Bed Bath & Beyond - Earnings Call - Q4 2017

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to the Q4 2017 Overstock.com Incorporated Earnings Conference Call. At this time, all participants are on a listen-only mode. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Mr. Rob Hughes, Senior Vice President, Finance. Please go ahead, sir.

Rob Hughes (CFO and SVP of Finance and Risk Management)

Thank you. Good afternoon and welcome to our Fourth Quarter and Full Year 2017 Earnings Conference Call. Joining me today are Dr. Patrick Byrne, Founder and CEO; Saum Noursalehi, President of our retail business; Jonathan Johnson, President of Medici Ventures; and Senior Vice President, Seth Moore. Let me remind you that the following discussion and our responses to your questions reflect management's views as of today, March 15, 2018, and may include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in the press release filed this afternoon and in the Form 10-K we filed today. Please review the safe harbor statement on slide two. 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. Patrick, with that, let me turn the call over to you.

Patrick Byrne (Founder and CEO)

Thank you, Robert. Welcome, everybody. We have 800 viewers. Welcome. I'm going to tell you a little story before we start. Some months ago, last summer, when I got thinking of doing something strategic with this company, one of the things, as I mentioned in the last quarter, was taking it private. I mentioned that in the last quarter conference call. I went to see my rabbi, and my rabbi, quick as a wink, and some of you know my rabbi, quick as a wink, said, "There's a case you got to think of called Texas Gulf Sulphur.

It's a very famous case, and you have all kinds of strange and difficult-to-understand assets in your company, and you need to make sure these are all fully explained to the public before you could ever do something like that." So I took it on myself to make maybe a much larger effort in the last six months than I have previously, for about 10 years, to talk to anybody. My goal here is not making stock go up, down, anything. I have no opinion, and I will repeat how risky various things are that we're doing in blockchain. But I feel my job is to turn all of our cards up on the table so the market can figure out what things are worth, and then everyone can make informed choices.

So that's my philosophy, and that's why I've taken such lengths in the last earnings call, and we're going to take such lengths in this earnings call to show anyone trying to understand, and remember I used to be a Wall Street analyst. I know what it's like. I'm trying to lay everything out so people can figure out for themselves what this is worth. Strategic options. I have a shock collar wired to my neck, and if I say one word, Rob Hughes is going to electrocute me. Seth Moore has a statement to read.

Seth Moore (Chief Strategy and Analytics Officer)

Yeah. We announced on our last earnings call that we'd engage Guggenheim to consider strategic alternatives, one of them being the sale of our e-commerce assets. This work is ongoing and will provide an update when appropriate. That said, our philosophy is that we should always run every asset like we intend to own it forever, and our strategy discussion will be framed that way. That's a position we think our shareholders should appreciate as well as any potential acquirers.

Patrick Byrne (Founder and CEO)

Can you say anything else about the process or where we are in this process?

Seth Moore (Chief Strategy and Analytics Officer)

No. Due to confidentiality and everything else around the process, we don't want to comment further.

Patrick Byrne (Founder and CEO)

May I say anything about this, Seth?

Seth Moore (Chief Strategy and Analytics Officer)

No.

Patrick Byrne (Founder and CEO)

If you hear me get electrocuted and fall to the ground, you'll know. Okay. In a nutshell, here's a montage. The whole story of what's going on is contained in these four photos. It's kind of silly. I know it's not normal convention to talk directly about a competitor, but it's kind of silly not to talk about Wayfair. It's the elephant in the room. It's changed the whole landscape of the industry we're in. For example, in the upper left-hand corner, you see they are spending eight times they're running eight times as many TV spots as we are. That's just one example. In the upper right-hand corner, you see our earnings history. There in red, you see a nice internet company dribbling along at basically 1%, struggling to make $10 million, $15 million, $20 million, $30 million of pre-tax income per year, our retail business.

That picture of those red bars is as rare as a unicorn. Where are you going to see that? But yet, it's just silly not to acknowledge somebody has come in, taken exactly our business model, and has now lost $700 million in the last four years. There's such a thing as margin compression, and that's margin compression when we have a direct competitor who's just doing this. They just lost $250 million in pre-tax operating income. So we've decided we can't play that game. Hello? Someone just broke into our line, operator. We decide we can't play that. I've decided we can't play that game any longer. We're in a knife fight, and it's time we're going to answer in kind. And we think we can do so far better and more efficiently. I think we're the most efficient e-commerce engine out there.

We've shown it in the past by showing profits. Now we're going to show that we can play the game that everyone else played, and we can do it far better than they did. In the lower left-hand slide, and we'll be going into these slides a little bit in more detail later, their share of voice, that's a leading indicator. I'll tell you how we get there, but the fact that there is a cross that we have now crossed with a company that was three or four times our size and market cap four or five, six times, whatever, we've now actually closed in terms of share of voice that's a very important leading indicator. On the lower right-hand corner, you'll see another rare thing. Well, no, everybody sees hockey stick projections all the time. What's rare about this is this is not a projection. This is actuals.

