the year as well.

And that covers my financial review. I will now turn things over to Patrick.

Thank you, David. Good summary of our financials, and we did have a great Q1. Our theme this quarter was blocking and tackling, blocking and tackling, and blocking and tackling. We have made some real progress.

I am going to hit my shareholders letter. Now I got a lot of snickers last time I wrote that long letter, and I wrote another one this time, and I plan on just keep on writing these letters. Some people seem to appreciate them.

Our gross bookings did grow nicely despite the Safeway. Most importantly, we are achieving this growth without a corresponding increase in expenses. What I care about the most, and I have said probably every conference call, is gross profit dollars, the growth in gross profit dollars. If we can crank that up and keep the sales, the SG&A tight, then ultimately something good has to happen.

Sales -- so all the gross profit increased 83 percent, and the topline increased on a GAAP basis to 181. But I urge everybody should understand by now why that is kind of meaningless. A much better indicator of growth is the 75 percent gross bookings increase with the 83 percent gross profit increase. Sales and marketing went up just 14 percent though, at 3.8 to 4.4, and the G&A went up from 4.5 to 6.3; it is 38 percent. And even that has -- we can come back to that. I am sure some people want to know about that. Of that increase, about $500,000 is related to our stock going up, so there is just increased amortization of stock options and such. About 500,000 has to do with specialty special projects we are doing, we are spending money on now in a way that we did not before. So some being outsourced, some not. And then about 500,000 I would say of actual secular growth. So overall if we can have our gross profit dollars growing to 83 percent and our combined SG&A growing 23 percent and really add a secular level even lower than that, again good things are going to happen.

We continue to get more analytical with our business. We have implemented -- Dave has implemented a wonderful system of weekly scorecards. We now have -- David has built a team of accountants in every department that are giving us -- at the end of each week, they go to work over the weekend, and on Monday morning, we start off with a very detailed set of metrics from every part of the company. And it is just wonderful. It is making it so much easier to jump on expenses when something gets a little bit out of whack to act quickly. And yet there is still room for improvement, but I will get back to that. But I think were off to a great start.

Our balance sheet is healthy. Dave gave the numbers. We do expect dollars from Safeway. That is because the way our deal worked with Safeway, we basically had to -- it basically operated on our cash. As the deals unwind -- and it is all been done very gentlemanly and professionally -- but as things unwind, there should be several million dollars flowing our way.

The belt-and-suspenders and elastic waistband approach I mentioned, the suspenders would be the line of credit. We have negotiated a line of credit; it is on our desks to sign. I mentioned this in the last conference call. Unfortunately I would say lawyers got involved in the intervening months, and it got a lot more complicated. The terms are still is good, the economic terms, but there is a whole much more verbiage evolved that I am not so crazy about the line of credit anymore. But if we want it, it is there for us to sign.

Our shelf registration went effective. So we are at the point -- our working capital I would say I think stayed just about exactly even for the quarter, and we are not really running through our capital quickly now. We are holding our own on that score. So as I say, I give this example the metaphor, the physicists and the mass and energy, that is inventory and capital.

We are really fine on cash I think unless or until we get to the end of the third quarter, and then if we really want to have a good fourth quarter, we have got to build our inventory. And to do that, we draw down on the line of credit. On the other hand, there is an argument that says it would be more prudent to run a company -- we will do somewhere in the neighborhood of $500 million this year I think. Arguably it would be more prudent to run with more cash in the bank than that. And yet we are all on the same side of the -- I am eating the same cooking you are eating. I don't like to distribute many more shares. I like to keep the denominator as small as possible. But there is an argument that says we should put some more cash on our balance sheet.

I mentioned the development. We think the development is a key to sustaining our growth and we have got -- we have always got ideas and projects and skunk works and we have actually have several skunk works at this point. that is moving along nicely. We launched Club O; that is moving along nicely. We have actually got over 1600 people as of last night.

