Overstock.com Investor

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January 30, 2008 at 9:06 AM EST
Overstock.com Reports Fourth Quarter and Fiscal Year 2007 Financial Results

SALT LAKE CITY, Jan. 30 /PRNewswire-FirstCall/ -- Overstock.com, Inc. (Nasdaq: OSTK) today reported financial results for the quarterly and annual periods ending December 31, 2007.

Key FY 2007 metrics (comparison to 2006):

  • Revenue: $768.8 million vs. $788.2 million (a 2% decrease);
  • Gross profits: $128.9 million vs. $94.8 million (a 36% increase);
  • Sales and marketing expense: $55.7 million vs. $70.9 million (a 21% reduction);
  • Contribution (gross profit less marketing): $73.3 million vs. $23.9 million (a 206% increase);
  • G&A / Technology expense: $101.7 million vs. $112.0 million (a 9% reduction);
  • Net loss: $44.1 million vs. $101.8 million (a 57% reduction);
  • EBITDA: $(4.0) million vs. $(55.7) million (a $51.8 million improvement)
  • Operating cash flow: $10.1 million vs. $(26.3) million (a $36.4 million improvement); and
  • Free cash flow: $7.4 million vs. $(49.7) million (a $57.2 million improvement)

Key Q4 metrics (comparison to Q4 2006):

  • Revenue: $300.0 million vs. $294.0 million (a 2% increase);
  • Gross profits: $49.0 million vs. $27.4 million (a 79% increase);
  • Sales and marketing expense: $27.6 million vs. $29.0 million (a 5% reduction);
  • Contribution (gross profit less marketing): $21.5 million vs. $(1.7) million (an increase of $23.1 million);
  • G&A / Technology expense: $26.0 million vs. $33.5 million (a 22% reduction);
  • Net loss: $4.3 million vs. $45.6 million (a 91% reduction);
  • EBITDA: $2.2 million vs. $(27.4) million (a $29.6 million improvement)
  • Operating cash flow: $55.8 million vs. $51.9 million (a $3.9 million improvement); and
  • Free cash flow: $55.4 million vs. $48.2 million (a $7.3 million improvement)

Dear Investor:

Free cash flow for the year was positive $7.4 million and operating cash flow was positive $10.1 million. For the first time in our history, we were EBITDA positive for two consecutive quarters (Q3 and Q4 2007), generating positive $6.3 million of EBITDA during those six months. At December 31, 2007, we had cash and marketable securities on hand of $147.4 million, up $20.4 million from the end of last year.

While I had hoped our Q4 results would have been stronger than they were, 2007 was still a major turnaround from the setbacks of 2005 and 2006, and we truly are well-positioned for 2008. I predicted that the turnaround would look like this: first, hyper-growth in contribution dollars (at least for a while); then, growth in gross profits; and, finally, growth in revenue. To many that may have seemed optimistic, as during the second half of 2006, revenues, gross profits and contribution dollars were all shrinking sharply. In 2007 we did, in fact, return to hyper-growth in contribution dollars, and we saw strong growth in gross profits. That was the proper place in the income statement to focus. Our next focus is revenue growth, without losing the discipline that has led to the turnaround of the first two. Once we achieve that, our turnaround will be complete. However, having returned to a solid cash-generating position, and positive EBITDA position, is a great relief.

During the last few months, we earned several distinctions. We placed number one in the Q4 2007 Online Customer Respect Study issued by the Customer Respect Group. We placed number two overall, and number one among mass merchants, in Gomez, Inc.'s "Merchant Madness Holiday Tournament" -- a competition that identified websites that were consistently responsive and available to shoppers during the holiday crunch. For the second year running, the NRF Foundation/American Express Customer Service Survey -- a national survey of thousands of households that ranks both on-line and brick-and-mortar retailers for customer service -- ranked Overstock the number four retailer in the nation.

I look forward to discussing our results with you on our conference call. In the mean time, I remain,

Your humble servant,

Patrick M. Byrne

P.S. Please email Kevin Moon at kmoon@overstock.com with questions prior to the call.

