Bed Bath & Beyond - Earnings Call - Q1 2018
May 8, 2018
Transcript
Operator (participant)
Good day, ladies and gentlemen, and welcome to the Q1 2018 Overstock.com Inc Earnings Conference Call. At this time, all participants are in a listen-only mode. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Mr. Greg Iverson, Chief Financial Officer. Mr. Iverson, you may begin.
Greg Iverson (CFO)
Thank you, operator. Good afternoon and welcome to our First Quarter 2018 Earnings Conference Call. Joining me today are Dr. Patrick Byrne, Founder, CEO, and President of Retail; Saum Noursalehi, CEO of tZERO; Jonathan Johnson, President of Medici Ventures; Seth Moore, Senior Vice President of Strategy; and JP Knab, Senior Vice President of Marketing. Let me remind you that the following discussion and our responses to your questions reflect management's view as of today, May 8th, 2018, 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 the Form 10-K filed for the year ended December 31st, 2017, and in the press release and Form 10-Q filed today. Please review the safe harbor statement on slide two of today's 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. Now, on a personal note, while I only joined the Overstock team a few weeks ago, I couldn't be more excited about being part of this amazing organization. We have an incredibly talented team, and I am confident we are well positioned to capitalize on the great opportunities ahead, both in our retail and blockchain businesses. With that, let me turn the call over to Patrick.
Patrick Byrne (Founder, CEO, and President of Retail)
Thank you very much, Greg, and welcome. This is our agenda today. I do believe we're going to have. There are a fewer number of slides than the last couple of calls, and we'll be able to get to more questions. The agenda we'll be walking through, I know tZERO is on people's minds, retail, then other Medici Ventures, financial results, strategic alternatives, and Q&A. This slide that you see is a map of tZERO. What's in blue is the company we bought several years ago, SpeedRoute. It's an unusual broker-dealer whose only other clients are other broker-dealers, not retail investors. They route 2.5%-3% of the orders in the United States national market system and the equity markets, about 22 million per day. They're tied into lit, the 13 lit exchanges, dark pools, etc. They came with an ATS.
We applied three years ago to the SEC, said we're going to blockchainify that. We got deemed approval. In April of 2015, we did the world's first private blockchain security, then a public blockchain security, OSTKP. We are in development of a security token trading platform. We are well ahead. I feel like in the last few months, the world's gotten the joke. All this stuff you heard about last year, the ICOs and the utility token craze, I thought was kind of wildly illegal when it came out and surprised, I mean, 90% of them seemed to me like wrong, and they're raising money and they're skirting the security laws.
So we think that that means that now that the SEC is finally bringing regulatory heat on these things, which they've been signaling since last July with the DAO decision, and then increasingly clear signals, it seems, to the marketplace that these utility tokens are actual securities, leading up to the Chairman Clayton saying a couple of months ago something like, "Truth is, every utility token I've ever seen was a security." That means that the world's going to need a trading system that can trade security tokens. We have just that. We have the—by the combination of starting with his Wall Street technology and his ATS and working for three years, we have what's needed. If you go up on the tZERO website, you'll see a demonstration of the prototype where the world doesn't yet have the security tokens really to trade on the platform.
There's a bit of a chicken and an egg thing. Now, with Saum there, I think that that's, well, I think that Saum's going to make an enormous difference. There's another side to this business, which we have mentioned before, and that is the crypto exchanges. Last I checked, there was about $3 billion of institutional money trying to trade in the crypto exchanges. People don't want to get wallets and such if they run hedge funds. On the other hand, $3 trillion of hedge fund money in the blue area. We have built a FIX protocol bridge from tZERO, from SpeedRoute system, into these crypto exchanges, and we actually, one is. I mean, the technology is done. As it is the case with a lot of things, we really need regulatory clarity on a couple of issues. The technology is not the problem. Regulatory clarity is the problem.
But we are working on that. Saum, do you want to add anything to that?
Saum Noursalehi (CEO)
No.
Patrick Byrne (Founder, CEO, and President of Retail)
Okay. Next, accelerating tZERO. I've made a huge decision. We have posted Saum to New York. He's taken over. He's CEO of tZERO. I'm absolutely just as involved. I will be executive chairman. Saum is the best technologist I ever worked with, and more than that. He's an extraordinarily effective executive. I described the reasons in the press release we put out about him, but I think this is going to become an innovation game, and I think that by putting Saum there—I mean, he's extraordinarily able as an executive anyway, but in terms of managing innovation, Saum and I have a decade history of working together on OLabs and other things that have changed our company, and I don't think anyone I've met in New York is going to be able to compete with what I know Saum has in mind, so with that, let's go ahead.
Saum?
Saum Noursalehi (CEO)
Yeah. As Patrick mentioned, we're in the process of building the security trading platform. All the trading technology is now in place, and as he mentioned, there's a demonstration of the prototype on tzero.com. We're actively working on the custody wallet and token contract portion of that.
That's the next step. We're making great progress on it, and you'll see more in the coming months. Next slide. In addition, we're going to give some updates on some of the other products, specifically DLRs, digital locate receipts. The last six months, we've been tuning and beta testing the product to a small audience on the demand side, and we're leveraging StockCross for that. While we enhance the product, we're also working with StockCross to accumulate significant supply for the platform. In the coming quarter, we will start licensing the software to clearing firms, and we'll significantly increase the number of borrowers that are using the platform.
Patrick Byrne (Founder, CEO, and President of Retail)
There's an interesting development we should mention that the digital locate receipts, the DLRs, have been in the past one-day DLRs. The locates are actually pre-borrows good for one day. What we discovered was the market was less excited about that. They wanted both intraday tokens, and they wanted tokens good for longer than one day. And we have recently integrated new sources of supply, and we now have the technology to - we are now doing intraday tokens. That just turned on recently. And do you want to comment on the longer-term tokens or do you not think so?
