Bed Bath & Beyond - Earnings Call - Q3 2015

Transcript

Patrick Byrne (CEO)

Great. Thank you, Chelsea. Thank you very much. Welcome, ladies and gentlemen. Sorry about that snafu. We've been in some voicemail jail for the last five minutes. Welcome to the Q3 earnings call script. Robert?

Rob Hughes (CFO)

Thank you. Good afternoon, everyone. Welcome to Overstock's third quarter 2015 earnings call. Before we begin, you should be aware that during this conference call, certain statements may contain forward-looking information. Actual results could differ materially from those that we projected during these discussions. Overstock's policy on forward-looking statements and additional information concerning a number of factors that could cause actual results to differ materially from such statements is readily available in our annual report on Form 10-K and our quarterly reports on Form 10-Q filed with the SEC. In addition, Overstock undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

If any non-GAAP financial measure is used on this call, a presentation of the most direct comparable GAAP financial measure and reconciliation of this non-GAAP financial measure to GAAP is provided as supplementary information to our release. Please note that you may listen to a live webcast or replay of this call by visiting Overstock's website and then clicking on Investor Relations at the bottom of the homepage and then on Webcast. Now I'd like to turn the call over to Overstock CEO, Dr. Patrick Byrne.

Patrick Byrne (CEO)

Thanks, Rob. Good afternoon, everyone. Welcome to our third quarter call. Joining us today are Stormy Simon, our President, Rob Hughes, CFO, and Mitch Edwards, our new General Counsel. We had an important quarter in which we've made some strategic pivots. As you may have noticed, we are continuing to grow our trusted and respected online retail business, but we're also a leader in developing some, I think, world-historic technology that is going to transform capital markets for the benefits of investors, our company, believe it or not, hedge funds, short sellers, just about everyone who's not an intermediary. More on that later. First, let's do the numbers. Slide three in your slide deck. Our revenue in Q3 was $391 million, up only 11% from Q2 last year. Gross profit, $72, up 8%. Contribution was up only 2%, and I'll be hitting those in a bit more detail.

Slide four, quarterly revenue growth. We were back on that plateau I like, 15%-20% growth. It has slid. I will tell you a few facts, so some of this, yeah, we slipped a stitch here and there in a couple of initiatives. Secondly, there was, as always, a Google search change. Well, we slipped a stitch on a couple of initiatives, and we've gotten them straightened out, but that was, I'd say, that was a third of the problem. Third of the problem was the Google search change, as it affects everybody. It was a little bit different this year than it was in previous years in some respects and who it helped and who it hurt, but we think we've already learned our way out of that, and lastly, I think there's a real secular fundamental question mark about the economy.

We have all kinds of ways of seeing in terms of shift what's going on, and we look at competitors, traffic numbers, and such, and it sure looks to us like, while housing remains strong and everything associated with housing remains strong, things that are really disposable income or that are, say, fashion and high-end jewelry and stuff, we're seeing some quick shifts that suggest an underlying secular issue in the economy, so I'm quite bearish in that regard. Slide four, quarterly. I'm sorry. Next slide. Slide five, quarterly gross profit growth. Grew 8%. Contribution growth. Slide six, contribution growth. Regarding contribution, the changes in the marketing environment I mentioned earlier mean that if you get everything optimized for one environment, when that environment shifts, you get caught off guard, and it's all a question of how quickly you can change.

In fact, the more optimized you are for one environment, the more it sort of catches you out when that environment shifts quickly, as it has been. So that's why you see a contribution growth rate that, while still positive, was lower in Q3 of this year than Q3 of last year. But I must say these gyrations have happened before, and it's really all a matter of who learns quickest about the changes in the unique digital marketing environment and figures out the root of it more quickly than the other folks. And of course, who's willing to lose the kind of capital you see some of our competitors losing. Slide seven, quarterly gross margin contribution. The tick down in contribution margin to 10.8% is a result from a slight increase in marketing spend. We spent $7.7 on marketing in Q3 this year versus $7.2 in Q3 last year.

