Overstock.com Inc (OSTK) 2004 Q2 法說會逐字稿

Good morning, I will be your conference moderator today. I would like to welcome, everyone, to Overstock.com's second quarter 2004 financial results conference call. At this time all lines are in a listen-only mode. Later, we'll announce the opportunity for questions and instructions will be given at that time. If you should need any assistance during this call, please press star, zero and someone will help you. This call is being recorded and will be available for replay beginning today through Saturday, July 31st. The replay can be accessed by dialing 888-203-1112 and entering the access code of 510171. At this time I would like to turn the conference call over to the treasurer of Overstock.com, Miss Kathryn Huang Hadley. Miss Hadley, you may begin. Thank you.

Good morning and welcome to Overstock.com's second quarter 2004 conference call. Participating in the call today are Dr. Patrick Byrne, Chairman and President, and Mr David Chidester, Vice President of Finance. Before I turn the call over to Dave, please keep in mind that the following discussion and responses to your questions reflect management's views as of today, July 23, 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 letter 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 this 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 provision 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 defer 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 materially from those in the forward-looking statement is contained from time to time in documents that the company files with the SEC, including but not limited to its most recent reports on forms of 10K, 10Q, 8K and S1. With that introduction, I'll turn the call over to Vice President of Finance Dave Chidester.

Thank you, Kathryn, and good morning to those of you on the call today. Our Q2 results were excellent. I started the first quarter call by saying that we came out of Q4 with strong momentum and that we had maintained that momentum through the first quarter and now I can add that this momentum has accelerated through the second quarter. Even more encouraging than the momentum in our top lines is the momentum we're seeing in cost savings, particularly at the gross margin level. Going through the financial highlights, beginning with revenue. Total GAAP revenue for the quarter was up 204% to 87.8 million, up from 28.8 million in the second quarter of 2003 and gross bookings, which you know are a better indicator of our true growth, increased 88% to 96.6 million, up from 51.3 million in the second quarter last year. Although gross -- overall gross bookings grew 88%, the B to C business grew 120% quarter-over-quarter and is growing 113% year-to-date.

So the underlying growth in our core B to C business is really accelerating. Gross margins were up 11. -- to 11.3%, which is up a full percentage point from 10.3 in Q1 and up 170 basis points from 9.6 in Q4. We still expect to see improvements in gross margins in the second half of the year. Gross profit dollars increased 106% over the second quarter last year to 9.9 million. We achieved this 106% increase in gross profit dollars while growing gross bookings at only 88%, reflecting the effect of our increase in gross margins. For the first six months of the year gross profit dollars are up 95% while operating expenses are up just 56%. Our operating loss for the first six months of 2004 was 2.5% of gross bookings which is a 270 basis point improvement from 5.2% of gross bookings for the first 6 months last year, which is a reflection of operating leverage working in the model.

The net loss for the quarter was 2.3 million or a 13 cent loss per share, from a loss of 1.1 million or 7 cent loss per share in the second quarter last year. The net loss for the first six months of 2004 is 4.5 million or a 27 cent loss per share, down from a loss of 5.1 million or a 33 cent loss per share a year earlier. And lastly, in looking at the balance sheet we ended the quarter with 66.9 million in cash and marketable securities up from 20.3 million in the first quarter. This is a result of the secondary offering we did where we raised 38 million during the second quarter. We also generated 10.4 million of positive operating cash flow in the quarter, primarily a resulting of a 5 million dollar reduction in AR from collection of our Safeway receivable and increased accounts payable due to increased inventory purchases and fulfillment of partner sales at the end of the quarter. That covers my financial overview, I'll now turn the call over to Patrick.

Thank you, David. I am happy with Q2 results. First of all, good morning everybody, it is nice to hear so many -- so many people are joining our calls these days. Happy with Q2 results, I've been, I think, relatively detailed in my letters to owners. Excuse me. But I will give a cliff notes version here for those who could not take the time to wade through my long letter. I spoke--we spoke last quarter of disciplined growth. We continue to focus on disciplined growth. Dave has hit some sales growth numbers, I'm gonna give you some other growth numbers. We have, let's see, total unique customers in this last quarter, 722,000 people bought from us, new customers were 414,000.

Repeat revenue was 59%. We're defining repeat revenue, because so many people have asked. We're defining repeat revenue as revenue from anybody's subsequent purchase to a first buy, even if it is within the same quarter. So if John Smith comes in April and buys for the first time, that is new revenue, but if he comes in May, that's subsequent -- that's repeat revenue. So that is how we're gonna calculate it going forward. It may be slight and -- unless we notify you differently that's how we are calculating it. Emphasize growth with discipline. We've -- discipline comes in two ways around here. First is our systems and controls and as I said in my letter, we've -- we really do have now a good solid set of controls, really good numbers by which to fly the business. I couldn't be happier that way.

The sandpaper down and out and we're maybe sanding it down a little bit here and there, but we really do have a good set of controls. And secondly, the discipline comes from having those controls in the hands of the right people and hands of the right colleagues, and as I think I said in the letter, I just couldn't be happier with the group of colleagues and junior executives we have here, executives and junior executives. Everybody has really gotten to know their part and has figured it out and is getting very good at it. Yeah, we try new things and as we do, we, you know, we take a few bruises here and there, but I'm really pleased with my colleagues As a result of this discipline, there is some things happening in the business which should be evident to anybody. One is the- the margins are increasing. They've increased rather dramatically, 9.6 to 10.3 to 11.3.

You can actually sort of play around with what the underlying numbers must be on a month by month basis and figure out where -- how much gain there really has to be -- to be to drive that kind of quarterly gain. That comes purely as a result of discipline. We've been, as I think I told people six months ago, we've just been -- decided to get really focussed on logistics costs. That's coming, by the way, purely from savings and logistics systems, not from -- not in any measurable degree from a change in buying. Another area, another result of discipline in controls and having the right colleagues is in our marketing spend. Now I hit on this because I know, and we hear all these rumblings about our marketing spend and we've had this sense here for the last week or two of a bunch of people running around like chickens with their heads cut off, and everyone was freaking out because everyone else was freaking out. And we don't quite know what to say about that or do about that.

