Overstock.com Announces Second Quarter Financial Results
Total revenue: $87.8 million, up 204% versus prior year*
Gross bookings: $96.6 million, up 88% versus prior year
Gross profits: $9.9 million, up 106% versus prior year
Gross margins: 11.3% versus 10.3% in Q1
Net loss: $2.3 million or $0.13 loss per share
B2C gross bookings: $92.0 million, up 120% versus prior year
SALT
LAKE CITY -- Overstock.com® (NASDAQ: OSTK) today announced financial
results for the period ended June 30, 2004. Detailed financial results
follow Overstock.com President Patrick Byrne's Letter to Shareholders.
"There is great disorder under Heaven: the situation
is excellent."
- Chairman Mao
Dear Owners,
The situation is indeed excellent.
Growth - We accelerate. Q1 showed 79% growth
in gross bookings, Q2 showed 88%. Those numbers fail to tell the whole
story as 2003 numbers include $5.7 million in Safeway business. On
a B2C-only gross bookings basis, we grew 120%. (Please ignore our 204%
total revenue growth. Followers of our company know why; newcomers
should check previous releases for explanation. This is the last time
this comparison will be an issue.)
Margins - We focus on tight logistics costs:
the last three quarters' gross margins have been 9.6%, 10.3%,
and 11.3%. I believe that there are still 100 basis points of gain
to be had from further focus, excluding gains from scale.
Customer Satisfaction - In May we released
our first American Customer Satisfaction Index score: 81, higher than
all ACSI-rated brick-and-mortar stores and all e-tailers but three
(BarnesandNoble.com, Amazon, and eBay). My sense is that 81 is an extremely
high first score. To have scored #4 in the entire retail universe out
of the gate while keeping a tight control on expenses is a result of
fine work by the entire Overstock team. But we aim to be #1.
Leadership - I have confidence in our executive
team. All know and are good at their assignments. The next cadre of
people is developing well and will be prepared for the additional responsibilities
that our growth is bringing.
Preparation for Q4 - In past Novembers we
finished the ark by wading in waist-deep water pounding nails in the
rain. This year our ark will be complete before the first raindrop
falls.
Investors often grill me about our capacity to continue accelerating
without the wheels flying off. They tend to focus on buying and marketing,
thinking them our constraints. The truth is that other departments
matter more: our constraints are in systems and operations. Thus, in
this letter I will be more expansive regarding systems, and briefer
regarding sourcing, marketing, and initiatives, than has been my prior
wont.
FINANCE, ACCOUNTING, & LEGAL
David Chidester (VP, Finance) has hired a slew
of accountants to monitor every corner of the business, and their work
provides the foundation for many improvements herein. In a sense our
week ends on Thursday night, because on Friday the accounting staff starts
preparing scorecards for every sector of the business, and come Monday,
the executive team begins its meeting with a walk through the scorecards.
There is a short list of things we focus on that we call, "Levinson's
List," (after a football coach I had, Coach Levinson, who emphasized
basics over anything fancy such as, say, "passing"). Having
such detailed cost and performance metrics have aided enormously in our
progress. I cannot overstate how valuable David's scorecards have
been to our company.
Jonathan Johnson has served ably as our General Counsel for nearly two
years, and as VP, Strategic Projects for more than a year. Recently,
he morphed into our VP, Corporate Affairs. Like David, Jonathan's
fingerprints are on many of the projects described in this letter (though
his fingerprints are in different places than David's, legal and
otherwise). As Jason Lindsey once did, Jonathan acts as my consiglieri.
LOGISTICS
Tad Martin (VP, Operations and Merchandising) and his 6 Sigma mavens
have done a fine job making our warehouse shipshape. Handling, inbound,
and outbound freight costs have all improved. Our pickers have become
about 75% more productive than last year. In addition, one of our new
JMO's (Junior Military Officers) has built a system of process-mapping,
then training, testing, and certifying warehouse workers for multiple
positions. We have made some slight progress in the net cost of returns,
but not enough: I believe, however, that I will be able to mark this
as "complete" by the end of this quarter. Our customer service
costs are in line with plan, though we provide high-touch customer service
(we are one of two Internet e-tailers I know of who have live phone customer
service, 24/7: the other is LandsEnd). Last week we launched inbound
live chat, today we launch individual CSR benchmarking, and in ten days
we are launching automated self-help and outbound live chat, all in an
attempt to improve our customers' experience while keeping a tight
rein on costs.