We're working hard on pricing algorithms, and I've built an expert team with analysts and statisticians, and I've brought in consulting experts who are working hard on our pricing models. Again, this is going to be continual, ongoing learning experience, but we think we have a long way we can optimize in pricing control. Slide eight, technology and G&A. We've been able to leverage our G&A, and so our G&A expenses flattish in the three quarters of this year. Technology expenses are growing appropriately given our continual improvement processes. And so for Q3, the combined G&A and tech expenses are growing at 7%. That's obviously not sustainable with the sales only growing at dropping to 11%. Our expense control is really, it's one thing that we've managed over the years, mastered.

I mean, we set budgets for ourselves, and we hit those budgets and often save a lot of money in those budgets. Unless I make, and generally it's me, when it happens, it's just a conscious decision, "Okay, I know I budgeted this, but I see some opportunity." To be honest, Medici is like that for us this year. We only thought we were going to spend $2-$3 million as the year developed, and we see these opportunities. We'll have spent $8 million directly by the end of the year, and I don't regret a penny of it. So our expense control is good, but when the sales, and especially the contribution margin, does not come in as anticipated, that's where the mismatch is.

I have no qualms or concerns that we're not going to be able to manage our expenses to whatever growth we are able to achieve. And in fact, we have in our expenses that we've structured in a certain way to make them easier to manage, to make them easier to manage. Slide nine, operating and free cash flow. We had $45 million in operating cash flow in the trailing 12 months. Free cash flow has declined, but remember we're building a new building to increase the efficiency and productivity of our employees and teams. We have spent a significant percentage of our cash so far this year on this building. The good news is that the remaining cost of the building will be financed by approximately $46 million of bank debt.

So the big differential between operating and free cash flows should be somewhat mitigated by that financing going forward. We had to put in our half the money upfront, and then once we got the last of our money in, that's when we started drawing on the banks. And when did we get the last of our money in? That was in September.

So that's really the big difference. Slide 10, GAAP inventory turns. GAAP inventory turns, 52, 1200%, GMROI. Unique customers, slide 11, unique customers and cost per customer. Unique customers are up a bit from last year, but so is the cost. I suspect acquisition costs are up across the industry. We have assembled the most serious team by far we've ever had on this with fantastic new hires in marketing and analytics with big company experience. I've never seen the kind of talent walking through our door that we're getting now. We've been looking for this kind of talent, but I've never had a pipeline of these kinds of people before who have been starting over the last six weeks or two months and so forth. And a lot of that has to do, frankly, with outside talent wanting to work with Stormy Simon.

She's off at conferences, and all these fantastic people get a cut of her jib and say they want to work for her. We also have some terrific people here who are getting liberated, but we think that by salting them with this outside talent, we're starting—we have figured out a lot of things ourselves, and then people come in from different large companies, well-known companies that they've had their own approaches, and it's a fecund intellectual environment. Well, let me see what else I want to say. Okay, let's go to slide 12. New customers are flat year over year, partially due to that search algorithm challenge and other factors discussed earlier. Slide 13, unique visitors, slightly up from last year, but again constrained by economic conditions and algorithm changes.

Slide 14, average order size increased every quarter this year, and the number of orders is up in Q3 both sequentially as well as year over year. So we have this wonderful 180, gosh, I remember when it was double digits, our average order size. We're up to 183. A lot of that is mixed shift change over the years. Slide 15, gross profit per transaction, but even with last year. Slide 16, up again from last year, but at a lower rate than revenue growth. Employee count rose 7.5% year over year. And remember, that includes that we have a whole bunch of, a couple dozen people are involved directly in the Medici efforts. So I think, what are we growing year to date? About 14%, 15%?

Year to date, and our headcount's up 7.5%. And even some of that 7.5% has to do with really we're standing up a new and unrelated business. So we are keeping our headcount in line and keeping it to less than growth.