We're doing something unusual in that we're showing you January and February customer growth. So this isn't just a projection. Saum?

Saum Noursalehi (Member of the Board of Directors)

Yeah. I would just add, up until now, we've really tuned our models for short-term profitability, as you can see from the historicals. The last two months or so, we're really now starting to optimize for future profitability and lifetime value of the customer.

Patrick Byrne (Founder and CEO)

Yep. And have gotten to the point we can do that. So that has led to this slide. What really happened last year is we lost $12 million, net, net, net, on Medici and $14 million on retail, net loss before tax changes. What we are doing is we're taking our net operating loss, our NOL, that we had previously, that years ago, four years ago, we booked. What's the DTA, Rob?

Rob Hughes (CFO and SVP of Finance and Risk Management)

The current tax asset.

Patrick Byrne (Founder and CEO)

Now that we are changing our strategy and are adopting the strategy that we have always eschewed, it's time to flip that back. So we're getting that that's a non-cash tax entry, a book entry, as well as Trump's tax cuts. It changed the value of that underlying NOL. So there's some non-cash tax cut stuff that takes this to $110 million, and there you see at the bottom what's going on underneath that stuff. The result is this horrible-looking number of $110 million, but $84 million-ish is that non-cash tax stuff and then negative operating cash flow. Moving forward, we're going to go into the retail business first, both the strategic overview and some particulars of what we're doing. So first, just again, in the big picture, we have another this is our weekly new customer growth. Here is our monthly new customer growth.

Sorry, there's a few seconds delay in the system. We have broken the back of the downward spiral.

Seth Moore (Chief Strategy and Analytics Officer)

Now, I think part of the value of these metrics that we're sharing around share of choice, traffic, new customers, those are to be understood as leading indicators of what a growth strategy should produce.

Patrick Byrne (Founder and CEO)

Yes. That's a good point.

Seth Moore (Chief Strategy and Analytics Officer)

That when you hit the throttle, you start advertising, and you start bringing in new eyeballs, first attitudes change, then traffic moves. Being in the home category and being highly considered, as that traffic starts coming in, it takes a period of weeks, even up to a month, to make decisions on the buying cycles and the categories we offer, and so then the customers trail next, and then those customers turn into revenues and finally profits as those cohorts of customers you're bringing in start building on each other.

Patrick Byrne (Founder and CEO)

Right. So these are leading revenues. Great point. Great point. I mean, sorry, leading indicators. And Seth has it exactly right. You're getting the customers, and then the customers start coming back, and so on and so forth. Here's capital raise where I just remind you how we've done this so sparingly compared to the entire industry. Our retail operating margin now, we've added Amazon to this picture. You can see they had, I think, two years of, it looks like, positive. They've slipped back under in a small way. We have now gone negative in our operating margin. And I view that very much as competition from having this kamikaze competitor who has come into our field. It's very tough to run a business making $20 million or $30 million when you have a copycat who's losing $250 million.

Not insurmountable, and we have a way to handle it, as you'll see. But next slide. This is what's going on underneath it. They're just spending three to four times what we're spending. They're running eight times as many spots. They peaked at 13 at one point in one of the weekends before. They're just blowing a bunch of money. And they're renting customers. Far as we know, they're renting customers. Here, even with our terrible SEO results, and I explained this in detail in the last earnings call, that we had starting in May a gradual erosion that just kept continuing of our SEO, our search engine traffic.

Even with that, and when 40% of your business goes into a 40%-70% tailslide, it was quite a surprise to us as it emerged over the course of last year, and it's a heck of a lot to overcome. And yet, even given that cataclysm worse than we've ever had, our customer acquisition cost stays better than Wayfair. Seth, any comment on that?

Seth Moore (Chief Strategy and Analytics Officer)

Yeah. It really speaks to the efficiency of our engine that through technology and through a very strong platform, even with a bunch of free traffic pulled out of the system, we still had almost a third lower customer acquisition cost than our next closest competitor.

Patrick Byrne (Founder and CEO)

Right. So this is that blown up, that larger slide again. This is, in a nutshell, what's going on. It's awful tough to maintain a business at 1% when we have a competitor doing this. And it's silly to talk about we can talk about our affiliate program if you want, but at the end of the day, this is the main event. This is the elephant in the room. We have a direct competitor who's adopted this strategy. Yet again, yet again, and just not that I want to sound sore about it, but there's just been 18 years of people coming in and losing. We took a bunch of names off that other slide, so you could read it, but of all the competitors who've come and gone and blown $500 million-$1 billion, and it's just gotten ridiculous. So we have another competitor doing this.

It has very directly affected the results of your company. Fortunately, we have Saum Noursalehi and his team. We put them on it, and as you can see, our competitive visit share as of yesterday, we have going back some months now. What does this go back to? Beginning January? Do I have that? Anyway, we have compressed and compressed Wayfair's lead over us in visits until this, and you need to know this isn't just we're blowing a bunch of money, although we are significantly increasing marketing. We're adopting a strategy much more like the other people. I believe you're going to see much more efficient. We've been playing the wrong game. We've been playing a game that no one else is playing, and nobody seems to care.

