Overstock.com Reports Q3 2017 Results

Overstock.com Reports Q3 2017 Results

Overstock.com Reports Q3 2017 Results

Consolidated revenue of $424 million (-4% growth) and net loss of ($786,000)
Retail net income of $1.1 million
Medici net loss of ($1.9) million
Updated tZERO ICO information
Sale of warrants for 3,722,188 common shares

SALT LAKE CITY, Nov. 08, 2017 (GLOBE NEWSWIRE) — Overstock.com, Inc. Common Shares (NASDAQ:OSTK) / Series A Preferred (Medici Ventures’ tZERO platform:OSTKP) / Series B Preferred (OTCQX:OSTBP) today reported financial results for the quarter ended September 30, 2017.

Dear Owners,

There is a tremendous amount of activity going on within your firm. I will mention one key event, then describe the retail side of the business, then the Medici side, and then strategic considerations.

I am pleased to announce that we have sold a warrant to a fund affiliated with Passport Capital LLC for $2.6 million to purchase 1,250,000 shares of our common stock at $40.45 per share until February 7, 2018. We also sold a warrant to Quantum Partners LPfor $4 million to purchase 2,472,188 shares of our common stock at $40.45 per share until January 2, 2018. Quantum Partners LP is a private investment fund managed by Soros Fund Management LLC.

 Overstock.com, Inc. Common Shares (NASDAQ:OSTK) / Series A Preferred (Medici Ventures’ tZERO platform:OSTKP) / S

Overstock.com Reports Q3

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On the retail side, all systems are running better than they have in a long time, with the exception of one marketing channel (SEO) which has suffered significantly since May (to address this, we have formed our largest war room to date in response). However, our Paid Digital Marketing and Branding metrics are doing well, especially given that we have a loss-gushing direct competitor who is outspending us on Paid Digital Marketing by 4.6X, and who on Branding is running 6X-7X as many television spots as we are running. The fact that we are holding our own against their decision to distort all previously known prices in the digital marketing landscape is purely a function of the fact that over the last few years we have made a prop-to-jet conversion, so that a large proportion of our channels are run by quantitatively-oriented people, including data scientists and machine learning experts, who keep tweaking more efficiency out of the numbers to seek to stay ahead of the loss-gushing competitors.

On the Medici front: There may be no better-positioned company for blockchain investments in the world. We have made nine such investments, and under the guidance of our President of Medici Ventures, Jonathan Johnson, Medici has brought a lot of value to our investments by tapping into various Overstock resources to help nurture the firms that desire it (some of which have been fairly nascent). The formula is proving to be quite a success. One of those successes is our blockchain-meets-Wall-Street firm, tZERO, which has drawn much attention this quarter due to the SEC’s July 25 ruling regarding DAO tokens: if the ICO world is going to shift towards security ICOs (and hence, securities, as the SEC decision has been read by most), then those instruments need to trade upon an SEC-compliant venue that is technologically capable of handling blockchain. Furthermore, we believe there is precisely one such venue in the world, and tZERO owns it. In addition, tZERO’s Digital Locate Receipt (“DLR”) product is hitting full stride today, with approximately $100 billion in securities on which tZERO can generate a DLR representing a pre-borrow (which is better than a “locate”). As of this week, the DLR platform is now integrated into multiple trading platforms allowing thousands of active traders, access to billions of dollars of available DLR inventory. All in all, there are historic possibilities piling up in tZERO alone (to say nothing of other blockchain opportunities we are already developing, including one I suspect is bigger even than tZERO).

Regarding tZERO: we intend to proceed with our ICO, but the form the ICO will take has evolved:

  • As you know, for 4 years we have been at the forefront of nearly every major development in the area of Blockchain and capital markets. Due to our vision and unique structure and a focus on maintaining that leading edge, we are offering what we view as a truly revolutionary construct for the

    tZERO

    ICO.

  • Our token will be a Security Token with a unique characteristic, in that it will have a Utility function which can be used throughout tZERO’s growing suite of products and ecosystem.
  • We anticipate that the ICO will be issued as a Security Token and offered as a private placement pursuant to an exemption from the registration requirements of the U.S. Securities Act.
  • Our team has worked diligently to design the token to ensure that it will be tradable on our U.S.-regulated ATS operated by one of

    tZERO’s

    subsidiary FINRA

    Broker Dealers

    .