Slide 17, loyalty, key initiatives. Loyalty expanded to, oh, this is a good time to talk about key innovations we are bringing to the market and their effect on our business. Our loyalty program, we launched this quarter our Club O Silver. We took 19 million people who were on our email address list, and we moved them into Club O Silver, this new program. It's Club O, but instead of paying $20 and getting 5%, it's free, and you get 2%. They start getting a minimum 2% back on every purchase. And we now have 19 million members in it. Where we have some learning to do is we've gotten pretty good at using coupons, discount coupons, to cause activity among those 19 million people when they received our emails.

We'd like them to start using reward coupons, but there is a migration path from getting them to use the discount coupons to getting them to use reward coupons. Our experience has been that there's kind of a 60-day hiccup that when you make that transition and you start getting people off the discount coupons onto the rewards, we're discovering for about 60 days it hurts you. And then it's certified by day 60, you should be breakeven, and then going forward. Turns out even to be what we've learned more complicated than that. But this is a focus of this is a focus now for our marketing team and our marketing. We've got a terrific fellow, Saum Noursalehi, who's been here forever. He's actually a developer by background, but has stepped up, and in a pinch, he's been our CMO on a number of occasions.

But we want to get him. He's also a great innovator. And I want to get him back to being our chief growth officer, really, working with me. And we have a wonderful new hire with our stunning pedigree, a woman who's coming to assume marketing roles, leadership in time. In fact, I think she's quite close to it now. So we really do have to manage better this Club O Silver, the testing of how to make people respond to reward emails. We have years of experience getting them to respond to discount coupons by using rewards and so on and so forth. So there's going to be some learning involved in that and some learning cost. Our Club O Gold has already become a very significant part of our business and is growing quickly. Club O Silver is just a new free layer.

It's not out of the question that you'll see us introduce an even higher end layer sometime this year at around a $50 price point. Medici. Medici is, if you look up on YouTube, I think I put the link in the letter I wrote to shareholders. I gave a talk a year and a half ago in Amsterdam at the first global conference on Bitcoin. I was the keynote. And I got up and said, "Bitcoin's not the main event. The main event is this underlying technology called the blockchain can change everything." We got a real jump, it seems to me. We got a real jump on the world.

We put together some crypto enthusiasts, developers, lawyers, our developers, and a bunch of finance folks I knew, people from Wall Street. And we started working on creating a crypto Wall Street 10 years or, shoot, over a year ago. We applied for a number of key patents. Now we have five in, including things that recreate Wall Street as we know it within the world of crypto. We spent $3.2 million this quarter directly, and it'll be $8 million by the end of the year. That's direct cost. But when you add shared overhead services, dual-task employees, load factors, the real cost of this isn't $8 million. It's probably something closer to twice that. I made the decision to do it and to do it much bigger than I thought in January. I'm happy to see that the world seems to have gotten the joke.

Starting with Mr. Dimon, who I happened to, well, I happened to have known him 20 or 25 years ago, fine fellow. He wrote a letter to shareholders in April, basically saying Wall Street, Silicon Valley is coming to eat Wall Street's lunch, and this crypto world is going to disrupt the world of fintech. And since then, it seems that every week there's another announcement from a bank which is forming a study group to study the blockchain or a consortium of banks. And we're getting invited all over the world to these centers that are springing up, funded by banks to study applications for this.

So I'm happy that people go back and see. I was talking—I mean, I've even seen a number of people saying this is the biggest financial innovation in 500 years and all that stuff. Well, we were there a year and a half ago. We knew that.

We started working first in a tiny way and started gathering the people and doing things, but it blossomed, and I don't regret that we are hitting the - I may regret that we're not putting the pedal to the metal even more than we are on this. The world is recognizing that the blockchain is going to change history. I think it may be more significant than the internet itself for some political reasons I described in my letter. There's all kinds of central institutions that get disrupted. They get turned into buggy whip businesses, so hang on a second. Just look at my notes, so we have been filing for patents surrounding this technology. From the beginning, we worked with expert firms such as Perkins Coie, Bracewell & Giuliani, and Jones Day.