Note regarding our Q4 and 2007 financial results:

From the company's inception through the third quarter of 2007, we have recorded revenue based on product ship date. In the fourth quarter of 2007, in response to an accounting comment from the staff of the SEC, we retrospectively changed our policy to recognize revenue based on estimated product delivery date. We have recorded the cumulative effect of this change in the fourth quarter of 2007.

We performed a detailed analysis of the impact of this change through the fourth quarter of 2007, and we have preliminarily determined that the impact of this change is immaterial to prior periods. As a result, for the full year 2007, we have recorded revenue of $768.8 million, which comprises of $777.5 million of revenue under the revised revenue recognition policy, less $8.7 million, the cumulative effect of revenue that would have been deferred as of the end of 2006. Our consolidated balance sheet at December 31, 2007 reflects $5.0 million of deferred revenue related to shipments in transit as of that date; we also reduced gross profit and net income in Q4 related to the revenue deferral by approximately $800K. Going forward, each quarter, we will make a similar deferral based on estimated product delivery date.

Although we have initially concluded that this is the appropriate manner in which this change should be reflected in our results of operations for 2007, we are still in the process of reaching a final conclusion. If we determine it was not appropriate to make the cumulative adjustment in the fourth quarter, our results of operations will be adjusted to reflect the results solely under the revised method.

Key financial and operating metrics:

Total revenue -- Total revenue for the three months ended December 31, 2006 and 2007 of $294.0 million and $300.0 million, respectively, a 2% increase. For the year ended December 31, 2006 and 2007, total revenue was $788.2 million and $768.8 million, respectively, a 2% decrease.

Gross profit and gross margin -- Gross profits for the three months ended December 31, 2006 and 2007 was $27.4 million and $49.0 million, respectively, a 79% increase, representing margins of 9.3% and 16.3% for those respective periods. For the twelve-month periods, gross profits were $94.8 million in 2006 and $128.9 million in 2007, a 36% increase. Gross margins were 12.0% and 16.8% for those respective twelve-month periods.

Contribution and contribution margin -- "Contribution" (gross profit less sales and marketing expenses) for the three months ended December 31, 2006 and 2007 was $(1.7) million (-0.6% contribution margin) and $21.5 million (7.2% contribution margin), respectively, a 1,383% increase. For the twelve months ended December 31, 2006 and 2007, contribution was $23.9 million (3.0% contribution margin) and $73.3 million (9.5% contribution margin), respectively, a 206% increase.



                                 Three months ended       Twelve months ended
                                     December 31,            December 31,
                                   2006        2007         2006       2007
    Total revenue              $ 294,029   $ 300,011    $ 788,150   $ 768,838
    Cost of goods sold           266,656     250,974      693,350     639,922

    Gross profit                  27,373      49,037       94,800     128,916
    Less: Sales and marketing
     expense                      29,045      27,580       70,897      55,661

    Contribution               $  (1,672)  $  21,457    $  23,903   $  73,255
    Contribution margin             (0.6%)       7.2%         3.0%        9.5%


Operating loss -- Operating losses for the three months ended December 31, 2006 and 2007 were $40.9 million and $4.6 million, respectively. For the twelve months ended December 31, 2006 and 2007, operating losses were $93.8 million and $40.7 million, respectively.

EBITDA -- EBITDA (a non-GAAP measure) for the three months ended December 31, 2006 and 2007 was $(27.4) million and $2.2 million, respectively. For the twelve months ended December 31, 2006 and 2007, EBITDA was $(55.7) million and ($4.0) million, respectively. We believe that, because our current capital expenditures are significantly lower than our depreciation levels, discussing EBITDA at this stage of our business is useful to us and investors because it approximates actual cash used or cash generated by the operations of the business.


