Q2 2019 Earnings Call
At this time all participants are in listen only mode. If anyone should of course. This is during the call. You May Press Star then zero on your Touchtone telephone as a reminder, this call is being recorded.
It is now my pleasure to introduce <unk>, Chief Financial Officer Gregory Arpus.
Good afternoon, and welcome to our second quarter 2019 earnings Conference call. Joining me today are Dr., Patrick Byrne, founder and CEO Saum Noursalehi CEO of T Zero, Jonathan Johnson, President of Medici Ventures, Dave Nielsen President of Overstock, retail and Seth Moore, Chief strategy Officer of Overstock retail.
Let me remind you that the following discussion and our responses to your questions reflect management's view as of today August eight 2019 and May include forward looking statements actual results may differ materially additional information about factors that could potentially impact our financial results is included in our Form 10-K for 2018, our subsequent filings with the Securities and Exchange Commission and in the press release filed today.
Please review the forward looking statements disclosure on slide two of todays presentation.
During this call we will discuss certain non-GAAP financial measures the slides accompanying this webcast and our filings with the SEC each posted on our Investor Relations website contain additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures with that I will turn the call over to Patrick.
Thank you Craig.
You see our agenda, we will be discussing that achieve beginning with and focusing on t. zero not neglecting other members of our metallurgy Pareto then turning to retail the magnificent company, which spawned the all this is wonderful block chain carried out soon.
And then two QNX.
Next.
We'll be.
Turning to Medici ventures, Jonathan Johnson, who is orchestrated this this wonderful Symphony Hey, guys. Patrick go on slide five as mentioned in previous earning calls managing ventures continues to focus on building and advancing a block chain Tech stack for society, we have nearly all the critical components in place. So we don't expect to grow recurring revenue as aggressively as we have in the past.
Every month, we get more comfortable with the ability of our current keiretsu companies to deliver on our vision of a block chain tech stack versus side.
We continue to support the growth of the Companys already in the metallurgy ventures family and help them in our operated in a symbiotic way as we build a government as a service solution.
Slide six.
Each of our keiretsu companies continues to build and deploy meaningful products today will focus on a few that have hit significant milestones in the previous corner as we have in the past, let's begin with T zero sum.
Thank you Jonathan we continued to execute against the strategic roadmap, we laid out last quarter.
If you go to slide eight.
These are some of the key milestones we've delivered this year. So it's been a busy year. This slide shows just kind of a steady stream of achievements that have come in im going to highlight many of these in the coming slides, but wanted to call out the last two on August six we announced that we were awarded a patent for how traditional systems can be incurred into the block chain.
This is the second patent this year and we see it as complementary to the first.
The last item you see in a few days, we expect to trade the T zero token among non accredited investors. So for those tokens to become freely tradable slide nine I'd before we go on I'd just point out that it was over a year ago. Some laid out a roadmap that seemed unbelievably compressed to a number of people and if you go back.
And check every he has hit essentially everyday maybe some slip a week or two or something like that but he has brought to life and in just 15 months. This.
This is an incredible set of achievements that I actually don't think the market has recognized the significance of what these all stack up there.
Got it thanks Patrick.
Next slide.
Slide nine the security token ecosystem as you can see we've made significant progress here, we completed on the left the Tokenization technology, which lets issuers digitize their assets.
And also in the top right in Blue you see we signed up a second broker dealer LTC to trade security tokens.
We're in conversations with additional third party brokerage is set to create liquidity, we want to make sure. We allow multiple sources of brokerages to access this new ecosystem and Weve also filed for our own new member application for our own in house retail broker dealer.
Slide it can you comment on the recent announcement of an overstock dividend what that has done for you in terms of.
Yes, and actually we will get to that but the dividend, we recently announced as tico.
We'll bring 40 to 50000, new customers to this new ecosystem.
So a huge advantage in getting adoption for our platform and in addition, we've had a significant outreach from many broker dealers big name broker dealers that are interested.
In participating in security tokens, and we have all the technology to power them and give them access to security took and trading.
Thanks.
Okay next slide.
This is a list of the company priorities, which we further refined.
The first onboard quality assets enhance liquidity.
Launched this setting the new version of our DLR digital locate receipt platform and get our national exchange be Stx life.
Slide 11.
So the first priority is to onboard quality tokens to achieve this we launched STK, though as the second token on June 27. This is the digital preferred share of Overstocks public stock, we announced anello lied to Tokenized. The first major motion picture at Tare, which is produced by Leonardo Dicaprio as production company. So we think it's this has the.
Opportunity to massively disrupt Pal film raises capital.
We've hired and it's not listed here, but ahead of issuance broken and borrow.
A managing director from Barclays two to lead the issuance effort.
And were having ongoing conversations with many other potential issuers.
Slide 12.
To enhance liquidity so as we get this trading platform lives that's going to be key to make sure. It's a liquid market on June 14th we filed the new member application for our own broker dealer, we launched the T zero crypto App on both iOS and now Android.
Which will be really the foundation for trading all digital assets. Once we are approved as a retail broker dealer.
We announced our TECOS dividend, which we just spoke about.
Which is again very important for adoption of our platform and getting.
Big name Brokerages plugged in.
On August 12, and just in a few days T zero token will become freely tradable by non accredited investors.
And we're in conversations with many other broker dealers interest in trading security Tech.
Slide 13.
Some of the other initiatives, our third priority launch and scale the securities lending product, we completed the market data feed portion of this which aggregates the supply of hard to borrow inventory from multiple sources.
And we're working on the next phase of that which is to integrate this technology with our order management service, which will allow short sellers.
For the demand side to make bids and get low case on pre borrows.
