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Overstock.com Reports FY and Q4 2010 Results
2010 revenue $1.09B (24% growth), 2010 net income $13.9M (79% growth)

SALT LAKE CITY, Feb. 28, 2011 /PRNewswire via COMTEX/ --

Overstock.com, Inc. (Nasdaq: OSTK) today reported financial results for fiscal year 2010 and the quarter ended December 31, 2010.

(Logo: http://photos.prnewswire.com/prnh/20110120/LA32935LOGO)

Key FY 2010 metrics (comparison to FY 2009):

  • Revenue: $1,090M vs. $877M (24% increase);
  • Gross margin: 17.4% vs. 18.8% (140 basis point decrease);
  • Gross profit: $189.6M vs. $164.8M (15% increase);
  • Sales and marketing expense: $61.3M vs. $55.5M (10% increase);
  • Contribution (non-GAAP measure): $128.3M vs. $109.2M (17% increase);
  • G&A/Technology expense: $113.9M vs. $101.2M (13% increase);
  • Reduction in G&A expenses related to the settlement of legal matters: $4.5M vs. $7.1M;
  • Net income attributable to common shares: $13.8M vs. $7.7M (79% increase); and
  • Diluted EPS: $0.59/share vs. $0.33/share (79% increase).

Key Q4 2010 metrics (comparison to Q4 2009):

  • Revenue: $348.9M vs. $322.4M (8% increase);
  • Gross margin: 17.0% vs. 17.1% (10 basis point decrease);
  • Gross profit: $59.4M vs. $55.0M (8% increase);
  • Sales and marketing expense: $17.3M vs. $18.6M (7% decrease);
  • Contribution (non-GAAP measure): $42.2M vs. $36.4M (16% increase);
  • G&A/Technology expense: $27.4M vs. $23.0M (19% increase);
  • Reduction in G&A expenses related to the settlement of legal matters: $4.5M vs. $5.2M;
  • Net income attributable to common shares: $14.8M vs. $12.7M (17% increase); and
  • Diluted EPS: $0.63/share vs. $0.55/share (15% increase).

The Company will hold a conference call and webcast to discuss its fiscal year and fourth quarter 2010 financial results on Monday, February 28, 2011 at 2:00 p.m. Eastern Time.

Webcast information

To access the live webcast and presentation slides, please go to http://investors.overstock.com. To listen to the conference call via telephone, dial (866) 551-1816 and enter conference ID 45467265 when prompted. Participants outside the United States or Canada who do not have Internet access should dial +1 (706) 758-1198 and enter conference ID 45467265 when prompted.

Replay

A replay of the webcast will be available at http://investors.overstock.com starting 2 hours after the live call has ended. An audio replay of the webcast will be available via telephone starting at 5:00 p.m. Eastern Time on Monday, February 28, 2011, through 11:59 p.m. Eastern Time on Monday, March 7, 2011. To listen to the recorded webcast by phone, please dial (800) 642-1687 and enter conference ID 45467265 when prompted. Outside the U.S. or Canada please dial +1 (706) 645-9291 and enter conference ID 45467265 when prompted.

Please email questions to Kevin Moon at kmoon@overstock.com prior to the conference call.

Key financial and operating metrics:

Total revenue -- Total revenue for the fiscal year of 2010 and 2009 was $1,090 million and $877 million, respectively, a 24% increase. Total revenue for the fourth quarter of 2010 and 2009 was $348.9 million and $322.4 million, respectively, an 8% increase. Revenue growth slowed throughout the year, from 42% in Q1 to 8% in Q4, due in part to an increasing revenue growth pattern in 2009. We also experienced softness during the holiday selling season that we believe was due in part to our decision to focus on contribution growth rather than revenue growth, particularly by not heavily promoting our BMMG and consumer electronics categories, both of which are popular holiday categories that typically have lower gross margin.

