Bed Bath & Beyond - Earnings Call - Q2 2015

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to the Overstock.com Inc Quarter Two 2015 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. Should you require assistance during this conference call, please press star then zero on your touch-tone telephone. I would now like to introduce the host for today's conference,Stormy Simon, President of Overstock.com Inc. You may begin your conference.

Stormy Simon (President)

Thanks, Tia. Good afternoon and welcome to our Second Quarter 2015 earnings conference call. Joining me today are Dr. Patrick Byrne, our Founder and CEO, and Rob Hughes, our Senior Vice President of Finance and Risk Management. Now I'm going to turn the call over to Rob, and he'll highlight some of our financial results.

Rob Hughes (Senior VP of Finance and Risk Management)

Thank you, Stormy. To cover the financial highlights, let me remind you that the following discussion and our responses to your questions reflect management's views as of today, August 6th, 2015, 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 press release filed this afternoon and in the Form 10-K we filed on March 12th, 2015, and the Form 10-Q we filed April 29th, 2015. During this call, we'll 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. Please review the Safe Harbor statement on slide two.

Turning to slide three, Q2 2015 total net revenue was $388 million, a 17% increase from last year. Q2 2015 gross profit dollars increased 18% to $73.7 million, and gross margin was 19%. Q2 2015 contribution was $45.6 million, a 17% increase from last year, and contribution margin was 11.7%. Q2 2015 technology and G&A expenses combined increased 17% to $43.5 million. Pre-tax income for Q2 2015 was $3.3 million, and net income was $1.7 million. Trailing 12-month operating cash flow for Q2 2015 was $62.3 million. Patrick, with that, let me turn the call over to you.

Patrick Byrne (Founder and CEO)

Thank you, Rob. Thank you, Stormy. I have more slides than is normal, for a little bit over 30 slides, and so I'm going to run through these briskly because I know most people read these in the transcripts. Anyway, slide four, revenue growth, as Rob said, we were back up, stabilized in the mid-high teens. Happy with that, well, comfortable with that, it's a good place to be. We think we can do better. Next slide, gross profit growth, same sort of story, 18%. The next slide, the contribution growth at 17%. By the way, the similarity of those numbers for now, given our business model, generally means things are fairly tuned in. When those all sort of reach equilibrium, now as we enter into separate lines of business, that may not stay true. Next slide.

We're running at 11.7%, so slide seven, we're running contribution margin of 11.7%. And versus Wayfair, we see ourselves as a contribution margin, the way we're looking at their numbers seems significantly better, although they have broken through deposits territory and whatnot. I remember that's an exciting day, so congratulations. Okay, slide nine. Tech and G&A, now you will see, you are seeing this growth here, and you're seeing growth here where we've always said, "Look at us." We're looking at ourselves on an annual basis on these kinds of questions and so forth. But in addition, you're starting to, if you read the news, you're seeing the kinds of innovations we're bringing to market, and we think that that really represents to me the delta in growth over what we could manage it to if we were just trying to manage out from net income now.

We're not happy to be in the position that we can be income net positive, net income positive, and still funding the kinds of efforts we're funding. Slide 10, quarterly pre-tax income, $3.3. As I said, in two we're paying cash income. I've said this number. In two we're paying taxes in cash. Now we recognized this very large and well a few years ago. So to me, we manage our business generally around a pre-tax net income. Also, because of certain operations we've entered into, our tax rate is going to look like it varies. And Rob, would you like to explain that or let them dig it out of the footnotes?

Rob Hughes (Senior VP of Finance and Risk Management)

I'm happy to make a comment there. Yeah, some of the crypto initiatives that we're working on are in a subsidiary that we can't consolidate for tax purposes, so we're not yet recognizing a tax benefit on those expenses until we see the revenues come and the income come. So that's driving up our effective tax rate for the consolidated Overstock entity as a whole for the time being.

Patrick Byrne (Founder and CEO)

Well said. Okay, slide 10 shows where that is, $3.3 million for the quarter. Cash flow, operating cash flow, you'll see has dropped since last year, $27 million-$17 million. Don't forget we're building a large new unified campus headquarters, and I will be discussing the economics of that shortly, but just remember that's when you look at the cash flow, that's what's going on. Rob, would you like to add anything to that again?

Rob Hughes (Senior VP of Finance and Risk Management)

No, nothing to add. That covers it well.

Patrick Byrne (Founder and CEO)

I'm sorry. I said operating cash flow went from 50-62. The free cash flow, that's the difference in the free cash flow. And when do we run, do you want to, you should probably, and I will get to that when we get to the building. Okay, next slide. GAAP inventory turns. We've decided to consolidate this inventory turns of 50 on a GAAP basis and GMROI of 1159%. Unique customers and cost per customer were up to $16 on this way of measuring, and we do have growth in new customers. Again, the type of customers we're getting are much more, well, are a different type than we've gotten in the past. They're changing. Slide 14, new customers again, 760-805, so reasonable growth there. Customer orders and average size order.

Here we've gone from 21-2,400, and the average size from 177-185. That's interesting. That's a 4% per year. It's a little bit above inflation, reported inflation. There's some mix shift going on with our customers, and we're getting, we are shifting more towards the type of customers we like and who are profitable for us and who like us a lot and care about the kinds of products that we're especially good at bringing. Slide 16, gross profit per transaction, up marginally from $29-$30, from $29, I'll just say $29-$30, $0.50. Corporate employees, some growth.

Again, this growth is, we can shut off this growth and lots of growth in the expenses and have the business as you know it or as you knew it a year ago or six months ago, but we don't think that's the right way to operate, and we think it gives us a really nice edge, frankly, that we can stay here and grow profitable GAAP net income, profitable growth while funding these kinds of initiatives. New corporate campus, people have asked for a couple quarters for more information about this new corporate campus. Let me tell you, I think this, setting aside the intangibles, I think it ends up saving us sort of roughly $2 million-$3 million a year once we move in, which should be August of next year. So now I'm on slide 18. We broke ground on Peace Coliseum in October of last year.

Construction's well underway. We actually should be moving furniture in sometime next summer and occupying in by the end of August 2016. The total campus cost, since everybody wants to know about this, the total campus cost, that's the land, the buildings, parking, landscaping, equipment, furniture, everything, is $90 million net of tax incentives of $10. The truth is our numbers are coming out at $99 million for this campus, and the original design was $96 million. So we're coming in, and I've probably added a little bit of stuff. So we're coming in $99 million with really $10 million of incentives and net present value and this and that. Looks like roughly $90 million. The financing terms, we have a $46 million real estate loan fixed as we're swapping under into that 4.6% interest rate for nine years. We are funding the first $38 million.