Target and we are currently targeting October to complete that.
Lastly.
We are working.
On our joint venture with box digital to launch Stx. This is our joint venture and were working closely with regulators on this and aiming for late 2019 early 2020 launch.
Slide 14.
Lastly, we made some significant additions to our human capital growth number of whom I mentioned as head of issuance from Barclays.
She has over 10 years of experience in capital markets, Mike with Gs as head of Investor relations with over a decade of experience coming from IMAX, Corp. and last but not least Alexandra soft dropless as head of communications, who joined us from Intermarket the financial PR firm.
I'm going to turn it back over to Jonathan our chairman Who's Who's managing our strategic investment project song you've done a great job advancing to zero and we're all excited.
Okay. After work during the two zero team are doing and to see T zero product get in the hands of customers. So focusing on slide 15, let me briefly discuss the status of T zero strategic investment efforts first macabre has completed its due diligence efforts and is in the process of taking a proposal through its investment committed we will update our owners as Theres materializes.
Second I remind you that GSR made a 5 million dollar investment in two zero.
$1 billion post money valuation.
We have investment was to be $2 million in cash and $3 million in Hong Kong exchange based stocks.
We've collected a $2 million in cash.
Because of some technical difficulty in transferring the stocks GSR is now liquidating those stocks in the contracted to transfer to zero and we'll pay TV remaining $3 million in cash we expect easier to have received that remaining $3 million in cash by the end of this month. It will be at that point, we will issue to zero equity to do two GSR.
Next slide.
I'd now like to shift focus to three other companies, which have also had significant milestones since our last call managing and governance bit and votes.
Next slide I'll start with management and governance and highlight three of its recent developments first ml GE announced that after its successful fall 2018 initial pilot Lamb piling project in Lusaka, Zambia. It has now signed a memorandum of understanding with the Lusaka City Council to significantly expand land idling and administration in and around the capital City.
Zambia with a population of approximately 2.5 million people on its Metropolitan District, Lusaka is one of the fastest growing cities in Southern Africa.
Second and LG signed a memorandum of understanding with Liberia's Ministry of Finance and development plan.
This annual review is expected to lead to a pro Bono pilot project exploring the potential for the Digitization of existing government services and the development.
Egovernment platforms in Liberia.
We believe this pilot could lead to further opportunities in Liberia for AML LG and other metallurgy venture companies developing applications for our broader government as a service concept.
And third NLG completed its earlier project with Teton County, Wyoming May continue Kern County, the first county in the United States to record land information on a block chain based platforms.
Two time county land record activities going back to 1996, including warranty deeds mortgages release civilians and other similar documents are now stored on the system using Emerald juice.
Technology designed to track record and make this information available to the public in a transparent and immutable way.
Patrick you want to comment on this at all yes, our strategy here as I've mentioned before has been some pro bono projects that gave us the reason and a customer for whom to build a specific tools different tools in the case of each project. We have each reached the point, where those different tools and platforms that we've created snap together and create pretty much was certainly in the most advanced block chain the land governance system in the world.
And we're really at the cutting edge in Africa, like using drones and all that stuff that you're that you're hearing about we're at the cutting edge of all that.
So those have snapped together into a very valuable platform I think people are going to be surprised at how much.
How lucrative this may may turn out to be that's not the only reason we did it we think it has kind of world historical benefits.
But it's this is not a pro Bono project at the end of the day, we have developed a very interesting and advanced.
Block chain based land governance platform way ahead of anything in the World I can say that with confidence is that the technology. They now have now all snap together is way ahead of anything out there Patrick I know you and I couldn't be more pleased with the products in production and progress.
Mentioned land governance is making let's flip to the next slide 18 next I'll focus on bed, which is our financial services company in Barbados.
This digital money product and money lost in Barbados in December of 2017.
It has been operating in the Central Bank of Barbados, and financial Services Commission regulatory sandbox, while in this regulatory sandbox Ben was under a full review of its anti money laundering compliance processes and an audit of them money operation.
We had recently announced and money has graduated from and exited the regulatory sandbox.
So this is a big deal that is now a candidate for regulation under legislation that is being currently drafting and bid now have the stamp of approval from the Central Bank of Barbados and financial Services Commission.
Hope you can understand why we think this is such a big deal. These developments should provide great comfort to bits potential partners and to consumers.
Beyond the end money product bid is making steady progress developing its central banking product for the eastern Caribbean Central Bank.
Vic continues to grow and use the development team and management answers for those development efforts and we're seeing great collaborations between the teams in Barbados and Utah Patrick is it fair to say that that our shareholders should think of the money product and the central Bank the digital Central Bank as two products that snap together in a sense absolutely without the money product and central banks are less likely to issue digital currency, having issued digital currency, having an end money application reckon that citizens can use to use and transfer that digital currency is the key so we talk about them separately, but there are really two halves to a whole circle right and our year end money and Jonathan is on the board there and has played a key role and helping this company emerge.
Hi, Great company that money product has been out there for December 2017, so almost two years now. So we are now just finishing up the central bank side of the front I'll have with that is that a fair elucidation people development team in Salt Lake is working closely with the eastern Caribbean Central Bank on its requirement. The development process is going well our team in Salt Lake was insane kits in July meeting with the central bankers and their technologists.
We're very pleased with the prognosis progress of the developer and I love that we'll be bringing that lives in the 600000 people 800000 people in the eastern Caribbean community. So as it comes in a in a community of that size financial system of that size before moving on to bigger bigger projects. The size is great because it's relatively small but it's also.
Eight different countries, which makes it or even better sandbox, because youre dealing with cross border transactions within a central bank community, it's really a perfect place to start.