Overstock Daily Deals, that is this thing to the cellphones. We called that Project Rocket. That is very exciting to me. That is a huge opportunity. I have been in other parts of the world of late where people sit there with their cellphones, and they use them to do a lot more than they do in the U.S.. Now the U.S. companies have built the infrastructure, but they have not yet really gotten a lot of good content. And we have applied for a patent on a push-based mCommerce and a certain kind of transaction through mCommerce. I think you are going to hear a lot more about mCommerce.

A year ago there was nobody in this field. But in November I was in a convention down in Vegas, and it is like the Internet of five or six years ago. I think people ought to look hard at different companies that are emerging in there. Some very interesting prospects.

Let's see. Some points I wanted to mention -- the marketing and branding. We have discovered ways to evaluate the value of the branding that we do, and I think they are pretty cool. I think there are among the top three or four cool things we have figured out here since we started is ways to value the television and radio advertising that we are doing. We have approached it very scientifically. People are concerned about the cost of online marketing. I would say that we were -- in the past, we were not literally 899 percent online, and then we shifted late last year into some off-line. We really do know the online marketing space very well. We know what dollars are effective and not.

Pricing did a year ago start stiffening up in that market, or it is been still for a year, and now I am seeing large companies are shifting a much bigger fraction of their marketing budget into online spending. So I do see those prices getting bid up. But there is always dimensions in which there is opportunity, and we still see those. We have got great relationships with all the main players in the field. And I am not worried that we are going to be priced out of the market there.

I will give you some customer metrics. We had total unique customers for the quarter were 711,000. Brand-new customers, 440,000. That was up 67 percent. Our business was 63.4 percent repeat versus I think in the fourth quarter it was about 50 percent.

BMV -- books, music, video -- continues to be a customer acquisition tool. 14 percent of our B2C bookings come from books, music and video.

So back to blocking and tackling. Expense controls. The controls are in place. We are using them. I think that is really going well. The scorecard has been quite helpful.

I would like to close on a note of talking about the management team. I have never been so comfortable with this management team. Starting with Dave. Dave has been here I think a week longer than I was here. He knows where every penny in the business is. That is really what I want out of a CFO or a Vice President of Finance we call it here. Dave has very accurate information, and the fact that it is getting to me now so promptly and we can act on it -- in some cases, this information gets updated hourly, but in some cases, it is weekly -- that is a big advantage.

Kami Twomey is our VP of Marketing. She has turned out to be extremely strong. Unfortunately she is going to be leaving us for Stanford. She felt it was necessary to go and get an MBA at Stanford. Isn't that the silliest thing you ever heard.

Shawn Schwegman. Schwegman, I will tell folks a quick story. What the outside world would call a CTO, Shawn Schwegman we call VP of Technology. We don't have any chic titles here, including myself. Some years ago I was running a company that had a massive computer problem. I knew a guy who knew a guy at Microsoft, and I called the guy and he made a call, and very quickly I had an Executive VP of Microsoft on the line saying we are sending you a team that only works with Fortune 100 accounts. It is four guys in suits and a high school dropout with a ponytail. Don't let that throw you. The ponytail is in charge.

Well, that was Shawn. He is just the best technologist I have ever worked with. I have huge confidence in him. We are doing things somewhere between the leading-edge and the bleeding edge I am afraid to say. For example, the Oracle cluster. We know of other companies that are trying to get live their cluster. We have been live with it for six months. Oracle is showing us a lot of love, and they have been actually a very good partner for us in building this out.

So there are lots of areas in this company where we operate on the (inaudible). But I would say that -- and IT has been one of them. But Shawn has done a very credible job in the last six months of turning IT into really a professional department. If there was an area where I would say we did not have enough people and enough hands in the past, it was IT, and Shawn has built a very credible department.

Jonathan Johnson, General Counsel, as you know, also manages a whole bunch of our special projects. Stormy Simon, who has a background in the video business and understands video and music distribution and such, she is our VP of the Book, Music, Video, and takes on a lot of special projects. Tad Martin was a buyer who came through Gear and has just evolved into originally my Chief of Staff within Buying and now the General Merchandise Manager. On top of that, he finished his Six Sigma Black Belt and has been involved with the warehousing customer service. Now that all reports to him.