That includes the $11 million we spent for the land before we can start drawing this $46. So we should be hitting that in September or October of this year. So this drain on our cash flow, please understand that now you understand where some of it's going. But that drain should be closed by October. We should be through our $38 million and starting to be into their $46 million. The debt service of $3.2 million on the loan is $3.2 million, and the net rent of everything that we're replacing by moving in here is $6.2. So actually, it looks like if we actually didn't do, if we didn't do this, set aside the transition. What is the transition like? We'll model that up separately.

When you get to steady state, and we've collapsed into this and our data center has collapsed into this, don't forget we have an expensive data center downtown. We'll be avoiding $6.2 million worth of, I'm sorry, we'll be avoiding $3 million worth of expense a year once this is all, once the transition is complete. And if we had stayed, we end up with a total of $210,000 of total office space where we have now, and if we move, we have a total of $320,000, $330,000, something like that. So we're getting 50-ish percent more space, and we're saving $3 million, and we're getting all the intangibles of having our company not split down the middle and 15 mi apart.

So to me, I mean, I know I've seen and have brought up to me, there is analogies of, "Oh, is this some crazy project?" This is hard economics. This is a no-brainer. And I'll tell you, I consulted with my friend in Omaha about this before we did it and said, "How do you analyze it? What cost of capital and stuff?" He said, "Just think of the whole thing as if you had a loan for the entire thing, what that would cost you and what the interest rate would be, and compare that to the rent." You can get into all the other stuff as a hedge, but if you look at it that way, this ends up saving us $3 million a year on the cash we have to put in.

And you can look at it as the ROI on that cash, and I know that's sort of the conventional way, but I actually think that the true economic savings are much higher than that before you even get into intangibles. And actually, before you get into the tangibles of economic savings derived by just people not having to physically drive back and forth and mistakes not being made and things like that, and getting people who work on the same project together in the same building. I think those are, there's hard economic tangible advantages as well as intangibles. So moving on, and we get a $10 million working capital revolving loan. Rob, would you like to opine on this before I move on?

Rob Hughes (Senior VP of Finance and Risk Management)

No, I have nothing further to add.

Patrick Byrne (Founder and CEO)

You, as CFO, as green eye shade guy, as penny pinching green eye shade guy, how do you feel about this?

Rob Hughes (Senior VP of Finance and Risk Management)

I'm really pleased with how our team has managed the project and kept it very close to budget, and the progress so far, and we'll get to that in a moment seeing some of the photos, the project's going really well, so I'm really pleased overall.

Patrick Byrne (Founder and CEO)

Stormy Simon, as uber-fisted as you are, what do you want to say about this? And feel free to.

Stormy Simon (President)

I think it was, sorry.

Patrick Byrne (Founder and CEO)

Go ahead, please. I'm sorry.

Stormy Simon (President)

I think it's something that had to happen. We're currently spread through three buildings. Our employees can spend an hour a day commuting back and forth. We need to be under one roof, so that kind of efficiency is there. To know that we're moving into a space where we can continue to grow, and we're doing it Overstock style. We've always pinched pennies while this may look elaborate, and it is a fun design, and it is going to be a great space to work in. We still pinched pennies to get there. The overall savings and efficiency of the organization, I can't even imagine. When I sign the expense statements of people driving back and forth, I know there's all these little other pennies that we're going to put in our pocket from it. So I'm happy the company will be under one roof. It is needed.

Patrick Byrne (Founder and CEO)

Yes, and just thank you. And just, I mean, thank you. Look at the design in the lower right-hand corner of slide eight. I want to point out some of these other values. So getting everybody, we have a $100 million payroll now. So we can look at hard economic savings. It looks like $3 million a year of just what we would pay in rent versus what we're going to pay in this place, $6.2 versus $3.2, and we go, we have roughly 50% more space. But we have a $100 million payroll. So think of the friction costs of the kind of commute Stormy's talking about. If we pick up 2% or 3%, what's that worth? In addition, and this campus is really quite, and props to the entire team that has worked through this. This is a peace sign from above.

It looks like a corporate glass, as you can see in the picture there on slide 18. It looks like a corporate glass and steel version of the Coliseum from the side. There in the hub of the peace sign is a community dining hall. Over on the far right is the parking garage. And as people walk, there's greenhouses that they'll be walking by where we're growing the food, organic food that is served there in the cafeteria, really healthy choices, exercise track around the place, healthcare facility, childcare, daycare, that kind of stuff there. So what does that do to our retention rate? We have a $100 million payroll. I don't want to tell you our, I don't think we disclose. It's good. It's better than general corporate America. I think we can do better.

But just any few points of savings there is worth an additional millions of dollars that, again, won't show up if you just compare rents. In addition, so I'm going to click to slide 19. There's a couple, a few pictures of the building itself. It is this round, it's an enormous concrete building. Slide 20, we just walked through this. Benefits are 270,000-310,000, unifies central location in Salt Lake, which I want to show you. The data centers end up in one location. All these great amenities, fitness studios, yoga studios, etc. It's going to be a really cool place to work. There's housing, great housing, great housing nearby. We've already made announcements about the special type of glass we're using. The LEED Gold certified.

And there's the beautiful Salt Lake. It has a great light rail system, TRAX, and a spur runs right to the front door of this place. And there's nobody out there using it yet, but it's already there. There's a station there that TRAX runs right to the front door of this place. So it'll be phenomenal. We'll be able to start drawing on people as far north and south of Salt Lake itself, probably 30 mi or more. Because besides the light rail system, there's a very good Wasatch Front. What is it called, Stormy, the FrontRunner?

Stormy Simon (President)

That's right.

Patrick Byrne (Founder and CEO)

Yeah. So people would literally live 60 mi away and commute on a high-speed train to two light rail stops away from the front door of this place. So the talent pool we can draw from, there's a light rail pops right out to the airport, and it's a 15-minute trip to that to the airport on the light rail. So this has unbelievable advantages. And if you go to slide 21, it shows you the physical layout where the current headquarters is there at the southeast corner of 215 and our warehouse in the northwest part of Salt Lake. That warehouse, we call it Castle. And that's a 650,000 sq ft warehouse, of which about 100,000 is now taken up with office in an office setting. And Peace Coliseum is sort of almost the midpoint. Very easy for both to get to.

The airport is out by Castle now, so it's just an unbelievable location. Intersections of I-15, it's within a mile or so of the intersection of I-15 and 215 around Salt Lake. And again, you have the rail line, the TRAX line, so the commuting to the place is great. And there's all these wonderful new, these new apartments that have been built out there. So I think our employee satisfaction is going to be phenomenal. We're putting quite a bit into this. We will end up saving all the visible kinds of money that the green eye shade guys believe in on the rent and the electricity and consolidating data centers and things like that. But to me, we'll just say it's $3 million on that. That sort of ends the discussion.

