Overstock.com Inc (OSTK) 2010 Q1 法說會逐字稿

Good morning. My name is Lindsay and I will be your conference operator today. At this time I would like to welcome everyone to the first quarter 2010 Overstock.com earnings conference call. (Operator Instructions). I will now turn the call over to the President, Jonathan Johnson.

Good morning and welcome to our first quarter 2010 conference call. It's been a while since we've had one of these early-morning ones. Joining me today are Patrick Byrne, Chairman and CEO; and Steve Chesnut, Senior Vice President of Finance and Risk Management.

Because we can't predict the future, let me first read the legal forward-looking statement language. The following discussion and our responses to your questions reflect management's views as of today, May 6, 2010 only and will include forward-looking statements. Actual results may differ materially.

Additional information about factors that could potentially impact our financial results is included in the press release we issued on May 4, 2010 and the Form 10-Q for the first quarter that we filed on the same day. As you listen to today's call I encourage you to have the press release and the Form 10-Q in front of you, since our financial results and detailed commentary are included in those documents and will correspond to much of the discussion that follows.

During the call, we will discuss certain non-GAAP financial measures. Our press release, slides accompanying this webcast, and our filings with the SEC, each of which are posted on our investor relations website, contain additional disclosures regarding these non-GAAP measures including reconciliations of these measures to the most comparable GAAP measures.

With that forward-looking statement and legal disclaimers out of the way, let me turn the call over to Steve to review some of our financial results.

Thank you Jonathan. Following is a brief review of the financial results for the first quarter ending May 31, 2010. Unless otherwise stated, all comparisons during the call today will be against our results for the first quarter of 2009.

Regarding revenue, revenue for the first quarter grew a nice 42% to $264 million. All product [categories] grew, including a 45% growth in our direct business.

A quick comment on historical sales patterns. Q1 revenues are typically higher than Q2 and we expect that trend to continue for this year.

Gross profit increased 31% to $47 million and gross margin was 17.9%, a 160 basis point decline over Q1 2009. Gross margins are lower compared to last year, largely because we are giving our customers better deals. The result is, gross profit dollars are expanding as a result of higher sales.

Contribution grew 46% in Q1 to $33 million and contribution margin was 12.5%. Contribution margin expanded 40 basis points in the quarter driven by modest growth in sales and marketing expenses.

Combined, technology and G&A expenses increased 5% to $28.9 million. However, excluding the $1.25 million termination fee we paid last year, these operating expenses would've grown 10% in Q1 and G&A expenses specifically would have increased 18%.

We were profitable in Q1. Net income was $3.7 million. This is a $7.7 million improvement over last year. Net income on a per share basis was $0.16.

As we conclude this piece I want to encourage you to review the earnings release and our Q1 Form 10-Q we filed on May 4 for a detailed and thorough analysis of our results. So, with that, Patrick, let me turn the call over to you.

Thank you Stephen; good, good summary. I'm going to, as usual, just walk through the slides. My overarching comment is [Yippee-ki-yay]. We'll go -- done the Safe Harbor.

Let's go to the slide three. Revenue growing 42%, gross profit growing over a little bit slower at 31%. Margin therefore is down. Contribution margin growing at 46%, contribution dollars is really the main event and the one which we've been telling people to focus on, telling them we are focused on.

Turning to the next slide, this is our historical growth rate over the last two years -- 2.5 years. You can see I actually thought we were -- by late 2008, mid 2008 I thought we were just about at the place we are now. We just had that downturn like everybody else.

We have lots of things coming online. But that's not to suggest -- that's not to convince anybody where that growth rate is -- whether it's going to go up or down. In fact, I think that the 42% at least for a while is probably going to be a bit on the high side.

It's not our intent to go back to trying days of growing 50% or 60%. But, there's projects in the works that -- a lot of this comes about from various projects in the works that reach and get turned on. There is also some nice major projects in the works.