And yet within the warehousing customer service, we have gotten two very solid people. One is a Master Six Sigma Black Belt, and she has been with the company for four and half years, probably the longest tenure of any employee here. Another fellow who is an Army logistics guy, Returns Handling Expert for U.S. Robotics. So we have really built out our team, and I am very comfortable within this team.

Well, that is all I have to say. We have got -- that is twenty minutes -- let's turn it over to questions.

(OPERATOR INSTRUCTIONS). Bill Lennan, WR Hambrecht.

Good morning. I have got a list of some detailed metrics and then some strategic stuff, so I will just plow through them I hope. Number one, could you talk about returns in the quarter? It seemed a bit high. Could you give us an explanation as to whether or not they were high by your internal estimates? Also, give us an idea of what categories were generating more returns or disproportionate returns?

Okay. That is really a question of the GMS versus GAAP, and that is a natural question to ask because the spread between GMS and GAAP is a spread that reflects returns and also to a much smaller degree coupons, and is there anything else in there? That is it.

So that I have said in the past if you can really expect that to be 7, 8 percent over time. In the first quarter, however, you have the effect of smaller sales than the fourth quarter and all of the returns of the fourth quarter. So that works; the gap widens. On the other hand in the fourth quarter, you have the effect of your sales go way up, and you do not -- you have only the third-quarter returns, so that gap narrows.

So on a yearly basis, I think that is a 7 or 8 percent difference. But it doesn't hold 7 to 8 percent quarter to quarter. It does not have an economic effect, the fact that it narrows and widens and such. And in fact, we had a very nice return experience this quarter.

One of the areas when I say blocking and tackling, we identified four or five areas of real logistics savings, and I look back and I think we could have -- a large part of our loss last year we realize now could really have been saved through some tighter logistics control, and returns is one area of it. What we look at is not simply the gross level of returns and what we call the economic cost of returns, which is a function of many things. It is a function of, of course, the total level plus what percentage of the returns get restocked and put on the shelf and resold; what percentage do we collect a 495 fee for; what percentage do we get a claim against FedEx or somebody because they broke the lamp when they shipped it; what percent do we return to the vendor because, hey, Sony, your computer did not work; we did not buy it broken. So those all -- plus all the cost of handling the returns. That all adds up to the economic cost of returns.

I think that there is of the areas -- of the four or five areas where we think we can really squeeze some nickels out of this system, returns is the area that did not make as much progress as I had hoped in the first quarter. The other four areas did. But still it made some progress. I think there is another on a GAAP basis about 150 basis points, 100 to 150 basis points we could squeeze out on a GAAP basis by tighter and tighter management of the returns.

So did that answer that question?

Yes. It sounds like it is simply -- it just a quirky math. It is a seasonality thing that is a math issue. I think the answer -- are you saying there was no material increase in returns anything beyond your expectation? That is simply a seasonality thing; is that fair?

Correct. There was not only no increase. They were actually slightly lower than we had anticipated, and our handling of them made some progress.

Let me put it this way. Our gross margin increased 70 basis points from the last quarter, and yet there were three things working against that. First of all, because you fall from the fourth quarter to the first, you have less revenue across which to amortize the fixed expenses of the warehouse and such.

Secondly, you have the changes that you make often have -- as I mentioned, there is some kind of dislocation. When you release people, there is termination costs and things like that. So that works. The expense restructuring itself has a short-term negative affect. You don't really get around to making the changes on day one of the quarter. They roll out over the quarter, and yet in the face of those three dynamics that would make it harder to make an improvement, we still improved 70 basis points.

So I think you can assume that the, say, real secular or the real underlying improvement was a fair bit more than 70 basis points. But that will washout as these -- that will become clear. That will manifest itself as these other effects washout.