                                   Three months ended     Twelve months ended
                                       December 31,           December 31,
                                      2006      2007        2006        2007
    Operating loss                 $(40,885)  $(4,577)   $(93,766)   $(40,690)
    Add:Depreciation and
     amortization                    11,525     6,670      32,327      29,495
      Stock-based compensation
       expense                        1,032     1,136       4,120       4,522
      Stock-based compensation
       to consultants for service        (8)      (91)         23         189
      Stock-based compensation
       for performance share plan         -      (900)          -        (550)
      Treasury stock issued to
       employees as compensation        108       (26)        787         902
      Restructuring costs -
       asset impairment and
       depreciation                     791         -         791       2,169

    EBITDA                         $(27,437)  $ 2,212    $(55,718)   $ (3,963)


Net loss -- Net loss for the three months ended December 31, 2006, was $45.6 million, or $2.15 loss per share, compared to $4.3 million, or $0.18 loss per share in 2007. For the twelve months ended December 31, 2006 and 2007, net losses totaled $101.8 million and $44.1 million, respectively, or $5.01 and $1.86 loss per share for those respective periods. For the twelve months ended December 31, 2006 net loss included restructuring charges of $5.7 million and $6.9 million loss from discontinued operations. Net loss in 2007 includes restructuring of $12.3 million and loss from discontinued operations of $3.9 million.

Free Cash Flow (a non-GAAP measure) -- Free cash flow for the three months ended December 31, 2006 and 2007 totaled $48.2 million and $55.4 million, respectively. For the years ended December 31, 2006 and 2007, free cash flow was $(49.7) million and $7.4 million.

Free cash flow reflects an additional way of viewing our cash flows and liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows. Free cash flow, which we reconcile to "Net cash provided by (used in) operating activities" is cash flow from operations reduced by "Expenditures for property and equipment." Although we believe that cash flow from operating activities in an important measure, we believe free cash flow is a useful measure to evaluate our business since purchases of fixed assets are a necessary component of ongoing operations.Therefore, we believe it is important to view free cash flow as a complement to our entire consolidated statements of cash flows.



                                     Three months ended   Twelve months ended
                                        December 31,          December 31,
                                       2006      2007        2006      2007
    Net cash provided by (used in)
     operating activities            $51,949   $55,846    $(26,293)   $10,089
    Expenditures for property and
     equipment                        (3,766)     (411)    (23,441)    (2,643)

    Free cash flow                   $48,183   $55,435    $(49,734)    $7,446


Cash and working capital -- At December 31, 2007, Overstock.com had cash, cash equivalents and marketable securities of $147.4 million and working capital of $72.1 million.

About Overstock.com

Overstock.com, Inc. is an online "closeout" retailer offering discount, brand-name merchandise for sale over the Internet. The company offers its customers an opportunity to shop for bargains conveniently, while offering its suppliers an alternative inventory liquidation distribution channel. Overstock.com, headquartered in Salt Lake City, is a publicly traded company listed on the NASDAQ Global Market System and can be found online at http://www.overstock.com.

Overstock.com(R) is a registered trademark of Overstock.com, Inc. All other trademarks are the property of their respective owners.

This press release contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include, but are not limited to, statements regarding revenue growth, without losing the discipline, completion of a turnaround, positioning for 2008, future cash generation and EBITDA results, and the outlook of the company. Our Form 10-K for the year ended December 31, 2006, our quarterly reports on Form 10-Q, and our subsequent filings with the Securities and Exchange Commission identify important factors that could cause the actual results to differ materially from those contained in our projections, estimates or forward-looking statements.



                             Overstock.com, Inc.
              Consolidated Statements of Operations (unaudited)
                   (in thousands, except per share amounts)

                                      Three months ended  Twelve months ended
                                         December 31,        December 31,
                                        2006      2007      2006       2007
    Revenue
      Direct                          $ 98,158   $68,471  $ 303,202  $197,196
      Fulfillment partner              195,871   231,540    484,948   571,642

        Total revenue                  294,029   300,011    788,150   768,838

    Cost of goods sold
      Direct                           101,730    56,897    284,943   165,698
      Fulfillment partner              164,926   194,077    408,407   474,224