I believe there are still over 100 basis points of margin improvements
to be found in tightening our supply chain.
TECHNOLOGY
Shawn
Schwegman (VP, Technology) remains a star. This year Shawn has assembled
a team of mature, experienced Database Administrators (DBA's).
Our network has become quite stable. Perhaps because our user community
has learned a lesson from production theory ("a factory where everything
is expedited is one where nothing is expedited"), our developers
are churning out surprising quantities of code. We have developed a fine
system of prioritizing and tracking development, and in fact this is
maintained by a Mayor of Usertown who now represents the user community
to the IT department. By the end of July, I think I will be able to say, "I
could not be happier with the IT team nor the level of understanding
between it and its internal customers."
CAPACITY
Investors frequently ask me about our capacity, and whether this growth
will break us. Since I am asked this so often, I would like to address
it here.
I worry about bottlenecks. I have learned that when I tell investors
I worry about bottlenecks they get nervous, as though we must be goofing
up to have bottlenecks. They are misguided. All relay teams
have slowest runners, all chains have weakest links, and all systems
have bottlenecks. A system without a bottleneck is infinite, and I have
seen few of those. Bottlenecks never disappear: they shift, and the trick
is not to build a system without them (which is impossible), but to understand
where constraints are, expand them, track their shift to new locations,
then expand those before the system needs it.
Our rapid growth has made staying ahead of this process difficult. Since
it takes six months for someone to learn his or her job well, we must
always be hiring with an eye to where we might be in six months.
In fact, we must build all our systems along the same principle, and
stress them not to what in six months the median load may be,
but to what in six months our maximum load might be. From this,
we back into appropriate capacity at every link: only through this process
will a spike not interfere with our ability to get customers their products
on time. But predicting some future period's maximum demand is
harder than predicting its median demand and the uncertainty widens at
growth rates like our current B2C growth rate of 120%. If we had hundreds
of millions (or billions) of dollars of capital, we could address this
problem as others have, by building huge amounts of unused capacity.
We don't, so we must approach this problem thoughtfully.
In general, the capacities of the kinds of systems with which we operate
(logistics, information technology, customer service call centers), tend
to display monotonicity punctuated by step-functions. We grew to the
limits of our warehouse in its former configuration, but with a small
amount of new equipment in the right places we expanded our capacity
and are growing into it again. Last year our database server reached
its limits: we migrated to an Oracle cluster solution that is now highly
(and cheaply) scaleable. We have outgrown our data storage solution,
so we are buying a robust SAN (Storage Area Network) that should carry
us to several times our current size.
In short, at Overstock.com we eat, sleep, and drink constraint theory,
and are always planning for years down the road and building for six
months. Our growth just makes this more complicated than it would
be otherwise. In more detail:
Warehouse Capacity - This area especially tends
to increase as a step function. For last year's Q4, we cut it too
close on warehouse capacity to handle the $123 million in revenue comfortably
(we ended up with an incredible shipping record, but only thanks to some
yeomanly efforts). This year we focused on expanding capacity. It turned
out to be not so much a question of new technology (we needed little),
but new organization (our employees were formed into squads with team
leaders, captains responsible for several teams, managers responsible
for several captains, with extensive process-mapping and training programs).
These changes will allow us to get through a $250 million revenue quarter.
There is some inexpensive (a few hundred thousand dollars) equipment
that can take us to a capacity of $400 million revenue quarter. In fact,
if one looks into the future, there are multi-million dollar tilt-tray
sorters and warehouse redesigns (narrow aisles, cherry pickers, off-site
bulk storage with nightly wave replenishment) that could take us to about
$1 billion/quarter capacity.