And we filed provisional patents long before everyone else seemed to be even aware of how this stuff could fit together. For example, I'm just going to throw this out. The application of crypto to ETFs. We've got that. We have a patent pending on it, and I haven't heard anyone even talking about that. And folks listening probably know how big a part of the world of the capital market is ETFs these days. Well, we have a, I think, two provisional patents filed on that. That there was nothing that we could find. There was nothing in the record. And we're having really blue-chip law firms do this patent work. So we think that these patents may turn out to be amazing. And that's just, I mean, that's just small potatoes compared to what we think's possible here. It is possible.

Every day, it seems there's more stories about another group getting funding and so on and so forth. It's not out of the question that some of those folks are going to, in a couple of years, find out that they're building on land that we own, that we stake claims to. But in any case, we built these systems. We issued the world's first crypto bond to me and then to First New York, a very prescient firm there in New York. Leading edge, and so I do expect to see that bond unwound soon. On August 4th, we announced the launch of tZERO at a news conference at NASDAQ. In late August, we signed an agreement to acquire SpeedRoute. That SpeedRoute gives us a node in the national equity system. They route 2.5% of equity orders in the United States, and it's growing like crazy.

And the point of buying that, not only is that a fine investment on its own, by the way, we paid a fair price. We paid a stiff price to Mr. Cammarata. Mr. Cammarata, Joe Cammarata, had built it. We paid a stiff price, but a fair price. And just on an earnings equivalent basis and such, we think it's going to be a fine investment. But you combine it with, it gives us a way that we can, having built all this crypto technology and patented it, we can start exposing it to the national market system. People are already all your brokers are all plugged into it already. Because we've acquired this node, we can start bringing this very easily to the national market system. We filed a shelf registration with the SEC statement in March, which was approved. It was a kind of a vanilla shelf registration.

Then we resubmitted it and added crypto securities. So the first shelf registration said this: an S-3 to cover common stock, bonds, futures, warrants, etc., etc. Got approved. Then we resubmitted saying crypto securities, as you may imagine. That caused - that went down sideways. And we've had three rounds of comments from the SEC to that. I guess we made our fourth set of replies. We got our fourth round yesterday.

Rob Hughes (CFO)

Fourth round of comments. We're about to reply.

Patrick Byrne (CEO)

We're about to. Yeah. We just got our fourth round of comments now last week, and we will be submitting our fifth reply tomorrow or whatever. It's causing. But the SEC has been, notwithstanding our long history, has been an amicable and professional partner to work through this with. I do feel we're starting to get asked questions that don't have much to do with our registration statement, but we are being super cooperative with all regulators and are sitting down with them when they ask to meet us. Just came back from Washington on one such trip. We sit down and explain open book. We have an open book policy with the Feds so they can understand this. Because I know it is going to be a sea change in the capital markets. So far, the relationship has been productive. I hope it stays that way.

I mentioned the five patent applications for technologies surrounding an innovative way to bring transparency into the world of securities lending through issuance of what we call short tokens. You who are familiar with the company's history may know that I took a special interest in the subject of stock locates and securities lending. And I think that in the process of learning about it, I realized that it's truly the last great opaque market on Wall Street that's ripe for disruption. I think it's the dirty little secret on Wall Street, how much money they make on securities lending. I think we have a better mousetrap, and we have institutions lined up on both sides to use it, both hedge funds and beneficial owners. So you may be seeing that launch within well, on a test basis, we did one $10 million short token.

And we're going to - you may even see that it's at a point we can turn it on - we can turn it on tonight for the whole world. We're down to the final crossing of T's and dotting of I's as far as legal matters before we expose that to the world. But it's ready to go. So human capital. I don't want to miss this. I made a - we've never had the kinds of - we have terrific human capital here and systems to develop human capital and E2O systems that let us cooperate with each other online and such. But it's always beneficial to get some outside thinking in. And we have really developed a stream of really qualified high-end Mitch here, being an example. Mitch is the guy who built Skullcandy. He was the adult supervision at Skullcandy, is how I would put it.