But to me, I look at the intangibles, and I think it's going to be frankly multiples or at least as much as that $3 million. So before I move on from slide 21, Stormy and Rob, would you like to say anything more?

Stormy Simon (President)

Just one on slide 21 is we did have to open up another remote near our headquarters here. We have another small bit of office space where we have about 120 employees that isn't listed here, and I had mentioned we were in three locations, so I just wanted to make that clear.

Patrick Byrne (Founder and CEO)

Yep. And I want to give you one more intangible benefit there on slide 21. That location is, or let me even, well, go back to slide 18. That 18, in the lower right of the slide is the picture of this from above, the round, the peace sign. That is how it looks underneath the right wing on the final approach path for the traffic that lands northbound in Salt Lake. And by the way, that's the normal unless the winds are quite odd. That's the way that all the jets land. How many people a year visit Salt Lake and land at the airport? 22 million. Well, when they look out their right wing tip, those 22 million people, that's what they see below it, below the edge of their right wing tip. And believe me, all these things factored into the decision.

I know that there are various, well, the normal knuckleheads are out there with these conjectures about what the economics of this is and everything. They're silly. They don't know anything. I'm always amazed when these people write these things. They have no idea. But on top of that, on top of all the economic benefits, I think the intangible, the economic benefits are a no-brainer, and then the intangibles are just unreal. And just we get 50% more space for growth. I'll stop there and move on to these announcements we've been making in the last week. Is that anything, Stormy? Does that sound right?

Stormy Simon (President)

That sounds right, and maybe just making clear that this is why we moved our conference call a week later.

Patrick Byrne (Founder and CEO)

Right. We thought that we had, we think, what was such big news that we did on Friday, last Friday, and then the big announcement was, or the other big announcement was this Tuesday. We had such big news that we, I felt like we did a conference call last week or the week before. People might have a legitimate reason to be if they say, "Well, you had all that big news that you were keeping it just after the conference call." So we delayed things after the conference call. We made quite a few announcements about this crypto initiative in the last week. And it seems to me that Wall Street three months ago has finally gotten, well, has gotten what they've gotten the joke. Wall Street's a bunch of Fintech companies, frankly. It's financial technology.

It's not Jimmy Stewart looking across the table at somebody deciding if they can get a second mortgage. It's financial technology mostly and quants and such. We do technology well. Silicon Valley does technology well. Jamie Dimon, the CEO of JPMorgan, did sort of a freak-out letter to shareholders three months ago where he said, "Silicon Valley's coming to eat our lunch. Wall Street our lunch." Blah, blah, blah, blah. And since then, it seems like every three days there's another announcement. Goldman Sachs is throwing $50 million into a crypto initiative. UBS, Deutsche Bank, DTC, NASDAQ, etc. All these institutions get how, in the last, since really the last time we've spoken, I think, or about the last time we've spoken, they get how disruptive this technology is. If you look back in May of 2014, I was on a stage in Amsterdam.

You look it up on YouTube, Patrick Byrne and talking about that intersection, and we've been working since then, and there's millions of dollars of cost that washed through our system to build what we've built, and we unveiled that to the world Tuesday night. And I think that in, it's different than people were necessarily, I think it's quite different than people were expecting. And I think if you're concerned about shareholder value, you should probably be looking up that event, which was streamed. Stormy, do you know where they, I know it was streamed live, and I know there's a recording of it somewhere. Do you know where?

Stormy Simon (President)

I do not. I'm sorry. I do not know that.

Patrick Byrne (Founder and CEO)

Go ahead, Rob.

Stormy Simon (President)

It does.

Rob Hughes (Senior VP of Finance and Risk Management)

I believe we have it on our investor relations website among other places and YouTube as well.

Patrick Byrne (Founder and CEO)

Great. And we had a demonstration of it down in NASDAQ, which was very gracious to let us just demonstrate there. Slide 22. I'm giving you a very abbreviated version, really to highlight seven slides or so of that talk. Alan Greenspan, when everything melted down in 2008, Alan Greenspan was asked to testify before Congress about what caused this. And the left jumped on the statement he said. So, oh, Alan Greenspan, even he admits that capitalism doesn't work without regulations. More carefully, what he actually said was additional regulatory changes that the competitive markets require, and that is fraud, settlement, and securitization. And this concept of settlement, I had to explain quickly.

But the big message here, the big joke here, people were a year, a year and a half ago, all tangled up with, well, how could Bitcoin be part of the stock market and when you have buying stocks and Bitcoin, it was all crazy. I mean, they didn't get it. It's not about Bitcoin at all. It's about the mechanism that's underneath Bitcoin. The mechanism that's underneath Bitcoin is an amazing invention. It will go down as one of the great inventions in human history. And that mechanism can be applied to many other things but money. One of the things it can be applied to is settlement.

The same settlement that Alan Greenspan's here telling the United States Congress, "Oh, why did things melt down last month?" They melted down because of fraud, i.e., say [audio distortion] type guys, securitization, i.e., collateralized debt obligations and mortgage-backed securities and stuff, and settlement. There were problems in the settlement system. Alan Greenspan was testifying to Congress in October 2008. Those problems to which he's referring that were part of, according to Dr. Greenspan here, part of that meltdown, that Chernobyl event of 2008, those problems can be addressed by using that technology that underlies Bitcoin. And that seems to be finally what people are getting in the last few months. These deep problems in our system that Alan Greenspan's referring to can be fixed with crypto technology.

And fixed in a way that eliminates even the possibility of the kinds of mischief that Greenspan, or however one wants to characterize it, that Greenspan is referring to here in October 2008. Again, a very quick version of this is if you think you own stock in America, you don't. All the stock is owned by a company called Cede and Company. And on Wall Street, there's a saying, on Wall Street, one never talks about politics, religion, or Cede and Company. But legally, the property rights of America and capitalism, it's all held in a company called Cede and Company. And this was all set up, and I walked through the real history of this back in that conference call we just referred to that you can find online. But this really all got set up in 1971. And there's the DTCC and Cede and Company.

What has happened is that the shares get turned into share entitlements, and share entitlements are what bounce around the system. They're really just chains of contractual claims against a set of actual legal property rights. My beef 10 years ago was, gee, those systems for settling those claims had much more sponge in them, much more rubber in them than they ought. The rubber was put in there to create fault tolerance. I can understand why a system needs fault tolerance, but some bad people figured out how to manipulate those loopholes, and it created systemic risk. That's the short version. Going to the next slide, a number of the kinds of scandals one has read about over the years has become due to normally fuzzy property rights.