I feel kind of bad for people because we hear some of these stories and we see some of the things people write and anyone is welcome to write whatever they want about me, and, you know, say, hey, sell the stock, whatever, I don't take any of that personally. But it is odd, it puts us in an odd position when we see people who we're not even talking to, incidentally, some people we don't even talk to and they're going out and writing the stuff and they're so far off the mark and I feel kind of bad for the market that there is all these people acting on this noise. Without -- so, you know, why is it that I say that we do have an effective marketing spend or a disciplined marketing spend when we have seen this increase in our CPA in this last quarter. The answer is we know exactly where the levers are. This was all a conscious decision. We know exactly where the levers are, where the dials are. We chose to turn the dials. We super sized our MSN contract, incidently, going forward.

That's really a July 1st forward thing. We supervised our TV spending. We may have super sized that. I wouldn't say too much, but we've--you know, that's open to weekly review and as I indicated in my letter we may be--well, that's just open to weekly review. We have--we also did this because we're confident that we goosed the marketing because we have -- we're confident we have other factors kicking in that help the CPA and make it worthwhile for us to spend more to get traffic. One thing is search and ENDECA, I mentioned this ENDECA engine, I think we did a press release when we turned it on, I mentioned in my e-mail or my news release last night, and just so nobody misunderstands, ENDECA has done a great job. ENDECA was wonderful in implementation and ENDECA is -- the engine is great. It has led to a measurable increase in our sales, or in our conversion from -- of people who search.

It is very good with hundreds of thousands of titles -- hundreds of thousands of SKUs, which is what we now have, about 5 or 600,000, I think. So they've been great. But all that said, there is still some elbow grease to be used in tuning it in and that's our job. We've also -- we're getting into analytics and CRM, customer relationship management, and that we think there's some unexplored - unmined value there. And then also in site design, we're doing a lot of site design tests and exploration. So, for all these reasons we're able to, we think, goose the marketing spend and yet we think we've got these other dynamics working in our favor that make -- that make it worthwhile for us, although, I repeat that the TV spend may have been--we are reviewing the level of TV spend. So we see people sort of, you know, I know that there is -- all this stuff going around the internet, oh, my gosh, customers have gotten so much more expensive to acquire and things and other companies have experienced that.

It is not really--well, David is -- David's always pointing out to me that people -- people just look at us a little bit too often as if -- like they look at the rest of the world and they haven't quite caught on yet that lots of things go differently for us than they go for the rest of the world. The retail industry, I understand other companies this week have laid an egg in some of their earnings reports and stuff and ours is booming and you can't really extrapolate from what other people are doing to what we're doing or what we're experiencing directly. Let's see, we've--okay, other note I wanted to make is we experienced this growth. I always get asked about capacity. Can--and that's really two questions. Can we accelerate without breaking? Can we accelerate without breakage? That's really -- the answer is we have a culture of constraints and bottlenecks, opening them, understanding where they are in the warehouse and the IT and the customer service. I do think we can accelerate without breakage. But the real question is, can the acceleration hold, will reality let us accelerate this fast? And the answer is we know there is a lot of large numbers that should kick in eventually.

Maybe it has already kicked in. On the other hand, we have some dynamics working in our favor. There is Overstock Daily Deals which so far has been a dud, but I think that -- I do believe that the American world is gonna move more to cellular phones. Club O has been very, very successful for us. Well -- it's been -- we -- we broke through the 10,000 mark recently. And that's -- so that's been nice. Club O Gold, there's actually a sneak preview on our site today of Club O Gold, and we'll be turning this on for the whole world, I think, next Wednesday or so. Then we have a few other projects in our back pocket, ocean, biscuit, boheka(ph) 2. So things that may -- that would accelerate growth, if they work, and so and against those we have this lot of large numbers that's gonna kick in. So I don't really know what reality is going to dictate. On the capital side, cash is great.

We got $67 million in the bank, we wrapped up our deal with Safeway, that ended, both parties walked away like gentlemen, we got paid and everything went well. We got our credit line in place with Wells Fargo for $20 million, we had a successful capital raise using the Dutch auction method. So with $67 million in cash in the bank and losses where they are, and I'm very comfortable. So in closing, before we go to questions, just -- we have our, you know, we're not fancy guys, we have our shoulder to the wheel here, we're wrapping up a number of projects in the next four to six weeks, we have gotten up on the step. David wants me to tell you this metaphor we use around here. We call it, just like in a speed boat, when you get up on the -- when you get up on the step, when you gun the throttle and at first you sink down into the water and then you climb up on the step, well, that's how we think of our business and marketing fits into that.

Maybe actually a good way to understand what is going on with our marketing CPA is -- in a sense we were up on the step and we came off the throttle in the first quarter and we got off the step and then this quarter we had to gun it a bit to get back up on the step. As we move that throttle back and forth, that's why you see our CPA going from $10 to $15 and what was it, 15.80 or something this quarter, and back. But that's really -- we're getting pretty good at fine tuning that throttle setting to a place that keeps us up on the step while using the smallest amount of gas. So -- lets see, I have no other notes I wanted to cover. I'll turn it over to questions, Pam?

Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touchtone telephone. If you are using a speaker phone, make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star, 1 on your telephone to ask a question. We'll take our first question from Tom underwood, Legg Mason.

Yes, thanks Patrick, looking at the site as it has evolved over the last quarter, it looks like that perhaps your placing a little less emphasis on some of the less profitable businesses, such as media. Just was wondering if you could comment on what percent of sales during the quarter were kind of your core overstock business versus everything else and how the margins were trending in those two areas.

Okay. And by the way, lets go this to -- because last time I didn't get through everybody. What I'd like to do is ask--request that people ask basically all the questions they -- and then I'll give a -- I'll give the answer and we'll try to maybe even get through the questioners will lap, lap them a couple times. Do you have any other questions for this round, Tom.