Seth Moore (SVP of Strategy)
No, I think that's really the story. It's a variable term of tokens we think adds a lot of value, both for shorter-term day traders as well as for people who want to hold their short for a longer period of time so they have predictability on cost.
Patrick Byrne (Founder, CEO, and President of Retail)
So this is a big lift. I mean, we are taking a product that we've developed that is disruptive to, as I indicated before, really major sources of revenue for prime brokers. Don't mean to suggest that there are not going to be hurdles and people responding and people fighting and pushing back. We heard about that already, that there are prime brokers who are trying to push back in different ways. We also have. It's a product development cycle. The product is just going to be improved and improved, but I know that some will oversee that beautifully.
Saum Noursalehi (CEO)
Yep. Next, an update on our security token offering. Patrick and team recently completed an Asia roadshow for this. Met with many key institutions. It was very well received, and it's generated a lot of interest. We have $110 million in executed SAFEs and considerable demand that is working its way through the allocation and accreditation and all the Reg S compliance process. So that's all in the works. We also expect to execute a significant number of order volume in the coming days as we wrap this up.
Greg Iverson (CFO)
Yeah. I hear I've got to say I have some sympathy. Or I was over in Asia for a couple of weeks talking to people, and if everyone who came in and said, "I'm in for $30 million," actually came in for $30 million, we'd have a good part of $1 billion here. What I've learned is what I learned in the first round, more of the domestic round, that it really is a matter of, the best metaphor I can come up with is milking peanut butter through a drinking straw. I mean, the peanut butter's there, but I mean, all these people are there, all these orders are there, and stuff. We have bankers. We've built a team of people who are dealing with the KYC and AML and accreditation and trade documents get translated into Chinese and Korean and Japanese.
Anyway, it's just—we are now milking peanut butter through a drinking straw and all the way back to Asia. But there's immense demand. It's a matter of how much patience we have to sit and milk, and we're getting the bigger chunks through first.
Seth Moore (SVP of Strategy)
I can say we learned a considerable amount from the domestic round. We have more parallel processes to make sure our efforts in Japan don't hang up our efforts in Korea or so forth, and the process is getting more efficient with practice. We're pleased that we're developing a better pipeline in that sense.
Patrick Byrne (Founder, CEO, and President of Retail)
And then lastly, the SEC. Oh, well, one thing I want to say to be absolutely clear is that we are under SEC investigation. And what I've learned is when you're under SEC investigation, the SEC wants you to say, "We are under SEC investigation," period, full stop. So having said that.
Greg Iverson (CFO)
Yeah. I would just add that our goal the whole time has been a regulated market. So we're cooperating and working.
Patrick Byrne (Founder, CEO, and President of Retail)
Yeah. From the beginning, we've gone to Jones Day, this huge law firm, and said, "Look, I know given certain history, that there's going to be scrutiny. Can we figure out a way that we can do all this while staying completely legal?" We believe we have at every step. And I will say that there was something misreported. It was reported that we got subpoenaed. We did not get subpoenaed. It's been reported that 180 other people got subpoenaed in that day, but we got a letter requesting our cooperation, and we are cooperating fully, and I enjoy cooperating with them, and I'm happy to, well, anyway. So we're under SEC investigation, and that's that. Okay. Next slide. Retail strategy. Seth, why don't we let you talk here?
Seth Moore (SVP of Strategy)
Sure. So on this slide, as we mentioned on our last call for the first quarter, we saw a transition to a high-growth, long-term, free cash flow optimized strategy. We paired with our marketing increases to drive that growth. We also announced on the last call that we're making investments into our supply chain loyalty program and AI-driven automation so that we can extract leverage on scale and leverage that growth to create more long-term free cash flow. On the next slide, you'll see we also showed on the last call that customers responded well, and we've experienced a nice return to customer growth that continued through the end of the quarter. I will call out that the Easter week landed in the first quarter of this year as opposed to Q2 of last year.
Because it's one of the worst sales weeks of the year, it had the effect of shifting revenue into Q2 this year. JP, do you want to add some color on the customer response and marketing efforts?
JP Knab (SVP of Marketing)
Yeah. As we discussed for last quarter, we've been retuning our models, and our leading indicators look strong. Along with the weekly new customer growth changes you see in the weekly chart, which is almost a 40% change in growth rates and new customers, we are seeing over a 100% increase in our email signups, which is a key part of our strategy. These trend changes are being accomplished even with our organic search still at historic low levels. But Google has announced that they're shifting focus to mobile experience this year, and we are well positioned for this shift as Google makes mobile a ranking factor in July and has announced that they'll be moving companies to mobile-first indexing throughout the year. In Google's own tools, our mobile speed and mobile friendliness are very highly ranked by Google.
We believe that these are potential organic search improvements from moving to mobile, paired with improved revenue retention via the email signups and Club O growth, will help marketing efficiencies in the second half of the year and continue to accelerate growth.
Seth Moore (SVP of Strategy)
Great. So as we said on the last call, a surge in marketing spend is at its most inefficient when it's first made because the ad tests haven't been optimized, and the new, stronger customer cohorts have not yet begun to repeat. Given that, we were encouraged to see a net 16-point swing in revenue growth from Q4 of 2017 because as these cohorts repeat and the marketing tests yield efficiency gains, you'll see that growth accelerate nicely in Q2 and Q3. I will also point out that with the return of growth to some of our non-home categories, which run on a more traditional marketplace model, net revenue reporting standards were masking the real level of sales on the platform and increased the appearance of margin rates, and so to give a more accurate picture of those two trends, we've begun to break out traditional GMV metrics going forward.
Patrick Byrne (Founder, CEO, and President of Retail)
Other people use GMV, and you can expect us to use it going forward, I think.
Seth Moore (SVP of Strategy)
Historically, those two remain fairly closely in line, as you can see from the graph. As that has started to diverge, we thought it was worthwhile to report to give the public a more accurate picture. Now, on the next slide, you'll see in Q1 of 2017, we were really happy when we reported that we'd hit a new high-water mark of 20% for our gross margins. Encouragingly, the team leveraged the volume growth to grow margins by nearly 100 basis points, even from that high-water mark in 2017.