And it sends me, aesthetically and philosophically, we've laughed our whole history at civilizations like the Soviet Union who try to run without property rights. But we've taken our property rights and done this hyper-financialization to them that I believe the system loses track under some kinds of conditions. The system can lose track of the property rights, and they turn into a gray goo, and that's an enormous error for us to make as a society. And that's at the common denominator of a number of different scandals, a number of different issues. I think I just read the other day on ZeroHedge, there's like 124 contractual claims on gold for every ounce of gold and all that kind of stuff one reads about. I think that that's a dangerous thing.

Let's move on to the, oh, and there's another besides just the latent derivative risk that can go off if people make a mistake. There's a vulnerability to our country. And that's absolutely, the FBI just arrested some folks in Russia, some Russian guy here in January who was evidently investigating how to crack the U.S. system, our capital markets through ETFs. And if you read, I read another blog, probably shouldn't mention its name on an Overstock call, but if you look up Patrick Byrne's blog, you can find it. And it's about these kinds of issues. And I do believe the, well, anyway, I think that my sense is the national security community and the regulators from reading what I read in the press, people have figured out that this is the truth. It's a real economic vulnerability for our country.

So the next slide, the common denominator here, really the original sin, so to speak, is net settlement. When you have net settlement, you have to shear property rights and turn them into these financial contractual claims. And on a good day, it doesn't make a difference. On a good day, everything tracks each other and such. But you don't want to. There's a concept in material science called shear strength. And the shear strength is the point at which in a metal, the molecules stop flowing smoothly past each other. It shears. The same can happen in a marketplace. And I think this makes us a more frangible society. And it's also the original sin that opens the door to various kinds of mischief.

So we believe, moving to the next slide, that one can create a ledger, a cryptographic ledger that, just like the ledger underneath Bitcoin, which is called the blockchain, but there are other commercial ledgers being developed in which one could track money and share ownership. And one could sort of augment or enhance or improve or replace, depending on how this all plays out, the plumbing at the center of the U.S. capital market. And I think this is the original vision of NASDAQ, was a peer-to-peer electronic exchange, the world's first electronic exchange. You could have that, but without all the mischievousness of what we have now, which has these different dangers that I've been sensitive to for a decade or so. We call this product, next slide, the product we're launching is t0.

It's a platform called t0 and tzero.com, the motto of which is, "The trade is the settlement." Here's the big idea for people trying to unscramble what's at the core of why bring crypto to Wall Street. In the United States, the trade and the settlement got divorced by these different systems. So there are some systems for the trade, i.e., the exchanges. There's another system for the settlement, the DTCC and Cede and Company. That can be reunited. When all you're doing is writing a ledger entry in a book, in a public ledger, cryptographically protected and so on and so forth, but a ledger, the act of writing the entry is both the trade and the settlement.

Now, Congress has mandated the 34 Securities Act, amendment 17A, which was amended sometime in the early 1970s, saying that Congress finds it is in the interest of the United States capital markets that the SEC provides for the prompt clearing and settlement of trades. You don't get any more prompt than making them identical. So we think that regulators should love this. Moving to the next slide, these are the kinds of benefits of the reunion of transaction and settlement. It can be just as transparent as the government wants it to be. They have trouble tracking trades when there's a flash crash and who did what, and they're supposed to be able to call things on blue sheets, but they can't blue sheet these trades, and these trades are not traceable to law enforcement through the system.

So again, I would think that they would prefer that it's transparent to the degree that the world wants it to be transparent. We can make it as private or as opaque or transparent as the world wishes. It reduces frictional costs. It's probably not for nothing, but we think at least 80%, maybe 90% of the friction costs get drained out of the system. It eliminates various forms of market rigging activity. Don't have to expand on those, but various kinds of front-running and such cannot be done in our system. And make it short selling. Short selling, it will, is a different matter, but make it short selling. Various kinds of front-running and mischief that gets played on Wall Street that we can all read different books about can't be played within the system. Details to follow as we start exposing it in more detail to the world.

It's highly tested, and we're on, well, we have given one application to the SEC back, I think around April. It's a matter of public record to trade a crypto security. They've come back with questions. We gave another response. They came back with more questions. Last Friday, we gave our third response, which details not just our crypto security, but how this platform itself works, how t0 works. So it's in a filing, our S-3 that we filed in some amendments or not amendments, an addendum to that. This is all laid out in great detail. It was the S-3 amended that was filed last Friday. Okay. And for the really good news, and this is the end, people are assured tokens. You folks may remember we've had a little fisticuffs with Wall Street regarding short selling and the loosey-goosey-ness involved with a stock location underlying short sell.

I believe it's an extremely profitable part of the industry. I think we can fix it. And how we're going to do that is, I think, long beneficial owners are really given the runaround. And I don't even have to refer to the court. You can go find your own court cases involving different institutions and how badly they rip the face off of their own clients. And this is one of the areas they do it. So beneficial owners, we have built a system so that they can give us the files of their positions, and we tokenize them. And when we tokenize them, so if somebody's 400,000 long in Lumber Liquidators, available to short, that turns into a series of tokens. The right to short sell 100 of those shares for tomorrow, for the next day, for the next day. So it all gets tokenized.

Each night, we run a reverse auction, like Bill Hambrecht runs for the Hambrecht, a reverse auction, and auction these tokens off. We take the stock loan business out of the shadows into the onto an exchange. We make it exchange-traded. What happens when you take a market that's in the shadows where the buyer and seller have to go through an intermediary and no one can see each other's prices? When you take that out of the shadows, what happens is a significant the margins compress, to say the least. That's what we've built into the system. We have been working actually throughout this. I should mention, so you know that last Friday we issued a $5 million bond with First New York. Very innovative folks. There's lots of things that can be done.

It's really been interesting developing this technology, finding these sort of innovatively inclined people here and people reaching out to us. And we've made another, I would say it was over described in a newspaper when I said Tuesday night. There is a far-sighted, innovative group of fellows at a bank that we are working with on just that type of proposition I described to you. Now, the press took that and called it a partnership and that we're trying to upend Wall Street. That's not at all the truth. But we are collaborating with the bank in developing the systems that would support the activity I just described regarding the pre-borrow assured tokens. And again, my hats off to the innovative people at both places who got the light bulb on this a long time before the rest of folks in Wall Street.

So that's the end. That's the concise version of what we put out Tuesday night, the value of it, both as a trading platform and for something to make exchange-traded to stock loan business. Slide 32, these are some of the innovations we've been working on and bringing to market of late. We've launched our new loyalty operations. Our Club O Silver, we have introduced Club O Silver. We are migrating millions of people over to it as we speak to our new Club O Silver program. Supplier Oasis got launched in May. We are signing up lots of people on that and filling up warehouses. A nice demand for that. Farmers Market, we're covering now about 45% of the U.S. population, but filling in, want to fill in inventory. And then all this Medici stuff.