No, we'll just go one this round, Patrick.

Okay. Our BMV came down to about 11 to 12%, I think it was 14% previously. It's come down to 11 or 12% of our sales. And the decision we are making -- we are changing our home page all the time and optimizing it. We have certain metrics we use. I'm not sure there has been a conscious decision to de-emphasize BMV at all. What we have found, I know, is a, because I do some of the pricing in there myself, is we have found a more concise way to express the BMV values in the menu and that's worked for us. But we probably do give less real estate on the front page to it at this point, but it is actually -- anyway, it's come down from 14 to, what, 12%, Dave?

Yeah.

Okay. Thank you, Tom.

What about just margins in the two areas.

Oh, margins in BM -- in both areas have gone up substantially. BMV is now running at a small profit, gross margin profit, how we calculate gross margin, which includes of course customer service and credit card fees and such. Dave, do you have something to add?

No, I think it has been pretty steady. It's been pretty steady. Again, I think we're staying to the ball of breaking even on BMV. It's really what we're trying to -- trying to get to.

We weren't there, as I indicated in our last conference call. We were still losing several percentage points. We're now -- we're no longer losing several percentage points. We're making a half a point or something. And -- but there --

Take care of that later. I'll just go over -- .

Hello? Hey, Tom.

Must have been the operator, that wasn't me, Patrick.

Okay. I thought gee, you've --. Okay, and then the rest of this we're seeing --

I got a deep voice all of a sudden.

we're seeing the same margin improvement, the same that we see in BMV and we are seeing margin improvement. That is coming again not from the products but as much as from the logistics cost.

Great, thanks.

Okay? Sorry, someone's voice leaked through there on the call.

Yes, and we'll move forward to Bill Linen, WR Hambrecht.

Hi, good morning, Patrick, Dave and Katherine and everybody. Outstanding results, congratulations on that. Could you give us a little--here are my couple questions, would you give us a little more insight into the TV advertising situation. You say your commitment is uncertain. I guess as investors, how do we think about marketing expense for the rest of this year, is part one, and then two, I know 2005 seems years away with we still have to get through Christmas but can you give us just some general thoughts on your outlook. You've got a trade-off constantly between growth and profitability and I wonder if you can shed a little bit of light on if things go as you -- as you forecast them right now, are thinking what investors should expect for the growth versus profitability trade-off in 05. Thanks.

Sure, thank you. Do you have anything else you want to get to this first round.

I have a zillion, but since I soaked up a lot of the Q&A last time, I think I'll wait for my second opportunity, thanks.

Okay. Lets see, TV advertising. We've -- Dave, do you want to -- do you want to -- how we think about it is we do get -- we do have a rough idea of what it does for us. I think it did a lot for us originally to get out there and spread our name. It did something for us with the vendors as well. We may have reached the point of saturation with TV advertising. That's all I'm really saying about that. So you'll see some continue, but unless we have some special announcement, you won't necessarily -- you won't necessarily see a great big spend through the rest of the year. With the exception of, as I say, if we do any announce -- large, new, announcements, it may happen over television. Dave, what else can you add to that?

I think, you know, it is an election year, we don't really know where the pricing is going to go on TV commercials, so we stick to discipline we're only going to pay -- we pay. So.

I do -- I do think that the TV advertising had us get up on a step and this metaphor we use and so we're up on the step, there's not a whole lot of point in gunning it anything extra. But it is something we review every week. We sort of look at what we're spending each week and we look at a couple metrics and think -- see if it is doing what we hope it is doing. As far as the trade-off between growth and profit, I think that the absolute trade-off between the two is maybe going away. I think that we see--we seem to be reaching the point that--you know, I think with just a little bit more -- I'm optimistic that our -- that our losses will shrink or disappear while we continue this kind of growth. Or even accelerate. Okay? Next question.

We'll take our next question from Derek Brown, Pacific Growth.

Hi, thanks. Couple different questions. Can you clarify the dollar amount that was paid from Safeway, and, number two, G&A moves around quite a bit and I'm wondering if you can give a sense for what the drivers of that are and how they relate to some of the projects you guys are working on, and then how that sort of correlates to what might be seen going forward, and then, lastly, a sense for -- actually two other questions -- prepays increased nicely and I'm wondering what drove that. And then lastly a flavor for how ASP's did in the quarter and also which categories may have performed better for you?

Okay. Before you go to Derek, what is ASP.

Average selling price of your products.

Ah, okay. Sorry. Thanks. Anything else? Okay. I'll -- Safeway, first of all, I think it was about $4.5 million in cash, $5 million that we got as that deal unwound. G&A. G&A you do see move around. Want to emphasize something that we've said before. We expense everything that we can. I mean, we literally get up to the limits of the rules. We're not trying to -- not only are we not trying to capitalize anything, we are trying to expense everything we can. Just this it's a better way to keep the books. We do it within the rules of GAAP, of course. So, a lot of the development we do, what you see are -- you know, we've got teams of people in other parts of the world doing massive programming projects for us. Things that we could very easily capitalize if we wanted to and treat as software development. There is a lot of that that goes on in our G&A. A lot of things that other people might very well capitalize we're expensing. Our actual -- gosh, our payroll is only 15 points above where it was last year, even though we're, you know, twice the size. So a lot of it is--a lot of those -- those lumps you see in our G&A are just those kinds of effects. They're development charges that other people would break out as they gave pro forma or some nonsense, but we, or they would capitalize, but we just expense. Prepaids, David, do you want to comment on prepaids?

Yeah, that number will move around at times. There is nothing in particular. That number just kind of flops around. We have a couple of deals we have done where we've put money out in front to get a better deal and, you know, it is just what we do.

How about ASP, average order sizes.

Average order sizes stayed pretty consistent, really, throughout the year.

Where were they this quarter.

We're still running around, overall around $70 an order, including BMV.

