Overstokc 2017 Q4 Earnings Call - Overstock.com Inc.
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Q4 & FY 2017 Earnings Call
Transcript of Overstokc 2017 Q4 Earnings Call - Overstock.com Inc.
Q4 & FY 2017Earnings Call
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Safe HarborThe information presented herein may contain forward-looking statements. Such forward-lookingstatements include all statements other than statements of historical fact, including forecasts oftrends. These forward-looking statements are inherently difficult to predict. Actual results coulddiffer materially for a variety of reasons, including the amount and timing of our capitalexpenditures, the mix of products we sell, adverse tax, regulatory or legal developments,consumer or regulatory claims regarding the products we offer or sell, the extent to which weowe taxes or are required to collect sales or similar taxes in jurisdictions in which we do not doso, competition, fluctuations in our operating results, any inability to raise capital or borrow fundson acceptable terms, difficulties we may have with our efforts to expand both domestically andinternationally, and risks of inventory management and seasonality. Other risks and uncertaintiesinclude, among others, risks related to the business our subsidiary Medici Ventures, Inc. ispursuing, our continually evolving business model, and difficulties we may have with ourinfrastructure, our fulfillment partners or our payment processors, including cyber-attacks or databreaches affecting us or any of them. More information about factors that could potentially affectour financial results is included in our Form 10-K for the year ended December 31, 2017 whichwas filed with the Securities and Exchange Commission on March 15, 2018. The Form 10-K andour subsequent filings with the Securities and Exchange Commission identify important factorsthat could cause our actual results to differ materially from those contained in or contemplatedby our projections, estimates and other forward-looking statements.
Strategic Options
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4
(21,005) (15,480)
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(193,767)
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Wayfair Pre-Tax Income Overstock Retail Pre-Tax Income
Wayfair Overstock
Q4 2017 Branding (TV Spots)
8:1
See later slides for source and notes.
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Monthly New Customer Growth
Tax Impact on 2017 Results
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$12
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$120
2017 Net Loss
Allowance on DTAs due to retail strategy(will be discussed later)
Trump’s Tax Cuts and Jobs Act(Federal rate reduction)
Net Loss before tax changes
in millions
RetailMedici
2017 Annual Results: OSTK Total
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* Non-GAAP – see discussion and reconciliation in our earnings press release** Excluding intercompany transactions eliminated in consolidation*** Net Income refers to Net income attributable to stockholders of Overstock.com, Inc.*** Includes $84M of non-cash tax provision related to tax changes (discussed on prior slide)
$1.7 Billion(3% decrease vs. 2016)
$340.6 Million(3% increase vs. 2016)
19.5%(vs. 18.4% in 2016)
$162.7 Million(19% decrease vs. 2016)
9.3%(vs. 11.1% in 2016)
$206.6 Million(5% increase vs. 2016)
($47.7) Million($25.4M) – Retail**($22.3M) – Medici**
(vs. $20.5 million in 2016)$32.3M – Retail**
($11.8M) – Medici**
($109.9) Million($91.6M) – Retail**
($18.3M) – Medici**(vs. $12.5 million in 2016)
$18.5M – Retail**($6.0M) – Medici**
($35.3) Million(vs. $39.6 million in 2016)
Revenue Gross Profit Dollars Gross Margin
Contribution Dollars* Contribution Margin* Tech and G&A Expense
Pre-Tax Income (Loss) Net Income (Loss)***
TTM Operating Cash Flow
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Overstock.comRetail
Weekly New Customer Growth
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Monthly New Customer Growth
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$-
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Amazon Groupon Wayfair Houzz Jet Zulily Gilt Overstock
$25,000
in millions
Capital Raised
10Estimated Capital Raised (includes IPO proceeds, other offerings, and outstanding long term debt, less treasury stock, where info available)Source: Crunchbase.com and Company 10-Qs and 10-Ks (data through 9/30/2017 where available)
GAAP Retail Operating Margin
Overstock figures are Retail only (excluding Medici)Amazon figures exclude AWS (results without AWS not available prior to 2013)
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Wayfair Overstock Amazon
Operating Income (Loss) divided by RevenueSource: OSTK, Wayfair, and Amazon 10-Ks
Quarterly Advertising Spend
12Source: Overstock and Wayfair 10-Ks and 10-Qs
$98 $94 $101
$116 $118 $124
$142
$166
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$45
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Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017Wayfair Overstock
in millions
Source: Nielsen Ad Intel
Wayfair Overstock
Q4 2017 Branding (TV Spots)
8:1
$73
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Wayfair Overstock
Lower Customer Acquisition Cost in 2017
13Source: Overstock and Wayfair 10Ks and investor presentationsCustomer acquisition cost calculated as Total Advertising Spend divided by Implied New Customers. Implied New Customers calculated as (1 - % of orders from Repeat Customers) * Total Orders
Overstock continues to maintain significant CAC advantage even with deterioration in free organic traffic (discussed in Q3 earnings call).