However, I fear that a $250 million/quarter capacity might cut it close
for this year's Q4. If we have a blow-out Q4 we would need to take
the step with more equipment (but not the radical warehouse redesign)
to get through. We considered trying to get it in place this spring,
but I wanted to focus on eking out all we could through improved management
before spending money on new equipment. We considered getting it all
in place this summer, but that looked like another game of Beat-the-Clock.
Thus we are opening a 3PL (third party logistics) warehouse to give us
buffer capacity and surge capacity: we will announce the details of this
next month.
Customer
Service - Some of our customer service resides within
our HQ: it gives us a tremendous edge, I think, to have customer service
agents sitting a few yards from our buyers and logistics team. We have
an unusual relationship with a local firm, Sento Corporation (NASDAQ:
SNTO). Because their facility is 20 miles away (with another small
satellite in Wyoming), and because our people are in and out of each
other's offices continuously, the executive responsible is in
our office, and we are one of Sento's larger clients, I don't
think of it as "outsourcing," exactly -- it is more
of a "hands-on" alliance. Our unusually close relationship
seems to be working, as is demonstrated by our ACSI score of 81.
However,
I want to maintain and improve the quality of our customer service as
our business grows (and even if it spikes). To that end, we are taking
steps to measure our quality continuously and precisely while we increase
our capacity.
Information
Technology
As I did with logistics, I will address capacity as it relates to IT.
It is time to move our computers to a new facility. Telecommunications,
power, and even air conditioning in our current facility are inadequate
to support future growth. Fixing this is relatively easy: after researching
a variety of co-locations, Shawn chose SingleEdge. For security reasons
I will say nothing more, other than that we are having enough fiber pipeline
laid to light most Third World nations (well, not really, but it is a
lot of fiber).
As far as IT systems are concerned, a few quarters ago we issued a press
release concerning our switch to an Oracle cluster solution. The move
was leading-edge, even bleeding edge (we had no choice at the time),
but I cannot say enough good things about it now. I know I sound like
a commercial for Oracle, but it truly has given us remarkably cheap,
scaleable computing power.
Go down one layer, however: beneath the cluster there is the storage
itself. Currently, ours has a legacy structure: scattered databases for
the production environment, reporting, financials, clickstream, etc.
There are disadvantages to this too arcane to delve into here, but the
long and short of it is that we are limited in the amount of data we
can collect and use fruitfully. To remedy this situation we are making
a major capital expenditure in the form of a Storage Area Network, or "SAN".
A SAN is, basically, a big box of RAM buffering a set of hard-drives:
besides storing huge amounts of information, a SAN allows processors
to read and write to RAM (which reads and writes to hard-drives in the
background), causing the system to speed up enormously.
We
decided to move to a monster SAN that would become the backbone of the
entire company. After exhaustive testing we chose EMC, not only for the
quality of its technology, but for the incredible customer service its
team gave us. In fact, it looks like we are going to go with EMC's
monster DMX 1000 and their mega-monster box, the DMX 3000, the
former to serve as a hot back-up in a separate location. Thanks to some
extra attention shown us by SingleEdge, EMC, and Foundry, we should be
live in the new co-lo facility on the SAN by mid-August.
The
reader may now know more about the internal workings of and plans for
our firm than he or she wished. If nothing else, however, I hope it has
become clear that we have thought through capacity issues.
SOURCING, MARKETING, AND SKUNKWORKS
Sourcing is going well under Tad Martin and his team of senior buyers
(who are, in a sense, their own General Merchandise Managers, all with
their own scorecards for capital deployed and gross profits generated).
We are getting more calls from vendors than ever. Firms and brands that
would not meet with me a year ago now sell to us. Partially this is a
result of our scale, I think, and the demonstrated value of our business
model. Partially, however, I believe (because vendors tell me this) that
this reflects the standard of professionalism and honesty that our buyers
have brought to an industry not previously known for its high-minded
principles.
Kamille Twomey (VP, Marketing) has developed the finest marketing team
on the Internet. The team is extremely analytical, non-dogmatic, and
agile enough to seize opportunities quickly. Jacob Hawkins, who oversees
our portal deals, has done an excellent job of managing these relationships
to the standards upon which we insist. The affiliate management team,
led by J.T. and Clark Stephens, is as good as the game. In addition,
we recently super-sized our relationship with MSN, who has consistently
proven to be a great party with which to work, and whose traffic continues
to prove more valuable than run-of-the-mill Internet traffic. We seek
similar relationships with other large Internet players, but to date
have been unsuccessful.