Then on operating expenses, which is a good intro. Could you maybe go through that one more time on the G&A line? The components. You had some compensation expense that was due to the stock price running. You are investing a little bit in special projects. Then, I wonder if you could shed a little light on what you spent on off-line advertising and what the plan is for that in the next few quarters?

Okay.

Mind if I take that, Dave? Of the million -- was it G&A went up 1 million 8. About 500,000 or 600,000 was comp charges and related to the stock running. 500,000 or 600,000 was development, and if you really went through and said what is the real cost on the system and allocated the portions of my time and travel and all that kind of stuff, and Dave's time and Jonathan Johnson's time, it is probably more -- I am sure it is more than 500,000.

And then there is, say, 500,000 or 600,000 more of just real increases. New hires. We built out our IT department with some really solid people for example, and we added some people here and there. So I would say that represents a $500,000 climb on the 4.5 million is what -- 11 percent.

And I think that is -- and yet our business grew 75. And if you really look at, if you take out the Safeway, last year we did I think 52 million of gross bookings in the first quarter. 52 million in gross bookings, but 7 million were Safeway. There were a few more million of B2B, so it was really 42 million of B2C.

This year you can assume that B2C -- oh, I am sorry -- Dave has corrected me. Our gross bookings increased 79 percent. I have been saying 75. So if last year in the first quarter our B2C business was 42 and this year the whole gross bookings were 92, 93, then you can assume at least 84 of that was B2C. So you are really seeing 100 percent growth in the B2C business.

I have always said that for every 100 percent we grow B2C, you should see about a 20 percent growth in true underlying G&A. I think that is actually high. I think it is actually less than 20 percent. And the truth is for us -- the real underlying -- in terms of headcount and salary and so on, that grew somewhere in the low-teens or less. And yet then we go off and we will have to stock comp on top of it, and we have these development projects like Rocket, some of which we outsourced. We have had people working in two foreign countries and another group within the U.S. outsourcing different aspects of development, too.

Did I hit all of the points you asked?

Yes, you did. And on the ongoing development, what should we expect quarter to quarter? If we have got a good idea, a good explanation on the secular growth of new hires for example, what should we expect in development costs quarter to quarter?

I think you ought to really expect similar amounts of development costs. Nothing extraordinary. David, what do you want to add? Similar amounts again?

In the next few quarters, I think it will be similar to what we are seeing now.

Yes. That sounds about right. 500,000 or more. That is right. The question I missed was on wholesales on the marketing branding. I think you will see us step that back up. We cut back on that, and between having no brand -- I just call branding any TV advertising -- between having none of it for three, three and half years and then doing it for four months and then cutting back in the first quarter as I did, we really completed the experiment, and we found out -- we really got it down to a science or at least a pseudoscience of where to spend money, how to spend it, what times to spend it, etc. that I think allows us to step on the throttle again. Now that has a short-term negative effect. It takes you awhile to get the momentum back up. But I really think we have found ways to make that advertising worth it.

On advertising or on marketing I should say, what is going on in the online portion of it? Are you seeing everybody from Yahoo! and as far as everybody you can think of in the sector is reporting good numbers? Are your prices going up? Is it getting more -- is the comparison between off-line and online getting more favorable for off-line as the cost of online increases?

Well, I am seeing something interesting. About a year ago, I was up at a conference at one of the portals -- one of the big portals -- and I was running into a lot of other people in the advertising industry who said that they were excited because in the past their clients, the GMs and the big -- I don't know them specifically I don't mean to be saying -- but those kinds of big companies had been saying spend 2 to 4 percent of my budget online. About a year ago, they started saying take it from 4 to 10 percent. Well, that was a year ago.

Now when I run into the same people in the same industry, they say their big clients are saying take it from 10 to 30 percent, and some, those who really get it, are saying, gee, as long as it meets certain metrics, spend all you can spend within these metrics. So I think you will see the big players from the people I know in the advertising world, their shared consensus is that you are seeing the big clients take money away from television and such and put into online.