Wayfair Comparison: Pre-tax Income (Loss)
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(21,005) (15,480)
(147,923)
(77,348)
(193,767)
(244,128)
8,004 14,248
(19,580)
15,154 16,344 13,205 10,092
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(300,000)
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Wayfair Pre-Tax Income Overstock Retail Pre-Tax Income
Source: Overstock and Wayfair 10-Ks and 10-Qs
Competitive Visit Share
15Source: Hitwise, a division of Connexity. 2018 US visit share of shopping websites.
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Wayfair Overstock
Competitive Customer Preference
16Source: Overstock Weekly Brand Tracker (administered through Qualtrics), 2017-2018. US sample of online shoppers.Source: 3 week rolled averages of ~300 base size per period.
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GAAP Retail Operating Margin
Capital Raised
Quarterly Advertising Spend
$-
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$750
$1,000
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Amazon Groupon Wayfair Houzz Jet Zulily Gilt Overstock
$25,000
in millions
$98 $94 $101
$116 $118 $124
$142
$166
$29 $30 $32
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Wayfair Overstock
in millions
See prior slides for sources and notes.
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-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
2009 2010 2011 2012 2013 2014 2015 2016 2017Wayfair Overstock Amazon
Competitive Strengths of the Retail Business
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Assortment• Automated Supplier Platform (Automated Promos, Pricing, SKU Optimization)
• Expanding Private Label• Rapid SKU and Partner Onboarding
Convenience• Site Infrastructure Optimized for Speed• Proprietary Search & Personalization Platforms• Augmented Reality
Price• Low Cost Leader in the Home• Club O Loyalty Program (25% of Revenue in Q4 2017)• Financing Options
Our Proprietary Technology is Recognized Across the Industry
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Award-winning Customer Care Fuels Customer Retention
6x
6 Years of TopCustomer Care
“Best of 2017”Best Shoppingor Deals App
Club O Memberships (Paid): Major Growth Driver
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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2017
Total paid memberships through end of Q4 2017
+47% YoY
Partner Onboarding
SKU Creation
• 6M SKUs (including product options)
• Suppliers: same-day account creation
• SKUs: on-site within minutes
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460540
730
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259344
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Active Drop Ship Partners Active Marketplace Partners
Recent SEO Performance
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Indexed pages up from 5M to 22M
YTD: Visits down 44%, Conversion up 38%
Recovery outside of head keywords
Source: SEO Clarity
Source: Google Search Console
Innovations:FinanceHub
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New forClub O Members
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$1.99 Stock Trades$2.99 for Non-Club O Members
Innovations:Automated Investing(“Robo-Advising”)
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Innovations:Cars
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Medici Ventures Develops and AdvancesBlockchain Technology
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A blockchain is a cryptographically secured, distributed infrastructure, or network, which may be accessed and in some cases maintained by each member of the network.
Medici Ventures has a team of ~30 software engineers, developers, and other technologists working on enterprise level software development and deployment.
Medici Ventures purchases interests in blockchain-related companies and, as appropriate, follows up by strategically deploying its personnel within these companies.
Medici Ventures Has Five Areas of Interest
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Examples:
Money & BankingProperty & Land Capital MarketsPersonal Identity Voting
Medici Ventures Has Ownership Interests in Startup Companies Pursuing Blockchain Applications
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Blockchain Meets Personal Identity & Voting
31(1) As of January 8, 2018; Source: https://www.prnewswire.com/news-releases/voatz-raises-22-million-seed-round-led-by-medici-ventures-300578763.html
§ Digital identity and compliance§ Risk management automation
§ Secure and auditable voting§ Document authentication§ ICO in process
§ Platform for secure high-volume remote voting on smartphones and tables
§ Approximately 70,000+ users over the past 18 months (1)
Blockchain Meets Property and Land: DeSoto, Inc.