As I said before, about 50 basis points of that growth is actually the result of our marketplace business and net revenue reporting standards, but there was an additional 50 basis points that was driven primarily by volume-based efficiency improvements in our supply chain and operations based on the ability to do greater consolidation and operational efficiency improvement through our efforts there. By continuing to liberate these operations dollars, we anticipate being able to invest in price-driven growth and expand margins going forward. So with that, we'll turn it over to Greg to present the retail financial results.
Greg Iverson (CFO)
Thanks, Seth. Seth covered the highlights of our retail results for Q1, including our return to revenue and GMV growth and our 100 basis point increase in gross margin. So I'm going to limit my comments to our retail pre-tax loss versus the estimate we previously provided in our Q4 2017 earnings release. In summary, our pre-tax loss for the retail business in Q1 was $33.6 million, which is slightly better than the $35 million pre-tax loss estimate we previously provided. I'm going to comment further on our consolidated financial results later in the call, but we'll hand it off to Jonathan for now to provide an update on Medici.
Jonathan Johnson (President)
Thanks, Greg. So if we flip to this next slide, it shows Medici Ventures has 13 portfolio companies. We've talked about tZERO, and I want to just briefly focus on three others this quarter. The first is Bitt. We're pleased with the Bitt, the progress that Bitt is making. It's entered into a memorandum of understanding with the Eastern Caribbean Central Bank, where it's doing a pilot program to help that central bank issue fiat currency digitally. It's also continuing its rollout of its mMoney wallet in Barbados, and that rollout is going well. The second one I'd like to focus on is Voatz.
Today is the congressional primary in West Virginia, and Voatz has been for the past several weeks doing a pilot program with two counties in West Virginia so that those that are overseas, particularly military voters, can vote in that congressional primary remotely using the Voatz blockchain-based application. Assuming that this pilot program goes well in these two counties, Voatz in the state of West Virginia expects to roll this out statewide for the general election in November. The last one I'll focus on is FinClusive. It's our newest portfolio company. It's a relatively modest investment.
FinClusive is working to bring the 8% of the population in the U.S. that is unbanked and the 27% of the U.S. population that is underbanked into the banking system by giving them a digital identity that is good enough to clear anti-money laundering and know your customer laws so that they can then get bank accounts. So those are the three I'll highlight this quarter.
Greg Iverson (CFO)
Q1 special items. We had some in retail that netted to nothing. Let me go to Medici first. We did have an $8 million hit on some impairment cryptocurrency holdings. We had a window where we had our security token offering open for rescission. And during that window, we stopped transferring Ethereum that we were getting in and Bitcoin into dollars. That happened to be the 10 days when everything really collapsed in that market and lost $8 million. You'll be happy to know we have since the end of the quarter, we have traded our way out of it and made back about $6 million. So it ended up being a net $2 million-$2.5 million dollar loss. I'm unhappy about this, but anyway, that's that loss. And as of yesterday, we had traded out of all of that.
I do not want to make one-way or directional bets on any crypto fluctuation. In addition, let's see, in the end, pardon me, on the retail side, we wrote off the cost of a discontinued equity offering. Since there's a lot of questions about it, I'll just be concise. When the stock was in the 60s, decided, "Okay, let's go ahead and sell a couple few million shares in the 60s and 70s." We made the decision it was there by the time we got our ducks in a row was in the 50s. By the time we announced it and announced things, it was 44. It traded down to 36, so we pulled the offering, and that's how that came about. At any individual step, the truth is we, well, we went forward thinking that we might be able to see it clear something in the 50s.
In fact, the market just deteriorated the several days. This was out there in the marketplace, and it got worse and worse. So we pulled it. Is that Seth?
Seth Moore (SVP of Strategy)
Yeah. Our intention was not to sell it anywhere near the valuations it was at. We believe our equity is more valuable than that, but we happened to choose sort of the worst two weeks in recent market history to have gone out with it, and so it was an opportunistic financing. As you'll see later, we have lots of money on the balance sheet, and so we're moving forward.
Jonathan Johnson (President)
Yeah, and I would say there was ample demand.
Seth Moore (SVP of Strategy)
Oh, yeah.
Jonathan Johnson (President)
Not as a demand given where the market was moving and it wasn't.
Seth Moore (SVP of Strategy)
6.5 million shares.
Jonathan Johnson (President)
At a price where we thought it made sense for our shareholders to be diluting.
Seth Moore (SVP of Strategy)
I should also mention something had come across our radar. An acquisition had come across our radar that was the bidder in March or on the last day of February, and it was the better part of $100 million, and that was another reason that this was an especially tempting thing to try to pull off. Again, when the stock was 65, it looked one way. It just didn't 38.
Patrick Byrne (Founder, CEO, and President of Retail)
Okay. Next slide. 2018 full year results. Our retail business lost. Well, Greg, why don't you?
Greg Iverson (CFO)
Sure. Sure. Yeah. Let me briefly just cover a couple of things on our Medici and our consolidated financial results for the quarter. This is on slide 17. So first, our Medici business reported a pre-tax loss of $21.2 million. And as Patrick mentioned, that includes $14.5 million in special items. In our Q4 2017 earnings release, we provided an estimated Q1 Medici loss of $15 million. And our estimate at that time didn't include Medici's $8 million of impairment in cryptocurrency that we recognized in the quarter. If you exclude the impairment, Medici's loss was then slightly better than our estimate. And also, as Patrick mentioned, in May, we sold substantially all of the cryptocurrency held at tZERO. So in Q2, we'll be realizing a gain that offsets much of the Q1 impairment.