On the other hand, the way I view it, two years ago we did $8.9 million of spending in advertising and marketing, and all but 50,000 of that was online. So we have been the original stomping up-and-down on one note online spending. So other people are figuring out the keywords are good and portals are good, although I think portals are getting less effective at this price. But anyway I still think that there are areas, there are areas within the portals. There are some areas within the portals that are still I think very good, and I look at it like the metaphor I use is you have got an ocean liner with a bathtub on it, and the bathtub is half filled with water. As the ocean liner rocks in the waves, the water sloshes back and forth in the bathroom. And when all the capital and all of the water sloshes down to one end, the opportunity is high and dry up at the other end. And then a little while later, all the capital sloshes back to it. But it leaves an opportunity back at the front end.

That is always happening, and it is happening in many many dimensions. Within the portals, as I say, there are areas that are still very good deals. Within keywords, a lot keywords have gotten overpriced, but there are a lot of areas that are underpriced. I won't go any further, but I wish I had more hands in marketing to do the analytics because there are still so many themes that I think are waiting to be explored. I am sure we will get there and a year or two later, other people will get there. But there will always be some part of the bathtub that is high and dry.

Bill, I hope that was good. I hear there is a lot of people on hold, so I am going to move along quicker.

Tom Underwood, Legg Mason.

I have a couple of questions, Patrick. First, just looking at the improvement that you made in the gross profit, I was wondering if you could give us an idea of what gross profits in the core Overstock business would be meaning excluding the other businesses that are there to drive customers such as media, travel, etc.?

Well, travel is not there to drive customers. Travel is there because I think we will make money at that at some point, and we are making money on it. But BMV should drive customers. I think you see you know $500,000 or so higher. You would see -- if you took out BMV, you would probably see gross profits $500,000 or so higher.

Well, what I am trying to get at is, where do you think in your core profitable part of the business, where do you think gross profit margins can evolve as this business matures?

Well, the way to understand our gross margins -- that is a good question -- let me take a running start at this. And because everybody is so familiar with Amazon, it is a lot easier for me to explain it versus them. In the fourth quarter -- I even studied their numbers last night -- they did 21.9 percent. We did 9.6 percent. But they moved 8.9 percent of what I would call cost of goods -- but they moved into SG&A. I am not criticizing them for that, but they put in into different places. So on an apples-to-apples basis, they were at 13; we were at 9.6. Understand that for now that 9.6 has gone to 10.3.

On a GAAP basis, you should understand that 10.3 is really a blend of three different businesses. It is B2C. The three businesses are B2C, B2B and then books, music and video, BMV. So I separate B2C from BMV. And the margins in them are quite different. The margins in the B2C business are midteens. So on an apples-to-apples basis, you might even say Amazon was at 13. And then B2B is in the mid to high single digits, and B2C is negative. And we have really by honing down into -- I am sorry BMV is negative. By drilling down into BMV and apportioning the right costs, customer service, we have realized it is a negative.

I thought that it was running basically breakeven. We are seeing now that is running several percent negative, but we also see ways to pick up several percent. I would like that -- however, it is a great cheap customer acquisition tool, and the customers we get from it turnout to behave just about as well as the customers we get from our normal products and we learn a lot more about the secular graphics of those people. It tells me if you buy a certain lamp, I know something about you. But if you come and by Master and Commander and a book on golf, I now know a lot more about you. That has a value. That secular graphic stuff is going to have value over time.

Did I hit all your points?

Yes, you did.

Except one thing. Sorry. Where do I see that going? I see, even just setting aside fixing the BMV loss, I think there is 200 or 300 basis points we can pick up. Well, we have actually already picked up in my mind more than the 70. Only 70 manifests itself this quarter because of these other three effects -- smaller sales, dislocation costs and the fact that we did not get it all done in the first quarter. But I think there is a couple of hundred basis points or more that remain to be picked up in the system.

Then if you could also just comment on the growth in terms of both sales and maybe profitability of your major sales channels? So kind of the dot-com versus the email versus the portals versus the partners.