So we think that while we could be eking out another $10 million, $15 million, $20 million a year, we think that these innovations are by not doing these kinds of innovations. We think that that's short-sighted and being in the position you can both do it and stay and sort of have nice annual profits and now our 14th straight quarter of GAAP profitability. We think that's a good place to be in. I know that was a lot more information this phone call than most, but I'm told that some people resent that we've been under, that I've underinformed in the past, so we overdid it this time. With that, I'll stop and we'll go to questions.

Operator (participant)

Thank you. Ladies and gentlemen, if you have a question at this time, please press star and the number one on your touch-tone telephone.

If your question has been answered and you wish to remove yourself from the queue, please press the pound key. One moment while we wait for questions.

Stormy Simon (President)

I have a couple of questions. Oh, I'm sorry, Tia.

Patrick Byrne (Founder and CEO)

Oh, yeah. Stormy, do you want to just ask some questions first? Because I know people have mailed in to you.

Stormy Simon (President)

Yeah. We got a couple of questions in. I think the easy one is we did receive some questions about Club O, our members, the percentage of Club O members that convert and things like that. Patrick, if you just want to talk about Club O in general.

Patrick Byrne (Founder and CEO)

Yeah. Club O is great. It's going beautifully. It's growing rapidly. But we don't want to give out exactly how to model it to people. But it's really quite a product platform.

Amazon has done a nice job building a product platform, obviously, with Prime and with more with their website and the Dash. I see somebody's asked about Amazon Dash and stuff. So I'm going to set their website. But anyway, they still are very good. Thinking of their engagement as a product platform on which to drop new things. We love Club O, and we've introduced this Club O Silver that, like I say, we're migrating. By the end of this month, we should have millions more, what, eight-digit people into Club O Silvers, Club O Silver. We love Club O, and I think that there's more levels. I think that we can maybe talk about introducing a higher level as well with additional benefits. Other than that, and it's growing extremely rapidly. Don't have plans to introduce Amazon Dash. We're not going to reveal how many people convert. And I don't know.

And then the question on Amazon's Prime Day event. My understanding was it was not. Some articles I saw suggested it wasn't so well received, but I'm not going to comment any more than that. It's not a bad idea, though. And Stormy, well, Stormy came up with this idea about Overstock October Fest some years ago where we make October sort of an Overstock Black Friday. But Stormy, do you want to say anything else about that, about these questions?

Stormy Simon (President)

Sure. Just in regards to the Prime Day event, and the question was, would we consider doing something similar, and especially with our Club O members? And the answer is I think we do those types of events every day. However, to Patrick's point, in October, we do celebrate the entire month with Overstock October. It's been an annual event that we've had for at least five years.

At that time, we run really steep discounts, steeper than before. It's like another Black Friday, but it lasts about three weeks. We tend to do events every day. I think that we differ from Amazon greatly there.

Patrick Byrne (Founder and CEO)

Yes. Well, I think that's a good way to put it. And any of these other questions, would you like to ask aloud, and I'll address?

Stormy Simon (President)

Well, just in regards to the Dash button, that's a function that's happening offline, and we are expanding our assortment. For instance, I now buy my laundry detergent on Overstock and paper towels. So we've expanded our assortment where the Amazon Dash button, it does make sense for Overstock, and we are building a subscription model in conjunction with our Farmers Market.

So we will be progressing our technology, maybe not exactly as, but we'll continue to do it the Overstock way while expanding assortment, which I think is very key.

Patrick Byrne (Founder and CEO)

Right.

Stormy Simon (President)

Another question that we have, Patrick, is this. On a previous call, you mentioned that you're open to an MBO. For those of us who stayed with Overstock through the formative years, rather than being paid a premium, would you instead be allowed to continue and participate in what I believe to be bamboo-like growth?

Patrick Byrne (Founder and CEO)

Okay. Well, thank you. Now that sort of this is on the table, I have been under hugely conflicting moral duties, it seemed to me, about this. Gosh, you didn't think that when this thing was at $5, I was drooling over putting together a group of people.

We didn't have that many millions of shares to buy this out. I absolutely didn't do it because for just the reason you, the shareholder, is describing here. It didn't seem right. There were people who stuck with us through all kinds of tough years, and when we were really in a battle for our lives with various large institutions. It just didn't seem like it would seem like I'd be hurting a bunch of. I think of myself as working for 6,000 little old ladies whom I'll never know. I know that myself and another organization speak for a lot of stock, but that doesn't really enter the equation.

And I always felt it would be wrong to do a management buyout while two people would buy something that I thought was at an extreme price and sort of force it to happen, a forced transaction from a bunch of people who had stuck with me. So having said that, I think that if we leave too many people in the deal, frankly, then it's no longer a buyout, is it? So it's hard to how do you balance that? And in addition, I don't think it's right until we do have some news on the suit. I don't think there's anything wrong with me saying it was at a case management conference yesterday that we do believe our suit with now Bank of America only is going forward, I believe, early next year. It'll be in a courtroom.

And I think that the valuation is too weird until we get through that, so I don't think I'd be right. And the truth is, now that everything is exposed, I would have been wrong for me six months ago working on this kind of technology to try to sort of buy from the public without them knowing. But now, the general direction of our fintech efforts has been exposed. I think that there'd be nothing ethically wrong with letting the market get its mind around it and put its value on things. I mean, I'm already kind of well, so nothing ethically wrong with doing it now that I don't think there's any major secret of the direction we're going with that fintech and the opportunities there. But still, I think I'd be more inclined to get through this lawsuit.

And on that front, I'll mention, and this is very important. And somebody asked this question, "What gives with Goldman Sachs?" You once said that settling them would be like negotiating with Hitler. Oh, oh, I see what you're saying. You're saying why do we, well, this is in the sense of it's a category mistake to think for me that there's a number. And you're going to understand why in a matter of weeks. I believe at the end of this month, the case, the documents are actually going to be delivered. And as people may or may not know, our case against Goldman Sachs and Merrill Lynch, there was a parallel, or I guess an orthogonal case filed by some gutsy journalists at New York Times, Rolling Stone, The Economist, and Bloomberg. And they have fought for years.

They have a joint case to get this stuff unsealed. The California Supreme Court made a ruling earlier this year, and they said, "We find," and I forget their language, but they basically said, "Although Goldman Sachs looked like they took part in this scheme, the way they took part in such did so in a way that we would only have jurisdiction over them in New Jersey, I think New Jersey or Chicago." The California Supreme Court said we could no longer go forward in California. However, they did give a ruling that it should all be unsealed. I can't go into the huddling between us and Goldman. I did disclose in a press release we filed on the last possible day a legal action against Goldman in New Jersey.