Turning briefly to cash flow and liquidity, our Q1 operating cash flow was a net use of cash of $10.2 million, which is significantly less than the $54.7 million in our pre-tax loss. We did have some timing items that favorably impacted our Q1 cash flow results, but it's important to remember that the retail business cash flow from working capital is positive during periods of revenue growth like we experienced here in the first quarter. So I want to conclude by talking briefly about our liquidity. We ended the first quarter with about $260 million of cash on our balance sheet, and that's having raised $50 million from a warrant exercise in the quarter, and then also $62 million in cash proceeds from the tZERO security token offering, and that's net of offering costs that we incurred.
And so with the proceeds raised, we decided to repay the $40 million term loan, which is about a year before the note was due. So with that, I'll hand it back over to Seth to provide an update on strategic alternatives.
Seth Moore (SVP of Strategy)
Great. As we said in our third quarter 2017 earnings call, we were considering three big strategic alternatives, and we hired Guggenheim Partners to help us work through them. One was capitalize up from Medici, e.g., tZERO. We're doing that nearing completion via our security token offering. Second, capitalize with a large capital partner who's willing to think big. We have the executed warrants from both Quantum and Passport that we think have been great partners and we're pleased with our progress and how we've been able to leverage that investment. And then finally, sell the retail business. The retail process and the review of strategic options with the retail business is ongoing. We continue to meet actively with interested acquisition candidates, and those considerations are ongoing.
Because of confidentiality, we can't comment in a great deal of detail, aside to say that that process is ongoing and we're pursuing the manner in which we'll best maximize value for shareholders.
Patrick Byrne (Founder, CEO, and President of Retail)
I can make two comments on that. One is I was told at the beginning of this by Andrew Taussig and Guggenheim when I was talking about schedules. He was giving me answers, but he was saying, "What you're going to learn, Patrick, is this is a souffle." And it's about baking the perfect souffle, and there's nothing you can do to rush that. And it's ready when it's ready. And I'm not a souffle kind of guy, but here it is.
Greg Iverson (CFO)
Patrick prefers microwaves.
Patrick Byrne (Founder, CEO, and President of Retail)
I prefer. And six months later, I'm telling you, you can't microwave a souffle. I can tell you this. I was open to the idea that these businesses belong together, the blockchain and the retail. So that was one pebble on the side of, "Well, maybe we shouldn't sell." That pebble's gone. I do not see any, I don't see any reason these businesses should stay together at this point, any serious reason. So I'm adamant that we go forward, but it is, and I forget how Seth, believe me, everything Seth just said was carefully worded by lawyers because we can't give tips one way or the other, but we are committed to, I'm committed to the point of view that the only logical place for the retail business is part of a brick and mortar. It should be hybridized with brick and mortar.
And that either means we're going to go buy brick and mortar or brick and mortar is going to buy us, or there are other kinds of relations that can be had. But I have no interest in buying brick and mortar, none whatsoever. I can promise you that's not going to happen. So that sort of leaves one alternative. And that's what I think the gods of economics want to see happen here, is this should be part of a brick and mortar chain that maybe has not gotten its own digital efforts quite where they want them. So I'm absolutely committed to that. It just turns out to be - I hate giving this answer because I get all these messages, "Don't you see that these businesses should be separated?" Of course, we see it. Of course, we see it. It's as easy. Doing it is a little bit tougher.
I mean, it just takes time, and it turns out there's no way to rush it. And as I think we've mentioned, there are - what are you saying in your press release, Seth, about various parties, including late entrants, we're helping to catch up? That's in the press release.
Seth Moore (SVP of Strategy)
Yeah. The key is the timeline is the timeline because we're trying to maximize your shareholder value. And so be patient and know that we are ensuring we get you the most for your shareholder assets.
Patrick Byrne (Founder, CEO, and President of Retail)
Yeah. We're all in the same boat, so we want to maximize the value of this, but that just turns out to be a long process, and I'm used to working with Buffett. Buffett, people call him up, and they have a deal, and he gives them a yes or no within 15 minutes. This isn't like that. This is like dating and getting married or something. It's just a lot of fish in the ocean.
Jonathan Johnson (President)
Well spoken by the Bachelor.
Patrick Byrne (Founder, CEO, and President of Retail)
Yeah. Okay.
Jonathan Johnson (President)
We've had a number of questions that were emailed in prior to the call, many of which have been addressed in the presentation, Patrick, but I'll read through ones I think have not been addressed or you may want to comment some more. Saum has been doing a wonderful job leading retail. Why is now the appropriate time to move Saum to tZERO?
Patrick Byrne (Founder, CEO, and President of Retail)
Great question. Fair question. Saum has done a wonderful job. Saum is the proverbial level five leader. Jim Collins, level five, humble. Anyway, he's just, we have a fantastic innovation partnership that has evolved over the years, but he doesn't need, anyway, he's ready to be CEO, and tZERO needs him as CEO. And I see tZERO is going to be, its success is going to be driven by its technology and its ability to innovate. Part of the thesis has always been that bringing some Silicon Valley techniques of Agile and Scrum and all kinds of things to the New York fintech world might be a good thing. And tZERO is an enormous opportunity. So we have to take it. And I think that we're fine.
There are some younger trees, shorter trees in the forest of retail that maybe with one less tall tree in the forest, those other trees will grow and expand themselves. Anyway, we're super comfortable. I'll be back. I traveled 170 days last year, and as of May 1st, out of 120 days this year, I've been on the road 87. And really, that's probably not different from recent years. I now plan on being back here with the retail team most of the time. There's a wonderful, wonderful retail team that's come together here. We're doing the stuff we dreamed of 15 years ago with machine learning and AI, and it's working. And it's just great. So my life is going to get easier. I'm not backing away from tZERO. We have quite a tech element of tZERO is actually out here in Utah.
But it's just going to be wonderful. I mean, Saum is made to order to run tZERO. I think that we've become unbeatable, frankly, with Saum there.
Seth Moore (SVP of Strategy)
I would add to that, it's very complementary. We have a very experienced team of sort of seasoned veteran employees that we received as part of the SpeedRoute acquisition, including Ralph Daiuto. And so Saum can help bring some of the Silicon Valley tech innovation talent to merge together with that traditional New York discipline and capability that I think will add a lot of value.