Quarterly gross profit growth, $47 million, 31%, which -- and our contribution margin 12.5%, I think that that's probably a tad on the low side. Steve or Jonathan, do you want to tell me what your thoughts are on that sort of over the rest of the year? Do you think 12.5 is the right -- do you think it's any lower than that?

Just a second.

I think it will be pretty close to -- my guess is that we'll be pretty close to that number. Maybe a little bit on the low side, but I'm going to guess we'll be not too far off that number for the year.

That's fair. Slide seven, the dollars, again this is what we really focus everything about. It's 46% growth. We've gone from $22.5 million to $33 million basically in the quarter against the cost structure of $30 million. Love it.

While I'm on that slide why don't I mention that if you're trying to model us going forward, I think [if] you model with the US growing at 10% -- the US growing at 0% which makes the Internet grow at 10% and our sales probably 20%. But if our sales grow at 20% you can expect our contribution dollars to grow a little bit more nicely, something more like 25%, 30%, somewhere in there.

I think that might be a basic picture people should have in mind. And that's just because even with sales growing 20%, our marketing costs get slightly better each year. We're not a 10%, 15% improvement. If you look that's been running 15%, 20% per year.

At $1.00, gets us X of revenue next year. $1.00 of marketing spend gets us X of revenue the next year. Let's say $0.90 or $0.95 gets us the same X of revenue. That's the sense in which I think it's getting just slightly -- it's going to keep getting a little bit more efficient each year.

Cash flow from operations, my favorite slide, page 8 is we are now trailing $45 million operating cash flow. Jonathan, do you want to say -- or Steve, I bet you want to say something about operating cash flow.

Yes, the underlying business is generating a nice cash flow. We are investing in the business. During the first quarter we put in some additional systems upgrades, which it's nice to be able to continue to build the platform for the future.

Okay, GAAP annualized inventory turns, 38, which (inaudible) on a real basis, I would say an underlying basis, it's 7.1. I start feeling good about 7.1.

I still think we can do better. And on a GAAP basis it's 38 of course because you have the partners.

So if we go to my page 10, GMROI of 867. That's higher than anywhere we've been. I am still hoping we can get it a three digit GMROI someday not too far from now.

Net promoter score, page 11. This has just gotten fantastic. Again for the newcomers to this idea, this is based on a book by Fred Reichheld called The Ultimate Question, which is you ask people would they -- how likely would they be to recommend you to a friend. And, you take those who give you 9s or 10s and you subtract those who give you 1 through 6s and see your net promoter score.

Average of US corporations according to this book is 8%. We are running at 69%. Right up there with when he wrote the book, he had the NPS of Harley, Costco, Amazon, eBay. And he called superstars and we are clearly superstar in even slightly in the high -- higher end of the range of superstars.

However, and we have a tough business -- it's a little bit -- our NPS on -- when we are selling books or CDs or something is higher than it is when you are selling what we sell, just because people get their book and they are happy with it. They are automatically happy with a book the way they aren't necessarily with a shirt.

What's striking to me is, our NPS even for people who contacted customer service -- so, they've had some problem and you would think that you're in danger of having an unhappy customer, they now score in the super score rank too. People who call our customer service for example by this score, score higher than the overall satisfaction of customers of -- well, according to Fred Reichheld, AMEX and just below FedEx.

We have a wonderful customer care department and just see that -- building that number has been a four year effort and I think it has really paid off. We have wonderful -- I was sitting out and listening to the people in the customer care center and it's music.

Patrick, I just have to comment. I think what we've done out in the customer care center is one of the factors that has driven our growth. People know when they purchase at Overstock they're going to have a good experience. The website is clean, the product is good and it is shipped quickly.

But when things go poorly or when they bought something that they didn't quite expect, they call customer care and things get taken care of. And frankly, when you got front-to-end business like that, I think that that is driving our growth as much as anything.

I agree and there's a lot of things that people can't see from outside unless they pay attention to; customer care is a big one, what it's doing. Another big one is human capital which is run by Steve Tryon, customer care with Stormy Simon. And Steve Tryon runs human capital development.