And that's a matter of the public record, and it was in the press release that we put out. And in any case, things worked out immediately after that. And the more of which I will not say other than I can say because I believe my understanding is as of yesterday, there was a case management conference which has established that the documents will all be unsealed. At the end of the day, what I think really has to happen, and I'm just being front and center, I think Uncle Sam needs 12 citizens to sit and look at these guys in a jury box. I think it's going to be a cathartic moment for America. I'm sorry that we're the vehicle of that, but we can settle and such.

But when you will understand better, when at the end of you shareholders will understand why at the end of this month I've taken the line I have with Goldman Sachs, more of which I will not say, but the documents will be in the hands at the end of this month, I believe, of the Rolling Stone, The Economist, Bloomberg, and The New York Times. And then you can read, and then you'll understand perhaps why I say as a matter of principle, we've got to get this story into court and 12 citizens good and true to look at these characters and say what they think of them.

So that's it on and I took the Goldman case and told it as far as I could, that the California Supreme Court said, "The truth is if we had pursued it in New Jersey, we would have had to have done so in a way that would have undermined the main case in San Francisco," or it could have. It raised the possibility of it, that was at the end of the trade-off I had to make to get somebody into court in San Francisco. Okay. When will we ever pay a dividend? I suspect that we're more of a stock buyback kind of company than a dividend. It's just from a tax efficiency point of view, in general, I would prefer to buy stock back than pay dividends. What is the value proposition for continuing as a shareholder?

Value proposition, I generally think of as something concerning a consumer good or goods that you purchase. In the case of a stock, I'd say, "Well, how you should be valuing is based on your expectations of the future cash flow of a business discounted to the present value at an appropriate rate." And make your own estimates. Why spin-off Medici? Why not keep it in-house? And if spin-off, would it be on a new exchange? Stormy, do you want to add anything back on the previous question or any of the previous ones I've hit?

Stormy Simon (President)

No, you're fine.

Patrick Byrne (Founder and CEO)

Okay. Spin-off Medici, I'm actually thinking we're not going to spin it off. I've decided that people in the first.

So I'm not going to disclose who we've met with and the kinds of people we've met with and the kinds of things that are being told us about the value of this. And I just heard a new number today. And people asked, "When are we going to do a Series A?" And I mean, with all respect, I'm not trying to embarrass anybody or say any names or anything. I've been sort of delaying for about six weeks. I've been kind of vamping till ready as the old-timers may remember the expression and not giving an answer and trying to decide my own answer to this question. And I guess my own answer is whoever asked this question, Stormy? Do you want to say?

Stormy Simon (President)

It's a last name that I cannot pronounce, but his first name is Rick.

Patrick Byrne (Founder and CEO)

Rick [audio distortion].

Shareholders since 2003. Why spin it off? I think you're right. I think people have been asking for six weeks or more when are you going to do a Series A and package this up and sell it to the public or whatever. And I think the answer is no immediate plans. That's my answer. I've been waiting sort of two months to figure out what my answer is. My answer is you don't have to wait. You can 9:30 A.M. tomorrow morning, go and buy it, ticker symbol OSTK. That's how people can invest in this technology.

Stormy Simon (President)

Great. I think there's a couple of people in the queue.

Patrick Byrne (Founder and CEO)

Okay.

Operator (participant)

Yes, ma'am. Our first question comes from the line of Scott Tilghman from B. Riley. Your line is open, sir.

Scott Tilghman (Senior Analyst)

Thanks. Good afternoon.

Stormy Simon (President)

Hi, Scott.

Scott Tilghman (Senior Analyst)

I have a few questions.

First off, the direct channel seemed to grow this quarter after not really having much growth over the last few quarters. Anything different going on there?

Stormy Simon (President)

And by direct channel?

Patrick Byrne (Founder and CEO)

[crosstalk]

Scott Tilghman (Senior Analyst)

Your direct segment.

Stormy Simon (President)

Got it.

Patrick Byrne (Founder and CEO)

Stormy, do you want to take that?

Stormy Simon (President)

Well, and we have to explain something. So Patrick is not on location. So if there's any awkward pauses, it's because we're in different states right now. So I apologize.

Patrick Byrne (Founder and CEO)

Yeah. Sorry. I should have said that upfront. Do you want to take that? I mean, we've done some bigger liquidation buys, but what else do you want to say?

Rob Hughes (Senior VP of Finance and Risk Management)

Yeah. It grew a little in the quarter versus for the six months on the revenue side, it shrank, but it's still in that 9%-10% range of our revenues. Yeah.

I think we've done some liquidation buys, but other than that, I don't see anything fundamental that's really different in that business right now.

Stormy Simon (President)

We did have some of it got stuck at port. It wasn't at this quarter where?

Rob Hughes (Senior VP of Finance and Risk Management)

Yeah. The port delays did hurt that business a bit and have now sprung back.

Stormy Simon (President)

But outside of that, I think we're okay.

Scott Tilghman (Senior Analyst)

That's helpful. Second, with respect to the headquarters, and thanks for providing all that detail, what are you thinking CapEx will look like this year?

Patrick Byrne (Founder and CEO)

Including the headquarters?

Scott Tilghman (Senior Analyst)

Yes.

Rob Hughes (Senior VP of Finance and Risk Management)

Well, we've got to if you saw the numbers in the slides there and in our 10-Q, we've explained. We've got to put our equity, so to speak, in first.

We've got another $14 million-$15 million we put in, and then we can draw on the loan over the balance of this year and into next year, and eventually, again, we'll get to that total $99 million-ish that Patrick mentioned between us and the bank.

Scott Tilghman (Senior Analyst)

Yeah. I wasn't sure how much of that 38 had already been funded.

Patrick Byrne (Founder and CEO)

About 21 or 23 or something.

Scott Tilghman (Senior Analyst)

Yeah. Okay.

Rob Hughes (Senior VP of Finance and Risk Management)

23-ish.

Scott Tilghman (Senior Analyst)

Third, you mentioned China quickly in passing, but I'm curious with what your early read there is?

Stormy Simon (President)

Sure. I'll take this one. It's a very low-key launch in China. We're very excited to be there. We opened up some space. We're selling our product there through Marketplace, JD.com, and we plan to expand it. But we're really just kind of putting our toe in the water and making sure we don't do anything large and drastic too quickly.

So right now, we're learning a lot. We've gotten some orders. We've started to gain a following there, a social following. But it's too early for us to say we've played our hand or done a large move. We're really just in a learning mode right now, but we're there.