Jonathan Johnson (President)
Patrick, a question came in later that relates to this one and that notes that you are taking over the position of president of Overstock Retail, something that you've had in the past but not had recently. What are the additional duties? How does this shift? Do you balance what you're doing at tZERO and Overstock work? And does it mean there's a closer relationship between those two companies or not?
Patrick Byrne (Founder, CEO, and President of Retail)
Well, not between tZERO and Retail now. It's not about that. It's about we have evolved over the last decade, especially a lot of management processes and E2O type of tools and such. My focus—so I'm back with retail because, although it's going to be hard to fill Saum's shoes, and maybe I haven't flown this thing since it was a P-51, and now it's an F-22, but I think it's going to fly basically the same. Actually, I've been very tuned in. I mean, for the last four years or so, I've been traveling an immense fraction of the time and doing a lot of blockchain stuff. So what does it mean to be back? I think that—I don't know. Seth, what does it mean that I'm going to be back? Are things going to run a little less smooth probably than with Saum?
Seth Moore (SVP of Strategy)
We'll definitely miss Saum, but it'll be good having you back. Also, we have a much stronger and deeper retail team than I think we've ever had before. Particularly, our depth of talent and technology is far, far deeper than it has been historically in our technology leadership. The team that Saum built and the organization that he created from a tech standpoint runs much more efficiently and independently than it ever has in the past. He's done a great job of transitioning us to bottoms-up management rather than top-down management that has proven very effective and suits us very well in a growth environment.
Greg Iverson (CFO)
Yeah. Two things I would add. I think Patrick's actually downplaying it. While he has been on the road quite a bit, he's been very involved. We talk almost daily. So he's been heavily involved in decisions in the business. So I think he'll be great. And we have, and in addition to that, the philosophy of shifting decision-making, as Seth mentioned, to the knowledge frontier where we're led by just a series of pods that make decisions on their own has been the goal of the company. And I think we're finally there. Product management. We've really shifted from conventional corporate hierarchy to product management. And we also have a plan that we told you exactly what our plan was. It's not my ideal plan. I don't like playing this game that everyone else on Wall Street has played that the internet has done.
But we have shifted to this, and it seems to be executing perfectly. And it's running ahead of schedule and so forth. So I'm not scared.
Jonathan Johnson (President)
Patrick, that leads to the next question. On the slides that we reviewed, we saw a nice growth in customers, and we saw a very nice quarter-over-quarter growth in GMV. Are you confident you can get Wayfair-like domestic sales growth on an appropriate level of spending, and if so, why?
Patrick Byrne (Founder, CEO, and President of Retail)
Yes. As I said in the press release, I think that you will see us continue this nice acceleration trend for Q2 and Q3. And then it will be in an area that I think of as a high-growth company, relatively acceptable. And then at that point, we start fine-tuning what we want out of growth and looking at the losses, which I'm confident are going to be significantly less than other people who have affected this strategy. So I am confident that you will see over the next two quarters continued acceleration such as you've seen in the last quarter.
Jonathan Johnson (President)
Great. Next question. Talk about international sales. How are they doing?
Patrick Byrne (Founder, CEO, and President of Retail)
International sales are growing very quickly, but on a low base. We think there's an enormous opportunity in Canada. Canada is growing very quickly. It still is not enough to make a difference in the company. It should be 10%. It's not. It's more than 1%, but it's not 10%. So Canada, especially, we've messed around with international for so many years pursuing opportunities in places like Malaysia where it was at this point. We're very heavily focused on the easiest countries to do. Canada, we've got some interesting things have even turned on in the last couple of weeks. We're about to turn on LTL shipping in Canada and free shipping in Canada. They're all within a week or two of coming live, I believe. JP, is that correct?
JP Knab (SVP of Marketing)
That's correct. And also the .ca site.
Patrick Byrne (Founder, CEO, and President of Retail)
Overstock.ca.
Jonathan Johnson (President)
Patrick, you talked about shipping in Canada. There's a question about adding distribution centers in the U.S. Do we still plan to add distribution centers to increase the retail business's two-day shipping footprint?
Patrick Byrne (Founder, CEO, and President of Retail)
Yes. The plan is to, for this year, at a minimum, add one additional distribution center, and we think with that, we can get 98% of orders within two-day shipping, so we are going to scale that effort.
Seth Moore (SVP of Strategy)
and as we spoke of gross margin improvements and efficiency gains, that volume is allowing us to pair into a much more efficient holistic logistics network. Our third-party logistics services grew more than 50% in the first quarter. Our initiative to volume moving through those services. and we think that will continue to accelerate in Q2 and Q3.
Jonathan Johnson (President)
There's a question on the online sales tax battle.
Patrick Byrne (Founder, CEO, and President of Retail)
Take that, JJ.
Jonathan Johnson (President)
We've been fighting this battle for a long time and, frankly, winning it for a long time. We fight it for two reasons. One, philosophically, we don't like states trying to reach across their borders and regulate people outside of the states. Second, where we don't have a physical footprint or, as the courts say, nexus in a state, we don't have to collect sales tax, and so we don't. Our case against South Dakota was heard in the U.S. Supreme Court last month. As one who sat in the courtroom during oral arguments, I will say that the tone and tenor of the justices' questions were encouraging. We expect a decision in that case before the court goes on recess in July. We're hoping for the best.
Patrick Byrne (Founder, CEO, and President of Retail)
The best would be they would reaffirm Quill.
Jonathan Johnson (President)
The best would be they'd reaffirm Quill, and we'd have the status quo.
Patrick Byrne (Founder, CEO, and President of Retail)
Which means, well, actually, wouldn't that punch a hole in the laws of a bunch of states who have tried to muscle us?
Jonathan Johnson (President)
You're correct, Patrick. The law would stay the same, but it would be stronger in our ability to fight the many states that are trying to.
Patrick Byrne (Founder, CEO, and President of Retail)
Egregiously.