Stormy Simon (VP, Chief of Staff) remains a triple threat, responsible
for our TV and radio commercials, our Book, Music, and Video, and our
nascent travel department. She has done a phenomenal job writing, producing,
and buying TV and radio ads. In addition, our Book, Music, and Video
department made money this quarter due to her focus on cost. She is a
one woman skunkworks and has many other ideas for Overstock which will
continue to germinate in her office until they are ready for the public.
INITIATIVES
I wish to comment on a little-noted issue: we remain disciplined in
our marketing and G&A expenses. In particular, our corporate expenses
scale: their growth is a fraction of top-line growth. This point is obfuscated
by the fact that in general, we expense the development costs of projects
that will not kick in until later, while other companies in our industry
tend to capitalize such costs. That said, please find brief updates on
key projects, as promised.
Capital - We raised an additional $37.9 million this quarter.
We ended the quarter with $66.9 million in cash and marketable securities.
We have a bank line available for $20 million. Our -2.6% net margin
is small (though it includes a fair amount of development spending),
capital spending is close to our depreciation, we have gathered our
momentum, and we are entering the best part of the year. Taken all
together, I am extremely comfortable with our cash position.
Safeway - This ended amicably. We were paid what we were owed.
I hope that in the future there might be further good business between
us.
Overstock.com® Daily Deals - I am not giving up, but this
has been a dud. One reason may be that the current O.D.D. requires
the consumer to call to order (we are testing a new version that allows
transactions via PIN over the telephone, which should improve usability).
Another reason is that mCommerce just has not yet caught on in the
United Sates. Some folks at the carriers say that, judging from Asia
and Europe, adoption is still two years away in the USA. If and when
it comes, Overstock.com has staked out some high ground without a huge
investment.
Search - Our internal Overstock team of Amy Boatman and John
Kennedy (a recently retired Navy JMO) did fine work overseeing the
installation of Endeca, our new search engine described in a previous
announcement. We are happy with Endeca's results, but believe
there is a large amount of fine-tuning to complete.
TV - We got in a minor beef with Big O Tires, who said our
use of "Overstock.com - The Big O" was confusingly
similar to, "Big O Tires." We discontinued using that tag
line on July 1. We had no other commercials ready on July 1, and so
for the very first part of Q3 there will be little TV expense. We have
developed three new commercials, but are uncertain regarding our commitment
to TV advertising.
Club O™ - We have over 10,000 customers now who have
signed up for this. I previously promised to inform shareholders when
certain thresholds had been reached in Club O membership: I now withdraw
that commitment because I have trouble sleeping with open-ended commitments.
Club O Gold™ - B2B has always been a disappointment.
It stalled around the $20 million per year level for the last 18 months.
This could be attributable to weakness in the model, but in retrospect
I think trying to make enough outbound calls to drive traffic to our
B2B site (www.overstockb2b.com)
was expensive and difficult. In theory, I still believe that B2B should
be larger for us than B2C, but it has not lived up to its promise.
Yet many of the people who come to our B2C site are small businesses
who like to buy from us in bulk. Because of this, we are morphing our
B2B site into a Club O Gold buyers' club, structured similar
to our Club O program but with a higher initial fee and steeper discounts
for bulk purchases: we will likely turn this on early next week. We
have formed an alliance with a company that will help us market this
far more broadly and intelligently than we could do on our own. This
may be a- swing-and-a-miss, but I believe it has huge potential.
Ocean - No comment.
I hope
you feel this briefing has been adequate.
Respectfully submitted,
Patrick
Byrne
President
Overstock.com, Inc.
Key financial and operating metrics
Total revenue--Overstock.com reported second quarter total revenue
of $87.8 million, a 204% increase compared to $28.8 million in 2003.*
For the six months ended June 30, 2004, total revenue was $169.9 million,
up 193% from $58.0 million recorded in 2003.