So we've switched this other game, and we can play it much better than anyone that has, and you're going to see that, I think, this year. But this was not just achieved through just increasing marketing like other guys, spending eight times buying eight times as many TV ads. This is a combination of in fact, I'm going to go one more slide. This is a combination of our digital marketing efforts, which have gotten. It's like what I dreamed of in 2002, 2004, and it's all happened and even better than I dreamed on machine learning and AI and the teams that are running all the different channels. It is as spick and span and tight as can be. We are pushing more money through those channels now that we have them so good. We are pushing a lot more money through those channels.

In addition, I mentioned in the last earnings call that we had sort of created a whole new paradigm. It happened to be Saum's brother thought it up and a whole new paradigm of marketing that the industry has missed. And we launched it around Christmas time, and it's working quite nicely. We're extremely happy with it. Now, I'll shut up. Saum, what do you want to add to that?

Saum Noursalehi (Member of the Board of Directors)

Yeah. I would just add that that paradigm allows us to target customers early in their inspirational period where they're considering shopping. In addition, in the last two quarters, we've really talked about the in-house marketing tech that we were building. It's really starting to pay back now. So while there is increased spending here, we have a much more efficient engine than competitors at acquiring customers.

Seth Moore (Chief Strategy and Analytics Officer)

We've been asked several times, "Why don't you adopt a growth strategy? Why do you insist on profitability?" Part of it was because we believed you needed discipline around retention and monetization of customers before it makes sense to invest in customers. We'll see as we lay things out over the next few slides. We've made material moves in our ability to retain, monetize, and scale our business without also scaling costs so we get better leverage on our G&A that we think enable us to take up this strategy now and increase the value of a customer to us when we acquire it.

Patrick Byrne (Founder and CEO)

Exactly, and this tells the whole picture. We've taken so much less capital than the other guys. The other guys are blowing it on insane unbelievable marketing budgets. We have something that no one else has had other than Amazon for a couple of years, a profitable B2C e-commerce company, but in the face of that sort of gravitational pull, we have to respond. We can't just be taking body blows and lose market share, so the right path is, and again, I guess I've woken up after 18 years and realized, well, nobody ever cared about our earnings, and nobody seems to care about Wayfair's losses, and so or other people's losses.

And so if that's it, it's Warren Buffett says, "Sometimes life is like you play the piano all the way to Carnegie Hall, and you get there, and somebody hands you a violin." I thought the game we were in was, "Let's make money and see who can do this smartest and most efficiently and the least capital." Turns out that's not the game we're in, whether other people have forced us on it or what, doesn't matter. But we have to wake up. We're going to play that game, and we can do it this year and play it better than anyone has ever yet played, adopt this sort of, and I give credit to Bezos.

This idea of him saying early on, "It's going to be about growth and not GAAP net income, but cash flow." We have this very interesting property to our business I've mentioned several times before, and it is that normally businesses grow like a brick factory. If it's growing and it's profitable, it sucks up cash, even if it's profitable, because you build inventory and accounts receivable and this and that. But normally, but our internet businesses, because we have this odd negative cash flow cycle, we get paid in three days, and we pay in 30, 45, something like that. Anyway, because of that, we generate cash as we grow. Bezos figured that out and did it with Amazon. He's the only guy who sort of got to escape velocity that I know of. We got to escape velocity, I mean, with profitability.

I'm super confident we can switch to this strategy, crush in the game that we've never played before, but we will now crush in that game, and anytime we want, we can switch back to the other strategy, but if this is the game that we are in and either our competitors have forced upon us or we've woken up to and realized it's the right way to play at this point, we don't want to lose market share. I'm super confident we can adopt this and do support with better numbers than anyone else you see on the field. Saum?

Saum Noursalehi (Member of the Board of Directors)

I think it gives us an advantage. When you've had to optimize your engine on very little capital and you've really tuned that engine, it's much easier than to go the growth path, and that's the position I think we're in.

Patrick Byrne (Founder and CEO)

Yeah. When you have all the capital in the world, it's a luxury. Now, we had to build the efficient engine first. So next up, Saum, how are we going to do that? Why don't we talk about the retail engine itself?

Saum Noursalehi (Member of the Board of Directors)

Yeah. So our competitive strengths, and as we've said on previous calls, we're really focused on price assortment convenience. Our pricing is significantly better than our competitors. Overstock customers, as an example, are 11% less than Wayfair's on average on pricing that's displayed on their site.

Patrick Byrne (Founder and CEO)

May I interrupt for a second, Saum, and ask Seth? I know there's some very precise wording on that, Seth. Can you say that?

Seth Moore (Chief Strategy and Analytics Officer)

Yeah. That when an Overstock customer makes a purchase, they are paying on average 11% less than the Wayfair listed price for that product.