He might be more modest. But Mitch built this $2.5 billion company as General Counsel and CFO. And Mitch was also similar positions at BitTorrent.

Rob Hughes (CFO)

BitTorrent.

Patrick Byrne (CEO)

Anything else?

Rob Hughes (CFO)

Razer Inc in Singapore.

Patrick Byrne (CEO)

Yeah. So Mitch has built some pretty cool companies. Anything else? What else do you want to say about it?

Rob Hughes (CFO)

That's enough.

Patrick Byrne (CEO)

Mitch is a serious player and comes as our general counsel, but can spread his wings and have lots more positive contribution for us beyond that. That's a big difference for us. The difference in the systems we have to develop human talent and the fact that we now have an inflow of extremely talented and experienced people. The cause of this really is Stormy Simon. She's made waves in the industry. What is happening is that strong entrepreneurial people in e-commerce, especially women, are applying to work for us. She goes out to these conferences where she's become a legend, and she gives these talks, and she comes back with resumes from all kinds of very powerful women and other companies who feel maybe that they've hit glass ceilings, and they're applying to us.

So we're getting this terrific talent from women and also men who get to know Stormy and want to come work here. Okay. Now, I was just checking my notes. Is there anything else I wanted to say? No. Let's leave the call open to questions. We'll go with there's a number of people who want to ask questions. So let's limit it to two questions per person. And then, oh, Mitch, somebody emailed in a couple of questions. Would you start with that?

Rob Hughes (CFO)

Absolutely.

Patrick Byrne (CEO)

Then we'll go to two questions per person so we can get through everybody and go round robin.

Rob Hughes (CFO)

Okay, Patrick, thank you. Two questions have been emailed in, and then we have several that are on the line. The ones emailed in, the first one from Sang Park, a shareholder. "Could you comment on your moat for the tZERO platform? How can you prevent another firm from doing what you're trying to accomplish better than Overstock?

Patrick Byrne (CEO)

There's a few moats. One is, of course, patents. When you can patent, those are good moats. Secondly, it's turning out to be the case that the law, you see all these people making announcements. I got to tell you, from our experience, a lot of the announcements in this field is vaporware. Just absolute vaporware. Some folks who are making announcements don't even have technologists yet. And what they're learning is it's really hard to hire technologists in this field. Utah has, for some reason, in the last year, become known as a bit of a microcenter in this field. Maybe it has to do with us taking Bitcoin. We've had all kinds of crypto talent apply to us. And we have built out a very strong tech team in this area. And that itself is quite unusual.

So I'm in some of these other companies. And I mean, their real stumbling block is getting the talent who can do this kind of work technologically. And we have it. In fact, we're growing that team nicely. I want to probably grow it to two-to-three times its current size just because I think that the team itself has such intrinsic value. So that's another moat.

I'd say another moat is we have very, between us and our experience in the famous lawsuit, which really all regards the microstructure and the settlement system of Wall Street and contacts we made 10 years ago in the course of that lawsuit, it was not, basically, we got a bunch of those kinds of folks who really understand the microstructure of the market together with a bunch of our crypto technologists, our development leaders, lawyers, lured everybody up to the hill and let them start inventing things. And that started over a year ago. And so that's a pretty, there's a pretty odd confluence of ingredients here.

While other people are scrambling around trying to get money so they can then go and hire the right technologists and things like that and find the right projects to work on, we have a number of business models that are just rolled right out of, "If you apply this technology to Wall Street, various processes on Wall Street." We didn't pick the most obvious ones, which were really payment systems. We knew that the banks were going to go for payment systems, and we had some good sort of—a little birdie whispering in my ear that that's what the banks wanted. But that's what we stayed away from. That's the big obvious one is going to save tens of billions of dollars for the financial industry. But we went to other areas. So I think we have a nice head start. We have some patents.

We have a team. We have funding. So those are the moats. But ultimately, it's going to come down to how quickly do we innovate and learn versus the other folks.