Gross profit and gross margins--Overstock.com reported second quarter
gross profit of $9.9 million, a 106% increase over the $4.8 million recorded
for the same period a year ago. Overstock.com reported second quarter
gross margins of 11.3%, up from 10.3% in Q1 2004. For the six months
ended June 30, 2004, gross profits totaled $18.4 million, up 95% from
$9.4 million recorded in 2003.
Net loss--Overstock.com reported a net loss of $2.3 million, or
a 13 cent loss per share, compared to a net loss of $1.1 million, or
a 7 cent loss per share, a year earlier. For the six months ended June
30, 2004, net loss totaled $4.5 million, or 27 cent loss per share, compared
to net loss of $5.1 million, or 33 cent loss per share, recorded in 2003.
Overstock.com had cash and marketable securities of $66.9 million and
working capital of $78.2 million on June 30, 2004.
Gross bookings--Overstock.com reported gross bookings of $96.6
million for the second quarter 2004, an 88% increase over the $51.3 million
in gross bookings reported for the second quarter 2003. For the six months
ended June 30, 2004, gross bookings totaled $190.0 million, an 83% increase
from the $103.6 million recorded in 2003.
Gross
bookings represents the gross selling price of all transactions, including
those for which we only record a commission under GAAP, before returns,
sales discounts, and before payments to fulfillment partners prior to
July 1, 2003, and therefore differs from GAAP revenue. Management believes
that gross bookings provides useful information to investors because
it represents the total price of the merchandise sold via the Overstock.com
Web site or other sales channels, regardless of the amount of GAAP revenue
recorded by Overstock.com on those transactions, which varies, depending
on, among other things, the returns policies applicable to the merchandise
sold via the Web site. Management uses the measure of gross bookings
as an operating metric for internal planning purposes, including measuring
the company's growth, measuring marketing expenditures' effectiveness,
and capacity planning for information technology, customer service and
logistics.
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
is a publicly traded company listed on the NASDAQ National Market System,
headquartered in Salt Lake City, and can be found online at www.overstock.com.
# # #
*Due to a change in Overstock.com customer return policies and procedures
that was implemented at the beginning of the third quarter 2003, GAAP
revenue increased significantly and gross margins decreased significantly
in that and subsequent reporting periods compared to previous reporting
periods. Therefore, gross bookings comparisons year-over-year may be
more informative than GAAP revenue comparisons for the affected periods,
especially on the measure of growth. We also believe gross profit dollar
comparisons year-over-year may be more informative than gross margin
comparisons.
Overstock.com is a registered trademark, and Club O and Club O Gold
are trademarks of Overstock.com, Inc. All other trademarks are the property
of their respective companies.
This press release and the accompanying president's letter contain
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 company goals, growth rates, preparation for
the fourth quarter, potential increases in gross margins, improvements
to customer service, the ability and preparedness of management, the
ability to monitor every aspect of the company's business, IT infrastructure
and the level of satisfaction with internal IT development projects,
and operations, planning for, expanding and managing capacity issues
(including changes to our warehouse and opening an 3PL and a co-location
facility ), completing revisions to the returns process, the value of
any one marketing method, the business future relationship between Overstock.com
and any particular company, and the future rollout and success of or
improvement of current and new initiatives. These forward-looking statements
involve certain risks and uncertainties that could cause actual results
to differ, including, but not limited to, our limited operating history,
our ability to manage growth, a general downturn in economic conditions,
and such other risks as identified in our Form 10- K for the year ended
December 31, 2003, and all our subsequent filings with the Securities
and Exchange Commission, which contain and identify important factors
that could cause the actual results to differ materially from those contained
in our projections or forward-looking statements.