I think that has another -- we're we have the esprit de corps and training and such in customer care. It's partially also a payoff of the human capital development we do. We really are now devoting a lot of energy in the budget to training systems within the company and keeping people fresh and certified in the different skills they need for the job and well-trained.

So, let's get to the last, which is revenue growth. Well, the last page is just the highlights. You can see the revenue growth, gross profit, contributions and operating cash flow. [All-time actually] operating cash flow has more than doubled from the first quarter last year. Trailing 12 month operating cash flow has doubled.

Jonathan, you said that 10 questions have been e-mailed to you. Why don't we do those quickly? And that way we will save some somebody from asking a question maybe.

Great. Let me go through a few of them in bunches. Some of these we've answered, but I'll just ask them. Two companion questions. One was growth in March and did Overstock report on April trends versus Q1 any weaknesses?

And I guess the answer is March was consistent with the quarter, much like the rest of Q1. And April trends, I think Patrick you gave a good answer of what people could expect. Do you want to expand on that at all?

No, I don't need to expand on it.

Okay. There are two questions on international. One, are we breakeven or better in international? And is there strong brand recognition on the international front?

The answers to those are yes, we are breakeven. Run a slight profit this year and, is there strong brand recognition, not yet, not yet.

Another question. Please cover what's driving the lower customer acquisition cost. Is it less non-efficient spend or did we find something more recurring like higher natural search acquired customers as a percentage of the total?

We've developed a very granular view of where our good customers are. That actually -- how our good customers are to be found. And we are targeting -- and part of being a good customer is being low marketing spend. We have just been just been able to get a step more granular than ever before.

So, we do have it down to -- I don't want to give anything away. But, we realize now instead of some -- a big set of numbers has an average, but if you dig into it there is really a small number that have a very different -- 1000 customers may have one average GPA. But if you dig into it you can find that you're getting them from one place with half for that CPA. So there's a lot of that kind of thinking now; integration of our CRM efforts with our marketing efforts.

Next, we may have answered this but I'll ask it. What's our best guess on the revenue trajectory once easier comps run off?

I think some -- I answered it for the long-term. I think you can take 20%. If the US is growing 0%, Internet grows 10%, we grow 20%. And you can just build up like -- so we should be growing 20% above the national GDP growth. 20% to 25%.

A question that's near and dear to my heart, always interested in the status of the prime broker lawsuit. Please comment. Want me to take that one?

Please do.

It's moving forward. A lot of document discovery from the prime brokers. We're scheduled to start depositions later this month or early next month. It maybe postponed a little bit. But we have a trial date for September 12, 2011. So, we are on our way. We like what we've got in discovery for the most part. So, it's moving forward.

Anything else, Steve Chesnut, you want to add?

No, I think Jonathan clearly speaks the voice of Overstock on that one.

Here's another question. Maybe Steve can answer this one. When adjusted for the legal settlement in the fourth quarter, operating expenses grew 24% year-over-year while in the first quarter they grew 5% year-over-year. Which is more indicative of the trend likely to be seen in the rest of the year?

Yes, I think we're going to be closer to the Q4, which is that 20-ish type of percent growth in operating expenses. We are continuing to invest on the people side building technology and competency, building out functionality within the business. So, I think we'll be closer to that 20%-ish type growth for the year.

Next question is how sustainable is the 30% year-over-year growth in gross profits we have seen over the last two quarters? And what does management see as having been the main drivers of the improved gross profit growth rate?

Well I think that if we can sustain 20% growth, then contribution dollar growth -- I'm not going to say gross margin growth -- but contribution dollar growth should be sustainable at 25 points or north. And, what do you want to say about to what you attribute that? I will let Steve Chesnut touch that.

Yes, I think there are three pieces that are key drivers of that. One, we have put a lot of energy and emphasis around supply-chain, supply-chain efficiencies that continue to pay off.