Gross profit -- Gross profit for the fiscal year of 2010 and 2009 was $189.6 million and $164.8 million, respectively, a 15% increase, representing 17.4% and 18.8% of total revenue for those respective periods. The decrease in gross margin is due primarily to pricing initiatives that were implemented beginning in the third quarter of 2009, partially offset by a shift in sales mix to higher margin products as well as lower returns-related costs. Gross profit for the fourth quarter of 2010 and 2009 was $59.4 million and $55.0 million, respectively, an 8% increase, representing 17.0% and 17.1% of total revenue for those respective periods.

Contribution (a non-GAAP financial measure) and contribution margin (a non-GAAP financial measure) -- Contribution for the fiscal year of 2010 and 2009 was $128.3 million and $109.2 million, respectively, a 17% increase. Contribution margin decreased by 70 basis points to 11.8% from 12.5% in those same periods. Contribution for the fourth quarter of 2010 and 2009 was $42.2 million and $36.4 million, respectively, a 16% increase. Contribution margin was 12.1% and 11.3% for those same periods.

Contribution (a non-GAAP financial measure) (which we reconcile to "gross profit" in our statement of operations) consists of gross profit less sales and marketing expense and reflects an additional way of viewing our results. Contribution margin is contribution as a percentage of total net revenue. When viewed with our GAAP gross profit less sales and marketing expenses, we believe contribution and contribution margin provides management and users of the financial statements information about our ability to cover our fixed operating costs, such as technology and general and administrative expenses. 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. You should review our financial statements and publicly-filed reports in their entirety and not rely on any single financial measure. 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 non-operating income and expenses. Management compensates for these limitations when using this measure by looking at other GAAP measures, such as operating income (loss) and net income (loss).

For further details on contribution and contribution margin, see the calculation of these non-GAAP financial measures and the reconciliation of contribution to gross profit below (in thousands):



Threemonthsended


Yearended


December 31,


December 31,


2010


2009


2010


2009









Total net revenue

$

348,870


$

322,359


$

1,089,873


$

876,769

Cost of goods sold


289,458



267,337



900,233



712,017













Gross profit


59,412



55,022



189,640



164,752

Less: Sales and marketing expense


17,250



18,578



61,334



55,549













Contribution

$

42,162


$

36,444


$

128,306


$

109,203









Contribution margin

12.1%


11.3%


11.8%


12.5%

Sales and marketing expenses -- Sales and marketing expenses totaled $61.3 million and $55.5 million for the fiscal year 2010 and 2009, respectively, a 10% increase and representing 5.6% and 6.3% of revenue for those respective periods. Sales and marketing expenses totaled $17.3 million and $18.6 million for the fourth quarter of 2010 and 2009, respectively, a 7% decrease and representing 4.9% and 5.8% of revenue for the same periods. The decrease in sales and marketing costs as a percentage of total net revenue was primarily due to more efficient marketing spending.

Technology expenses -- Technology expenses totaled $58.3 million and $52.3 million for the fiscal year 2010 and 2009, respectively, an 11% increase and representing 5.3% and 6.0% of revenue for those respective periods. The $5.9 million increase is primarily due to a $6.5 million increase in salaries and benefits expense (primarily due to increases in staffing), and a $1.5 million increase in depreciation expense as result of investments in information technology assets, partially offset by a $1.4 million decrease in bonus expense as a result of lower than expected financial performance. Technology expenses totaled $15.9million and $13.5million for the fourth quarter of 2010 and 2009, respectively, an 18% increase, and representing 4.6% and 4.2% of revenue for those respective periods.