I know that without BMV our average order sizes are very comfortably 110 or above. Okay next - Thank you, Derek. Next question. Operator? Pam?

Yes, one moment. We'll go next to Rob Wilson, Tiburon Research.

Yes, thank you. Patrick, could you discuss are there any Safeway type of arrangements in the pipeline? And also if you could remind us, you kind of stumbled in Q3 last year, should we be possibly modelling a higher rate of growth in sales in Q3 this year?

Hi, Rob. Let's see, as far as modelling a higher rate of sale -- of growth, higher than what we have now?

Yes. Is that a fair modelling assumption?

I think that modelling of -- well, first of all, going back to -- I guess to answer that I should answer your first question first. Safeway, are there any other Safeway like deals in the hopper? We're always looking at Safeway like deals and pursuing them, but I would say there is nothing -- there's nothing that I would say is in the pipeline, or if they are in the pipeline, the top edge of the pipeline. So, as far as growth goes, I think that understanding our overall growth -- you know, we're lapping the part of the year last year where our Safeway business started to die away. So, for example the way I look at it last year in the first quarter we did 52 million of gross bookings but 7 of it was Safeway and about 3 of it was other B to B, so we really did 42 million B to C and this year we've -- we did--I'm sorry, I think that was the second quarter. And this year that 42 turned into 92 of B to C but we just didn't have the other business on top of it. We didn't have the Safeway business that we did before. So, our growth rate -- I think -- it's safe to say you can model it as we lap the part of the year last year where the Safeway business started dying away. Our growth rate will become more and more our B to C growth rate. And, yeah, I do think that you can-- sort of just doing some quick numbers in my head, I don't think -- you know, I know that people have a GAAP estimate for us this quarter, this third quarter of 82 to 89 and I think that is low. You know we don't give guidance, but I do imagine 100, take it from 82 to 89 up to 100 million to 105 million GAAP is probably about right. Okay. Thank you. Thank you, Rob.

Thank you and we'll go next to Glenn Krevlin, Glenhill Capital.

Good morning, guys.

Hi, Glenn.

I said last quarter was your best quarter. I guess now I got to say this has been your best quarter since you've been public, so congratulations.

Thank you, onwards and upwards.

Hopefully I can keep saying that.

I'm sure we'll disappoint you some day. Just in general principle I'm sure it will happen.

Patrick, a couple things. One, you mentioned the launch of this club 0 gold next Wednesday. Is that the full blown version with the credit card company youve been alluding or is this a slimmed down version. That's my first. Second is there has been some talk in the marketplace about you making some sales coming up here, now that these numbers are out. I was wondering if you wanted to address that. And then lastly, going forward how should I look at the mix between the film and partner in direct and is that important.

Okay, four good questions. Thank you, Glenn. And by saying that I'm sure we'll disappoint some day, it's just I want to always remind people we're calling these as they really happen. And it is great when we have a great quarter but, you know, we're not going to hit -- we're not going hit -- get on base every time. But, thank you. It felt like a good quarter. It was a lot of work. As far as Gold goes, it will be modestly slimmed down. You'll see over August club 0 gold get juicier. We'll be launching next week, we'll have about half our products on it. Within 2 or 3 week you'll see about -- the other 50% go up. We're just kind of taking it slow there. We don't really know how -- well, there is no way to gauge the demand and we don't want to shock our systems, so we are going to unveil that in a -- in a couple of stages. There is a company, a credit card company, a financial services company that we have an alliance that we've worked out with, that we will be -- that will be helping us market this. They have not -- they have asked us not to disclose their name. They want to do it themselves, so they will be doing that in the near future. And they're going to help us do the marketing. It seems like a very symbiotic relationship.

Just to be clear, Patrick, they're going to make that announcement soon with the -- concurrent with this movement on the site that you're having?

Yes, you'll see them, I think within the next two weeks make an announcement.

Okay, thank you.

Okay, I'm sorry, what was the question after that, I was taking notes but I scribbled.

There has been some talk in the marketplace that, you know, you're going to sell some stock now that the quarter is done. I don't know if you want to address it or not. But I'll give you a shot if you want it.

Okay, sure. And then the other was the split between direct and revenue. As far as me selling, no, I'm not going to sell. Yeah, I saw somebody forwarded me, a guy -- there's some guy who is evidently a hired gun to do hatchet jobs, who, I heard -- I heard -- people pay this guy 30,000 bucks and then once a year they get to pick up the phone and say please do a hatchet job. So somebody came up with a hatchet job on us yesterday. It was kind of funny. Besides being -- besides being poorly written, at the risk of being school marmish I want to sort of take this guy to task on his bad grammar, but he points out that since, you know, since Patrick Byrne bought $12 million of stock in February no executives have bought new stock. Well -- and you have to use, since evidently we've taken a blood oath never to sell stock, then you can only use our buying as an indication of our real faith in the company. Well, that's the most crepuscular logic I ever heard. First of all it's wrong, and we have had a executive recently sell some stock to buy a Porsche, but I'll let that go. Anyway, so his facts are wrong. The logic of, you know, gee, since the CEO bought $12 million worth five months ago no one else has bought any that must tell us something, I don't know what to make of that. Third, maybe he doesn't but we have a window that works both ways. We can only buy -- of the five months he's talking about, four of them the window's been shut. So, just -- oh, well, I don't know what to make of that and in August, no, I'm not planning on selling any stock. And, no, not only am I not, I don't really intend to ever sell stock. I know that there has got to be some day, theoretically, where I sell some stock, but, no, I'm not going to sell any stock. And I'm going to use any derivatives trader to trade out of it, either. Somebody came through recently, Max, I think was making that up, always trying to hint at one of these crazy funds, where everybody puts in some stock and you get money back, and you don't have to report--but, anyway. The split between direct and drop-ship, I don't -- I hate to tell you, I don't even know what it is. We don't pay attention to it that way on a percentage basis. We pay a lot of attention to it on a deal by deal basis. Here is a deal, does it make sense to bring this in? How else should we --? So, we look at it on a deal by deal basis, but we don't have any sort of macro view of what the right split between those -- those -- between direct and partners and dropship should be. Dave, do you have any.