Turning to slide 19 for the third earnings call on a role I'd like to highlight both last time has suggested that next on the roadmap for bonus would be more states and municipalities adopting their product and technology.
So how often is that the next opportunity for votes is right here in our own backyard Utac County, the second largest county in Utah is piloting the votes mobile voting app in its municipal primary elections in August .
We will also August this month this month this month, yes. Thanks here.
It will offer.
The block chain based voting services to active duty military they're eligible dependents and other overseas voters, it's nice to see the steady progress that both as Mike.
Hey, what another opportunity Americans are ready for a solution to devoting I mean, there is no one it doesn't there's no believes anymore I think in the.
In the sanctity of the voting system as it exists modules make two comments on this Patrick one is I think the way through adoption is first overseas Motors natural food were budgeted versus entered with next it will be disabled voters, who need access under the American with disabilities Act, none it will be vote by mail voters and then frankly, it will be everyone, who want to use this as an alternative so I think that's how votes expands its footprint to be larger and larger and also mentioned yesterday I was reading a Harvard business review article, which was published yesterday on how to get out the vote and its number one thing was.
Good afternoon, Bohn should be non partisan in nature.
Frankly, that's what boats is its a non partisan company, that's helping make it easier for people to vote, where it's been difficult for them to develop.
Al alluded rather.
Let's start on slide 20.
Weve highlighted just for Marc Caira listed companies that doesn't mean that the others aren't making progress each is and its own pace and several are working together for example, this corner I was in Washington, DC with the Ceos of grain chain and Vincent they presented to legislators and regulators how block chain is being used in the supply chain area. Several of our keiretsu companies use net key as an identity vendor and of course, our world Class development team Energy ventures is working with some of our keiretsu companies to help develop products and get them into production.
Symbiotic nature of the Keiretsu model is really blossoming well.
To close I would type footnotes claims that just that when I think of.
That value that maybe people on the outside don't understand having started different companies and.
This is such a that's been proven to be such an accelerator, especially since John of indicative over got it organized like this it has been such an accelerator the advantage to these companies for being connected within managing and then frankly from energy to be connected to a 1600 per cent.
Tech company.
Retail sites that company is is letting us put distance I had I had been expecting by this point others to be catching up with us in different areas and instead. It seems to me that we're putting distance between ourselves and competitors. These different companies the benefit of matching ventures being part of overstock and the retail organization as our.
Brother in arms on this has just been really really important so thanks for noting that.
To close the Medici ventures section of the presentation, let me remind our owners that 2019 continues to be the year of product in production for the Medici ventures keiretsu companies, while we look to fill our identity pillar.
It feels like our keiretsu is reaching its rightsize moving forward, we plan to focus on supporting the growth and development of our existing competence. We will of course continue to keep our finger on the pulse will be industry and to even reach out proactively on interesting opportunities, but we will only add if we find just the right addition to the family So Patrick with that I'll pass it back to you to discuss the retail business.
Thank you Jonathan now to Overstock retail, Dave Nielsen, our president of retail takeaway. Thank you Patrick.
While we anticipated a small loss due to the weak seasonal nature of Q2, our retail businesses snap back quicker than anticipated delivering positive adjusted EBITDA.
As Patrick as mentioned on our previous earnings calls many expected this turnaround to take years.
To return to profitability. We first began speaking of turning the ship three quarters ago and as you can see from the slide 22, we beat our estimate and delivered positive adjusted EBITDA of a positive 2 million within three quarters. This is the first positive adjusted EBITDA quarter since Q2 of 2017.
Before we go any further into financial results I'd like to turn the time to South more chief strategy officer at retail to introduce you to the retail strategy and the roadmap will be focused on as we move forward.
Seth.
Absolutely.
So on slide 23 ill start by saying the past few quarters, we've shared with you the progress in our financial recovery, but now we're at a point, where we can share with you a deeper explanation of the strategy underlying our recovery.
Lets start the discussion with some foundational market analysis, the home furnishing industry to $301 billion highly fragmented market.
As you can see here the top five players only make up about 35% of the market with 65% in the market residing with retailers with a 2% or less market share.
On Slide 24, you will see that of that $301 billion market only 19% of it is online which as you can see on the following slide.
Represent significant under penetration relative to many other product categories.
Taken together this represents a significant opportunity for us.
The market is fragmented primarily because the kinds of home shopping experiences that delight, one customer may actually turn away other customers, making it difficult to consolidate wallet share across a broad range of customers.
So on slide 27, you will see in recognition of that fact, we've done some significant segmentation work across the home shopping market through various behavioral attitudinal and consumption variables and broke the market into six specific consumer segments.
We are targeting two of them through a differentiated and narrowed focus on their shopping preferences.
These two segments combined to make up about 40% of the home goods market Thats, roughly 120 billion and already have an affinity for the experience at overstock delivers.
On the next slide you will see that the attributes that make overstock a great fit for these customers are their love of deal hunting on high quality items, and the fact that they seek a balance in function style ease in price.
They both want beautiful comfortable homes, but they are also not the type of people who have you shopping for those items in their homes as a form of recreation.
The friction these customers experience and finding the products they like as well as the deals. They crave is what creates the dissatisfaction with incumbents in the home purchases.
To satisfy them, you'll see on the next slide that we're expanding our moat around three core competencies that they already appreciate about overstock. These competencies are a more personalized relationship with the customers high value promotional pricing on quality home goods that helps them feel smart about their purchases and on shopping experience easier and frictionless to remove the risk required in buying in other home furnishings retailers. We have a number of metrics that we look at in order to benchmark our progress against these three competencies that I want to walk you through.