Jonathan Johnson (President)
Egregiously reach across their borders and define physical presence. We have an easier time beating them back.
Patrick Byrne (Founder, CEO, and President of Retail)
We like the Constitution. And what does the Constitution say?
Jonathan Johnson (President)
The Constitution says that interstate commerce is to be regulated by Congress and not the various states. That's, frankly, one of the main reasons we had a constitutional convention because the Articles of Confederation were weak on it.
Patrick Byrne (Founder, CEO, and President of Retail)
And we're doing all kinds of internal tariffs. The truth is the second-best solution would be if the Supreme Court says, "You Congress have to evolve." But if Congress passes a national law.
Jonathan Johnson (President)
We continue to work frequently, regularly with Congress to pass a law that will be fair to both brick and mortar, brick and click, and pure click retailers.
Patrick Byrne (Founder, CEO, and President of Retail)
Something that creates some, I mean, something that creates the kinds of things that are at issue in this, and it's significant as we're taking a minute. There are things at issue in these tax laws when the states do this that, for example, if states want us online guys to collect their taxes for them, we would like the states to have to put their tax rates up in a database that we interrogate and use. And if they make a mistake, it's on them. You would think that would be kind of a very common-sensible thing to ask for. Well, people's heads explode when you ask that. States? Well.
Jonathan Johnson (President)
What's good for the goose should be good for the gander.
Patrick Byrne (Founder, CEO, and President of Retail)
Yeah. What if Vermont, which has some village in Vermont where I come from, has a two-week back-to-school tax holiday on sweaters or something? And they forget to update their database. And we're using one rate for two weeks for anyone ordering in that place in Vermont. Well, multiply that by tens of thousands of towns and such across the country. You start having - if people might have mispaid by a dollar or two here and a dollar to - next thing you know, you have class action suits and people expecting billions of dollars. So we think the states, if they want us to do this, they should publish the rates, and they should be certifying that these are the rates if we use them. That's true. And believe it or not, that's kind of one of the big holdups, which is hilarious to me.
Jonathan Johnson (President)
It's hilarious to all of us, and that's why we fight. Patrick, Rob Hughes has been our longstanding CFO. Did a great job. He has moved over to De Soto. Question came in, why does De Soto merit Rob Hughes involvement?
Patrick Byrne (Founder, CEO, and President of Retail)
Oh, De Soto is a huge opportunity. De Soto is a huge opportunity, I believe. I mean, there's global interest in this, and even since we got started, there's all kinds of ways we see this can create value. We didn't really do it thinking just by way of example. There's over $100 trillion of known mineral reserves in the world that really can't be gotten to because before a mining company can dig, a mining company needs to raise capital, and when it raises capital, it needs to prove that as it's digging or mining, that it's not that the—what was that movie that we were talking about? The movie The blue people? Avatar.
Jonathan Johnson (President)
Yeah.
Patrick Byrne (Founder, CEO, and President of Retail)
That they're on Avatar people. So we can solve problems like that and make sure that the wealth is enjoyed by the Avatar people living there. But there's trillions of dollars of value that is locked up in so many different ways, mineral reserves just being one of them. We're hearing from global entities. I had a conversation a week ago with the head of a global entity to ask me, "How quickly can you bring this to our continent and do this and that?" So there's lots of, but this is a long-term, to me, this is a sleeper. And it can change the world and make the world better. I think there's ways it's going to make money. But go ahead, Seth.
Seth Moore (SVP of Strategy)
Yeah. And I would also add, Rob Hughes really loves De Soto. It was his choice to go there. He was really interested in it. And when you have somebody who's great and talented and extremely competent like Rob Hughes, letting them do something they're passionate about is going to unlock a bunch of value in it. And so.
Yeah. And he is very passionate about it. He's passionate about it.
Patrick Byrne (Founder, CEO, and President of Retail)
And so we got Greg instead. And it's going to be. He's this young guy. Warren Buffett says, "It's tough to teach a young dog old tricks." But I'm sure Greg will do just. We conducted a long, long search, and we have some real talent in our new CFO.
Jonathan Johnson (President)
We have found, Patrick, that having good financial leaders in our organization makes a big difference. Having Rob with De Soto and having Greg at Overstock, I think will make a big difference for both of us. We appreciate the explanation about the status of the ICO. Is either Overstock or Medici still considering investing in the greenshoe or in the STO at all?
Patrick Byrne (Founder, CEO, and President of Retail)
Thank you.
Jonathan Johnson (President)
That's the right term.
Patrick Byrne (Founder, CEO, and President of Retail)
STO is the correct term. ICO is so 2017. But as security tokens as distinct from these utility tokens, 90% of which I think broke the law, we're going to have—what are we—we're thinking of—we're not stepping in the way of this security token. I think that we might do something intercompany at the end. I think we'll probably take a little bit of cash back that De Soto does. Not a lot of amount. Not a big amount. And no, but I don't think we're going to be investing any cash in the security token. But I forget, there's some legal wording I need to obey. Do you have any comment on that, Jonathan?
Jonathan Johnson (President)
No. No. We haven't made a decision, but it's not our plan to invest in the market.
Greg Iverson (CFO)
Yeah. I would say if we do something, it will be in the greenshoe, and it will be non-cash. It'll just be as a repayment for debt. But it will be a relatively small amount. We won't be major holders in it, I think.
Jonathan Johnson (President)
tZERO is building a security token platform. Is there any concern that it will be up and running with no or very few security tokens to trade on?
Seth Moore (SVP of Strategy)
Absolutely. Because there are no security tokens out there to trade yet. I mean, technically, technologically, we could turn something on, I think, this week. But the question of what token do you want trading on there?
Greg Iverson (CFO)
Yeah. I think the first Reg D and Reg S tokens that were offered under SEC exemptions are now just beginning to come up on the end of their trading lockouts. And so it's really in the coming month or two that the very first tokens are coming available to be listed.
JP Knab (SVP of Marketing)
Several parties have reached out, both private and public, that want to do their STO using our platform.