Patrick Byrne (Founder and CEO)

Yeah. We're being careful. And we didn't go in here in some way that takes $10 million of capital. We kept the amount of capital under a million dollars, being very careful. We're being patient just like they can be, we can be. We're being very patient about this. And we want to get this right without making any big mistakes.

Stormy Simon (President)

That's right.

Scott Tilghman (Senior Analyst)

Do you plan to launch a club-type offering there as well?

Stormy Simon (President)

We would like to. We really would. We would love a global loyalty program, and that's something that we're exploring internally.

Patrick Byrne (Founder and CEO)

Yes.

Scott Tilghman (Senior Analyst)

Okay.

I know you called out the million-dollar contract exit or sponsorship exit in the quarter. As you look through the balance of the year and knowing that the [audio distortion] case may start early next year, any thoughts around non-operational expenses that may be hitting in 3Q or 4Q?

Patrick Byrne (Founder and CEO)

I think that you can probably expect. By non-operational, you mean associated with the lawsuit?

Scott Tilghman (Senior Analyst)

Yes. Legal.

Patrick Byrne (Founder and CEO)

I think that you can expect a mild ramp in legal of $1 million or $2 million a quarter. Would you, Stormy and Rob, is that what your thought?

Rob Hughes (Senior VP of Finance and Risk Management)

Yeah. And I think we probably should comment that we also have as part of the Medici initiatives, we have a lot of lawyers engaged there in helping us get through the regulatory process and so forth.

And those costs have been ramping up as we work on that S-3 and other activities on that front.

Patrick Byrne (Founder and CEO)

Those costs have been huge. Those costs have been multimillion-dollar costs, of which I'd like to shout out Bracewell has done a fantastic job as sort of the team quarterback on the legal side. Perkins Coie has done the work associated with the S-3 and the intellectual property around all this stuff. So Perkins Coie has been great. And Jones Day right here in New York, where I'm sitting now, they've been a terrific partner. They've been handling the legal work associated with the ATS and the actual crypto aspect of this as well. And so we've had three great and Bracewell has acted sort of as our it's been our outside counsel and such for years. So we've got a terrific legal team, but boy, they're expensive.

This is sort of the burp of expense through the system, building not only this, just building the technology, but getting holy water sprinkled on it from the regulators.

Scott Tilghman (Senior Analyst)

Any sense as to how long that persists?

Patrick Byrne (Founder and CEO)

I would think it's persisting through this quarter, through Q3 as is. But I don't if everything goes as planned, I would expect a drop-off after that.

Scott Tilghman (Senior Analyst)

Then the last one for me for now, as you look at Medici and t0, what ultimately is the revenue plan? Is it a selling of technology? Is it a licensing? Or is it some sort of fee-based system?

Patrick Byrne (Founder and CEO)

There's an incredible number of businesses that can spring off this, an incredible number of businesses. Let me just take, for example, look at the venture capital world.

VCs invest in companies, and part of their risk profile is they put money in, and it takes them eight years or 12 years or whatever to get liquidity on average. I don't know what the number is. Those Series A's and B's and such can be tokenized and traded on this exchange. I know there have been a couple of companies that have tried this, but this has a lot of advantages. This crypto exchange we've built, including, that is, built on top of the national market system, we could create a private market for venture capitalists or qualified institutional investors, limited in whatever kinds of ways they want it among themselves, and all kinds of investments that have been made and will be made in Silicon Valley. That's just one little and there's whole enterprises that are out there trying to do that.

This is all sort of latent, essentially for free now in our technology, and it harnesses because this was built within the national market system. It harnesses the connectivity that's already there. This is all fixed compliant, what we've built. The internet speaks HTTP to each other, to itself. The financial system speaks FIX. This was all built within FIX compliance standards. That's just one of the businesses. We can have an exchange where people are launching new stocks, just like we have filed to do with the SEC. There are people we can be an exchange, or we can be the pre-borrow business looks healthy. Other people, since we made the announcement Tuesday night, you can't believe the phone calls and the people who have ideas and want to do things with us that plug into this. It could be that kind of transactional.

It could be on the pre-borrow, the basic deal is we're taking 20%, and the beneficial owner is taking 80%. And we think we can collapse the market so much on the exchange that it's going to save the short-selling hedge funds a ton of money. My old friend at the short-selling hedge funds will save a ton of money. They're not going to have their faces ripped off, and the beneficial owner is not going to have their faces ripped off by their friends and brokerages. So that model is a 20% cut. But believe me, I've given you just a few of the businesses that can grow out of what we have built. And in addition, what I'd really love to do, I mean, my first choice would be Wall Street would get that I'm not the enemy.

I think that this would make a lot of people happy on Wall Street, and it could eliminate a lot of things. I would license it to Wall Street and there are all kinds of people, very important people, who have reached out to me this quarter to talk about the ways that we could work together and I've been trying to signal them as nicely as I could this quarter. As far as I'm concerned, I think they expect me to come through the front door with an axe. As far as I'm concerned, the past is the past. If the past is the past for them, we've got this technology. We're hearing from international players who want it. This is going to happen.

It's not going to. They're not going to be stopping us or trying to cold-shoulder us. They're not going to stop it. There's international players who want this. There's domestic players. There's international governments who are very interested in this and this being brought to their country. So we have it. I'd rather see it developed here in the United States. I'm not going to accept that we don't develop it. I'll move to a different country to develop this because this solves all those things. I can't imagine the regulators trying to stop this because that would be, in my mind, you all understand what I would think would be the motive force behind such a decision. There are other countries who want this developed within their domains. I'd rather see it developed in the United States.

So my first choice is to license it to Wall Street. And I'd love to hear, I feel like I've been rude, frankly, in the last six weeks or eight weeks, the number of people on Wall Street and organizations who've reached out to me. And I'm being kind of rude. I have been for about three months in the sense of giving a cold shoulder or finding excuses not to meet and such because I didn't want to meet with anybody until we had this. There was almost nobody I met with. I really didn't want to meet with anybody because the conversation couldn't mean anything. It'd be a bunch of deflection and oblique stuff until we had this exposed. And I've actually been trying to decide what's the right corporate structure. Should we be spinning this off, etc.? But I think that the answer is no.

I think that this should just be it's a division within Overstock. And finally, having sort of been not taking the phone calls or minimizing the number of those conversations to have because I felt I was being somewhat disingenuous, not to now I'm ready to have the conversations that people have been asking for for the last couple of months and such matters. So my first choice to close out would be fee income should be royalty income and just license this to people. But I got to tip my hat again to a couple of organizations, one I mentioned Tuesday night and one I mentioned I think I mentioned earlier in this phone call. Oh, no. And we put the press release out on Friday that were very innovative and far-sighted.