  • We are working with our strategic, financial and legal advisors to structure the unique features of the

    tZERO

    token to provide the utmost flexibility and value for purchasers. We currently contemplate that the token’s features will include:

    • a right to share in a portion of

      tZERO’s

      top-line revenue (with such payments deposited into holders’ digital wallets);

    • utility to pay for fees on the ATS, with a reduced fee schedule for token holders;
    • additional utility features and functionality that will be announced at a later date.
  • The proceeds of the pre-sale will be used, among other things, for strategic acquisitions and enhancements to the

    tZERO

    platform.

  • Since announcing our intention to do an ICO on October 24 we have been overwhelmed with interest. The feedback we have received is positive, and many have expressed questions or concerns about the approaching Hard Fork, which as of today is a question. To that

    end

    we have decided to defer to the wisdom of the crowd, and address any uncertainty in committing to a firm ICO date. Therefore, we have decided to move the ICO pre-sale process out to allow for broadening the registration of all interested participants and account for any uncertainty regarding the potential fork.

  • tZERO expects to launch the ICO process around November 30, 2017, subject to market conditions and regulatory developments.

I have indicated for about 18 months (and loud-and-clear in the last earnings call) that I hear the Gods of Economics whispering that the best model is a brick-and-click model, and that around the end of 2017 I would be working on exploring such a hybridization, which could take various forms (by way of non-exhaustive examples, click-buying-brick or brick-buying-click, or a strategic partnership formed with the right large partner). I stand by my earlier statements regarding the exploration of strategic alternatives.

This earnings call will be unusually interesting and informative, especially for investors who are new to this story and who are trying to get an understanding of how to think about an admittedly unusual collection of values. I urge you to make time for it. For those who cannot, a recording of it will be available at 10:00 p.m. ET on our PR YouTube channel.

Your humble servant,
Patrick M. Byrne

Key Q3 2017 metrics (comparison to Q3 2016):

  • Revenue: $424.0M vs. $441.6M (4% decrease);
  • Gross profit: $83.7M vs. $79.7M (5% increase);
  • Gross margin: 19.7% vs. 18.1% (168 basis point increase);
  • Sales and marketing expense: $45.2M vs. $34.7M (30% increase);
  • Contribution (non-GAAP measure): $39.2M vs. $49.2M (20% decrease);
  • G&A/Technology expense: $50.4M vs. $50.1M (1% increase);
  • Pre-tax loss: ($6.5M) vs. ($3.9M) ($2.6M increase);
    • Pre-tax loss – OSTK retail (non-GAAP financial measure): ($2.9M)
    • Pre-tax loss – Medici (non-GAAP financial measure): ($3.7M)
  • Benefit for income taxes: ($5.4M) vs. ($543,000) ($4.9M increase);
  • Net loss*: ($786,000) vs. ($3.1M) ($2.3M decrease);
  • Diluted net loss per share: ($0.03)/share vs. ($0.12)/share ($0.09/share decrease);

*Net loss refers to Net loss attributable to stockholders of Overstock.com, Inc.

We will hold a conference call and webcast to discuss our Q3 2017 financial results Wednesday, November 8, 2017, at 4:30 p.m. ET.

Webcast information

To access the live webcast and presentation slides, go to http://investors.overstock.com. To listen to the conference call via telephone, dial (877) 673-5346 and enter conference ID 4188309 when prompted. Participants outside the U.S. or Canada who do not have Internet access should dial +1 (724) 498-4326 then enter the conference ID provided above.

A replay of the conference call will be available at http://investors.overstock.com or on the Overstock.com PR YouTube channel, https://goo.gl/AYZYY7 at 10:00 p.m. ET on Wednesday, November 8, 2017. An audio replay of the webcast will be available via telephone starting at 7:30 p.m. ET on Wednesday, November 8, 2017, through 6:30 p.m. ET on Wednesday, November 22, 2017. To listen to the recorded webcast by phone, dial (855) 859-2056 then enter the conference ID provided above. Outside the U.S. or Canada dial +1 (404) 537-3406 and enter the conference ID provided above.

Please email all questions in advance of the call to ir@overstock.com.

Key financial and operating metrics:

Investors should review our financial statements and publicly-filed reports in their entirety and not rely on any single financial measure.