Saum Noursalehi (Member of the Board of Directors)

Yeah. That's illegal. I mean, it's on their display price, actually, to be specific. But that's on our matching engine, which matches on hundreds of thousands of products.

Patrick Byrne (Founder and CEO)

I have to interrupt for a second. We had a server error show up on our computer. I don't know, Operator, Crystal, which slide are people seeing right now?

Operator (participant)

I'm sorry, sir. I don't have access to the slides on my end.

Patrick Byrne (Founder and CEO)

Okay. Well, are you well? We just had a server error show up on our computer. We can't tell if anyone's seeing anything. We will just a moment. Just a moment. Let's advance back. It looks like it's working now, but we'll have somebody check.

Saum Noursalehi (Member of the Board of Directors)

Okay. We should be on slide 18 for everyone to know.

Patrick Byrne (Founder and CEO)

Good. Okay. So, Saum.

Saum Noursalehi (Member of the Board of Directors)

Yeah. On assortment, I just want to highlight some of these items. We have a supplier platform that we know is very efficient based on all the feedback we've heard from our partners. It allows us to really scale assortment without human capital. It's all about automation and incorporating machine learning to optimize SKUs and onboard partners quickly. Lastly, on convenience, we've really tuned our site and our mobile experience for speed. And that's just not me talking about it. We've won awards the last five years from Compuware and other companies like Gomez in the past for site performance, which we know is a huge benefit when it's for conversion on the site. So our whole infrastructure was designed with page speed in mind.

Patrick Byrne (Founder and CEO)

I'm going to mention something. Saum is so modest. Our machine learning. There have been sort of, in our 18 years, maybe five big revolutions in the technology, say, of digital marketing. We've probably caught three of those revolutions very early and probably missed one or two of them or come later than we should have. This machine learning and AI is the sixth. We are in on the ground floor. I deal with engineers at the largest companies you're thinking of, the largest Silicon Valley companies out there, who are continuously telling me the team that we have assembled here is so elite. What we're doing is so leading edge. They say there's only one, frankly, only one other guy in the field doing this.

Seth recently had, well, Seth has had in the last five months a lot of opportunity to study what other people have. And in terms of on the supply side and on the marketing side, I really think there's us and Amazon. And I have to give credit to Wayfair. I think Wayfair's in the same class. I think us and Amazon are ahead. And then it's kind of head and shoulders back to everybody else in the field. Seth, do you want to expand on that or?

Seth Moore (Chief Strategy and Analytics Officer)

No. I think that covers it really well.

Patrick Byrne (Founder and CEO)

Okay. Moving on. This is not just talk. I'm gauging how long. There's a delay of about 30 seconds. I will account for that in the future. Moving to the next slide, which will show up shortly for you. I'm going to wait till it shows up, and then this slide will be gone. Okay. Copy. This is not just our opinion. We have won all kinds of awards for Saum's technology and our customer care. Saum, why don't you walk?

Saum Noursalehi (Member of the Board of Directors)

I wouldn't say me. I think we have the best tech team in the industry. So these are awards in mobile, best mobile experience for building proprietary in-house tech like our recommendation engine. And then as well as we have an amazing customer service team. So these are all the awards they've won, including Loyalty360, which was just this year or.

Patrick Byrne (Founder and CEO)

Yeah. Go ahead, Seth.

Seth Moore (Chief Strategy and Analytics Officer)

Yeah. I think really if you look at the last couple of slides about our payments offerings, in-house financing, our customer service program, all of these indicate the improvements that we've made at retaining customers and keeping them loyal, which increases the value of customer acquisition and is justifying this pivot for us to move to a more aggressive growth strategy.

Patrick Byrne (Founder and CEO)

Yeah. And this is no small thing. Even six people don't even know if this were Amazon, everybody would notice this. Six years in a row, our mobile apps have won the award as the best Android, the best iOS shopping apps, our search engine. We started off as a third-party integrator. We weren't trying to be a tech company. We integrated all this third-party technology for all these functions. Somewhere along the way, the guy I call Spock sitting next to me and Saum, Mr. Spock and Saum and some others like them, Commander Data, they started building technology internally that replaced that stacked up against those third-party integration. And we never gave them any advantage. And it's only when they developed technology that could beat all that third-party stuff, we said we would switch to it.

Now, I think we've got. I mentioned this in the last earnings call. McKinsey came and did a study on us. And they basically said, as far as website intelligence and all this stuff, there's Amazon, Overstock, and then head and shoulders down to the whole crowd. That was two years ago, and we're substantially better now. Next, Club O. And Saum, why don't you talk about the importance of Club O?

Saum Noursalehi (Member of the Board of Directors)

Club O members are about four times more valuable than our non-members. In general, we've really focused on investing in our owned customers, which our loyalty program Club O falls under. That grew 47% year-over-year. In addition to that, other owned type customers are email or our mobile apps, which we've talked about. Those customers have the best customer lifetime value, which is why we invest in it. We really think you've heard about the challenges we've had with SEO. These channels or these areas are going to totally usurp or be much more dominant in the coming quarters and years ahead.