And they got, before Jamie Dimon wrote the letter to the world, they got how disruptive this technology is. And they're not sitting on their haunches. They want to be part of it. And so we don't have any partners. Let me clear that up. There's no partners. There's no formal agreements. But there are innovative people. I mean, as the people reach out to us who want to be involved in this, what we're looking for are the people who really want to innovate and use this, not the people who are trying to figure out how to stop it ultimately. And actually, even within the prime broker, well, even within the large banks, there are large banks who get they'd rather be part of this than trying to stop it. So anyway, I'll stop there.

Scott Tilghman (Senior Analyst)

It's a shame you're not more passionate about it.

Patrick Byrne (Founder and CEO)

Yeah. Well.

Scott Tilghman (Senior Analyst)

I'll jump out of queue and turn it over to the next person. Thank you.

Operator (participant)

Okay. And our last question comes from the line of Mike Arnold, private investor. Your line is open.

Mike Arnold (Analyst)

Hey, Patrick, Stormy. Congrats on the last quarter.

Patrick Byrne (Founder and CEO)

Thank you.

Thanks, Mike.

Mike Arnold (Analyst)

No problem. I guess I have a couple of questions, but I guess I just wanted to say I really appreciate the candor and the straightforwardness on these calls. I mean, I feel like I learn something new every time I listen. So I appreciate that. Thanks.

Stormy Simon (President)

Thank you.

Mike Arnold (Analyst)

First question. I'm really excited about the t0 platform, as you guys are. And you talked about ICBC using the platform, maybe five international banks are lined up behind them. I'm just curious, is there any way to quantify how big the opportunity is?

And then when I start to think about the business in general, is it like a SaaS business where we could see 80%-90% gross margins?

Patrick Byrne (Founder and CEO)

Let me clear something up because if you go back and look well, so there are a number of people willing to do this. I don't want to say the name of the bank again on this phone call, but there are a number of banks who have been willing to do this. We sort of chose the one we'd like to ride with for now. And well, we'd like to see how far they're willing to go and such. So I don't mean to say we're going to be integrating well, anyway. And we don't have any legal partnership with anybody, but we have a collaborative relationship developing.

And there's a number of people for us to choose from, but we're collaborating, let me say, with one. And I find it extraordinarily innovative that there are them, sort of the people at the bank, at the group that bought our bond, when we go out on a limb and do this. Because I can tell you when we did the Hambrecht Dutch Auction 13 years ago, people told me literally, people at big prime brokers just told me, "If you go through with Hambrecht, you will be a pariah for life on Wall Street." That's a direct quote. And we saw that worked out. So I find it terrific that there are people willing to sort of reach across the aisle and work with us on this. Other than that, I don't want to characterize these as partnerships.

And I see somebody wrote a headline about major Asian banks working with Overstock to turn over Wall Street. That's not what I said. And go back and look at the transcript. That was a huge push by the guy who wrote that article. I don't know what I said. So we think the opportunity is ridiculous. It is the only financial term I can think of. I think that a very significant fraction of the prime brokerage revenue derives from this industry, the industry of securities lending. And I think that's because it's an opaque market. And I think that crypto is to solve that opacity. But even to get into the numbers is so if we can make this market, the numbers are so ridiculous, it doesn't even make any point investigating.

Mike Arnold (Analyst)

Okay. Understood. I'm curious, too. Could it also come down to the retail level?

So if I held 10,000 shares of Overstock, for example, and I wanted to issue some puts against those, or are you guys focused more on institutions?

Patrick Byrne (Founder and CEO)

You're reading my email, my boy. Well, we think the same way. Yeah. This can be brought to the retail level. This can make a liquid-efficient market in securities lending.

Mike Arnold (Analyst)

Okay. Great. Yeah.

Patrick Byrne (Founder and CEO)

That's all those we're thinking about in all those paths.

Mike Arnold (Analyst)

Awesome. All right. Well, I'll jump off. I'm really interested in that. And I'll just say I've been down to visit you guys a couple of times. And if people have questions about the locations and things like that, I think it makes a lot of sense to combine everyone at the headquarters. Because I think now aren't the ops folks and customer service folks at the castle and everyone else is at the headquarters?

If your friend in Omaha validated for the plan, then I'll take that as a pretty good vote of confidence.

Patrick Byrne (Founder and CEO)

Well, thank you, Mike. I didn't say that. Let me be clear. I don't mean to say he doesn't validate things. He just tells me how to think about things. And I go validate the plan. And he told me from a financial point of view how he thought the right way to think of this was. And I followed that way. And even if you follow a more conventional way, it's a healthy return on capital with a real intangible kicker. So yeah. And did you go out? Did you see the new location? I remember you drove by. You came by. You visited Overstock.

Mike Arnold (Analyst)

I didn't actually last time, but if I ever swing back down, I'll take a look.

Patrick Byrne (Founder and CEO)

Well, people are welcome to go.

It's out there. The photos in this deck show. I mean, it's out there being built. I think she's closed in for winter. Okay. Thank you, Michael.

Stormy Simon (President)

Thanks so much, Mike. And you were exactly right on how our organization was split. And we appreciate your visit and your questions. Thank you.

Operator (participant)

Thank you. Thank you. And we are currently out of time. So I'd like to turn the call back over to Stormy Simon.

Stormy Simon (President)

Well, thank you so much, Tia. Thank you for all the questions. And we appreciate your support, shareholders. And Patrick, I'll send it to you for any final thoughts.

Patrick Byrne (Founder and CEO)

Nope. Thank you for your long patience. And I hope you understand how cryptic we've been in various ways for the last year, year and a half. I really didn't think people would want to hear the details of the building.

I actually thought that. People, I'm kind of surprised to think anybody would think that we would go out and waste a bunch of money on just a big vanity project and that it wouldn't pencil out and that it wouldn't be from just pure economics a great deal. That's how we've built the company on a shoestring compared with lots of our competitors, and I know that we've taken sort of double-digit millions of dollars out of the system over years funding various innovations, and I hope you see now the scale on which we're thinking, and we think that this is a great use of shareholder money. We're right on the front leading edge of a bunch of different kinds of technology, and we see this as a smart way to capitalize to monetize that, so thank you very much for believing in us this long.

And we have a great fundamental business. The Overstock retail business is, I think, pretty unusual. It's growing high teens. It's been profitable 14 quarters. I don't know how many straight years at this point. I guess I should tally that up. And what we're holding ourselves to for now is GAAP net income profitability. I actually think of pre-tax net income. If I can keep that sort of around one-ish % while we're doing these rather revolutionary things and growing nicely, I think that's a beautiful balance of our different mandates. So thank you very much. Bye-bye.

Operator (participant)

Ladies and gentlemen, this does conclude the conference. You may now all disconnect.