First as you can see here, we're making progress year over year and improving our 28 day repeat rate through our personalization efforts. We have significantly also increased our private label penetration as a percentage of our sales.
This private label program gives the customer value accuse both in terms of quality and in terms of price on our offerings.
And helps to differentiate the experience for the customer.
I'll point out on that we once did have a thriving.
Private label business over a decade ago and sort of stopped at one point. We've just really started this again and for it to already have popped up 12%, it's been less than a year I would imagine you will see this.
By accelerating continue to accelerate direct to end up yes, Dave you want to estimate we think this goes to where we'd like to see this 50 to 60, maybe even higher we have to do 60% of our revenue right.
And I think that you will see it by a year from now 30% or something.
Absolutely.
On Slide 31, you will see that our means for generating smart value for the customer come primarily through our cost reduction efforts.
As reported in a recent article in search engine land in June we made another significant breakthrough in the recovery of our ESCO rankings.
You can see that while we have made over 100% improvement year over year, we still have lots of opportunities to grow just to get back to where we were in 2017.
We believe this will be a significant growth engine for us going forward and helps us control, our marketing expenses and offer more competitive pricing.
That graph unleaded footnote that graph in the upper left really tells the story of what happened in the last two years, we really thought we were we were skimming along two years ago that collapse in our CEO .
Total to one graph is that graph and it is because of JP now that we survived that we I don't think there is and there are other companies that have had collapses like that we had and at March 2017 was itself a little spike we were running more like 400000.
Half of our keywords, we care about showing up in the top three researchers in Google that fell to 50000.
Other companies have had something like that happened and they all went out of business I can't think of anyone who survive because of JV now.
Who is here with us today and you'll be hearing from we did survive that and as you can see we've gone from 50000 back to 150000 and Thats. So that a significant process progress, it's going to be but and June . This would do we had a very nice June in googles, new algorithm rolled out in the first week of June and we've seen that had been tells US we've been doing the right things and focusing on the right things in our Seo efforts.
Absolutely.
We also made progress from a logistics standpoint, as we continued the multi year trend in driving down returns and returns costs as well as realizing.
Freight savings from rebalancing carrier lanes.
And all of that together adds up to the improvement you see in our perceived price advantage versus other online retailers.
We expect these trends to continue and have initiatives around continuing to drive these costs out of our ecosystem.
I have one more.
This is one of them and lower less than south was a very key part of this the net returns costs, which is a measure of the true net economic cost to us of our returns.
Which is a combination of what percentage of products get return what percentage of them can be resold versus.
Versus liquidated the cost of all the handling and sorting and all that stuff, we come up with a true number we have over time here you see this dropped 50% that is real.
Nickel and dime management and that just that alone.
If you knew how many of those there was.
Things like that in this company that created a moat that makes it in my view.
Something of value to when I look at these other companies that are much much larger brick and mortar companies and the value, we could say theoretically bring back bringing that kind of a.
Scale is sort of worth more than the current trading value of our company.
Go ahead.
At.
Finally on this last slide I think you'll see that we also continue to make significant progress in the improvement of our website experience.
We've reduced the page load times, both of our mobile and desktop web sites and we've also seen significant improvement in the percentage of our products on which we can message free two day delivery a number we expect to continue to improve in the coming quarters as our fulfillment services offerings continue to expand.
These improvements taking together are driving meaningful improvement to our net promoter score at the point of sale, which we believe is a good representation of the quality of our shopping experience.
Yes, and 82 by the way in 82 NPS at point of sale is astronomical.
So if you went back 20 years ago, there were not enterprises of any type.
So absolutely and we think Thats really key with these customer segments that we drive the friction out of that experience and make them comfortable with shopping with us in a way that they just aren't particularly in the legacy brick and mortar environment.
So with that I'll go ahead and kick it back to Dave to discuss the financial results of our completed initiatives as well as some of our upcoming roadmap.
Thank you Seth.
Turning to slide 33, if you would.
We've had a focused and productive quarter, the key initiatives and product now live on our new site monetization AD Tech is really spending up nicely and creating some interest with our partners.
Adoption is happening even happening even quicker than we expected. We have also completed all of our freight contracts, except just mentioned and rebalanced our freight lanes.
Which in turn is providing.
Improved margins, we've continued to expand our reach of machine learning throughout our organization and estimate we've completed approximately 40% of the needed integrations.
And Seth just mentioned, we've spent a significant amount of energy focusing on our target audience defining our retail strategy and rolling it out to the entire team.
Moving to slide 34.
Going forward, we'll be focusing our energies around reporting our progress on the three core competencies that our customers already appreciate about overstock first and building a personal relationship with each customer customer.
We will focus on increasing our volume of Threed content, while expanding as Patrick mentioned, our private label program and fully integrating our CRM platform.
And to all of our customer facing products by the end of 2020.
And next we'll create a smart value for our customers by continuing to reduce the friction created by returns and complete the integration of our multi carrier freight lane implementation and finally, we will deliver an easy and seamless shopping journey by continuing to expand our number of two day shipping products and accelerating our growth and our award winning mobile apps.
As we move to slide 35, you will see year over year improvement in our gross margin coming in at 19.7%, which is an 80 basis point improvement over Q2 of 2018. The primary driver behind this improvement is the rebalancing of our freight lanes by adding additional carriers to our freight mix. We're in the initial stages of this multi carrier strategy and we will continue to see improvement in our gross margins as we build on our freight and logistics carriers and footprint.
As I shared at the beginning of the retail segment, we're thrilled to deliver our first positive adjusted EBITDAR quarter since since Q2 of 2017.