Patrick Byrne (Founder and CEO)

Yes. And there's a lot of things we can tie into our Club O program and make things that just keep making it more and more appealing. Partner onboarding, let's go to here. What's going on here that you want to talk about?

Saum Noursalehi (Member of the Board of Directors)

I mean, we mentioned the partner platform being a competitive advantage. This will allow us to quickly scale our assortment as we grow. And so this shows our partner growth, but our assortment is growing nicely with it.

Patrick Byrne (Founder and CEO)

Okay.

Seth Moore (Chief Strategy and Analytics Officer)

This is really critical in that a lot of companies in the past have failed to scale. The graveyards of e-commerce are littered with companies that went from zero to a billion in three years and then died. And the story for virtually all of them was that they failed to extract any sort of leverage out of their G&A. Their G&A grew indefinitely with their top line.

Patrick Byrne (Founder and CEO)

Give me an example of how a company is doing that today. You don't have to name your name, but just.

Seth Moore (Chief Strategy and Analytics Officer)

Yeah. So a lot of these companies, for example, have been driven by manual human curation. If your business model relies on humans picking sets of products, arranging them together to display to customers to create a shopping experience, the more clusters of products you want to display to more customers, the more bodies you have to add to build those curations. And you don't extract leverage on that over time. And there's not just one of those. There are many, many dead e-commerce companies who grew to $500 million, $1 billion, even more, only to discover that there's no leverage in that model over the long run.

Building a partner onboarding platform and a supplier curation platform that's bringing products in, building content, and then doing that curation to create an appealing shopping experience, but doing it algorithmically rather than manually creates an experience that actually scales and extracts leverage on your technology DNA that you can't ever get out of human investment.

Patrick Byrne (Founder and CEO)

Yeah. So for example, we have a competitor, Wayfair, whose, in my view, their business model is just commodifying commodity products and marking them up. And so they have whole teams of people who are just writing, writing, writing and reshooting so their copies and just is distinguishable from other people's. And they can make sure they look new, and then they just mark them up. That's all this human labor that doesn't scale. That's going to go up linearly. In this case, for example, we can have suppliers from the moment they sign the contract, they can actually be live that day. And they can have SKUs on site within minutes once they're partners. Saum, how does that compare with the other big marketplaces?

Saum Noursalehi (Member of the Board of Directors)

On suppliers, what we've heard from our partners is that can take two weeks to a month or more to get the suppliers on site. SKUs can take days or weeks.

Patrick Byrne (Founder and CEO)

Yeah. So I'm going to break just a second to inquire into the sync or lack thereof. Just a moment. Okay. Next up, recent SEO performance. It may be a few seconds away from you. But in the upper left-hand corner of this slide, you will see our recent SEO performance. And ours is the red line. Amazon is the mustard. Wayfair is the second from the top. And this is terrible. Remember, this was 45% of our 40, 45% of our business a year ago. It collapsed. Our SEO collapsed. And it's especially confusing or troubling because we've always been great with Google, other than a hitch here or there. Different theory as to what's going on. This may be due to they switched to a machine learning algorithm last May. So yeah, we're sorry that no one's sorry that we are that this happened.

It began crumbling last May and just kept crumbling through the year. It completely, I mean, this isn't one of those situations where there's 100 different things to fix. There was this big problem. The fact that we haven't had worse results is actually a function of the fact that all of our other channels are just singing. That's especially growing 15%, 20%, even 30%, which is especially odd because SEO is sort of the fresh water in the top of the aquarium. You would think that that and with that cut off, you would think these other channels would really suffer. They have. Yet they're still doing the head pull to screw. Now I'll turn it over to Saum. That was the problem. What did we do about this, Saum?

Saum Noursalehi (Member of the Board of Directors)

Yeah. So we lost rankings, particularly in head terms, which are getting very competitive. And what we mean by head terms is things like online shopping or living room furniture. So that tracks 50,000 keywords on head terms. And while we lost rankings there, we shifted our strategy to the long tail. And so that's why you see index pages climbing. And as a result, our sales climbing.

Patrick Byrne (Founder and CEO)

Yeah. And Seth, go ahead.

Seth Moore (Chief Strategy and Analytics Officer)

Yeah. And you'll see even though the keyword on head keywords has not improved materially, the sales have. As we've expanded those long tail pages ranking, they convert much higher because they have a much higher level of intent.

Patrick Byrne (Founder and CEO)

That's right.

Seth Moore (Chief Strategy and Analytics Officer)

People searching for very specific products. So even though it doesn't replace all the traffic, it actually does a very good job of replacing the sales. And it's helped us claw back a lot of that customer acquisition that we had lost previously and that really kind of bottomed out at the beginning of December.