Seth Moore (SVP of Strategy)
Oh, yeah. Well, 2,000 companies have reached out. But in terms of folks we've had real conversations with and so forth.
Greg Iverson (CFO)
Who are nearing the end of their lockouts so that they're ready to be traded.
Patrick Byrne (Founder, CEO, and President of Retail)
Right. So when people sell under Reg D, which is accredited, there's a one-year lockout. And when they sell under Reg S, there's a 90-day lockout, I think.
JP Knab (SVP of Marketing)
That's right.
Patrick Byrne (Founder, CEO, and President of Retail)
So the first ones are reaching the point where they'll come out of lockout and we'll be developing, we'll be getting them up. I got excited about this quarter, one investment in Elio Cars Coin. Although the car itself are exciting, and we have a copy of it here for the shareholder meeting tomorrow. To me, it takes people a bit to get the magic of security tokens and what's possible. What security tokens unlock is a way for people to cooperate far beyond what shares of stock have ever allowed. And in particular, the ElioCoin token, I think, so I'm hearing dozens of different ideas about how security tokens can be used to raise money and devise capital markets around them. The ElioCoin token is very interesting to me for the following reason. They need, let's say, $200 million to get their car company launched.
If they went and saw a normal institutional investor or VC or something, they're trying to convince the fellows, "Give us $200 million." The investors have to decide how big is the market for this kind of ultra low-priced car, how big a share of the market can this fellow Elio get, and then can he run the rest of the company. That's the decision tree that they've got to go down. The Elio car token, the coin, is very anticipated. They've got like 65,000 pre-orders or something like that for the car. So they think they're going to bring something. They can bring something to the market. There'll be a long line of people waiting for it. There will be people willing to pay to advance themselves in line, one in eight cars. Look at the Elio documents to get the details.
By the way, this is the first securities token that's being brought to market underwritten by a major bank, JonesTrading. So what they anticipate is when there is this line for these cars, there will be people who will pay to advance the way in line. They're going to take one in eight cars that comes off the assembly line and take it away from the normal waiting line and put it in and auction it off. It actually auctions for $7,500, but you auction to get the bidding is to get to the price is the same, but the bidding is to get to the front of that auction line. And the auction is going to be conducted in ElioCoins. That was a mouthful.
But what all that means is they have found a way now to anticipate demand in the future that they can and people's willingness to pay to advance themselves in line, monetize it now, turn it into capital with which to build the company. Why I find that so interesting is that the question of do they sell the car token turns out to be a very good proxy for the first two of those three questions I described a minute ago. The question of how big a market is there and can this guy capture a share of it is pretty much the same question as can he sell these tokens? And for various detailed reasons, if you think it through. That means that this may lead to a much more efficient way of allocating capital.
Capital, I mean, this innovation, which is made possible by security tokens, the way Elio has structured the coin, could be adapted to building buildings, building public works, building highways, funding pharmaceutical research, all kinds of things. It's a really revolutionary idea that now it may flop. It may totally flop. But if it works, it means American entrepreneurs have a way to connect with capital, not by going and praying to the gods on Sand Hill Road, but by creating these coins. And if they sell the coins, then that's the same thing as saying there's a market there and they can get a share of the market. So it may be a very efficient mechanism. I'm intrigued by it for that reason. So it's not, however, all that said, I think the Elio car is really cool. A safe $7,500 car that I think it's a cool car.
And I know there's some slop out there. The guy, eight or nine years ago, a factory closed down in Louisiana. A GM plant closed down. And this entrepreneur who's a 36-year Detroit engineer got somebody made a deal with a town and said, "Give us a chance to get a car company there." And now the town is impatiently tapping their foot and saying, "Well, where's the car plant here? Where's the car plant now?" I don't know how many car plants have been reopened in Louisiana since the Great Recession, but they're very impatient that this gets reopened. And so you see that somebody sued them for this or that. It looked pretty trivial to me. The lawsuits, I mean, I'm sorry. The due diligence, there's more MoFo is involved. JonesTrading is involved. There's been a bunch of due diligence on these guys.
It's not like the fellow's sitting at home counting his money. This is a classic American entrepreneur who's trying to get a company off the ground, and this funding mechanism may prove to be really a cold fusion moment. It's a whole new way for entrepreneurs to think about their funding, and so we'll see if it works, but as I do with all this tZERO stuff, it's extremely risky. I mean, we're creating a whole new financial market and ways of doing things, so just be aware, all this stuff is risky. Some of it may flop. We have entrenched contenders we have to compete with, so sorry if I don't warn people. I try to remember every time to remember we're talking about dislodging some deeply entrenched competitors.
Jonathan Johnson (President)
I'm glad you talked about Elio. There's another question on that. We're approaching the hour mark and have three or four questions left. One of the questions on Elio is, why did Overstock make the investment rather than Medici Ventures or tZERO? You may address that, Patrick?
Patrick Byrne (Founder, CEO, and President of Retail)
Sure.
Jonathan Johnson (President)
Medici's charter is really to invest in companies or advance companies that are using blockchain technology. Elio is using blockchain technology in a coin offering, but not in its operating of its business. And so in that respect, it felt a better fit for Overstock than for Medici or tZERO. Next question is, is Joe Cammarata still affiliated with tZERO?
Patrick Byrne (Founder, CEO, and President of Retail)
Joe is a director of tZERO, and I thank him for his eight years of service putting SpeedRoute together and building that into what it was. He promised me that he would give at least two or three years to this, that he completed his promise. But yes, he is affiliated. He's on the board, and I anticipate he will be giving no small amount of advice going forward. Joe is a real. I get repeatedly told around the country, no one in this country knows more about routing and exchange technology than Joe Cammarata. So he's built a wonderful base for Saum to take into the world of blockchain.
Jonathan Johnson (President)
Two more questions on tZERO. This investor appreciated the update on the DLR and stock lending business. Wanted to know, is it currently operational, and are we receiving revenues from the DLR stock lending business? If so, are there any projections for the future?