Note that this number is inclusive.
Our allocated shared services cost of 70%.
Finally note our year over year decrease in revenue of 23%. This is due to our pulling back on the marketing afterburners from a year ago, we anticipate as we move into November and December of 2019 and on to 2020, we will deliver sustained profitable growth as we focus on our strategy.
On slide 36, as we continue through this transition you can see that we improve our retail expense line and are out looking to continue that improvement.
Throughout 2019 as Weve been as we have additional contracts and cost that we're eliminating as we move forward throughout the year, we anticipate our contribution dollars will continue to improve throughout the second half of 2019 as we execute on several of our company initiatives, primarily driven by two that I previously mentioned expanded site monetization via new AD Tech and the rebalancing our freight contracts.
Moving to slide 37, I will turn it over to Patrick for a moment great. Thank you. So on the left you see the graph David is just showing you it and on the right we see the competition and what I like to call as their March to progress.
It's to me is as our March to profitability. It to me is I mean, we did not talk about the competition for years, we did not talk and of course I'm speaking of Wayfair. It seems to me at some point silly of me like there's they've an elephant in the room, that's not being addressed.
I view Wayfair as a separate business that is so similar to our own and more ways and you would probably even guess that.
And then having to choose chosen to do this.
Which looks odd to me, but I know I'm old fashioned.
Having your your expense structure grow like that.
And I know there are people, who believe in that but that it's such a central fact, I think of the fact of the online business that it means that it changes our strategy completely at but our strategy. It can become instead of trying to bring our head against that what's going on on the right is just to focus on the most explicit jewel of a tech platform and competing on that basis, and we're going to have a multibillion dollar company, making and on making tens of millions of dollars a year again, and we're not going to try to measure ourselves against.
Hi, growing, 40%, but losing $180 million per quarter.
So that's as clear and an uncertain of the of this our future strategies, we can make.
And might I add to that I'm very pleased that were on the left side chart, where we sit today.
We're on a great trajectory nicely done nicely managed days.
In Q.
And the whole team.
As we turn to slide 38, let me point out that our second quarter retail contribution was equal to our first quarter coming in at $39 million of 42 million improvement over second quarter of 2018.
Typically our second quarter is our softest quarter of the year, which speaks to the continued recovery in positive trajectory.
And finally, as we turn to slide 39, you will see that our current outlook is to finish the year at $167 million.
This equates to an adjusted EBITDA of 17 half million dollars for the year and is an increase of $2.5 million in adjusted EBITDA from our previous Q1 estimate of $15 million.
We're very bullish about our retail.
Business, we like the trajectory, we're on and with that Patrick I will turn it back to you.
Thank you Dave.
We won't walk through each of these again weve.
What we are is.
We're in the business of technological disruption, we are doing it now with capital markets T Zero I mean, thats really the main event, we think the T zero is.
Im not going to try to convince shareholders about whether to believe in the block chain Revolution or not that's you do your own homework on that but if you believe that you probably understand why security tokens are the killer app of that revolution, but we have a multi year head start and building the best training system for security tokens App out there at this point given just the announcements in the last few weeks its and we have really crossed we have crossed some lines and put a lot of distance between us and competitors.
And okay with that let's move on to the question.
And that question, we have questions for key zero managing retail and.
T zero.
Sam why don't we start here.
On the digital dividend decision was brilliant says one of the smaller in simple terms, what's it mean to the average overstock investor.
How if at all is it beneficial to T zero.
For example, it seems to us that it should drive trading volume on the EPS, which would be favorable to TDR says the shareholder some yes, it's it's obviously a benefit to investors.
In that we are rewarding them with access to preferred.
Share dividends for every 10 share owned on September 20, Threerd, the Investor gets one digital share of Overstock, which is all tradable on our on the T zero.
How has this beneficial to tease year, we talked about it earlier, but it brings 40 to 50000 customers to the platform. So getting that initial adoption, which is key as well as bringing other broker dealers to the table that that we.
That we wanted to plug into the security tokens system.
Okay.
I have some you wrote action a little up letter the token holders one should token holders expect to next we are thinking on a quarterly basis, but if they are helpful. We can do more frequently perhaps even monthly.
Okay how is the.
Digital crypto wallet app, performing how many downloads and assets and such so weve had thousands of downloads and I think we have like $100000 in assets right now and Thats with no marketing we plan to start doing some marketing in the coming weeks. So in the next one to two weeks sale you will see us start to market. This through.
Kind of on the digital side on Google and Facebook and I would add to that that there is a ramp up period to getting assets in based on QHC laws and everything yes.
Make sure that people are hiding money in those accounts, so that will continue to grow yes.
Solid we've made a number of significant additions to management and who are the new people what are the roles.
And when do you think it will they will result in actual increased revenue, yes, we talked about Brook, who is head of issuances that she is over kind of business developments is a very direct line to revenues and getting new tokens into the platform.
She is already improving our processes, there and helping aren't the areas of focus in our prospecting. So I expect in the next quarter that she will help drive revenues to the business and then we have we've talked about Mike Mooney Gs and Alexandra.
Who is head of communications and.
I think you're already seeing them, they're helping more in an indirect way, but you've seen communication kind of go up in volume coming from Tcs not only is that due to execution, but.
They have been great and getting the word out and so I think they're they're actually contributing to the increases that you've seen in our token price.
In general it's Tom.
Somebody asked investors, we have spoken to have referred to your products as taking a lot longer than expected to generate revenue would you agree with that assertion why or why not.
I do not agree with that this is a completely new alternative to how capital markets, where today and that takes time and so we're starting to see revenues come in from the block chain side of the business, but.
