Overstock.com Reports Q1 2017 Results

Consolidated revenue of $432 million (5% growth) and pre-tax loss of ($6.6) million
Retail pre-tax income of $1.4 million
Medici pre-tax loss of ($8.0) million, including a $4.5 million impairment charge

SALT LAKE CITY, May 04, 2017 (GLOBE NEWSWIRE) -- Overstock.com, Inc. Common Shares (NASDAQ:OSTK) / Series A Preferred (Medici Ventures’ t0 platform : OSTKP) / Series B Preferred (OTCQB:OSTBP) today reported financial results for the quarter ended Mar. 31, 2017.

Key Q1 2017 metrics (comparison to Q1 2016):

• Revenue: $432.4M vs. $413.7M (5% increase);
• Gross profit: $86.9M vs. $77.3M (12% increase);
• Gross margin: 20.1% vs. 18.7% (141 basis point increase);
• Sales and marketing expense: $37.6M vs. $31.5M (20% increase);
• Contribution (non-GAAP measure): $50.0M vs. $50.0M (0% decrease);
• G&A/Technology expense: $51.6M vs. $47.6M (9% increase);
• Pre-tax income (loss): ($6.6M) vs. $22.1M ($28.7M decrease);
  - Pre-tax income - OSTK retail (non-GAAP financial measure): $1.4M
  - Pre-tax loss - Medici (non-GAAP financial measure): ($8.0M)
• Provision (benefit) for income taxes: ($340,000) vs. $9.0M ($9.3M decrease);
• Net income (loss)*: ($5.9M) vs. $13.4M ($19.3M decrease);
• Diluted EPS: ($0.23)/share vs. $0.53/share ($0.76/share decrease);
• Q1 2017 results include an impairment charge of $4.5M related to a cost method investment;
• Q1 2016 results include a litigation settlement received of $19.5M.

*Net income (loss) refers to Net loss attributable to stockholders of Overstock.com, Inc.

"The retail business had a pre-tax income of $1.4 million in Q1 and remains fundamentally sound," said Overstock founder and CEO Patrick M. Byrne. "Our Medici business cost us $8.0 million pre-tax in the first quarter, which included a $4.5 million impairment charge related to our investment in Peernova. However, I remain confident that we are doing the right thing for our shareholders by having Medici pursue a position of global leadership in blockchain technology."

We will hold a conference call and webcast to discuss our Q1 2017 financial results Thursday, May 4, 2017, at 4:30 p.m. ET.

Webcast information

To access the live webcast and presentation slides, go to http://investors.overstock.com. To listen to the conference call via telephone, dial (877) 673-5346 and enter conference ID 7574200 when prompted. Participants outside the U.S. or Canada who do not have Internet access should dial +1 (724) 498-4326 then enter the conference ID provided above.

A replay of the conference call will be available at http://investors.overstock.com starting two hours after the live call has ended. An audio replay of the webcast will be available via telephone starting at 7:30 p.m. ET on Thursday, May 4, 2017, through 7:30 p.m. ET on Thursday, May 18, 2017. To listen to the recorded webcast by phone, dial (855) 859-2056 then enter the conference ID provided above. Outside the U.S. or Canada dial +1 (404) 537-3406 and enter the conference ID provided above.

Please email all questions in advance of the call to ir@overstock.com.

Key financial and operating metrics:

Investors should review our financial statements and publicly-filed reports in their entirety and not rely on any single financial measure.

Total net revenue - Total net revenue for Q1 2017 and 2016 was $432.4 million and $413.7 million, respectively, a 5% increase. The growth in revenue was primarily due to a 10% increase in average order size. This increase was partially offset by increased promotional activities, including coupons and site sales (which we recognize as a reduction of revenue) due to our driving a higher proportion of our sales using such promotions. In addition, the percentage of revenue we defer from orders taken but not delivered was higher due to increased sales volume at quarter end. These decreases to revenue were partially offset by a decrease in Club O Rewards earned (which we recognize as a reduction of revenue) due to discontinuing rewards on the Club O Silver program in Q4 2016 and a decrease in returns. Our average order size has increased in recent years due primarily to a sales mix shift into home and garden products. We are uncertain how long this trend will continue.

Gross profit - Gross profit for Q1 2017 and 2016 was $86.9 million and $77.3 million, respectively, a 12% increase, representing 20.1% and 18.7% gross margin for those respective periods. The increase in gross profit was primarily due to revenue growth. The increase in gross margin was primarily due to a continued shift in sales mix into higher margin home and garden products, partially offset by increased promotional activities.