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DeSoto intends to build systems using blockchain, social media, artificial intelligence, and mobile apps to help develop more effective records of ownership in developing countries
Blockchain Meets Money
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§ Bitt, Inc., is a company based in Barbados that operates a digital asset exchange
§ Bitt is working to develop a blockchain-based payment and banking solution to digitize fiat currencies (currencies declared legal tender by a governmental authority) in cooperation with one or more Caribbean central banks
§ Banking compliance and data immutability
§ Digital wallet, payments, and credit lending
§ 100K+ active users in Latin America (1)
§ SME payments and invoicing systems
§ Bitsy is a startup company building a regulatorily-compliant bridge between the U.S. Dollar and cryptocurrency markets.
§ Bitsy may also offer Overstock customers a way to purchase cryptocurrencies on the Overstock site.
(1) Source: http://invezz.com/news/crypto/27804-Upcoming-ICO-Ripio-ICO-Makes-Inroads-in-Latin-American-Banking-
§ Mortgage loan compliance
§ Digital asset verification
§ Smart contracts for digital securities
§ Digitized corporate ownership records
§ Private equity syndication and crowdfunding
Other companies in capital markets
Non-Blockchain§ tZERO owns two registered broker dealers – SpeedRoute and PRO Securities
§ SpeedRoute is an electronic, agency-only, FINRA-registered broker dealer that provides connectivity for its customers to U.S. equity exchanges as well as off-exchange sources of liquidity such as dark pools.
§ All of SpeedRoute’s customers are registered broker dealers
§ PRO Securities is a FINRA-registered broker dealer that owns and operates the PRO Securities ATS, which is regulated by the SEC
§ An ATS is a trading system not regulated as an exchange, but is a licensed venue for matching buy and sell orders
§ The PRO Securities ATS operates an overnight trading sessions known as the Blue Ocean Division
Recent and Planned Advisory Services
§ tZERO recently purchased 65.8% of the membership units of a registered investment advisor firm, now known as tZERO Advisors
§ tZERO Advisors is offering automated investment advisory services through our website’s FinanceHub
§ tZERO recently purchased 81% of VerifyInvestor, LLC, a leading accreditation processing firm
§ tZERO Advisors intends to offer advisory services to companies considering or pursuing security token offerings
Blockchain Meets Capital Markets
34(1) As of the date of this presentation, tZERO is only in the preliminary stages of development of the Token Trading System. The Token Trading System may never be developed and, even if it is developed, may, for a variety of technological, legal and regulatory reasons, never become operational.
§ tZERO is a financial technology company focused on the development and commercialization of financial applications of blockchain technologies
tZERO is Medici’s largest blockchain commitment and an 80% owned subsidiary
tZERO is currently involved in the following:
Blockchain BasedDigital Locate Receipts
§ tZERO has developed software – referred to as DLR software – intended to help broker dealer licensees with stock inventory to both load and manage inventory in order to assist short sellers of public securities
§ DLR software is currently in customer testing by StockCross and has not yet been commercially licensed to any broker dealers
Security Token Trading System
§ In 2016 tZERO developed a suite of trading software for use on the registered alternative trading system (“ATS”) operated by its subsidiary PRO Securities
§ In December 2016 Overstock completed the first public issuance of a Blockchain security tradedunder OSTKP, utilizing the PRO Securities ATS
§ tZERO intends to leverage its experience to develop a new trading system (the “Token Trading System”) that will be capable of trading tokens or coins issued by companies in security token offerings that are treated as securities for purposes of U.S. securities laws (1)
tZERO Ecosystem
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GDAX
Gemini
Kraken
PoloniexBinanceBittrexBitfinex
Crypto Exchanges
FIX Protocol
Security Token Trading PlatformTo be conducted within SEC regs.
FIX OMSs(Bloomberg, etc.)
Front-end
Clients
SpeedRouteSmart Order Routing / AI Risk Mgmt.