That gets into -- although we are seeing nicer and nicer repeat business, 63 percent even though the top line is growing 100 percent, we don't really want to get into the profitability by segment. We want to keep a few parts turned facedown. But if you do the math, if you do a quick modeling, you see you have got one business that is growing 100 percent or somewhere on the order -- it is somewhere between 79 and 100 or maybe even over 100 percent. To have that be a repeat -- to go from 100 to 200 and have 63 percent of the 200 be repeat business, is not easy. All the growth works against the repeat rate. So that you can back into how loyal our customers are getting.

Great. Thanks.

You see why the arithmetic works against having a high repeat rate when you have a high-growth rate unless you have really fanatic customers and we seem to be getting more more of that kind of loyalty. Thank you, Tom.

Patrick Duff (ph), Prospect Associates.

Thanks very much. This is a great call. You are really giving us a lot of great color on the quarter and business going forward. I just wanted to switch gears a little bit beyond the numbers on the quarter. I will try and keep this as a succinct as possible.

But you have certainly morphed into being much more than just a closeout merchandiser. I think the branding has driven home in the consumer's mind that this is a site to come for great value, opportunistic buys and what have you. But I am just wondering now what kind of brand image have you really created for the consumer? If I think about shopping experience in a mall, you have customers that go to the mall because they want to get a specific product and they have the favorite stores that they go to look for a product. You have other customers that come and they go to mall and they browse. They are not sure what they are going to buy, but they walk through the mall and see what catches their eye.

You have a lot of products that come in and leave the site at any given time, so I do not know if the consumer necessarily knows -- I am going to go to the Overstock site because I want get a specific product, as much as they say, hey, let me just go and browse. I am wondering in your branding what image are you hoping going forward could convey in that sense to have consumers consistently come to the site regardless of what it is they are looking to buy?

You know that is a great point, Patrick. I would say that if there is an (inaudible) branding that has not gotten that across, that we have not really gotten the right point across, it is it. The basic value proposition we offer is we do not have everything.

We are not Amazon with 25,000 electronics SKUs. But what we have is cheaper than anyplace else you are going to find it. So you have to be -- it is almost more of an Ebay. You've got to be coming back and checking. In fact, in the early days, one of our reputed customer complaints was, hey, I found something there last week. Now I have come and it is gone. When is it going to come back in? We cannot reorder most of the stuff we do. We just cannot reorder it. Most of it. Almost all of the stuff is not reorderable.

So we have not done as much as we could in our mass marketing to get that point across. You can make a fun point. You can make it, hey, you have got a check. When it is gone, it is gone. We have changed the site in the last two days. You will now see products that have recently sold out will still appear but with a Sold Out banner across them. And things that are about to sell out, have a Sold Out banner. Well, that is just a modest step.

But the point is to show the casual browser who is coming in, gee, here is 50 great products, but look at the five of them or eight of them or something that have sold out, and that is because I did not check yesterday. So just that minor change in the site was to get at the point you said. Although the truth is, I would say it is an area where we can do better is to get that across to people.

Do you have another question, Pat?

Mike Napoleton (ph), JMP Securities.

Great quarter. Patrick, I was wondering if you could give a little bit more clarity on some of your existing customer profiles and how many times they frequent the site? Is their average ticket higher than maybe a new customer? Because I think the point you articulated a couple of questions ago with your unique customers continuing to expand and your new customers building, it looks like that conversion to an existing customer on a larger cumulative customer base continues to grow, and that will really be the upside in the revenue model at least in the near-term as long as you can continue to acquire new customers and convert them to an existing customer that purchases more frequently and at a higher average ticket? I was wondering if you could give a little bit more detail on what you are seeing there as far as that existing customer adoption and what are some of their profiles?

Sure. Good question. I took a trip this quarter, and I was away a little bit longer than I thought. But I had not much to do, and I asked Dave to send me a whole bunch of data and it was great. He sent me just reams of data, and I spent a couple of weeks just playing with this data and finding profitability and looking at these kinds of questions. I ended up writing some 15 page treaties that my colleagues had to wade through.