Then, when you look at the drivers of growth being -- Jonathan said customer service, a solid customer service model, providing value in the form of sharper pricing for our customers, and then understanding what the right marketing efficiency and the right spend look like. A combination of all of that together really is what propels the gross margin and gross profit to drive forward going through the balance of the year.

Last written question we've got is, in the Q4 call, it says management referenced three main investments, two of which were quote/unquote money in the bank. Do any of these investments have an impact on the first-quarter results?

Yes, I think I recall what I was referring to, at least specifically in one of them. And yes, that's -- that was the new recommendation engine, RichRelevance, and which is doing quite well for us. I knew that would add, but no. So, yes, I know at least one of them has turned out to be money in the bank. But Jonathan, do you recall anything the other two?

I don't, specifically; I'm sorry.

I can say we've gotten much -- thoroughly organized about project development, having the right developers, integrating the business. There's really -- the division between business and software development is just really breaking down that we -- the software developers have a lot of respect. They are building out teams and leading teams that are taking business challenges.

And we have a plethora of ideas of -- to -- for the company. We just have -- we were thinking gosh, maybe six months from now if we just grind through things it will finally let up. But of course by the time you hit six months, there is always another huge list of ideas.

But we have -- it feels -- the ideas that we are working on now, and some are for implementation in Q2, feel like they are ones we could not have done before because for the last few years we've kind of built the building blocks of these ideas. But now they are all -- we seem to have enough building blocks. We can pursue lots of good ideas. And they -- deliver them at a rate at a couple, say, per quarter and so, I actually think we'll see -- our best days are ahead of us.

I'll just comment on that. You know, while development projects are never easy as falling out of bed, they've -- our development team, one, has gotten larger, two, is working very closely with the business team, and three, is taking off more bite-size chunks and getting things rolled more quickly. And, I really just couldn't be more pleased with how we are getting projects done.

As Patrick has commented, in years past, development was a real bottleneck. And, while it always is a slower thing because it takes work and you've got to make sure things are set up right, it's running I think about as smoothly as can be expected right now.

We are hiring there if any (inaudible) engineers are looking.

Absolutely. Those are the written questions. Are there any -- we will take questions from any folks on the call.

[JP St. Jacques].

I'm in Canada. I'm actually a shareholder also of the company. Can you explain to me the dynamics of bit more? Because I was starting to accumulate a position in your stock for me.

And the dynamics of the free cash flow solution in the last quarter, is it because you paid back a lot of -- account payable that your free cash flow came down? Or what -- why is it negative so much there now?

Well, you always have to look at it on a 12 month basis I think. Especially the first quarter it's kind of meaningless and the fourth quarter, because the fourth quarter you sell all these products for which you get paid and are holding the cash as the quarter ends. And then, in the first quarter sales drop and you payback all those vendors. And by January 15, you pay back all those vendors whose products you sold through Christmas.

So, you get this jump in float, but in cash, at the end of the year. It's not really cash. It's not our cash. It's just cash we're holding for somebody and it gets paid out in two weeks. So we usually look on a trailing year basis.

Steve Chesnut, do you want to add anything to that? You are the guy actually moving the cash around.

Patrick, well said, because when you go from fourth quarter to first quarter you've got that big spike in accounts payable that sits on the balance sheet at the end of Q4 that gets paid out in Q1. That's why we like to look at this one on a trailing 12 month basis so you get that seasonality and noise out of the picture. So, if you look at it on a true 12 month rolling it gives you I think a more -- better perspective of where the business is actually headed.

Okay, great. Great quarter.

(Operator Instructions).

There being no further questions, I am happy to end the call.

Yes, I think we are being let off easy Patrick. We should keep continuing delivering quarters like this one. And the calls -- there may not be a lot of tough questions.

Noted.

Okay, well, I think we should wrap it up.

We will be speaking to you in -- well, we just spoke a month ago.

Won't be that soon next time; at the end of the quarter.

Okay.

Thank you. Thanks Lindsay.

Thank you. This concludes today's conference call. You may now disconnect.