Patrick Byrne (Founder, CEO, and President of Retail)
It is operational in the. There is a brokerage using it. I'm sorry. You go ahead.
Saum Noursalehi (CEO)
Yeah. It is in production. We're doing production beta testing, and especially so there's more demand, as I mentioned earlier, than we want to onboard, but we're going to scale that up in the coming quarter. With products in general, but especially in the fintech space, you don't want to immediately onboard a lot of clients while you're enhancing and improving the product, and so we've been very careful to make sure it's a solid product and there's no leaks and it does exactly what we want it to.
Greg Iverson (CFO)
Also, to be clear, we're not a clearing firm. We don't hold and lend securities directly. We license software to people who do. And so the expansion you'll see is additional software licensing to clearing firms to lend their securities.
Jonathan Johnson (President)
The last question has to do with.
Greg Iverson (CFO)
Oh, sorry. I did miss a piece of that question. We do have some small amount of revenue coming from that beta period, but that is from the limited production testing we've done in the one-off agreement. You'll see those revenues expand as we increase the licensing base on it.
Patrick Byrne (Founder, CEO, and President of Retail)
Yeah. We have some favorite or there are favorite clients of a broker-dealer who are getting to use this, and they're using it, getting locates, and shorting into the market. We've learned a lot. Product development is like this. It's real-time. We've learned that what we brought to the market was not exactly what the market wanted. They wanted the ability to do intraday. They wanted the ability to do longer holds. And so the product is evolving in order to meet that demand.
Jonathan Johnson (President)
Last question has to do with the security token offering. It's kind of two pieces. How much Overstock cash has been spent on marketing tZERO's security token offering? And what percentage of the tokens purchased to date have been purchased by someone by Overstock or someone affiliated with Overstock versus those not affiliated?
Patrick Byrne (Founder, CEO, and President of Retail)
No. Overstock hasn't purchased any, and I haven't purchased any.
Jonathan Johnson (President)
Nor has Medici Ventures. I think that...
Patrick Byrne (Founder, CEO, and President of Retail)
No. These are all legitimate orders from them.
Jonathan Johnson (President)
Legitimate orders, and the marketing of the. I don't think we've disclosed what the marketing is, but it's coming out of the proceeds of the token offering.
Patrick Byrne (Founder, CEO, and President of Retail)
Of tZERO. Yeah. Overstock has spent nothing on this. tZERO has. There's my time. I've spent a lot of time in the last several months with this. But no, Overstock has not been spending anything to support this. Okay. Saum, do you want to add anything else?
Saum Noursalehi (CEO)
No. Just excited to be part of this world-changing opportunity with tZERO.
Patrick Byrne (Founder, CEO, and President of Retail)
Yeah. Saum is my first, second, and third choice to do what has to be done in the next stage of tZERO's growth. I don't want to overstate, but I feel. I guess I mentioned in the press release something about Texas Gulf Sulphur. And that really was my concern. Last September, my concern was we had all. Look, I'm just being. I'm not at all suggesting I have no idea what the stock should do. I have no idea. Or I don't think it's my job to make the stock do one thing or another. It's odd that I have some of the conversations I'm having with people where they see extraordinary values in tZERO. I mean, people throw out numbers in the billions. They throw out numbers in the tens of billions of what they think this can be.
Maybe even the kinds of numbers we're hearing that people think it might be worth now or relatively soon. I think in terms of if somebody sold their stock today or a year ago, if somebody had sold their stock and they didn't know that we've got something we're working on in here that may actually be like cold fusion, I feel like some obligation to people like that, not to convince anybody how much it's worth, but just to let people know we are working on things that there are powerful people in the world think are going to be worth fortunes. I'm not trying to convince you of that. I feel just like I got to turn the cards up on the table. You folks should be looking at these.
The value of the business, you got to look hard at tZERO and try to come up with, as well as the other blockchain investments, as well as retailing, come up with your own conclusion. But I felt an obligation to sort of set up a flare and get people to know there are assets within our company that may end up being extraordinarily valuable.
Jonathan Johnson (President)
Patrick, one more question came in. Can we talk about the status of the securities class action lawsuits? I'm willing to answer it if you want.
Patrick Byrne (Founder, CEO, and President of Retail)
Please.
Jonathan Johnson (President)
There have been two suits filed. They're basically copycat suits that will be put together, we think, sometime at the end of, before the end of this quarter. We don't think the claims are valid. We can defend ourselves. Securities class action suits tend to happen whenever stock goes down. When we read through the claims, we think they're, to call them frivolous, I think, is being generous.
Patrick Byrne (Founder, CEO, and President of Retail)
They didn't call it the frivolous thing?
Jonathan Johnson (President)
Yeah.
Patrick Byrne (Founder, CEO, and President of Retail)
Frivolous? Yeah. I mean, I stopped reading in the press release when it said something about, "Well, Bitcoin went up, and then Bitcoin went down, and you didn't warn us Bitcoin went down." We are not Bitcoin. There is, unfortunately, a 92%—last time I calculated, there was a 92% correlation between Bitcoin price movements and Overstock over the last year. That's a huge mistake. If anyone's betting on us as a proxy for Bitcoin, it's a big mistake. We carry a small amount of Bitcoin. We liquidate it every once in a while, make a couple million bucks. We don't have it. This is a terrible bet as a proxy for Bitcoin. So.
Jonathan Johnson (President)
We are bullish on blockchain technology.
Patrick Byrne (Founder, CEO, and President of Retail)
Right. We don't have any opinion on what Bitcoin's going to do. Okay. Thank you. Nice working for smart owners. Sorry we do not yet have answers for you on a couple things we are actively involved in. I would tell you more if I could. But I can tell you that the plan we announced for retail business, we are executing. It's coming off just right. And the key point is I think that you will continue to see nice acceleration for this Q2 and Q3. Thank you very much.
Saum Noursalehi (CEO)
Thank you.
Operator (participant)
Ladies and gentlemen, thank you for participating on today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.