But we have discovered really profound differences in -- first of all, we are not just saying new customers. We are now breaking down new customers by source, by the type of thing they buy, and some other factors about them, and we are really discovering differences in value and lifetime value. In areas that we thought were marginally economic, when you look at the behavior of those customers later, they turn out to be really economic and maybe much better than people who on a first purchase basis appeared better.

People do when they come back -- there are different patterns, and I don't want to give away too much -- but there are different patterns, for example, between men and women. Women tend to like to buy, and pardon the blatant sexism here, but it is implicit in just about any marketing, women tend to like to buy cheap to begin with. They want to buy something, establish a relationship, see if they get it for under $30 to $50. See if they get it. See if they like the customer service. If they do, they come back, they place a bigger order, and they become regular.

Guys are sort of -- pardon me -- guys are more one-shot guys. They will come in, and they will plunk $250 down on a stereo as their first purchase. They are not interested in building a relationship first. That does not mean they don't come back. But the initial buying patterns are quite different between men and women.

Now, as I mentioned before, we have really structured our site to appeal to women. We don't make that explicit, but a lot of aspects of our site are to hit on female shopping buttons, things that they care about. So that is one difference between the sexes.

There is also you can break your customer group down into many more dimensions than gender. You find those kinds of differences, and then as you find them, you can play off them. You can construct your marketing around it, and you realize that along different dimensions customers have much different lifetime values.

As a general group, you definitely see them coming in and making smaller purchases first, and then the more they come back and buy, the more they buy bigger and the more they buy products that we make a look bit more margin on.

It appears -- to me, it seems like the way this is going to be very successful is once you identify who your core utilizers are, it really flows through the organization as far as you tailoring your inventory and tailoring your inventory risk and product assortment to that core customer base, and you don't really need to rely on the casual one-off.

Moving over to marketing, have you improved your e-mail distribution, or what are some of the initiatives you have in place to really tailor your recovering e-mail reminders to your customers on certain things, or is it not that specific yet to emphasize certain products based on their purchasing patterns?

Well, we have made one step, but there is an additional much larger step to be made. The small step we made is the Olar (ph) system. You can go on our site and download a downloadable -- it is on the homepage; it is called Olar -- and you can configure that to be alerted to deals in areas that you have an interest. It just sits on your homepage as a little red O.

But beyond that, the personalization both of e-mails and of our site is really in its nascent stages. The engine that drives both personalization of the site and e-mails is a fairly complex engine to build. It is the area that Amazon -- I have to give them props -- has been great at. They figured out that area first. They later got to the areas that we figured out or that we focused on first. But they have been very good at the personalization, especially of the site, not so much of the e-mails from my experience. So that is an area where we are moving hard right now.

I have spent a lot of time trying to get a feel for the subject, and we have hired one statistician. But I understand that other companies have 70 to 100 statisticians, other companies of our size doing this kind of work. I have an idea for an approach that won't be so labor-intensive. So it is going to be three to six months to build that out.

But to me on the one hand, so we made a little bit of progress, but it is an area where I think of it as an ace in the hole. If we can get that working right, it should be good for a lot of growth. (technical difficulty)--

Glen Crevlin, Glen Hills.

I am on a cellphone, so I may break up. But first, I want to tell you on a metric basis this quarter blew away the fourth quarter, so congratulations.

Thank you. Even a blind pig finds an acorn once in a while.

It has been a roller coaster, but this one has been a good one. In terms of some of the questions that weren't handled, can you talk about B2B, which going back to the beginning when we first met, you thought it might even be bigger than B2C at some point, so I want to know what you are thinking there?

And then secondly, just your overall expanding in the liquidation market, how you are viewed today, and what you see as the opportunities to buy great products?

Okay. As far as B2B goes, I think I can compared it once to Brazil, which is always -- if you go back to the 1908 Encyclopedia Britannica, they talk about Brazil as the country of the future, and in 20 years, blah, blah, blah. And I know when I was in college, they taught it that way, but it is still Brazil.