It just, you know, amazingly, runs close to fifty-fifty over time and there is no conscious decision at all to do that.

Well, we don't really try to -- we're not trying to say lets take it to 60% or take it 40. In general, as we understand new business we do more buying and bring it in. I've said before that when we commit our own capital we like to commit and make several points more of margin for having committed. Well, we'll only do it if we can make several points more of margin for committing our capital. But I don't -- we're really agnostic about what the right global split should be just on a deal by deal basis we look. Thank you, Glenn. Other questions.

My models don't show a disappointment til 2010.

The model shows what?

I was kidding, I said my model doesn't show a disappointment til 2010.

Okay, well I'll cancel my vacations. Thank you.

And we'll go next to Patrick Duff, Prospect Associates.

Good morning, all, and thank you for delivering on all our expectations. I just want to followup, again, on this discussion on the TV advertising. Maybe more broadly on the sales and marketing. I don't suppose that you're looking at it all this way, but it is interesting that in the quarters where you choose to deploy mass market advertising, the sales and marketing comes in roughly around 7 to 7.5% of gross merchandise sales. In the quarters where you're using the more paid search and other forms of Internet advertising, the sales and marketing has been running in the neighborhood of 5% of sales and it may be too simplistic but it is been an interesting relationship the last few quarters. As you look into the second half of this year, as you're adjusting your customer acquisition cost and the overall marketing, how you're going to market for customers, how might that relationship work to your gross merchandise sales?

Well, it's a good question. We look at it, I guess there is two parts to the answer. It's that may be that -- it is easier for us to turn up the throttle quickly on TV than it is on online spending. A lot of -- a lot of the big online spends are contractual. They're, you know, a quarter or year in basis more off in a year. So when we decide to spend more money, it is easier to make that decision and go out today and start spend more money on TV than it is an online. So that may be why you see the majority of the gunning and cutting comes from TV rather than online. Although we're getting better at -- at the -- well, we've gotten -- we're developing tools that let us control our online spending, we understand for some of the search engine companies that these are sort of the most advanced tools anyone is using. They let us control -- there may be a week lag as opposed to with TV we can do it, you know, in a day or 2, we can change what we're spending on TV. I view it, again, back to that -- what you're seeing out there, the move from 10 to 15 to 10 and stuff, that is just us trying to fine-tune the right place for that throttle. David, do you have anything to add to that?

I've got a -- another way I view it is, and I use this metaphor at business school so I hope you'll forgive me, it is like imagine a bathtub that is half filled with water on an ocean liner that's going through the waves. As it goes through the waves, the water in the bathtub is sloshing back and forth. And opportunity is wherever the water is not. And so one end of the bathtub is high and dry for a moment and that is where the opportunity is and then a little bit later all the water sloshing over it, well that's my view of opportunity and capital and excess. Yeah, we do have a lot more -- we have a lot of water sloshing at the online marketing place. People are figuring out where we were 2 or 3 years ago and you have sort of the big, I would say, the big automobile companies, for example, and the big brand-intensive companies, coming in, and they are bidding up the prices of some things. But as they do that, the water--another part of the bath--as the water sloshes around there is always a part that's high and dry. I think our record has been one of being able to figure that out quite a bit ahead of everybody else and get there and exploit it and then the water sort of sloshes in after us. So, yeah, there is a lot of water sloshing in our direction, but we've -- we have some niches that other people haven't figured out, yet. And by the time they do, we'll have figured something else out. Plus, we have reached a size that we're able to do really large scale deals that we weren't able to do before and that's a dynamic working in the way of getting stuff cheaper, as well.

Just quick follow up. Does that imply that you think you're starting to get leverage on the S&M line.

Well, I -- if you took away seasonality, I think the answer is yes. I think that you see--yeah, there is a lot of noise between the second and the third and the fourth quarter and sometimes you see us spend a lot in the second quarter and the effect, especially if TV spending seems to be a lag, there's a lag effect. So you spend one quarter and you get the benefits the next quarter, or some of the benefits the next quarter. So if you took that away, I do think that you will see, yes, year-over-year, our overall, if it's 7 points this year, it should be 6 next year or 6.5 and then 6 and then 5.5. It should drop half a point to a point each year is what I think. Okay?

Thank you and we'll take our next question, Leland Bettis, Camelback Research Alliance.

Thanks. Hey, congratulations on the work that you guys are doing in bringing employment to an Afghanistan.

Well, thank you, Leland.

Closer to home I want to ask a couple of questions. Looking forward to your $2 billion sales goal. I appreciate you guys are not looking at making a profit here in the short run, but on the top line the sequential quarter-over-quarter increase in sales, 7%, looks like you're having difficulty hitting a stride through the first half of this year and I'm wondering what you guys are doing in the backend and what we should be looking forward to.

Well, we actually think that 7% between the first and second quarter -- do you have any other questions, Leland?

Yeah, as a followup to that. I mean, as we look at the $2 billion sales mark, I'm wondering what you guys see as a little of net income once we get there?

Okay. First I'll ask you a question. And that is, if we're at $2 billion, I can tell you what my income is going to be if you can tell me what you want me to sell the next year. In other words, if you want me to sell $2 billion the following year, I think we can make 100 to 150 million. If you want me to sell 4 billion the next year, I think we can -- we're not going to make 100 to 150 million, we're going to make, you know, 50 million, something like that.

2 billion, I think, is the mark you guys have set looking three years out and so I'm -- I know that's a target that you've talked about in terms of net income and the margins you need to get there.

Right. But the question, even if we do get to 2 billion 3 years out the decision will then be what -- what do you want us to do four years out. If you want us to do 4 billion 4 years out, it's going to change what I tell you we will make when we're 2 billion 3 years out.