Patrick Byrne (Founder and CEO)

Yeah. So let's move on to Finance Hub. Very proud, and I actually think that previous graph is also a great example of what these guys are good with. We don't have the billions that other people got, so these guys rolled with the punches. Something crazy happened and just dribbled away over the course of the year, this SEO, and we probably put three or four years of SEO projects together and got them through last year, have still not fixed that underlying problem, but the fact that we were able to respond and switch from the heads to the tails and do this and that and even go from that graph that shows we were as much as 70% down in SEO, and we've only gotten back to 20% or 10% down. That's nothing to cheer about.

When it's 40% of your business, think of how well the rest of the stuff had to do. And now that we're sort of coming up on lapping the point where that degeneration started and it's a smaller part of our business now, it won't have nearly as big an effect. Okay. Finance Hub. I'm very happy about Finance Hub because one of the plays here may be the big mashup, the big enhance between our normal e-commerce world and this world of fintech. There's a lot of directions that can, a lot of places that can emerge. So for example, we now have this $1.99 stock trade, $2.99 to the general public and $1.99 for Club O members. I do see there's about a 45-second lag in the slides.

So I'm just going to power through that and we'll sync it up in post, as they say in Hollywood. We have robo-advising. I'm really excited about. And then we have quite a unique product. There's basically two big robo-advisor out there. Each worth, I asked that earlier, a couple of billion dollars. They had a couple hundred thousand people in them. In our case, what they do is they offer, you come in, they ask you some questions, they infer a risk profile. And then they go up and say, "Well, you want to be in mid-cap stocks? We'll go out and find you an ETF in mid-cap stocks." In our robo-advisor, and then they charge you 25-75 basis points for it. In our case, we go out and we basically create a personalized ETF. There's some propeller head up from MIT behind all this.

They match the alphas and gammas and everything else. And they create a personalized ETF in the sector you want to be in of 20 stocks. I think it's a great product. And we charge $9.95 a month for it. Next up is cars. If you've not been on our car tab in the last couple of weeks, you probably want to check it out and keep checking it out in terms of the quality of the technology, the quality of the search, and in specific, the fact that you can buy warranties and bind right on our site, and you can finance your cars, new car, used cars, even car you already have. You can go there and refinance it. It's a really unique car offering. Anything else you want to say on any of those, Saum or Seth?

Saum Noursalehi (Member of the Board of Directors)

No. That's great.

Patrick Byrne (Founder and CEO)

Okay. Medici Ventures. And there's a nice description of Medici Ventures. You can come back and read. Medici has five areas of interest. Why don't I just hold on for a second till things sync up? Okay. So Medici Ventures has five areas of interest: the personal identity, property and land, money and banking, capital markets, and voting. And if you think of that whole chain, that's kind of a country right there. If you could go into some rich country, for example, and install these systems, and this country could have the most bulletproof, inexpensive, leading-edge such systems in the world. We have 12 investments. What people are across that area, what people are maybe not having tuned in on, is the type of synergy there is among these investments.

And what the guys are building in IdentityMind fits what they're doing in Bitt and in Bitsy and what the folks are doing in etc., etc. There's all kinds of tZERO and Symbiont are wonderful partners at some point. So there's a lot of synergy. This ecosystem may seem random, but there's a real underlying structure to it. Our investments in personal identity and voting. Very excited about IdentityMind. Look that up. It's won all kinds of awards. It's one of the hottest companies in Silicon Valley, hottest startups, all that. SettleMint, some really leading-edge players in Europe we know quite well and are very fond of. And we made an angel investment in that company and Voatz. There's a lot about voting in the air. I'm surprised there isn't more in the general public's consciousness about if we are questioning our national voting system.

How about making it blockchain, digital citizenship. All of the questions can be taken out of it. I think there's people on both parties who don't want to see that happen, having all the rubber taken out of it. De Soto. I mentioned in the last conference call, if you go back and look at the transcript, that we were working on something even more exciting than tZERO and Bitt. I didn't say what it was, but it was De Soto. It took a long time to woo Hernando de Soto, let me tell you. You probably saw some announcements around the end of the year. This is bigger. This is so exciting because I think we changed the lives of 5 billion people. Five years, 5 billion people. We are building stuff, having a team intensely working away on it.

I think that we started this because we thought we could do something good for the world, and we figured that there's, of course, some way I can be able to make money when you build something that's useful. However, I will say that in the course of building this, and we got a bunch of people working many months on it, a whole team is just coming back from Hernando's home in Peru and such, and I've been there about four times in the last six months. It is starting to appear. There's actually a huge financial opportunity here. It's not why we started the project. We wanted to do something historic, but there is actually quite a large financial opportunity here. Now we move into Bitt, and Bitt and the blockchain meets money. We have some nice investments here.

Bitt just made an announcement yesterday and one a couple of weeks ago that we have the first that the mighty island nation of Montserrat has agreed to digitize its currency, and then we just announced yesterday the entire region of the Eastern Caribbean Central Bank is going to digitize the ECCB and Eastern Caribbean dollar, but there is a place right now. It's the only country, only place in the world, Barbados. You can walk in, download an app, go to Barbados, download an app, go to an ATM, put some money on your phone, and that money exists only in the blockchain and on your phone. It's mobile money without a bank account, and you can go into a shop in Barbados and buy something, so again, a lot of people talk about this stuff are ahead. Now we get to tZERO.

tZERO is in the news a lot. It's blockchain meets capital markets. You want to read this carefully. There's a legacy non-blockchain business we quite like. There's a blockchain business that has a number of products. You can read about them there. Digital Locate Receipts. I'll emphasize this is currently in customer in StockCross. It's not been commercially licensed. Rob, how would you describe this? Testing, but there are actually people paying and using it?