B2B is I think the future. Well, we have something of such value to the smaller retailer -- smaller retailers cannot afford the kind of buying system that we have. They cannot afford to do the sourcing that we do, and even the big retailers, we have some of the big retailers who want to do business with us, and one of the things about the Safeway contract being over is we are now open to pursue a lot of other areas. I am going to focus on grocery.

But anyway, so we have this great value, but it has been tough getting the word out, and I would say it has been my fault. We try to mask outbound calling effort. We went through about 100 people doing 100 phone calls a day getting people registered and such two years ago, and it has never quite come out. What do we do, Dave? What do we do now? $1 million a month; $2 million a month?

2 million.

2 million a month. It pays for itself. It more than pays for itself. It probably makes us 100,000 a month. It does not take any new capital. It is all running out of the capital we already have in the warehouse, so it has not been what it could have been. And yet I really think the potential is such a compelling proposition for the small retailer who is getting squeezed by that Wal-Mart and the big boxes can come to us and just cut their expenses, their buying costs dramatically.

So what we have done is we are working on this -- we are going to have our B2C site, our Club O, which I hope all of you join -- and then Club O Gold, and it is structured after Costco. Costco you paid $45 to get one price or you pay -- and that is really what families typically do. The small retailer goes in and pays $99. They get a slightly better price, and they get a 2 percent rebate. That is the basic structure of what Club O Gold is going to be.

It also opens up the possibility of companies that already do business with -- there are some companies out there that you can figure out for yourself, that already do business with hundreds of thousands or maybe even millions of small businesses, who would love to provide the kind of service, who would love to add this to the value they already sell to those small businesses. So there is really an opportunity I think to hook up with, to latch ourselves to one or more (inaudible) them and get this to takeoff.

We did a study. We have got a whole bunch of customer data across our millions of customers, about 150 fields of information on each customer where available. We discovered that a significant percentage of them are actually businesses. We did not know it. But they are actually small retailers buying from us on our B2C, and they did not even know about our B2B even though we have been trying to get it out there. So that is an answer on B2B.

And on our standing in the retail world, in the liquidation worlds, I think we have gone from buying from liquidators to being a liquidator, to being a uber-liquidator. We are up there getting the first calls. I think we have got incredible contacts now in apparel, in you are going to see that just grow and grow, especially given I think that there is a reason to think that apparel is the second big wave now after Internet. The first being books, music and video.

We could just get the first call, and I think we are really great to do business with. We have emphasized. We pay promptly. We do quick deals on the phone. I have got a call today from somebody in a different industry whose got a fantastic opportunity. We are getting the first call.

It's a pretty tough grimy business in many respects, and it is a pretty hard-nosed business. We hear over and over that we are like the most decent guys to do business with in the industry, and I hope that does not mean we are just the suckers. But we really have taken the -- there are not that many professional players. There are a few professional players. But there are not many professional players in the industry. The fact that we deal with cash, we pay our bills, we get back to people, all these little things I think have given us an edge.

Plus the fact that when we went on the road, I think Jason and I used to say we were taking about 20 percent of the average deal that comes our way. When we did our secondary last year, we were saying we take about a third of the average deal that comes our way. Now we are taking two-thirds and a lot of takeoff. Somebody came in last night talking about a deal for 350 stereos and he shrugged apologetically like, sorry, that is all that is available. We laughed because three years ago we were buying 20 and 50, and we used to gulp when we bought 350 stereos. But now it is not enough. It such a good deal, but I wish it were 3,500 or 35,000. Thank you, Glen.

I am sorry. I am getting the hook. Dave, did you have anything else? Sorry.

Well, thank you all for calling. It is a pleasure working for smart owners, and I hope we have better and better logistics numbers to report. And I mention again that we are going to go back and step on the throttle a bit with the television and radio, especially with radio advertising.

I look forward to talking to you in three months. Bye-bye.

Thank you. This does conclude today's conference. We appreciate your participation. You may now disconnect.