Do you think you can do 4 billion at 2 years after that? That's great. You fire away.

Okay, we're -- we're on different wavelengths. Just going back to this -- to the growth thing, I think 7% between the first and the second quarter is great. Last year we actually were down 2%. What happens, we don't really grow, we're not like e-Bay, so much, where you just grow quarter after quarter, 20%. Our tendency tends to be flat to modestly up through quarters 1, 2 and 3, and then a spike in the fourth and then we just don't fall back all the way in the following first. We have a new plateau. That tends to be our 4.5-year history. Anything else.

Yeah, right, but I'm looking at the, you know, the uptick you guys got last year on your change in revenue model and the boost that you've had since that time. I'm wondering how that's going to be (inaudible-recording) going forward?

Well, that's why the -- that's why we have said look at the gross bookings number which is at this point quite close to GAAP, 10%, 8%, or something. But, look at the gross booking number because that lets you, you know, on the GAAP number, yeah, it is 204% but that is meaningless. That's not really how fast we're growing. We're growing at the 88%. And last year, on a gross bookings basis, I think the first quarter was 52 million and the second quarter was 51 million. And that's the right way to look at our gross and that is basically we declined 1.9%, first to second quarter last year. This year we grew -- we went up 7% between the first and second quarter. So, so far our growth on a real basis, not a -- not -- on a real base not as a matter of any accounting changes or anything, our real basis growth this year is doing better than it was last year.

Yeah, looking at your margins, a trend I've noticed in beginning in '04, is your fulfillment partner revenues are coming at higher margins than your direct revenues? I'm wondering what is driving that increase in margin, what's changed and, maybe, is there a possibility that you guys might even sort of outgrow the bricks and mortar operation altogether, just leveraging your brand and your reputation.

Well, we do--we do -- I don't think we'll ever outgrow the bricks and mortar, because you need that -- you need ability to be a liquidator. You can't just be, unless you're e-Bay, you can't just be a website -- you can't just do it all with electronics. To be a liquidator you have to have a warehouse that can do some of the things we do. And it is why we get the deals. As far as the partner business, I'm not sure that I can say -- the partner business may -- may -- it may have fluctuated up but I wouldn't, in terms of margin, but I wouldn't look for a steady trend up in that partner margin. Okay, any other questions?

Thank you. We'll go next to Scott Schleffer(ph), Tiger Technology.

Hi, Patrick, congratulations on a great quarter.

Thank you very much, Scott, you're calling from China?

I am. My flight is continuing to be delayed. Three quick questions, first, out in Vegas you mentioned that you had sort of a stat of -- if a customer spends a dollar, you guys track over the next month and years how much they're spending and that over the last years that that -- the number that they're spending has been has been going up.

Yes.

We would love to know what the trends in the last few months. Second question is if you look at the Amazon numbers last night and you also just look sort of around the second quarter of E tailers, the trend has been that revenue growth is slowing meaningfully. I'm just wondering, you know -- I don't know if you guys have any thoughts on why you guys are able to accelerate while other are decelerating. And then third, on the online marketing spend, I know there's a bunch of things moving around, you know, particularly I'm sure that your costs to acquire clicks are going up. I guess we'd love to hear how the offsets to that, like increase gross profit margins, trends and order sizes and then also the customers coming back more frequently, whether or not your sort of variable margin per click online is going up or down.

Great questions, thank you. As far as -- one metric we look at is if somebody spends a dollar in month X what do they spend in the remainder of month X and month X plus one. That number has over 3 or 4 years trended from 19 to 31 cents. I've not calculated again for the last three months. Secondly, why are we able to grow so much faster than other people? I can give my answer and I'm afraid it sounds -- I mean, I'll give what I really think. I'm always sensitive to -- I know that there's, especially this industry, there has been a lot of crazy CEO's who say -- who pump and stuff, and I hope by this time we have people who just -- well, I know that we have some people who just know that we're -- when we make mistakes, we call it and when things go well we-- I just try to explain it. I think what is happening is something like what happened to Google, four years ago. I remember four years ago you mentioned Google and people just stared at you blankly, they didn't know. And then there was like this period where suddenly everybody found out about Google and everybody started using it. I think that is happening with Overstock and I know it's anecdotal. But I get it everywhere. And I just see such a difference in the last two years. I get it -- it's like people have discovered Overstock and it's become part of the vernacular and it seems to be happening this last six months. Everywhere I go people -- I mean I'm not like a celebrity or something, but when people hear the company I work for, oh, yeah, my wife shops there. I mean, that happens to me all the time. That didn't really happen two years ago. So I think that has something to do with why our B to C business is growing 120%. People are just -- I mean, the real answer is, as corny as it sounds, we're just a lot better deal than everybody else out there on the Internet, I think, and the world is figuring out that we're just not sort of another flee bag dot comer but we -- we're a great place to shop and we're getting -- that -- that shows through in the fact that our B to C business is growing 120%. On the cost per click, that has stayed stable for us. Our cost per click and the -- but we look a lot at juice per click and we -- juice meaning gross margin dollars, effectively gross profit dollars -- and we do--we're trying to fine-tune things based on the cost per click of different sources and the gross margin dollars of different sources. We're not really seeing our cost per click dollar go up but we are getting slightly better at managing, not in aggregate, but by managing by source. Okay? Thank you, Scott. Have a safe trip back. Pam?

We'll go next to Elizabeth Hopper, Wells Fargo.

Elizabeth hopper,.

Hey, Patrick, congratulations. How are you?

Very well, thank you for that 20 million-dollar line.

Hey, anytime, we got lots of it.

Super size it.

We'll do that. I think that was Dave in the background, but I won't take a lot of time but as a consumer and as your banker, I look at this tremendous audience, you have over 700,000 customers and I'm wondering, are you planning to add other soft services? By that I mean, you've added travel, what about potential for even finance, real estate, insurance, other soft services that would access this huge audience that you have.