Rob Hughes (CFO and SVP of Finance and Risk Management)

Yes. It's my understanding.

Patrick Byrne (Founder and CEO)

Okay. Then, of course, security tokens is the big event. Now, security tokens. We got here a long time ago, frankly. We said that I think this world of ICOs, of utility tokens, is largely a chimera. And largely, people are pretzeling themselves around the securities regs in order to raise money from the public, but not call it a security. And on July 25th, the SEC ruled in the case of the DAO utility token that it was a security. Well, the chairman of the SEC came out a couple of weeks ago, and he said, "Actually, I've never seen a utility token that isn't actually a security token." What that means is, A, anyone's nuts if they keep doing utility tokens. The whole market has to shift to security tokens or else no Americans can be involved.

B, it means that the thousands of things that got issued. I think people have no idea, and I'm sadly in this community with these young folks. I don't think they have any idea what kind of hot water they're going to be in with the SEC if they've raised money and will have raised money and never from the public and just never got around calling it a security. Here's a map, so to speak, of tZERO. The blue is the conventional system, what they do, their different kinds of clients, and how they route using AI into different exchanges and dark pools. We are setting up a security token trading platform. Of course, it is going to be conducted all within the SEC regs.

I will emphasize because I hear there's some knuckleheads out there saying, "Oh, we can't do this." We are the first company in the world. Two and a half years ago, we issued the world's first private blockchain security. And then six months later, in December of 2015, we applied to the SEC with an S3 for Overstock to issue a public blockchain security. It took a year. The S3 contemplates how it's all going to work and how there's this blockchain trading system and so on and so forth. In December 2016, the SEC sprinkled holy water on it, by which I mean they gave deemed approval. They said, "You can sell this to the public." And we did sell it to the public. We today, people, we have, you can go right today and buy a public blockchain security. There's exactly one in the world.

Go set up an account with Keystone and you can buy it. That's out there as described in an SEC S3. That's live in the world. So anybody who tells you otherwise, just tell them what's the ticker. I can name a ticker, OSTK.P. If they're telling you that we can't do this, just tell them OSTK. Or if they say that they can do it, ask them for one ticker because ours is OSTK.P. That's a digital security, the only one in the world. Saum, did you want to add?

Saum Noursalehi (Member of the Board of Directors)

I just wanted to make sure you highlight crypto exchange, which you haven't discussed yet.

Patrick Byrne (Founder and CEO)

You're right. Thank you. The thing is in black on the right side, there is a wonderful business opportunity. We don't want to set up our own crypto exchange. We could take this tZERO wonderful. By the way, the folks at SpeedRoute, I get told again and again by people deep in Wall Street that these are the most knowledgeable guys in the country on routing and exchanges. They are incredibly knowledgeable. It's a very unique company, SpeedRoute. It's the only broker dealer in America with only other broker dealers as its client. It's a specialist in routing. We can take its technology and apply it, integrate to these exchanges, and create a bridge across between these two different ecosystems and a very smart bridge.

However, given Commissioner Clayton's statement, if all these utility tokens that have been issued are in fact securities, then not only are the people who did that breaking the regs, but the exchanges that those coins are trading on, if they're trading a security and they're not an SEC-approved venue, then they're breaking the regs too. So whether we in fact build that dotted bridge has a lot to do, is going to be driven by regulatory clarity. On the next slide, blockchain meets capital markets. You've seen a number of interesting transactions from us since we last spoke, including buying an interest in StockCross. So we're not going to explain how the puzzle adds up yet. There are pieces of the puzzle that we have to reveal, but we can't yet show you the whole picture. But you should be able to fit them together.

We bought an interest in StockCross, which is a self-clearing firm at the DTCC, Muriel Siebert. We bought a prime broker, Weeden & Co., or there's a letter of intent that's been accepted, and there's other things that are being considered. And then lastly, we do have a security token offering going. I warn everybody because, again, I saw some noboby saying, "Well, Byrne says forgets to tell people there's going to be competition." Yeah, there's going to be huge competition. We're talking about raising $250 million and creating an alternative ecosystem to Wall Street. I expect we're going to have some competition. I expect we're going to have some regulators to talk to. It's going to be all kinds of pushback and all kinds of problems. I warn people all the time. It's extremely risky. My money's in it. I think it's a I love it.