Overstock.com, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
Three months ended
Jun. 30, Sept. 30, Dec. 31 Mar. 31, Jun. 30,
2003 2003 2003 2004 2004
Revenue
Direct $25,402 $29,284 $58,250 $38,580 $41,113
Fulfillment partner 3,431 28,504 64,910 43,498 46,679
Total revenue 28,833 57,788 123,160 82,078 87,792
Cost of goods sold
Direct 23,014 26,674 51,130 34,816 36,786
Fulfillment partner 1,016 26,863 60,256 38,793 41,114
Total cost of goods sold 24,030 53,537 111,386 73,609 77,900
Gross profit 4,803 4,251 11,774 8,469 9,892
Operating expenses:
Sales and marketing
expenses 2,572 3,855 9,898 4,377 6,605
General and administrative
expenses 3,367 4,059 4,940 6,251 5,567
Amortization of stock-
based compensation 112 171 145 135 123
Total operating expenses 6,051 8,085 14,983 10,763 12,295
Operating income (loss) (1,248) (3,834) (3,209) (2,294) (2,403)
Interest income 142 98 69 98 127
Interest expense (55) (8) (6) (16) (46)
Other income (expense), net 25 79 1 2 --
Net income (loss) (1,136) (3,665) (3,145) (2,210) (2,322)
Deemed dividend related to
redeemable common stock (78) (58) (49) (48) (46)
Net income (loss)
attributable to common
shares $(1,214) $(3,723) $(3,194) $(2,258) $(2,368)
Net income (loss) per share
- basic $(0.07) $(0.23) $(0.19) $(0.14) $(0.13)
- diluted $(0.07) $(0.23) $(0.19) $(0.14) $(0.13)
Weighted average common
shares outstanding
- basic 16,384 16,419 16,473 16,646 17,577
- diluted 16,384 16,419 16,473 16,646 17,577
Other data:
Gross bookings $51,315 $61,018 $130,155 $93,412 $96,627
Net cash provided by (used
in) operations $(9,592) $(8,326) $21,882 $(21,787) $10,364
Average customer
acquisition cost $8.69 $10.97 $13.19 $10.24 $15.88
Overstock.com, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
Six months ended June 30,
2003 2004
Revenue
Direct revenue $50,600 $79,693
Fulfillment partner revenue 7,397 90,177
Total revenue 57,997 169,870
Cost of goods sold
Direct 46,498 71,602
Fulfillment partner 2,071 79,907
Total cost of goods sold 48,569 151,509
Gross profit 9,428 18,361
Operating expenses:
Sales and marketing expenses 6,420 10,982
General and administrative
expenses 7,912 11,818
Amortization of stock-based
compensation 440 258
Total operating expenses 14,772 23,058
Operating loss (5,344) (4,697)
Interest income 294 225
Interest expense (62) (62)
Other income (expense), net 35 2
Net loss (5,077) (4,532)
Deemed dividend related to redeemable
common stock (155) (94)
Net loss attributable to common
shares $(5,232) $(4,626)
Net loss per common share $(0.33) $(0.27)
Weighted average common shares
outstanding 15,938 17,128
Overstock.com, Inc.
Consolidated Balance Sheets
(in thousands, except per share amounts)
December 31, June 30,
2003 2004
Assets
Current assets:
Cash and cash equivalents $28,846 $45,648
Marketable securities 11,500 21,206
Accounts receivable, net 10,183 6,579
Inventories, net 29,926 30,848
Prepaid expenses and other assets 4,583 7,013
Total current assets 85,038 111,294
Restricted cash -- 1,875
Property and equipment, net 9,483 11,303
Goodwill 2,784 2,784
Other long-term assets 427 1,765
Total assets $97,732 $129,021
Liabilities, Redeemable Securities and
Stockholders' Equity
Current liabilities:
Accounts payable $30,363 $21,522
Accrued liabilities 9,316 9,911
Short term borrowings -- 1,000
Capital lease obligations, current 75 698
Total current liabilities 39,754 33,131
Capital lease obligations, non-
current 86 944
Total liabilities 39,840 34,075
Redeemable common stock 2,978 3,072
Stockholders' equity:
Common stock 2 2
Additional paid-in capital 123,934 165,904
Accumulated deficit (67,815) (72,441)
Unearned stock-based compensation (1,094) (1,421)
Treasury stock (100) (100)
Accumulated other comprehensive
income (loss) (13) (70)
Stockholders' equity 54,914 91,874
Total liabilities, redeemable
securities and stockholders'
equity $97,732 $129,021
.