I'd like to say no comment, but first if we were to do something like that, do you know any banker who might be interested in a 700,000 quarterly new retail accounts?

I think so. I might know one or two who at least would give you the time of day.

Well, you're reading our mail, but I'll say, you know, that's -- we've got a few battles to win closer to home, first. But you're reading our mail.

Okay.

Thank you, Elizabeth.

Thanks.

Elizabeth, nice to hear from you. Okay, operator, next question.

Thank you. We'll go next to Bill Linen, WR Hambrecht.

Hi, round two for me. Patrick, could you comment on the competitive landscape, you've got a notable competitor who's filed for an IPO and I wanted to know how their access to capital changes things if at all. Also wanted to hear competitive update on the jewelry segment, you've got Amazon getting more aggressive and Nile has gone public. And then finally getting back to this -- the dynamics between new customers and existing customers getting more active. I'm just tinkering with the model here as we're doing this call. What kind of growth should we expect for customer additions in the next couple of quarters? It seems to me that you're getting a ton of leverage out of repeat business, so, I wonder how we start thinking about the growth in new customers versus repeat business as it has drivers. Thanks.

Good questions, thank you. Let me take the last one first. I think that the -- at some point -- we have to get better at driving. I think we've been really as good at the game -- as good as the game at figuring how to get new -- how to spend a dollar and get new customers. We have been not so great, we've been, as I've said before, in kindergarten, when it comes to figuring out, okay, now we got this pot of, I think, 4 million people who have bought from us, where are the buttons and the levers in that pot to get it to spend more. That's what you might loosely call customer relationship management. That really is our focus. We're doing a lot of data mining and customer -- we're 00 we're embracing the serum philosophy. So I think that some -- on the one hand some growth can pick up just by going from kindergarten to high school and that and then from high school--but we're there. We're focussed on it and we are working on it and we're seeing some effects. As far as, okay, your other question is Smart Bargains and I guess you mean Amazon and Blue Nile. Let me put on a headset so you guys can hear me better. I don't know what to say about that competitor. We had a -- gee, let me think about this a bit. We have -- the folks who founded Smart Bargains,sort of had a -- were nice guys and I knew -- I knew them personally and they -- we sort of had a handshake deal some years ago just to be what we call friendly competitors, which of course means nothing on pricing. But there's ways to be businessmen and be bare knuckle and jerks and there's ways to be friendly competitors. I've tried to be a friendly competitor..I hear a lot of stuff from them and I don't quite know what to make of it. It doesn't -- well, there is a new management team and they've taken a very different tact over the last few years. You know, I don't want to sit here and slag anybody and I'm not going to slag anybody. I have heard that they are saying -- I heard that they were on Wall Street going around and saying a bunch of stuff, oh, our customer satisfaction is so much higher than Overstock's, we have a real oh, wow effect, just look at Biz Rate, you know, our brand's so much better, our margins are better, you know, ours is a profit story. So what can I say about that stuff? I'll -- I guess I'm not going to give anybody advice but I can -- I think that I should probably answer some of the things they say. I'll call this Patrick Byrne's top 10 reasons why I'm not going to invest in Smart Bargains' IPO. I don't know if there are 10 reasons. I'm scribbling out some notes here as I speak. First of all I did read their S1. They've lost 91 million versus our 59 million. So what did they get for that? Well, they go around being very proud of their -- six months ago they were saying everybody just go and check Biz Rate. Well, what they left out, and maybe they didn't know, was Biz Rate's scores get skewed based on whether you're a client or not. Because if you're not a client of Biz Rate, then the only people who go and leave scores are sort of the malcontents who -- and so that affects your score one way. And so as I heard that they were saying this, I just signed us up to be with Biz Rate, again, which means a certain percentage of our customers get surveyed and I actually checked this yesterday. Our Biz Rate scores at this point are, in the last three months, were positive 86, theirs 67. The last month were 87, theirs 79. For the past week we've been at 90, they have been at 74. You can just go on Biz Rate and pull these yourself. Our negative ratings are 8%, theirs are 22%. So, I don't know what they were being looking at. But our Biz Rate scores crush theirs. In fact the overall satisfaction we score an 8.3 and they score 6.9. This is all just public, go to Biz Rate and you can look us up and you can see that. Brand. We think that there is a -- there's something that people haven't noticed, now, but there is a real way to measure brand. You can go to the search engines, if you're a client. I assume this is publicly available. And you can see what words are searched for. And so you can measure the sort of the brand in the public mind. Amazon is searched for, at least on one guy I looked up, they're searched for about 1, I don't know, 1.3 million times a month, or something. We're searched for 330,000 times a month. They're searched for 30,000. So we have 11 times the presence in the public mind that they do. And on another one I think it was 36 times the presence. So for having lost 91 million to our 59 million or 60 or whatever to date, that's -- we -- they -- you know, their brand stamp in the public mind is somewhere between 11th and a 35th of ours. Margins, they were claiming they have much higher margins than us. Well, as Bill, you put out, on this Amazon piece versus us, everyone's got to be real sensitive to the fact that people use account margins differently. So, for example, they claim in the 30s, there is an--what I call an Amazon effect around here, which is if you move your-- your fulfillment cost into your SG&A that's going -- out of your cost of goods sold, that's going to dramatically improve your margins. If you make it apples to apples, there is a 14% effect there. We put that fulfillment cost in our gross margin, they don't. If you move that -- for them it is 14%. If you move that up out of their SGA into their gross margin they would be at 20, 21%. They book things gross. They book things net, their partner business net. So that makes the comparison 11.3 versus 20, 21, for them. Now, if we book things net instead of gross, our margins go up eight points. So that takes us to the sort of 19 to 20 range versus their 20 to 21. And then on a top of that remember that 15%, 15 to 20% of our business has, for the last couple of years, been B to B or BMV, which is either single digit margin or breakeven, so -- on B to B, BMV. So, you know, that's -- you factor that in and it is not at all clear that their margins on their actual business, say the core