Overstock.com Inc (OSTK) 2010 Q2 法說會逐字稿

Good afternoon. My name is Taprika, and I will be your conference operator today.

At this time I would like to welcome everyone to the second quarter 2010 Overstock.com earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (Operator Instructions) Thank you. I would now like to turn the call over to Jonathan Johnson, President of Overstock.com. Sir, you may begin.

Thank you, Taprika. Good afternoon and welcome to our second quarter 2010 conference call. Joining me today are Patrick Byrne, Chairman and CEO of the Company, and Stephen 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 in our responses to your questions reflect management's views as of today, August 9, 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 August 5, 2010, and the second quarter 2010 form 10-Q we filed with the SEC on the same day. As you listen to today's call, I encourage you to have the press release and the Q2 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 and the slides accompanying this webcast and our filings witht 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 out of the way, let me turn the call over to Steve to review some of the financial results.

Great. Thank you, Jonathan. Let me give you a brief review of our financial results for the second quarter which ended June 30, 2010. Unless otherwise stated, all the comparisons we're going to talk about on today's call are against our results from the second quarter of 2009. For revenue, revenue grew 32% to $231 million in the quarter.

Growth was distributed broadly across all major categories of the business and we believe that our focus on pricing and marketing initiatives was a key driver for this revenue growth. Surrounding gross profit, gross profit increased 15% to $42 million, while gross margin declined 270 basis points to 18%. While the revenue growth benefited from our overall pricing initiatives, gross margin is lower as a result of these pricing initiatives. Contribution grew 9% to $27 million in the quarter and contribution margin was 11.8% and contribution margin contracted primarily from gross margin compression offset slightly by a 30 basis point reduction in sales and marketing expense. And, during the quarter we also retired $9 million of our long-term debt and invested $10 million on capital expenditures.

We believe our balance sheet is sound, and we have cash of $76 million and working capital of $37 million. Like Jonathan said, let me reiterate that I would encourage you to review our Q2 earnings release and our form 10-Q filings for a detailed and thorough analysis of the results, so with that Dr. Patrick Byrne, let me turn the call over to you.

Thank you very much, Steve. Jonathan. I will be going through the slide deck to begin with. Starting on slide three, well, all of these numbers are essentially what was just read, so let's go to slide four quarterly revenue growth. It did decelerate from 42% to 32%. Still ample and several multiples of the industry.

But we -- slide five, quarterly gross profit growth, we have decided -- we have decided too that we had a little much starch in our pricing in some areas and this is to me, a strategic move that we are squeezing our prices -- we're squeezing costs out of the supply chain and passing on those costs, -- those savings to customers. Still, all of that said, this was maybe a -- well anyway, I will stop there.

Slide six. This is our contribution margin. I would say that 11.8% is a little light. I think this should be running 12% to 13% as now I think I have said that before, under 12% is a little light. So we would like to see this back in the even 12.5%, 13%. Shouldn't, - - it has been high, as high as 14.4% , but that was probably having a little bit too much starch in our pricing, and we'll, again -- you should understand that we're, -- our model expectation here is really to run sort of 12.5%, 13%.

Contribution dollars, slide seven, $27.4 million. We have mentioned before that's how -- that's really I think -- we pay a lot of attention to this number, and we manage around this number, and we managed around this number using one set of techniques, and we're managing all the corporate expenses using another. So we pay a lot of attention to this internally and recommend you might as well. Eight, cash flow from operations, healthy at this point, trailing twelve month, $38 million cash flow from operations. We,--it is nice to have a good positive cash flow. That keeps the wolf away.

Slide nine, our GAAP annualized inventory turns are [$36 million]. That's an all time high for these two years. Was there ever a time before for these three years, was - -that may be an all time high for

Yes, I'm going to get - -we would have to go back and look, but I am going to guess that [$36 million] is an all time high.

On a real basis, the GAAP basis includes it is a blend of two different business models, and it is not -- it is one number, and it's an important number, but there is another number which is just on our internally held inventory, 6.8. Nice, I do think there is still some -- I think that we should be able to improve that somewhat, not radically, but we should be able to improve that somewhat.

Slide 10, annualized [inaudible] 779% is great. It is great not being a brick and mortar business when I see that. As you probably know, [inaudible] sort of 150% to 200% what you get in brick and mortar.

Net promoter score, slide 11. Very proud of this. We now have -- this is again I think I repeat this every quarter, this is the theory taken out of the book by Fred Wright held The Ultimate Question, the average American company, according to that book, has an 8% net promoter score. We're at the point where even people who contact Customer Service are now at 51%. That puts us in by the standards of that book, the all star category, and that's again we're talking about people who contact Customer Service. People who haven't had any issue don't contact Customer Service are even higher.

However, in this, usually you see it's been running about 70%, 71%, something happened this quarter Steve. What was it that we can't report that number?

We had [container] and integrity issues with our supplier. We're working to reconstruct it, but we will get this information going forward.

But, it is another supplier who gives us the number, another vendor who gives us the data and tracks the data on the customers who contact Customer Service, and that's really the number to me that's the most -- the more important number, and it is just fantastic. Even people who have had some issue that has made them contact Customer Service, still come out scoring us you know with fantastic satisfaction. I will repeat again that we have been you know for several years now, we have been number two in the AMEX National Retail Federation do a national poll of 8000 households, and we're number two in that poll in customer satisfaction only behind L. L. Bean but ahead of Aetna, ahead of Amazon and Zappos, and Nordstroms and some other very good companies, and we're just pleased to be in the same company as them let alone ranked higher by the American consumer.