        Total cost of goods sold       266,656   250,974    693,350   639,922

    Gross profit                        27,373    49,037     94,800   128,916

    Operating expenses:
      Sales and marketing               29,045    27,580     70,897    55,661
      Technology                        20,680    14,667     65,158    59,453
      General and administrative        12,859    11,367     46,837    42,209
      Restructuring                      5,674         -      5,674    12,283

        Total operating expenses        68,258    53,614    188,566   169,606

    Operating loss                     (40,885)   (4,577)   (93,766)  (40,690)

    Interest income                        577     1,429      3,566     4,788
    Interest expense                    (1,127)   (1,103)    (4,765)   (4,188)
    Other income, net                       88         -         81       (92)

    Loss from continuing operations    (41,347)   (4,251)   (94,884)  (40,182)
    Discontinued operations:
      Loss from discontinued operations (4,267)        -     (6,882)   (3,924)

    Net loss                           (45,614)   (4,251)  (101,766)  (44,106)
    Deemed dividend related to
     redeemable common stock                 -         -        (99)        -

    Net loss attributable to common
     shares                           $(45,614)  $(4,251) $(101,865) $(44,106)

    Net loss per common share - basic
     and diluted:
      Loss from continuing operations $  (1.95)   $(0.18) $   (4.67) $  (1.70)
      Loss from discontinued
       operations                     $  (0.20)     $  -  $   (0.34) $  (0.16)
      Net loss per common share -
       basic and diluted              $  (2.15)   $(0.18) $   (5.01) $  (1.86)
    Weighted average common shares
     outstanding - basic and diluted    21,163    23,807     20,332    23,704

    Other data:
    Shopping bookings (in 000s)       $319,621  $342,642  $ 863,202  $855,913
    Auction gross merchandise volume
     (in 000s)                          $7,180    $3,183  $  28,870   $14,259
    Average customer acquisition cost
     (shopping)                         $25.06    $24.98     $24.80    $22.65



                             Overstock.com, Inc.
                   Consolidated Balance Sheets (unaudited)
                                (in thousands)

                                                             December 31,
                                                           2006        2007
                                 Assets
    Current assets:
      Cash and cash equivalents                          $126,965    $101,394
      Marketable securities                                     -      46,000

        Cash, cash equivalents and marketable securities  126,965     147,394
      Accounts receivable, net                             11,638      12,304
      Notes receivable                                      6,702       1,506
      Inventories, net                                     20,274      24,603
      Prepaid inventory                                     2,241       3,572
      Prepaid expenses                                      7,473       7,572
      Current assets of held for sale subsidiary            4,718           -

        Total current assets                              180,011     196,951
    Property and equipment, net                            56,198      27,197
    Goodwill                                                2,784       2,784
    Other long-term assets, net                               578          86
    Note receivable                                             -       4,181
    Long-term assets of held for sale subsidiary           16,594           -

        Total assets                                     $256,165    $231,199

                  Liabilities and Stockholders' Equity
    Current liabilities:
      Accounts payable                                    $66,039     $79,097
      Accrued liabilities                                  40,142      41,910
      Capital lease obligations, current                    5,074       3,796
      Current liabilities of held for sale subsidiary       3,684           -

        Total current liabilities                         114,939     124,803
    Capital lease obligations, non-current                  3,983           -
    Other long-term liabilities                                 -       3,034
    Convertible senior notes                               75,279      75,623

        Total liabilities                                 194,201     203,460

    Stockholders' equity:
      Common stock                                              2           2
      Additional paid-in capital                          325,771     333,909
      Accumulated deficit                                (198,694)   (242,800)
      Treasury stock                                      (64,983)    (63,278)
      Accumulated other comprehensive loss                   (132)        (94)

            Total stockholders' equity                     61,964      27,739

        Total liabilities and stockholders' equity       $256,165    $231,199



                             Overstock.com, Inc.
              Consolidated Statements of Cash Flows (unaudited)
                                (in thousands)