business that overlaps with us, is higher. And in fact, ours may be higher. We just keep our books in a way that we are comfortable with. So you got to make those -- those kind of adjustments. Growth. Maybe they're a growth story. Now, their growth I calculated, it was 270% slowed down to 21%, slowed down to 17% and then it is at zero, for the fourth quarter. They've lost the MSN deal. Our deal with MSN is a quasi exclusive. You will see us own the Bargain Center. Or Amazon was 8 to 10% of their business last year. AOL has is little, they have this big brother relationship with AOL that is in their -- that gives them an edge. We've heard different things. AOL is a nice company but there's sometimes they speak with different voices. We've heard that we're going to be allowed into the Bargain Center as of October 1st with Smart Bargains. We've also heard that they're going to have us both out of the Bargain Center and they're going to turn it over to Macy's and Bloomingdales and stuff. So,I don't know what to make of that. The puresite advertising that Smart Bargains was doing, that's the Spyware advertising and we call it parasiteware in the business. I think they've ended that due to this lawsuit. So who knows that effect that will have on their growth. So maybe it is a profit story, if it is not a growth story. Last year they lost 1.5 million and in the first quarter of this year was 1.7. They're -- they're operating loss for last year was 1.4%, first quarter was 8%. This first quarter was 8%. We're at 2.6% loss. So I don't see how they go around saying they're more profitable than we are. Size, we're four times their size. And again we've gotten there on 59 million of loss versus theirs. I have -- I pulled up a Internet retailer magazine, did a really nice study and I can highly recommend this, they did a 6 month study that came out just recently of the 300 top websites. On it we show up 28 and they show 190. But there is some very interesting comparative data and I use this, not just Smart Buyers, but I use this for all the businesses that we're competing with. For example, they show an average order size on Amazon of 136, ours is 110. I guess they excluded B and B, or something. Amazon 136, ours 110, Smart Bargain is 55. They show Amazon with 3% conversion, us with 2.5% and Smart Bargains is 1.5. Now, they say they get those numbers from data from (inaudible) score, I don't know how they--. But it happens to be pretty accurate for us, I don't know about the others. So then there is this lawsuit issue. And now the reason I'm going into such depth, I'll get back to you in a moment, on the lawsuit issue I was kind of surprised to read their S1 where they say, hey, they, you know, they kind of say this isn't an issue. There has been -- this is a lawsuit between, you know, it is a civil suit between two parties. There has in fact been a court order, a temporary decision, that affected the state's attorney's ability to go after a company called Wenue(ph). It has nothing to do with our, as far as I'm concerned, with our lawsuit against Smart Bargains. I don't think there is sort of any -- I don't understand how they're even making that claim in their S1. The two are - don't have anything to do with their --they're indemnified, they claim, by Gator. I don't know that to be true, I'd like to see that. Gator is a company in legal battle for its existence. What happened is the State of Utah passed a law, a lot like that do not call list, that says there is a $10,000 fine every time somebody calls you during supper call, if you're on the do not call list. There is a $10,000 fine every time somebody pops a parasiteware in front of somebody in Utah. We don't know how much -- how often that happened before we filed our suit. It could be a thousand times, could be 10 thousand times, could be a million times. I'm anxious to find out in discovery, I sort of back into a number statistically and if it is 10,000 times, times 10,000 that's a $100 million suit and these are statutory damages, strict liability. And it is totally irrelevant to us that the state's attorney has been temporarily enjoined, which he has appealed, going after a different company, Wenue, on a totally different set of facts. So I put all that together. Why did I go into such detail? Well, in my conference -- in my broachow(ph) -- I mean I really did and I thought I've always treated these folks as friendly competitors but I've been hearing -- I know in my road show they showed up at a, a guy who'd said he was a Smart Bargains board member showed up at our luncheon and did everything he could to sour our luncheon. He asked a bunch of dumb questions that were not accurate, I mean, he stated a bunch of things that were not accurate and did everything he could to sour. And I've never really cared or never really responded to them then but now I see them going out on the street and saying, hey, their customer, you know, their customer satisfaction is much higher, their customer having Oh, wow effect, their brand's better, their margin's better, their profit's better and all I can say is, you know, it's a, in my mind it is a me-too site and that's my answer to their claim that they're a better managed, better margined, better brand in customer service business than we are. We were four times better, we're growing bigger, we're growing six times faster, we managed our losses to 2% when they're at 8. On the search sites we're searched for between 11 and 36 times more often. When people come to our site they convert 60% more frequently, according to the com score numbers, and when they receive their goods from us they have a far higher satisfaction as reported on Biz Rate than they do when they receive it from Smart Bargains. And to accomplish all that they've lost 50% more money than we have. So you put all that together and if the market is going to fund that, the market is going to fund that. So that's my reasons why Patrick Byrne is not going to get involved in the Smart Bargains IPO, but of course you follow your own guidance. As far as Blue Nile and Amazon, I would say I don't think--first of all, I just -- you guys know how I feel about Amazon. I mean, I'm not --. There are smart competitors. Blue Nile is a smart competitor, they're a great competitor. The guy who's running it is a very smart guy. I think that Amazon is the 800-pound hamster. I think that Amazon is the ottoman empire of the internet. And some it may just drift along as the sick man of Europe for 200 years or one day you may wake up and it's gone. I don't think Blue Nile faces much of a threat from Amazon. I view us as competitive with Blue Nile. I view them much more as a competitor, but I'm not worried about Amazon. Thank you, Bill. Last question--oh, that was the last question. I'm getting a note, we're over 9:30. Okay. I remind audience, okay, we are going to make a transcript of this available as we always do. It is on our site. It will be on our site within 24 hours, a free transcript. Go to the Investor Relations section for a free transcript. We are -- we're -- just got our shoulder to the wheel, continuing our growth with discipline mantra and we're just trying to build value in this company. Thank you all for attending. Bye-bye.

Thank you and this does concludes today's conference. We do appreciate your participation. You may now disconnect.