Slide 12 highlights. Revenue growth while it did come down from [$42 million to $32 million] still is pretty robust at 32%. And again the contribution at [$11.8 million] is something we've got to -- you should see that turn up a point fairly soon. We probably ran that a little too lean, and everything -- we have great operating cash flow trailing $38.5 million on a trailing 12 basis, and we see -- what's nice about this cash flow is we are actually now investing and doing a lot of things under the hood and laying, I would say innovating, putting the money behind different innovations that are am coming that have come in some cases that are responsible for growth.

Some of it has to do with stripping costs out of the supply chain. Some of it has to do, I mentioned in an interview recently that we have a bunch of nice things hitting between, I think before the next time we're talking in October, there is a lot of interesting projects crossing the finish line. Our site is just getting better and better, and more and more intelligent I would say, so I mean there is just more and more built-in intelligence into the site which drives customer satisfaction and sales.

So with that, why don't I stop and do you fellows have anything you want to add before we take questions?

Let's go to questions.

Let's go to questions. Okay. Oh, actually I'm going to hit one more thing. People, I have said this before, that you could service so much that we would get through Q3 it looked to me about flat on a net income level. Steve, does that still seem like a reasonable --

That's still the picture and the position that we see.

And the way I see things, and people ought to understand this as applying not just to this year but even to the next couple of years, I really expect quarters one, two and three to sort of all add up to flat, and by flat I mean plus or minus a half a percent, plus or minus a percent, but that to me is flat, and then in the fourth quarter we make X. Well, last year in the fourth quarter we made X. This year in the fourth quarter, you know if we get flat through the first three and then in the fourth quarter we should make Y where Y is some number significantly larger than X, and then next year I think it is the same pattern.

I think it is basically Q's one, two and three all add up to a - -about flat, and then we make Z in the fourth quarter, and Z should be significant -- that's how I see our profits developing over the years. Kind of interesting to me to see how many people get sort of really concerned about what are you making [inaudible] -- well, as I said before, there is not a person in this company I think who knows what Wall Street's numbers are. It is never talked about. I am hoping Steve Chesnut doesn't know. I have no idea what Wall Street's, what the analysts predict, no one, I think if anyone even mentioned it that would, we probably wouldn't be here very long, so we have no -- we don't pay any attention to what Wall Street analysts are predicting for us on top line, bottom line or anything. We really don't. I can't recall when I ever have looked at that number, but I do know that in general, some because I hear it from shareholders, some people are really sort of very focused on things -- they don't seem to be getting that the model we have in mind, especially as we're growing and innovating, is taking profits that you might otherwise see that in quarters one, two and three and keep on putting them back into the business, so again quarters one through three should all end up roughly flat but then the pay off of each year in Q4, so --

I think I totally agree with you, Patrick. I think that the goal there is to always do what's best for the long-term value of the business and rather than, we're not trying to manage any quarter or frankly any one year. We're trying to build our customer base, improve the business as a whole and increase the enterprise value in the business.

Fair enough. Good summary.

Tapreka, we can take questions now.

(Operator Instructions) We'll pause for just a moment to compile the QnA roster. (Operator Instructions)

We'll give it another ten seconds and call it a day.

(Operator Instructions)

Okay.

(Inaudible) We don't need to make that announcement again. I think what we'll say is we're grateful to the folks who called in to listening, for listening. Are there anyone on the call.

Matt Schindler of Bank of America.

Yes.

Go ahead - - Let's go ahead and take Matt's call.

Hi, this is Paul [Bieber] for Matt. Thanks for taking my question. (Inaudible) If you can just give us some color on some of the trends you're seeing so far over the summer in terms of consumer spending and the general business?

Well, I take June was a -- I think that this recovery is [fergazy], is the slang, is term in our industry for what we avoid. Which is, if you go to Canal Street and you buy a purse and it says Gucci on it but you get it for $10, it's a fergazy purse, so I think that this recovery is fergazy and I think that it started -- June was softer than we would have expected, and June and July actually.

I mean, the growth rates now holding where about where you see it, but it was just kind of to us there is now these numbers coming out that are making I think more people aware that the recovery is fergazy, but I never believed in it, and I think it started to manifest in consumer spending as far as we could see in starting in June. Is that a fair summary, Steve?

Yes, I was going to say, we started feeling softness in Q2 especially relative to Q1.

How do you assess the general online marketing environment in terms of keyword prices and things like that?

Well they really are at a two or three-year low, keyword prices is what I am told. That's what I understand. Do you have any other knowledge?

I would say they're probably depressed.

I used to follow that more closely, and of course there are some people who you can report it and see what their average price per click is. I am told that it is at a two or three-year low. We may be getting back into more aggressive keyword buying because it is at a low. We really were early going back seven or eight years. We were kind of early in the game of aggressive keyword buying and it worked and it was all under price for a long time.

I think that about three or four years ago it got overpriced if I may say, and we pulled back the throttle on pay keyword buying, but then recently we think that it you know is -- I am told it is at a two or three-year low and anyway we're reanalyzing and seeing if we can't -- if it isn't the right time to up our buys.

And one more question. When you talk about more intelligence on the site, is that more use of analytics and AP testing or what exactly are you talking about?

AB testing, product recommendations, but also site -- a lot of site design and usability issues.

Okay. Got it. Thanks for taking my questions.

Thank you. Take care. Are there any other questions?

There are no further questions.

Okay. Well, thank you, owners. Nice working for smart owners, and we look forward to talking to you in three months. Thanks.

This concludes today's teleconference. You may now disconnect.