Rob Hughes (CFO)

Okay. Another question from Mike Arnold, a shareholder. "What sort of IP protection do we have on tzero.com? And related to that, do we have patents covering the software code to trade securities peer-to-peer? If so, is your plan to out-license the technology to the brokerage industry, or are we more focused on keeping it proprietary and going to market solo?

Patrick Byrne (CEO)

Well, the IP protection, first of all, is the patents. And we have five provisionals applied for. Now, provisional patents normally - a friend said you can spit on a piece of paper and submit it and say, "I have a provisional patent." But we got Perkins Coie to do the patent research. And let me tell you, a year and a half ago, this was wide open. A year and a half ago, I stood like, "Go and look up this speech on YouTube where I'm up in Amsterdam talking on the stage about you can. This isn't about Bitcoin. This is about you can change Wall Street." And how few people even got it a year and a half ago. Now the whole world gets it. If you're paying any attention at all to the financial press, every day there's more announcements about this. Well, we got there.

We got the lawyers together with the crypto people, with the Wall Street guys, and so part of it is we really have first mover advantage. It's kind of odd how there are stories coming out now in certain respected journals, which go way out of their way, not to mention us. We are the unquestioned leader in the application of crypto as financial technology. We got there first. We have these patents applied for. Everybody knows us. We've built systems. We've launched systems. We've done a private crypto security. We're ready to do a public crypto security. We're in negotiations with all kinds of major people on Wall Street who invite me in. And I go in thinking it's going to be like, I'll be like Damien in the movie The Omen, where he goes to the church and his head spins around on his axis.

And I thought, but actually, everybody's being super gracious, and they understand. And we seem to be on the same side. There's a whole new generation of leadership in some of these institutions. We all seem to be on the same side. They understand the power of this technology to disrupt the world, and they don't want to be disrupted. And they actually see the value of it and so forth. So these are the different moats and approaches we're taking. As far as licensing it, absolutely, we want to license it. We're not about creating a monopoly. We want to break up monopolies. This is about we're doing God's work here with this crypto stuff. We designed it. We built it. We want to license it to people who are going to use it.

This is absolutely not about trying to create an alternative to the system and force adoption, but it is to license throughout the system, and we've had unbelievable meetings and conversations with the most high-level people you can imagine across Wall Street, major institutions who want to be part of it.

Rob Hughes (CFO)

Okay. Another question emailed in from Eric Burnside, an investor with Acme Capital. "What are the biggest challenges management is facing in operating the business, including new fintech ventures?

Patrick Byrne (CEO)

Let me just start with the main business, what we used to call our core business, but core means something else internally now. Just the retail business. We did conduct a long strategic review, and we found two real levers that we can pull, that we can pull over the next four months. One of them is starting in a couple of weeks, and it'll take four months. And another one will take a few months. I don't want to describe them as challenges. All I'm going to say is there's a big opportunity on the marketing side and a big opportunity on a change in how we do our sourcing. I'm not going to say specifically what they are because they, for competitive reasons. But we realize we've been marketing very, very well to certain groups in the population, but really missing some groups.

And we've been devising plans in the last couple of weeks and working with outside parties to figure out how to get those groups we've been missing. Internally, I would say the other biggest challenge at this point is competition. Competition is really heating up. It's heating up from brick and mortars. And by the way, I think that in general, the gods of economics think that the most efficient model is brick and click. There's such synergies between having a brick operation and a click. Because look at how much money we spend on marketing. If somebody's a brick and click, they get all the benefit. Walmart and Target got in around 2005 or 2006. They got their websites sorted out and were good. And then they just started putting it on every receipt. Visit target.com, visit walmart.com.

So with no marketing costs or just hanging some signs in their stores, they start getting traffic. And that's when they exploded and blew by us. Until then, I think we were bigger than they were, by a good margin. There's just such efficiency with brick and click. And there's a number of large brick and click, IKEA, Bed Bath & Beyond, others I won't name who have made clear over the course of the summer that they are going to be charging, that they missed the first generation of e-commerce, but now they're charging into it. There's also some pure plays who are coming in, who are getting lofty valuations and lofty amounts of capital put in their pockets. We have a $2 billion business that's been profitable. I think we've been the most consistently profitable pure play retailer around for about five years.

