Overstock Q2 CC Notes

My overall view is positive, my comments are in italics, with a summary of my thoughts a the end.

·         27% Rev growth, at $189 mln, fulfillment 79% up 41% So rev grows 27% and 4/5ths of it, the part the want to focus on, grows 41%. Seems like a good thing to me, or maybe I'm od'ing on common sense here...

·         18.1% Gross Margin, dollars up 30%, All-Time High Another positive, wow

·         4^th consecutive Q of positive EBITDA usually a good thing, especially when D&A is killing income because CapEx is way down in recent numbers...

·         Sales and marketing up 14% this is what dragged the income down

·          SG&A up 2%

·         Total expenses up 2%

·         Up 20% w/o restructuring so they grew and bettered customer service, but expenses still grew less, huh positive, right?

·         Net loss .28 cents per share

·         5^th consecutive Q of positive Cash Flow, TTM $13 mln El Positivo

·         CapEx at $5 mln that's on $190 mln of revenue, seems like a small amount, which is good, so positive!

·         Expect them at ~$15 mln on the year

·         Feel they are, “thru hurricane.”

·         Analysts expecting 17% rev growth, doesn’t think it’s a bad assumption, toughest months last year were July, August and November, did unseasonably well

·         Contribution growth took a dive due to change in marketing program said they could have done something that evened out expenses, but they did a more one-time thing that was better, so the marketing expenses won't keep at this high level

·         Contribution margin at 10.5%, 12% good place to look

·         Revenue outpacing fixed expenses by 25%, think they fixed will get back to negative territory, tech and G&A will be flat to down This is what my thesis was in 2006, and this is what will make them profitable, and will probably make their stock go up a few hundred percent because of the huge volume of ignorant shorters

·         TTM EBITDA at $9.6 mln, up ~48% So basically income up 48% POSITIVE

·         Operating Cash Flow at $12.7 mln, down because cash flow before was from inventory dropping basically they cleaned up their balance sheet a huge amount last year, so the negative change in working capital hlped OCF, this number is the best starting point

·         Balance Sheet hasn’t changed

·         GAAP Inventory turns at 38, Amazon at 12 Seems like a positive (even though it should be higher because direct, Amazon does take commissions from a bunch of sellers so it still good to be this much higher)

·         GMROI 854%

·         NPS at 70%; 29% customers who contact customer service Very, very good, this is powering their growth right now

·         Expenses dialed in, through the storm.

·         Analysts say $12 mln loss, thinks he could make as much as $10 mln is they hit all numbers, this is a reasonable range for year expectations

Legal

·         SEC finished, said they were OK

·         In discovery phase in two suits

·         Can’t comment a lot on what they’re saying

·         Prime Broker case begun to receive trading records, in all trades in OSTK; not in required form Apparently these two (Prime Brokers and Rocker/Gradiant) aren't giving them the right stuff or in the wrong form, but there has not been any new on this...

·         Advocating changes in Reg. SHO, eliminate loophole for naked short-selling; hopeful they will eliminate sometime this year

·         Hopeful for Pre-borrow requirement before short-selling

 

One thing I noticed a lot in the conference call was: POSITIVE STUFF, however, the stock fell from $27 to $16 (40%) afterwords.

Maybe I stand alone, but I don't think that makes any sense, the only positive is that it may finally force the SEC to actually regulate. Where I'm from selling something you don't have is called theft.

On the brighter side, the turn-around is officially over and they are healthily growing, pretty soon they will be GAAP profitable (a lot of the 'value investors,' and 'accounting experts,' who write negatively about them forget to mention that they have been OCF positive for over a year and non-cash charges are the reason they are not GAAP profitable) and the resulting stock take-off will make-up for any losses incurred this year.

Comments

[david]

Hi Mike, I hope that everything is well with you.
I am susbcribed to your blog and I miss your interesting posts/analysis.
Best regards from Spain,

David