Sales and marketing expenses - Sales and marketing expenses totaled $37.6 million and $31.5 million for Q1 2017 and 2016, respectively, a 20% increase, and representing 8.7% and 7.6% of total net revenue for those respective periods. The increase in sales and marketing expenses as a percent of revenue was primarily due to increased spending in the sponsored search marketing channels and increased staff related costs.

Consolidated contribution (a non-GAAP financial measure) and contribution margin (a non-GAAP financial measure) - Contribution for Q1 2017 and 2016 was $50.0 million and $50.0 million, respectively, a 0% decrease, representing 11.6% and 12.1% of total net revenue for those respective periods.

Contribution and contribution margin (non-GAAP financial measures - which we reconcile to "Gross Profit" in our consolidated statement of operations) consist of gross profit less sales and marketing expense plus Club O Rewards and gift card breakage and reflects an additional way of viewing our results. Contribution margin is contribution as a percentage of total net revenue. We believe contribution and contribution margin provide management and users of the financial statements information about our ability to cover our operating costs, such as technology and general and administrative expenses, while reflecting the selling costs we incurred to generate our revenues and adding back the reductions in revenue that we recognized for Club O Rewards that have subsequently expired and for gift cards whose redemption is remote. Contribution and contribution margin are used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. The material limitation associated with the use of contribution is that it is an incomplete measure of profitability as it does not include all operating expenses or all non-operating income and expenses. Management compensates for these limitations when using this measure by looking at other GAAP measures, such as operating income and net income. You should review our financial statements and publicly-filed reports in their entirety and not rely on any single financial measure. For additional information about our non-GAAP financial measures, including “retail pre-tax income” and “Medici pre-tax loss” please see the "Additional Non-GAAP Financial Measure Reconciliations" section below.

Our calculation of our consolidated contribution and contribution margin is set forth below (in thousands):

Technology expenses - Technology expenses totaled $29.0 million and $25.7 million for Q1 2017 and 2016, respectively, a 13% increase, and representing 6.7% and 6.2% of total revenue for those respective periods. The increase was primarily due to an increase in staff related costs of $1.0 million, an increase of $958,000 in technology licenses and maintenance, and an increase in depreciation of $902,000.

General and administrative ("G&A") expenses - G&A expenses totaled $22.6 million and $21.8 million for Q1 2017 and 2016, respectively, a 3% increase, and representing 5.2% and 5.3% of total revenue for those respective periods. The increase was primarily due to an increase of $2.0 million in staff related costs, partially offset by a $438,000 decrease in legal fees.

We continue to seek opportunities for growth, in our retail business and through our Medici blockchain and financial technology initiatives and through other means. As a result of these initiatives, we may continue to incur additional expenses or make investments in, or acquisitions of other technologies and businesses. We also anticipate that our Medici initiatives will incur losses in the near term. These losses, additional expenses, acquisitions or investments may be material, and, coupled with the seasonality of our business, may lead to reduced consolidated income or losses in some periods, and to reduced liquidity. Additionally, we may recognize additional impairment charges from our investments. We are also considering other alternatives for Medici, including a divestiture or raising capital.

Other income, net - Other income, net totaled ($3.7) million and $4.2 million for Q1 2017 and 2016, respectively. The decrease is primarily due to an impairment charge of $4.5 million related to a cost method investment and decreased Club O Rewards breakage of $3.5 million due to discontinuing our Club O Silver rewards program in Q4 2016.

During Q1 2017, we repurchased approximately 604,000 shares of our common stock for an aggregate purchase price of $10.0 million under our stock repurchase plan. All common shares repurchased were recognized as treasury stock. We may repurchase additional shares in the future.

Net cash provided by operating activities - Net cash provided by operating activities was $51.0 million and $63.1 million for the twelve months ended March 31, 2017 and 2016, respectively. The $12.1 million decrease is primarily due to decreased net income.

Free cash flow (a non-GAAP financial measure) - Free cash flow totaled ($13.1) million and ($9.4) million for the twelve months ended March 31, 2017 and 2016, respectively. The $3.7 million decrease was due to a $12.1 million decrease in operating cash flow, partially offset by an $8.5 million decrease in capital expenditures including costs related to the development of our recently completed new corporate headquarters.

Free cash flow reflects an additional way of viewing our cash flows and liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows and liquidity. Free cash flow, which we reconcile to “net cash provided by operating activities,” is cash flow from operations, reduced by “expenditures for fixed assets, including internal-use software and website development.” We believe that cash flows from operating activities is an important measure since it includes both the cash impact of the continuing operations of the business and changes in the balance sheet that impact cash. Also, we believe free cash flow is a useful measure to evaluate our business since purchases of fixed assets are a necessary component of ongoing operations and free cash flow measures the amount of cash we have available for mandatory debt service and financing obligations, changes in our capital structure, and future investments, after we have paid our operating expenses. Therefore, we believe it is important to view free cash flow as a complement to our entire consolidated statements of cash flows.