General and administrative ("G&A") expenses -- G&A expenses totaled $55.7 million and $48.9 million for the fiscal year 2010 and 2009, respectively, a 14% increase, and representing 5.1% and 5.6% of total revenue for those respective periods. The $6.7 million increase is due to a $5.1 million increase in salaries and benefits expense (primarily due to increases in staffing), a $2.3 million increase in professional service fees for our external auditors and a $2.0 million increase in legal fees, partially offset by a $3.2 million decrease in bonus expense in 2010 as a result of lower than expected financial performance. The increase in legal fees primarily resulted from a $2.6 million reduction in payments received from the settlement of legal matters during 2010 compared to 2009. We recognized a reduction in G&A expenses of $4.5 million and $7.1 million during 2010 and 2009, respectively, related to the settlement of legal matters. The reduction in G&A expenses of $4.5 million in 2010 is related to the legal settlement announced in the Form 8-K filed on December 16, 2010. G&A expenses totaled $11.5 million and $9.5million for the fourth quarter of 2010 and 2009, respectively, a 22% increase and representing 3.3% and 2.9% of total revenue for those respective periods.

Restructuring -- There were no restructuring charges during 2010 and 2009. We reversed $569,000 of lease termination costs liability during 2010 and $66,000 during 2009 due to the reoccupation of space we previously ceased to use.

Operating income -- Operating income for the fiscal year of 2010 was $15.0 million compared to $8.0 million in 2009, a $6.9 million increase. Operating income for the fourth quarter of 2010 was $15.1 million compared to $13.4 million in 2009, a $1.7 million increase.

Interest income -- Interest income was $157,000 and $170,000 for 2010 and 2009, respectively, and $46,000 and $9,000 in the fourth quarter of 2010 and 2009, respectively.

Interest expense -- Interest expense was $3.0 million and $3.5 million in 2010 and 2009, and $732,000 and $763,000 during the fourth quarter of those same periods. Interest expense is largely related to interest incurred on our Senior Notes, our finance obligations and capital leases. The decrease in interest expense in 2010 is primarily a result of extinguishments of long-term debt.

Other income, net--Other income, net for the fiscal year 2010 and 2009 was $2.1 million and $3.3 million, respectively. The decrease was primarily due to lower gains on extinguishment of long-term debt, partially offset by an increase in gift card breakage income in 2010. Other income, net for the fourth quarter of 2010 and 2009 was $678,000 and $290,000, respectively.

Income taxes --Our provision for income taxes for 2010 and 2009 of $359,000 and $257,000 is for federal alternative minimum tax and certain income tax uncertainties, including interest and penalties.

Net income attributable to common shares -- Net income attributable to common shares for the fiscal year 2010 was $13.8 million, or $0.59 per share on a fully diluted basis, compared to net income attributable to common shares of $7.7 million, or $0.33 per share on a fully diluted basis for the fiscal year of 2009. Net income attributable to common shares for the fourth quarter of 2010 was $14.8 million, or $0.63 per share on a fully diluted basis, compared to net income attributable to common shares of $12.7 million, or $0.55 per share on a fully diluted basis for the fourth quarter of 2009.

Free cash flow (a non-GAAP financial measure) -- Free cash flow for 2010 and 2009 totaled ($4.2) million and $38.8 million, respectively. The $43.0 million year over year decrease was due primarily to $13.2 million of incremental capital expenditures in 2010 over 2009, and a $29.8 million decrease in operating cash flow due primarily to changes and timing differences in inventory, accounts payable, and accrued liabilities that were partially offset by changes in net income, depreciation and amortization, and gains on the early retirement of our Senior Notes.

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 and liquidity. Free cash flow, which we reconcile to "net cash provided by operating activities," is cash flow from operations, reduced by "expenditures for fixed assets, including internal-use software and website development." We believe that cash flows from operating activities is an important measure, since it includes both the cash impact of the continuing operations of the business and changes in the balance sheet that impact cash. However, 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 and free cash flow measures the amount of cash we have available for future investment, debt retirement or other changes to our capital structure after we have paid all of our expenses. Therefore, we believe it is important to view free cash flow as a complement to our entire consolidated statements of cash flows.