We I mean, we just got the platform live at the end of January and so we're seeing steady increases in revenues from the Ats and crypto and we expect that to continue may I add that I think thats. An absurd question. This guy is inventing a parallel universe based in block chain to our national capital market and better advantage and I just I think it's an observed assertion.
Okay. What day, we'll have in T zero token be open for trading on the Ats on for all investors not just in credit we are targeting August 12.
Okay next set of questions any update on timing for Boston exchange, JV and SSD regulatory approval.
It's hard to estimate, but we're shooting for ended the year.
This year or early 2020.
Any update on your pipeline and new potential security offerings to trade on T. zero, nothing we want to publicly share, but we have a pipeline of about 200 companies and we're focused on the top 5% of that so Tim 10 companies that are issuance team is working with.
We have another.
I know that there's some very interesting ones in the pipeline.
Tier will likely need funding soon what is the plan for this.
I am actually not terribly worried about this overstock unmet achieve our committed to funding T zero and so.
The team would actually like to execute a bit more and start generating more meaningful revenues before we raise capital that all that said we are working to raise money and Jonathan is working closely with macabre as he mentioned as I mentioned in the call Mccars Cogen.
The.
Proposal to its investment committee or is taking it through to investment committee, we move forward, but absent back.
Managing overstock continued to see easier or is the crown jewel something it will be funded.
By us.
As long as needed.
Right.
Next one will choose you'll get a new York crypto licenses and what steps are being taken and this the new York bit license is challenging to get we are working on and we are hopeful we'll get it in the next six months.
Okay. What is the marketing strategy for the teaser app overstock customers don't seem like the likely target market.
Yes, the traditional customers for crypto and we had an analysis done by on this is.
Hi income men between the age of 30 and 40, but we think that Mark this market is evolving and.
One more and more as I understood.
So we so we want to test audiences and see where it resonates.
Overstock does have some customers that we think have an overlap and so we're going to kind of test broadly and identify the groups where it really resonates.
Thank you. Thank you some excellent work on key zero and again, where people may not understand where there may be hidden value is the distance Salam.
Hi, guys with security tokens, if you believe in that field, what key zero has done and is built in the last 15 months and is now has been bringing to market in recent weeks is.
Yes, I think puts us way ahead of the competition.
Next let's go to meditate Jonathan.
You want to address these questions sure okay.
Facebook.
Of this also from Tom Forte from da Davidson.
Facebook seems to be interested in creating a cryptocurrency to us to be an enormous side validation of your multiyear investments spending on block chain would you agree with that.
Yes, I want I think any time.
Household names.
Get involved in anything block chain, it's good for what we're doing in managing ventures, so whether its Facebook coming out with the Libra cryptocurrency or Walmart, which recently received <unk> patent for its own private cryptocurrency all of these things seem to normalize the mainstream something we've understood for years now and I do think it is a validation of what were working on.
Are there opportunities for you Tom Ash for you to work with Facebook to advance that company's efforts again, yes. We have had some initial discussions even before we bought it was announced with.
By Facebook and we will continue to advance those discussions move domenici level and sometimes.
At the camera to company level, we know that.
Some of our companies have reached out are trying to work with Facebook on this area.
Our why not do Escos security token offerings for more or some or all of your investments such as managing land governance and votes.
So thats a great question, Tom many of the contracts few companies are interested in doing security token offerings on the T zero platform.
But I would say as with all equity raises the timing has to be right for this specific company and just because it hasn't happened already don't assume that won't let me footnote that if I may I love.
I love that idea and you've you've name companies that I think would be perfect well they need a few more months or a few more quarters.
To get some revenue, but they would be perfect for reggae or rate plus or even small reggae offerings.
And I would like.
Easier to be that's a market that I think T zero.
Should we should be in and it'd be great for America, if we could tokenize.
Reggae in Rite aid plus offerings, so I think.
My Hope is that you will see that as this high retro mergers one of the things that will happen as you will see some of these portfolio companies doing small offerings on T. zero and in the process, we'll figure out the right way to do re offerings as security tokens.
So one hand wash at the other okay going on to Allen Klee of Maxim.
Could you give an update on managing land governance, the status of the capital of Zambia potential contract and what it could represent dollar wise.
So we've talked about this in the presentation, Zambia is a big deal. The it's gone from 50000 title pilot program to much larger paid program.
We're not talking about the dollars here, but as Patrick frequently sense.
Ml Judaism are one of the portfolio companies were big numbers or are bandied around.
Yes.
The three companies, where you hear the word trillions is when you talk about key wouldn't it.
People within T zero met achieve land governance and fit.
The addressable markets there are.
You used the word trillions alive.
Okay, what are the opportunities in voting Jonathan.
Well as soon as I talked about in the presentation I think the way that offered the weighted voting is going to expand his first as an alternative for overseas voters.
Then disabled voters then absentee voters.
And then all voters is going to be iterative expansion, but it's an expansion process that make sense.
And Thats really what thats addressing us voting.
People countries that are talking to us about Jonathan gas product government as a service one of the things they bring up or one of the first layers that they want and I'm thinking of one country. In particular is that we will get voting.
In that country on on the go tap so I would say I saw any amount just this morning from a.
Premier.
Our country when we're talking to.
To his voting manager copying me and the CEO of votes.
Asking the premier too.
Good on it and some for the Permian or asking the minister the minister to get on it. This is something we want to do quickly. So I think the United States the.
Process is as I have described I think Tom.
Countries elsewhere, the process could jump to the fourth step immediately.
Okay.