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

Cash and working capital - We had cash and cash equivalents of $136.4 million and $183.1 million and working capital of ($21.9) million and ($4.8) million at March 31, 2017 and December 31, 2016, respectively.

About Overstock.com
Overstock.com, Inc. Common Shares (NASDAQ:OSTK) / Series A Preferred (Medici Ventures’ t0 platform : OSTKP) / Series B Preferred (OTCQB:OSTBP) is an online retailer based in Salt Lake City, Utah that sells a broad range of products at low prices, including furniture, décor, rugs, bedding, jewelry, electronics, apparel, and more, as well as a marketplace providing customers access to hundreds of thousands of products from third-party sellers. Additional stores include Worldstock.com, dedicated to selling artisan-crafted products from around the world, and Main Street Revolution, supporting small-scale entrepreneurs in the U.S. by giving them access to our national customer base. Forbes ranked Overstock in its list of the Top 100 Most Trustworthy Companies in 2014. Overstock regularly posts information about the company and other related matters under Investor Relations on its website.

O, Overstock.com, O.com, O.co, Club O, Main Street Revolution, Worldstock and OVillage are registered trademarks of Overstock.com, Inc.  O.biz and Space Shift are also trademarks of Overstock.com, Inc.  Other service marks, trademarks and trade names which may be referred to herein are the property of their respective owners.

This press release and the May 4, 2017 conference call and webcast to discuss our financial results may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include all statements other than statements of historical fact, including forecasts of trends. These forward-looking statements are inherently difficult to predict. Actual results could differ materially for a variety of reasons, including the amount and timing of our capital expenditures, the mix of products we sell, the results of legal proceedings and claims and the amounts we spend relating to them, the extent to which we owe income taxes, competition, fluctuations in operating results, any inability to raise capital if needed on acceptable terms, our efforts to expand both domestically and internationally, risks of inventory management and seasonality. Other risks and uncertainties include, among others, risks related to new products and services we may offer, and difficulties with our infrastructure, our fulfillment partners or our payment processors, including cyber-attacks or data breaches affecting us or any of them. More information about factors that could potentially affect our financial results is included in our Form 10-K for the year ended December 31, 2016 which was filed with the Securities and Exchange Commission on March 3, 2017. Our Form 10-K and our other subsequent filings with the Securities and Exchange Commission identify important factors that could cause our actual results to differ materially from those contained in our projections, estimates and other forward-looking statements.

Additional Non-GAAP Financial Measure Reconciliations

As described above, contribution and contribution margin (non-GAAP financial measures - which we reconcile to "Gross Profit" in our consolidated statement of operations) consist of gross profit less sales and marketing expense plus Club O Rewards and gift card breakage and reflects an additional way of viewing our results. Contribution margin is contribution as a percentage of total net revenue.

OSTK Retail and Medici pre-tax income or loss (non-GAAP financial measures - which we reconcile to Consolidated pre-tax income or loss) consist of income or loss before taxes of our Retail and Medici businesses, excluding intercompany transactions eliminated in consolidation. We believe these measures provide management and users of the financial statements useful information, because they provide financial results for our separate businesses which are distinct in nature. The material limitation associated with these measures is that they are an incomplete measure of our consolidated operations.

We determined our segments based on how we manage our business, which, in our view, consists primarily of our Retail and Medici businesses. Our Retail business consists of our Direct and Partner reportable segments. We use gross profit as the measure to determine our reportable segments because there is not discrete financial information available below gross profit for our Direct and Partner segments. As a result, our Medici business is not significant as compared to our Direct and Partner segments. Our other segment consists of Medici. We do not allocate assets between our segments for our internal management purposes.

Contribution, contribution margin, OSTK Retail pre-tax income or loss and Medici pre-tax income or loss are used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. You should review our financial statements and publicly-filed reports in their entirety and not rely on any single financial measure.

Our calculations of our contribution and contribution margin by Retail Total (which consists of Direct and Partner) and Other (which consists of Medici) are set forth below (in thousands):

Our calculations of OSTK Retail Total (which consists of Direct and Partner) and Other (which consists of Medici) pre-tax income or loss are set forth below excluding intercompany transactions eliminated in consolidation (in thousands):

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(1) — Interest and other income (expense), net for the Other segment includes a $4.5 million impairment charge related to a cost method investment.