Total net revenue – Total net revenue was $424.0 million and $441.6 million for Q3 2017 and 2016, respectively, a 4% decrease. In Q2 2017 and continuing in Q3 2017, we have experienced slowing of our overall revenue growth which we believe is due in part to changes that Google, Inc. (“Google”) has made in its natural search engine algorithms. We have found that the algorithm adjustments that Google has made have introduced more volatility than past years and the length of the tuning has been significantly greater than previous years. This has created tremendous headwind for our business beginning in May and continuing. We have reorganized a large number of resources around addressing this current challenge, as well as seeking to prevent it from occurring again. We have implemented a variety of innovations and technical improvements in this area and expect to continue to do so. This decrease to revenue was partially offset by efforts to increase revenue in other marketing channels such as sponsored search and email.

Gross profit – Gross profit was $83.7 million and $79.7 million for Q3 2017 and 2016, respectively, a 5% increase, representing 19.7% and 18.1% gross margin for those respective periods. The increase in gross margin was primarily due to a continued shift in sales mix into higher margin home and garden products, partially offset by increased promotional activities.

Sales and marketing expenses – Sales and marketing expenses totaled $45.2 million and $34.7 million for Q3 2017 and 2016, respectively, a 30% increase, and representing 10.6% and 7.9% of total net revenue for those respective periods. The increase in sales and marketing expenses as a percent of revenue was primarily due to increased spending in the sponsored search and television marketing channels, due in part to our seeking to increase revenue in these channels to offset the effects of the Googlealgorithm changes described above.

We are experiencing an increasingly competitive digital marketing landscape. We have competitors who are spending significant amounts on advertising bidding up the cost of certain marketing channels, such as paid keywords. While we may not choose to match their levels of spending, this has increased our marketing costs in recent quarters. We expect this trend to continue. However, we do have a variety of countermeasures spinning up week by week. These countermeasures, one of which involves a quite creative alliance never before seen in e-commerce, and others of which involve applying our now-hearty AI systems up to wider and wider application across our Digital Marketing portfolio, will play out in just a handful of months.

Consolidated contribution (a non-GAAP financial measure) and contribution margin (a non-GAAP financial measure) – Contribution for Q3 2017 and 2016 was $39.2 million and $49.2 million, respectively, a 20% decrease, representing 9.2% and 11.1% of total net revenue for those respective periods.

Contribution and contribution margin (non-GAAP financial measures – which we reconcile to “Gross Profit” in our consolidated statement of operations) consist of gross profit less sales and marketing expense plus Club O Rewards and gift card breakage and reflects an additional way of viewing our results. Contribution margin is contribution as a percentage of total net revenue. We believe contribution and contribution margin provide management and users of the financial statements information about our ability to cover our operating costs, such as technology and general and administrative expenses, while reflecting the selling costs we incurred to generate our revenues and adding back the reductions in revenue that we recognized for Club O Rewards that have subsequently expired and for gift cards whose redemption is remote. Contribution and contribution margin are used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. The material limitation associated with the use of contribution is that it is an incomplete measure of profitability as it does not include all operating expenses or all non-operating income and expenses. Management compensates for these limitations when using this measure by looking at other GAAP measures, such as operating income and net income. You should review our financial statements and publicly-filed reports in their entirety and not rely on any single financial measure. For additional information about our non-GAAP financial measures, including “retail pre-tax income” and “Medici pre-tax loss” please see the “Additional Non-GAAP Financial Measure Reconciliations” section below.

Our calculation of our consolidated contribution and contribution margin is set forth below (in thousands):

Three months ended
September 30,
Nine months ended
September 30,
2017 2016 2017 2016
Total net revenue $ 424,007 100 % $ 441,564 100 % $ 1,288,466 100 % $ 1,273,781 100 %
Cost of goods sold 340,332 80.3 % 361,848 81.9 % 1,033,713 80.2 % 1,040,436 81.7 %
Gross profit 83,675 19.7 % 79,716 18.1 % 254,753 19.8 % 233,345 18.3 %
Less: Sales and marketing expense 45,153 10.6 % 34,707 7.9 % 126,068 9.8 % 99,516 7.8 %
Plus: Club O Rewards and gift card breakage (included in Other income, net) 692 0.2 % 4,162 0.9 % 1,924 0.1 % 12,247 1.0 %
Contribution and contribution margin $ 39,214 9.2 % $ 49,171 11.1 % $ 130,609 10.1 % $ 146,076 11.5 %

Technology expenses – Technology expenses totaled $28.7 million and $26.7 million for Q3 2017 and 2016, respectively, an 8% increase, and representing 6.8% and 6.1% of total revenue for those respective periods. The increase was primarily due to an increase in staff related costs of $1.5 million, an increase in technology licenses and maintenance costs of $1.3 million, partially offset by a decrease in depreciation of $848,000.

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