Our calculation of free cash flow is set forth below (in thousands):




Year ended December 31,



2010


2009

Net cash provided by operating activities


$

16,322


$

46,117

Expenditures for fixed assets, including internal-use software and







website development



(20,511)



(7,275)

Free cash flow


$

(4,189)


$

38,842

Cash and working capital -- At December 31, 2010, we had cash and cash equivalents of $124.0 million. Working capital was $14.7 million and $51.2 million at December 31, 2010 and December 31, 2009, respectively. The decrease in working capital is primarily due to the reclassification of the remaining balance of Senior Notes outstanding at December 31, 2010 of $34.5 million from long-term to current liabilities as the Senior Notes mature on December 1, 2011.

On February 1, 2011 our Board of Directors approved a $10 million increase to our previously-announced debt repurchase program. With this increase we may repurchase up to $15 million of our outstanding Senior Notes. On February 7, 2011, we repurchased an additional $10.1 million of our outstanding Senior Notes reducing the balance outstanding to a face amount of $24.5 million.

About Overstock.com

Overstock.com, Inc. (short cut: O.co) is a Savings Engine offering brand-name merchandise at discount prices. The company offers its customers an opportunity to shop for bargains conveniently, while offering its suppliers an alternative inventory 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 and http://www.o.co. Overstock.com regularly posts information about the company and other related matters on its website under the heading "Investor Relations."

Overstock.com(R) is a registered trademark and O.co(TM) and Savings Engine(TM) are trademarks of Overstock.com, Inc.

This press release may contain 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 all statements other than statements of historical fact. Our Form 10-K for the year ended December 31, 2009, our subsequent quarterly reports on Form 10-Q, and our other subsequent filings with the Securities and Exchange Commission identify important factors that could cause our actual results to differ materially from those contained in or contemplated or implied by any projections, estimates or forward-looking statements.

Overstock.com, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)














Three months ended


Year ended




December 31,


December 31,




2010


2009


2010


2009











Revenue, net









Direct

$ 69,188


$ 55,053


$ 209,646


$ 150,901


Fulfillment partner

279,682


267,306


880,227


725,868













Total net revenue

348,870


322,359


1,089,873


876,769











Cost of goods sold









Direct

62,932


48,490


187,124


130,890


Fulfillment partner

226,526


218,847


713,109


581,127













Total cost of goods sold

289,458


267,337


900,233


712,017











Gross profit

59,412


55,022


189,640


164,752











Operating expenses:









Sales and marketing

17,250


18,578


61,334


55,549


Technology

15,948


13,538


58,260


52,336


General and administrative

11,499


9,458


55,650


48,906


Restructuring

(433)


-


(569)


(66)













Total operating expenses

44,264


41,574


174,675


156,725











Operating income

15,148


13,448


14,965


8,027











Interest income

46


9


157


170

Interest expense

(732)


(763)


(2,962)


(3,470)

Other income, net

678


290


2,088


3,277

Income before income taxes

15,140


12,984


14,248


8,004












Provision for income taxes

(281)


(257)


(359)


(257)











Net income

$ 14,859


$ 12,727


$ 13,889


$ 7,747











Deemed dividend related to redeemable common stock

(12)


(13)


(112)


(48)











Net income attributable to common shares

$ 14,847


$ 12,714


$ 13,777


$ 7,699











Net income per common share - basic:

$ 0.64


$ 0.56


$ 0.60


$ 0.34

Net income per common share - diluted:

$ 0.63


$ 0.55


$ 0.59


$ 0.33











Weighted average common shares outstanding - basic:

23,060


22,838


23,019


22,821

Weighted average common shares outstanding - diluted:

23,466


23,272


23,366


23,067











Other data:








Gross bookings

$ 395,238


$ 358,389


$ 1,210,983


$ 966,560

Auction gross merchandise volume

5,286


3,121


15,858


13,903

Average customer acquisition cost (in dollars)

13.85


14.92


16.86


17.88


Overstock.com, Inc.