This is our first losing quarter in 15 quarters, is it? Something like that. So what we could do with $500 million or $200 million to burn like some of our competitors is amazing to me. So a third challenge is competition. I will put it this way. A third challenge is competition from the brick and mortars who are going to now be pushing hard into e-commerce. We've not really been players before. And a fourth form is the competition from the pure plays who are getting huge funding and huge buckets of cash. And who are going out and spending suddenly. Suddenly, they're bidding two or three times what we see as the economically correct price to bid for a term on Google. They're spending two or three times that. And they're just throwing money, and their shareholders are willing to accept $100 million losses.

And they're saying it's going to be that way for however many years and such. So that's the fourth challenge. And I'd say the fifth challenge is the economy. I think the economy, I've said this before, I don't ever think there was a recovery. I think there was a, we re-flated a bubble, and we got to a nothing burger of a couple% growth. And I'm not even sure I believe that because who knows about if they're stating inflation rate and such. So anyway, they've done the best they could with zero interest rate policy. They got us back to nothing of a recovery. And even the air is starting to go out of this recovery.

There's been this whole Kabuki dance about, "Well, we're going to raise interest rates when unemployment gets to 6% and when the sun rises in the west and when this and that happens." Well, unemployment's at 5%. They don't raise. And the reason is the labor force participation rate is the lowest it's been in 40 years, and they really can't. Our economy is really so fragile. The most they can afford to pay is zero. And that affects us as a company. So that would be the last challenge I would hit. Thank you, Mr. Burnside.

Rob Hughes (CFO)

A question from Glen Thorwilde from GDF Investments. "You used to disclose your Net Promoter Score in the earnings presentation. Does it still rank in the retail elites?

Patrick Byrne (CEO)

Yes, it does. Our Net Promoter Score is running just where it was or a point or two higher than last year. Yes, I don't know why we stopped. I think we decided our deck had just gotten so thick. But yes, our Net Promoter Score, customer satisfaction, is up. It's extraordinary. It's like 72% last day. I happened to check a few days ago. And we get that score every day. And I mean, I don't think it's. Don't hold me to it if it's 72%. That's really what it is as an average. But it runs very high, at least in the 60s or low 70s.

Rob Hughes (CFO)

Great.

Patrick Byrne (CEO)

Next question.

Rob Hughes (CFO)

Okay. A question from Richard Kreger from Source Grp. "Can you comment on the status of the new office building, the headquarters, as well as when you expect it to be complete? Second, can you give some guidance on what improvement the free cash flow should be in the year after completion of the capital expenditures to build the new headquarters?

Patrick Byrne (CEO)

Sure. The new headquarters, our goal was to get it all in for under $100 million. The full cost of building it should be about $98 million with furniture, with kit and caboodle. And we've gotten back about $10 million of various government incentives. So you might think of the whole thing as being about a $90 million cost, of which we're putting up half, the bank's putting up half. The economics, just continuing on the economics. In our current headquarters here, we're spending $5 million. If we had re-signed the lease, we'd be spending $5 million. We have a data center where we're spending at least $2.5 million. And for that, we get. Let's just call it X amount of seat capacity. In the new building, we'll be spending about.

Well, we'll have about 165% of X capacity for people. We will have the data center right there with everyone. We will have combined these two forces from opposite sides of the valley. So we have people driving back and forth 15 miles a day now between the two buildings. And we have a $100 million payroll. How much does that inefficiency cost us per year? On and on. So you look at all these efficiencies, and you say, "Well, the whole thing's going to cost, it's the outlay of about $46 million upfront or call it $50 million upfront. And then the debt service on $46 million." And what was the debt service on the $46 million, Rob? What's the debt rate?

Rob Hughes (CFO)

The interest rate is 4.6%.