                                       Three months ended  Twelve months ended
                                           December 31,        December 31,
                                         2006      2007      2006       2007
    Cash flows from operating
     activities of continuing
     operations:
      Net loss                        $(45,614)  $(4,251) $(101,766) $(44,106)
      Adjustments to reconcile net
       loss to cash provided by (used
       in) operating activities of
       continuing operations:
        Loss from discontinued
         operations                      4,267         -      6,882     3,924
        Depreciation and amortization   11,525     6,670     32,327    29,495
        Realized gain from marketable
         securities                          -         -     (2,085)        -
        Realized loss on disposition of
         property and equipment              -         -        599         1
        Stock-based compensation         1,032     1,136      4,120     4,522
        Stock-based compensation to
         consultants for services           (8)      (91)        23       189
        Stock-based compensation
         relating to performance share plan  -      (900)         -      (550)
        Treasury stock issued to
         employees as compensation         108       (26)       787       902
        Amortization of debt discount
         and deferred financing fees         -        86        417       344
        Restructuring                        -         -          -    12,283
        Notes receivable accretion           -      (136)         -      (272)
        Changes in operating assets and
         liabilities, net of effect of
         acquisition and discontinued
         operations:
          Accounts receivable, net      (4,932)   (4,697)    (2,052)     (966)
          Inventories, net              42,522    (2,203)    67,009    (4,329)
          Prepaid inventory              1,783     1,431      7,388    (1,331)
          Prepaid expenses               1,720     2,685      1,004       (99)
          Other long-term assets           601       105        496       471
          Accounts payable              18,279    40,593    (35,200)   12,961
          Accrued liabilities           20,666    15,523     (6,242)   (3,157)
          Other long-term liabilities        -       (79)         -      (193)

            Net cash provided by
             (used in) operating
             activities                 51,949    55,846    (26,293)   10,089

    Cash flows from investing
     activities of continuing
     operations:
      Change in restricted cash              -         -        253         -
      Purchases of marketable
       securities                            -   (46,053)         -   (75,217)
      Sales of marketable securities         -    16,934     56,756    29,258
      Expenditures for property and
       equipment                        (3,766)     (411)   (23,441)   (2,643)
      Proceeds from the sale of
       property and equipment                -         -          1         -
      Proceeds from the sale of
       discontinued operations, net of
       cash transferred                      -         -          -     9,892
      Collection of note receivable          -         -          -     5,196
      Decrease in cash resulting from
       de-consolidation of variable
       entity                             (102)        -       (102)        -
      Other investments                      -         -       (100)        -

            Net cash provided by
             (used in) investing
             activities                 (3,868)  (29,530)    33,367   (33,514)

    Cash flows from financing
     activities of continuing
     operations:
      Payments on capital lease
       obligations                         (79)       (5)    (2,957)   (5,261)
      Borrowings on line of credit       8,178     1,254     86,681     2,423
      Payments on line of credit        (8,178)   (1,254)   (86,681)   (2,423)
      Proceeds from the issuance of
       common stock                     39,406         -     64,406         -
      Exercise of stock options            267       936      2,534     3,118

            Net cash provided by
             (used in) financing
             activities                 39,594       931     63,983    (2,143)

      Effect of exchange rate changes
       on cash                              23         2         34        (3)
      Cash provided by (used in)
       operating activities of
       discontinued operations           1,469         -      1,581      (204)
      Cash used in investing
       activities of discontinued
       operations                         (223)        -       (566)      (53)

      Net increase (decrease) in cash
       and cash equivalents             88,944    27,249     72,106   (25,828)
      Change in cash and cash
       equivalents from discontinued
       operations                       (1,247)        -     (1,016)      257
      Cash and cash equivalents,
       beginning of period              39,268    74,145     55,875   126,965

      Cash and cash equivalents,
       end of period                  $126,965  $101,394   $126,965  $101,394

SOURCE Overstock.com, Inc.

CONTACT:
Media, Kirstie Burden,
+1-801-947-3172,
kburden@overstock.com,
or
Investors, Kevin Moon,
+1-801-947-3282,
kmoon@overstock.com,
both of Overstock.com, Inc.

Web site: http://www.overstock.com