Consolidated Balance Sheets


(in thousands)










December 31,


December 31,




2010


2009

Assets




Current assets:





Cash and cash equivalents

$ 124,021


$ 139,757


Restricted cash

2,542


4,414


Accounts receivable, net

13,560


11,640


Inventories, net

32,114


23,375


Prepaid inventories, net

2,082


2,879


Prepaids and other assets

11,651


10,275



Total current assets

185,970


192,340

Fixed assets, net

27,800


20,618

Goodwill

2,784


2,784

Other long-term assets, net

1,405


758



Total assets

$ 217,959


$ 216,500







Liabilities and Stockholders' Equity




Current liabilities:





Accounts payable

$ 67,311


$ 76,623


Accrued liabilities

40,751


43,296


Deferred revenue

24,027


20,665


Convertible senior notes, net

34,484


-


Finance obligations, current

3,922


-


Capital lease obligations, current

729


520



Total current liabilities

171,224


141,104







Capital lease obligations, non-current

113


806

Finance obligations, non-current

12,219


-

Other long-term liabilities

3,175


3,580

Convertible senior notes, net

-


59,466



Total liabilities

186,731


204,956







Redeemable common stock

570


744







Stockholders' equity:





Common stock

2


2


Additional paid-in capital

349,747


343,040


Accumulated deficit

(242,327)


(256,056)


Treasury stock

(76,764)


(76,186)



Total stockholders' equity

30,658


10,800



Total liabilities and stockholders' equity

$ 217,959


$ 216,500

Overstock.com, Inc.

Consolidated Statements of Cash Flows

(in thousands)
















Year ended December 31,







2010


2009










Cash flows from operating activities:






Net income


$ 13,889


$ 7,747


Adjustments to reconcile net income to cash provided by








operating activities:







Depreciation and amortization


14,580


12,883



Realized loss on marketable securities


-


48



Loss on disposition of fixed assets


-


183



Stock-based compensation to employees and directors


5,056


4,775



Stock-based compensation to consultants for services


-


10



Amortization of debt discount


391


331



Gain from early extinguishment of debt


(346)


(2,810)



Restructuring reversals


(569)


(66)



Changes in operating assets and liabilities








Restricted cash


1,872


(152)




Accounts receivable, net


(1,920)


(4,540)




Inventories, net


(8,739)


1,344




Prepaid inventories, net


797


(2,118)




Prepaids and other assets


368


(604)




Other long-term assets, net


(215)


(120)




Accounts payable


(9,315)


18,642




Accrued liabilities


(2,575)


9,131




Deferred revenue


3,362


1,433




Other long-term liabilities


(314)


-














Net cash provided by operating activities


16,322


46,117










Cash flows from investing activities:






Purchases of marketable securities


(136)


-


Purchases of intangible assets


(396)


-


Investment in precious metals


(1,657)


-


Sales of marketable securities prior to maturity


-


8,893


Expenditures for fixed assets, including internal-use software








and website development


(20,511)


(7,275)


Collection of note receivable


-


1,250














Net cash provided by (used in) investing activities


(22,700)


2,868










Cash flows from financing activities:






Payments on capital lease obligations


(490)


(348)


Drawdowns on line of credit


-


1,612


Payments on line of credit


-


(1,612)


Capitalized financing costs


-


(245)


Proceeds from finance obligations


16,383


-


Payments on finance obligations


(841)


-


Paydown on direct financing arrangement


(197)


(218)


Payments to retire convertible senior notes


(24,865)


(4,563)


Purchase of redeemable stock


(26)


-


Purchase of treasury stock


(825)


(340)


Exercise of stock options


1,503


29














Net cash used in financing activities


(9,358)


(5,685)











Net (decrease) increase in cash and cash equivalents


(15,736)


43,300


Cash and cash equivalents, beginning of period


139,757


96,457











Cash and cash equivalents, end of period


$ 124,021


$ 139,757

SOURCE Overstock.com, Inc.