Patrick Byrne (CEO)

So we're talking about reducing an ongoing expenditure of $6-$7 million to an expenditure of a fraction of that, but having to put up $50 million to do it, but getting all these operational efficiencies and 65% more space. We will be moving in, moving furniture in in June, and we will be certificate of occupancy and moving in ourselves in August of next year. And then once we get through all that transition, and of course, there's costs associated with that transition, I do expect, even assuming no operating efficiencies, yet a couple, few million dollars a year dropping to the bottom or a couple of dollars a year just in rent savings. And this has been designed so the heat from the data center heats the building in the winter and all this kind of stuff that it's not frivolous. It may look odd.

You know what? It may look frivolous to people because, well, it's a peace sign. Well, every little piece of this has been thought out. That peace sign is under the approach path of the main runway to Salt Lake City International Airport, which is a hub for Delta, and 22 million people a year land on that flight path. And they're going to look out their right wing and see this iconic building that's both a peace sign and a giant O about 500 feet beneath them. I think that has some value. So it's clearly going to be a money saver for us even before we get to efficiencies. It's going to be a great branding event. It's going to be great for the morale.

And even the fact that it will make it easier for us to recruit people and retain people because it's going to be, as Fortune Magazine wrote a story just a week ago, where they quoted me, I think, as saying it'll be the hippest place to work. It's going to be just a great building. So just a moment. Okay. What part of that question from Mr. Krieger? Thanks. What part of that question did I miss? The new building, when we're moving in, the economics of it?

Rob Hughes (CFO)

Cash flow.

Patrick Byrne (CEO)

You covered it.

Rob Hughes (CFO)

I think we covered it.

Patrick Byrne (CEO)

Anything?

Stormy Simon (President)

No, other than in our last conference call, we had even more information about the new building. Those slides are still out there on our investor relations website.

Patrick Byrne (CEO)

David Kanen, AEG, oh, Aegis Capital. Tian? Okay. Go put him through. Oh, sorry. I thought that he's next. Well, we'll put you next. Any more questions? Okay. Oh, sorry.

Rob Hughes (CFO)

Hey, are there people? It looks like those are the emailed questions.

Operator (participant)

Ladies and gentlemen, if you would like to ask a question over the phone, please press the star and then the number one key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. One moment for questions.

Patrick Byrne (CEO)

Okay. Well, thank you. I'm sorry we broke our 14- or 15-quarter winning streak on this. On this quarter, we spent five. I'll throw one other thing out. Our new general counsel may get heartburn over this. Our lawsuit, I think, is we're going for a low nine-digit number. I think we'll be in trial in March, and I think they owe us. I think they owe you $100 million. And that's what our damage model supports: 100, 100 something, plus or minus, a few giblets. And we have a great case. And I think they're shaking in their boots. We have them dead to rights. There's a story coming out maybe within hours. And I happen to know that because somebody's been fact-checking with me.

Another story, there's a couple of stories in the works that I hope hit over the next weeks or maybe even days that will maybe make it somewhat more explicable why I have been on the warpath I've been on for 10 years. There are some people who tried to destroy this business, specifically went to extraordinary lengths to destroy this business 10 years ago. You will be reading all about it quite shortly. They owe us money. They owe us a nine-digit number. They owe us a nine-digit number. Now when those stories hit and the stories are out, the trial is now scheduled for mid-March. We have fought 10 years. We've gotten, we're a few months away. I think that we, well, I guess I can't predict what we're going to win, but our case is for a nine-digit number, and it's worth fighting on.

Mitch, how much, well, you take over from there.

Rob Hughes (CFO)

Hard to comment on ongoing litigation other than we believe we have a great case, a great law firm. We've been prepping for it. We will see in the next few months how that all turns out, but it could be very favorable to us. Yes.

Patrick Byrne (CEO)

Anything else to come before this, Gustavo Arnal? Well, thank you very much. Thank you for your faith and look forward to talking to you in probably early February.

Stormy Simon (President)

Bye-bye.

Patrick Byrne (CEO)

Stormy, would you like to add anything?

Stormy Simon (President)

Guess not.

Patrick Byrne (CEO)

Thank you.

Operator (participant)

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.