Overall, how do you think about how much you willing to posted losses in Medici, Jonathan If you look at ways and metallurgy does this mean, the overall segment losses will go down or will this be more spending on other investments. So let me begin by saying manage Usan energy ventures, as an incubator and will take time for each of the camera two companies could you have ramped up.
We're more pleased with how quickly summer ramping up than others, but that of course is to be expected.
As T zero and am LG ramp up to profitability managing their insured losses will be significantly reduced.
We'd like the operator, we'd like to be operating in a place in the next year or so where retail profits are more than able to fund and Matt achieved ventures operating outlays.
As I mentioned during the call we are slowing down our search for companies to add to our K rats.
Well said.
Thank you Jonathan on metallurgy.
And beautiful work both of you Fellows and T zero added.
And taking on that.
He's pulling managing together as an organization.
Turning now to our retail some questions I am going to farm these out to different people.
On it.
Dave.
So what specifically do you attribute the turnaround in your retail business, including the return to free cash flow generation, what gives you confidence into sustainable.
Okay. Thank you Tom.
Patrick as you know, we've we've made some tough decisions and right size our expense structure.
We also have backed off of the aggressive afterburner marketing spend that you've mentioned on a few calls.
The few of the previous calls.
Weve returned to our strategy of sustainable profitable growth, so that fixed charge that I talked about with expenses and contribution being put in line thats been some tough decisions. Some some and returning to our our strategy of profitable growth sustainable profitable growth I emphasize that.
Regarding the confidence and sustainability set discussed earlier.
It was 301 billion dollar.
Home furnishings market is fragmented and the largest retailer is only 11% was 60 plus percent of the market share being owned by people with 2% or less.
By by narrowing our focus and our innovation and focusing on our key customer segments, increasing the use of AI and machine learning across the enterprise improving on logistics and operations effectiveness and staying disciplined to our expenses, we see no reason, we cant face sustainable.
Thank you.
Seth where do things stand on our ESCO efforts and its shareholders heard drove Google made change serious algorithm this year and have that once again hurt some retailers summit.
Yes, they did make some big updates in June .
But as we showed you on the chart earlier I think in short it's been a fairly productive month for US I think we've seen more value from our ESCO program.
We're now up more than 100% year over year in terms of our rankings in the top three.
And saw a significant uptick in June and we're really pleased with the improvements we're making to our site experience are being recognized and awarded by Google.
Thank you.
Next question sounds like you have an extra executive involved in retail it efforts what is the edtech doing as it looks like she is currently doing well, Dave why don't you take that.
Thank you, yes, we do we're thrilled to have committee ARIA far here with this the Phd in machine learning and data science. She is our chief algorithms officer.
She is leading the teams that are implementing AI and machine learning and real time data access searcher income personalization across the retail enterprise just to name a couple of things she is working on.
We believe as set talked about our customer strategy, we believe that the data driven personalized approach that familiar can bring to the table.
We can take overstock to new levels.
And I think we even said in our last quarterly call that we had probably taken machine learning to about 25% of where we planned on taking it up to about 40 now hope to get to 70 by the end of the year take I think you said earlier in the call to the end of next year to really do a 100% tumor that's coming in which that's the answer which is has brought us as well as really shrewd.
Business Savviness.
So speaking of 2 million I've got a question for you club you announced some changes to the effort.
After quarter end, such as price matching.
How should investors think about those efforts impacting club familiar we are continually seeking new benefit that delayed Laura guerrant, Mailmen, Larry and drive additional new customers to become an hour.
We expect these new benefits to helping to that overall signup and retention rate.
Hi, Thanks, Darren ensuring that our club O members have a shopping experience.
Not we believe benefit site that will encourage our men Larry engaging overstock more frequently and more confidently. Thank you.
Welcome. That's this is that your first on speaking earnings call welcome.
Okay next.
Prime day, this super JP, where your sales helped or hurt by Amazon's primes to day sales event, JV Nap well Patrick I first want to thank you for your kind words earlier about the testing through the STL slide.
I think the teams nature is oftentimes seen when the way we rallied to a challenge and the fact that we're reporting positive adjusted EBITDA off when our most lucrative channel is only partially recovered with potential upside is a testament, what youve done the last year.
On Prime day, we saw positive impact as Doug talked to the fact that our prices have amazing perception of how good they are because they are great and so when a competitor creates a lot of traffic and pulled it online we see much of that traffic come over to overstock is a great home prices a purchaser. So we tend to get positive impact when a competitor does a major event.
Thank you.
Well said.
Hi, Andrew well all set.
Dave talked about logistics, what percent of merchandise to sell and deliver to customers on a two day basis, and how has that changed over time.
Thank you Patrick assess showed on the previous slide we've grown our deliveries to 22% within two days.
We expect that to grow we anticipate over the next two years to get that to roughly 60%.
Of our business and we have many initiatives with our supplier Oasis fulfillment services.
Our sauce program as you'll hear us frequently refer to that technology allows our partners to put their products prepositioned in warehouses closer to the customers and we are undergoing that initiative as we speak.
I am going to footnote that we built some years ago. If you go back in the earnings calls transcripts you will hear you will see our discussions of sauce, we spent $30 million more building in agile lean supply chain that would let us manage inventory in 1000 warehouses.
That is a key part of increasing the percentage of skews that show on a two day basis, we know what that does for us.
And.
The how much it increases the likelihood of a product selling by being able to say we will deliver this within two days to you.
Taking that number from 22% to 60%.
Over a couple of years just that alone.
Taking the non.
Net income.
That itself dropped will drive a a make an acceptable not an overwhelming but a very acceptable sales rate and low just that technological innovation.
And.
So okay moving on Dave to what extent is your legacy home e-commerce business affected by terrorists, including the latest round that was announced 10% of everything else made in China.