US Exchanges
ATSs /Dark Pools
PRO ATSBlue Ocean 24/5 Trading
U.S. Equity MarketsIssuance & “Listings”
tZERO AffiliateSpeedRoute
Technology & Software
Siebert Financial Transactions
§ On January 31, 2018, tZERO purchased a 24% interest in StockCross Financial Services, Inc. (“StockCross”), an affiliate of Siebert Financial Corp. (“Siebert”), and approximately 1.2 million shares of Siebert, from 12 individuals for $12 million
§ In a separate transaction, also on January 31, 2018, tZERO purchased 70,000 additional shares of Siebert, and a one percent ownership interest in Kennedy Cabot Acquisition, LLC, the controlling owner of Siebert (“KCA”), from KCA for $1 million
§ tZERO believes that StockCross, a self-clearing brokerage firm, will be an important part of a network of financial firms that tZERO intends to assemble
§ FinanceHub contains a link to access electronic discount US equity trading through Muriel Siebert, a registered broker dealer
WPS Prime Letter of Intent
On February 6, 2018, tZERO entered into a Letter of Intent (the “WPS LOI”) with Weeden Prime Services, LLC (“WPS”), a U.S. registered broker-dealer. The WPS LOI contemplates that tZERO will acquire 51% of the outstanding membership interests of WPS for $11.0 million in cash with a subsequent purchase, prior to the first anniversary of the initial purchase, of an additional 30% of the aggregate membership interests of WPS for an additional $7.0 million in cash. Following the subsequent purchase, tZERO will own 81% of the then-outstanding membership units of WPS. The WPS LOI contemplates that the existing members of WPS shall retain certain minority investor rights, including with respect to representation on the board of managers of WPS (proportionate to ownership) and customary drag-along and tag-along rights and anti-dilution protections. The WPS LOI also contemplates that any time following the first anniversary of the second closing, tZERO may, with 60-days’ written notice, acquire all (but not less than all) of the outstanding membership units of WPS not then owned by tZERO at fair market value. tZERO expects the transaction to close during third quarter of 2018, subject to the execution of definitive documentation, any applicable regulatory approvals and customary closing conditions.
Other
tZERO is also considering additional equity purchases.
Blockchain Meets Capital Markets (Continued)
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Additional Interests
Blockchain Meets Capital Markets (Continued)
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Security Token Offering§ On December 18, 2017, tZERO launched a $250 million(1) offering (the “Security Token Offering” or “STO”) of the right to
acquire, if issued by tZERO in the future, tZERO Preferred Equity Tokens (the “tZERO Security Token”) through a Simple Agreement for Future Equity (“SAFE”)
§ The STO is expected to run through May 14, 2018 but may be extended or shortened
§ There can be no assurance that the STO will be successful or that any tZERO Security Token will ever be issued
§ tZERO currently expects to use the net proceeds of the Security Token Offering to:
– (i) repay amounts payable to Overstock
– (ii) make further strategic equity purchases
– (iii) to make investments in the development of the tZERO Security Token and the development of the Token Trading System
– (iv) develop the functional utility features that tZERO may offer to holders of the tZERO Security Token
– (v) fund general corporate purposes, which may include capital expenditures, acquisitions, debt repayments, cybersecurity upgrades and short term investments, among other things, and
– (vi) perform regulatory lobbying activities regarding blockchain technology
§ Overstock may purchase up to $30 million of Tokens in the STO or may elect to receive Tokens in payment of some or all of tZERO’s indebtedness to Overstock
– However, Overstock has not yet made a determination, and there can be no assurance as to whether or not either or both such possibilities will occur
§ As of March 14, 2018, tZERO has received $91.4 million in proceeds, net of withdrawals, from the STO.(2)
(1) tZERO may increate the amount of the STO to $300 million.(2) This presentation is not an offering to sell, or a solicitation of an offer to buy, tZERO Security Tokens, which are only offered by means of
tZERO’s Amended, Supplemented and Restated Offering Memorandun, dated March 1, 2018,
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39
RetailStrategy
Strategic Options
40
Growth Strategy
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• Grow investment in technology platforms (including AI/ML)
• Selectively increase branding and digital marketing
• Add distribution facilities to speed shipping to customer
• Accelerate private label strategy
• Expand Club O rewards program to enhance customer loyalty
43
(21,005) (15,480)
(147,923)
(77,348)
(193,767)
(244,128)
8,004 14,248
(19,580)
15,154 16,344 13,205 10,092 32,332
(25,422)
(300,000)
(250,000)
(200,000)
(150,000)
(100,000)
(50,000)
0
50,000
2009 2010 2011 2012 2013 2014 2015 2016 2017
Wayfair Pre-Tax Income Overstock Retail Pre-Tax Income
Wayfair Overstock
Q4 2017 Branding (TV Spots)
8:1
See prior slides for source and notes.
-25%-20%-15%-10%
-5%0%5%
10%15%20%25%
Mar
-17
Apr
-17
May
-17
Jun-
17
Jul-1
7
Aug
-17
Sep-
17
Oct
-17
Nov
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Dec
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18
Feb-
18
Monthly New Customer Growth