Yeah. The the most recent round of tariffs.
The the announcement last week of the 10% was primarily on on goods of clothing toys and footwear non material really to to our business at this point in home furnishings. However earlier in the year back in May we did reduce our outlook our bottom line by about $1 million because of the.
Tariff rates from the 10% to 25% on those goods that hit directly in the heart of home furnishings.
Our next question is from me.
What do I think of the current trade war and what our view on the end game.
First of all practically every economist for 200 years has believed and free trade I am going to shock people buy well certainly with the doctrine that isn't performing the decisions on this in Washington are really not about economics, there about national security as book called Mike.
Called out 100 year marathon by Michael Pillsbury that is really the the doctrine that is informing this administration has a a protege so to speak named Peter Navarro, who is the trade guy, but if you really want to understand the thinking that is informing this all this read Michael.
Pillsbury and the 100 year marathon so they see this in terms of National security.
And the the thesis is that China in 1929 cents on a 100 year marathon to take us down.
And they're basically 67 years into it they were when the book was written but they're about 20 years ahead of schedule that thesis of the book and I think that's really what's informing.
The hardline trade trade policy.
What do I think I think that the right solution is something Buffett put out 20 years ago that I wish people paid more attention to because he sees saw free trade as.
Imposing at Costa its way for us to currently led better and get Nike's sneaker, well I should say brands, but to get sneakers are such that we trade little pieces paper for and it's our children and grandchildren have to honor those or a piece of paper. So it was a way of us living higher on the hog and taking things away from our grandchildren as what he and so anyway I wish people would look up hit the proposal. He may 20 years ago.
Okay next question, we'll give this to Seth.
Ebay has indicated that the new online sales tax laws. Following the Supreme Court's ruling last year have hurt us sales by more than 100 Bips other ecommerce companies such as Etsy have referred to it as a head as a headwind what impact is that having on our ecommerce business.
Yes, so I would say in terms of our E Commerce business, there are benefits and detriments from the change in policy.
Detriments are clear collecting sales tax in every state has its costs.
The benefit is we did not operate physically in a number of states because of that policy.
And so weve gained access to those states weve opened to some additional programs that have.
Largely offset I think the cost to us and that was really overstocks push all along is we wanted a level playing field with a uniform set of standards that was easy to comply with in terms of sales tax.
Some of the.
Platforms, you mentioned that don't really operate as retailers, but rather as platforms already operated in a number of those states, but there are sellers did not and so I think our situation is somewhat differentiated from ebay and Thats Patrick rack comment on this sure Whos there.
So because overstock was the tickets this year in this fight we were I think more prepared and better position.
Or the Supreme courts ruling in Wayfair, and we were able to act quickly and nimbly. So that we really have been slippage at all and.
While this may have heard and still be hurting other competitors not so for us right.
Okay. Two more questions. Thank you Jonathan two more questions in the other category wanting to stay around an answer these Jonathan.
One of them is that the FCC investigation has been dragging on and acts as a cloud hovering over the company have you asked the FCC to provide guidance as to when this man Jonathan who is recovering attorney.
It used to be general counsel.
Before you traded off go ahead sure whom.
Passenger that introduction I am pleased to answer your question, Yes, we regularly meet with the FCC and I've personally met with the FCC enforcement.
The answer to your question is yes, but the FCC as good as it is engaging in regular dialogue with us well not good shot clock on itself. So we're working to get an answer we're in regular dialogue with the FTC wants anyone.
We did announce this FCC is laid a series of interactions with the FCC last March Onest.
I will point out that we we complied with.
An enormous document request and I think we spend $10 million to $13 million or something.
So the share holders can know that we we understand that we want to accelerate this process and we have done our part and have been extraordinarily responsive in everything that they have asked for Glenn General Counsel with you. Let me just also just comment on that Patrick. The fact that we are in a regular weekly dialog with the FCC is if not unprecedented highly unusual so our cooperation with the FCC is appreciated is appreciated and I think moving this faster.
Then even slower process would be Glenn yes, I would echo jonathan's comments that we have been as cooperative Lee as.
Earth cooperated Lee at our cooperative as possible during this and continue to work with the SEC on this matter I think the FCC should put we should give them an office within Ts Europe . They have spent so much of the last two years. There three years. There we've had the six month investigation. The year investigation that while investigations are the right word, but hey, that's the next step.
Hey.
That would be the next but we are being extremely co-operative.
And then last question I am obviously concerned about the share price I don't think that reflects the value of the underlying assets what is the management or board planning to do about this Jonathan.
So management is focused on running the business. The best we can for long term value like we always are.
I would say this if share owners are concerned about the share price and it being subject to manipulation.
And I will note I've seen we've again shown up overstock is again shown up from time to time on the regulation throws show.
Securities threshold last.
Those shareholders should contact the FCC and ask the FCC, what it's doing to protect them against market manipulation.
Jonathan Thank you for that answer I would add to that if youre contacting the SCC shareholders, let them know how how.
How much you like the dividend idea and how much we look forward to receiving that dividend.
So with that said we have a tremendous.
Network of Echo system of companies emerging here. If you go back to the transcript of this call. You'll note. All these places that these companies are starting to cooperate with each other and help each other.
We think we are we have crossed a strict a strategically important line so that we're back to where the retail business.
We thinking over the future it's it.
Thing that the retail company as this equipment jewel of a tech platform.
That.
So thats its future and Meanwhile, the block chain companies are at the very leading edge of the biggest ideas in the block chain Revolution.
So.
Everyone. Thanks for joining us.
Talk in a few months.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a wonderful day.