The public should stay way the hell away from that security token offering. And even accredited should be very careful and understand what they're getting involved with. Next, just so I never mentioned, or could be accused of not mentioning it, I'm going to mention Ravencoin, which is put this in the category of Texas Gulf Sulphur. I have now officially publicly mentioned Ravencoin. Don't know what it's worth. I probably should disclose. We have over 60 million of these. It's currently trading at $0.03 apiece, $2 million. Nothing to get excited about. Who knows? But it's not our coin. It's an open-source project of which we became quite enamored. And we threw in several million dollars of developers to help it along and such. It's a very interesting project. And that's enough. So now moving to retail strategy. We have strategic options.

Seth, why don't you comment again on the strategic option you're managing?

Seth Moore (Chief Strategy and Analytics Officer)

Yeah. So again, like we said at the top of the call, we announced last call that we'd engage Guggenheim. We're considering strategic alternatives, including the sale of the e-commerce assets. Because the work is ongoing and because it's confidential, we're not going to comment further until it's appropriate to do so with the public.

Patrick Byrne (Founder and CEO)

Can I say anything else, Seth?

Seth Moore (Chief Strategy and Analytics Officer)

Nope. That's it.

Patrick Byrne (Founder and CEO)

That's it. Okay. Shock collar and squeak through. Okay. I will not comment on that. But I feel that I probably should not say a word past what you've said.

Seth Moore (Chief Strategy and Analytics Officer)

Yes.

Patrick Byrne (Founder and CEO)

Growth strategy, Saum?

Saum Noursalehi (Member of the Board of Directors)

Yeah, so we've built one of the most efficient pure-play e-commerce businesses, and we've delivered consecutive years of profitability. Our focus going forward, as Patrick has mentioned, we're going to go after growth now and market share, and we're going to do that by focusing on our technology, which has given us these great results we've had the past few years, so doubling down on things like AI/ML and increasing our digital marketing.

Patrick Byrne (Founder and CEO)

ML is machine learning.

Seth Moore (Chief Strategy and Analytics Officer)

Yeah.

Saum Noursalehi (Member of the Board of Directors)

Thank you. Yeah, good point. And so we're also increasing marketing. But with that, we're doing it very intelligently with in-house tech and really finding the best growth opportunities across all our channels and finding audiences that are the most profitable long-term. So it's the shift in strategy from short-term profits to long-term customer lifetime value. And that's really what we're going to be doing going forward.

Patrick Byrne (Founder and CEO)

Well said.

Seth Moore (Chief Strategy and Analytics Officer)

Yeah. We really want to see long-term free cash flow. That's what we're trying to liberate here.

Patrick Byrne (Founder and CEO)

Yeah. We've had lots of free cash flow before. It's going to take, I think it takes as you shift the gear from one strategy to another, there is an effect. I used to describe it when we went through different shifts. It's like if you're on a speedboat on a pond and you just hit the throttle, the first thing that happens is you actually sink down and you plow, and your gas mileage is quite bad for 100 yards, and then you get up on the plane and then your gas mileage gets really good. So we have broken, we have done, we have anyway, distribution facilities. We actually think we can add two distribution facilities this year at not much cost and get 95%-98% of the country within two days. Accelerating private label strategy is working.

We kind of not discontinued, but this was much smaller for a decade than it once was. It's now been taken over and somebody is charging with it and the expanded club rewards program. Saum, you want to say anything?

Saum Noursalehi (Member of the Board of Directors)

Yeah. I mean, I think we discussed this earlier, but this is one of the cohorts that is making us a lot of money, and we think it's going to continue to get better, and we're adding more and more value to the program, but we can't really discuss that beyond that.

Patrick Byrne (Founder and CEO)

If you have any questions, send it to [email protected]. And lastly, I'll close for questions as we're waiting for them to come in with a slide. It tells the whole picture. We've gotten, I think, a great company, a unique earnings history. We've just gotten crushed by some dumb money, it feels to me. And well, anyway, no, I shouldn't say that. It's a different strategy. A strategy we've always said was not the strategy. But given I look at this in the upper right-hand corner, clearly Wall Street never cared about our earnings. Clearly Wall Street never cares about Wayfair or anyone else's losses. We've been demonstrating we have a more intelligent engine, an efficient engine by showing the profits.

If that hasn't gotten across, what we can do is demonstrate the efficiency another way and achieve high growth and cash flow and such and just show much better numbers than the other guys, so with that said, I see a ton of questions have come in. Seth, what's up? Do you want to get them?

Seth Moore (Chief Strategy and Analytics Officer)

Yeah, so the first questions are from Tom Forte, analyst from D.A. Davidson. His first two questions are, What are the criteria you're looking for in considering different companies to join? And has anything changed your views on the benefits Overstock could provide to large legacy bricks and mortar retailers?

Patrick Byrne (Founder and CEO)

I think the second one first. Yes, this whole process has changed my view on what we could provide. It's made me realize I totally understated that because Spock here has spent the last five months carefully building models for various people and models that show connected to, and it's unbelievable how many hundreds of millions of dollars can just drop to the bottom line, and it makes me actually realize I probably figured three or four years ago this was the right way to go. It makes me wonder if I, anyway, the gods of economics is clear to me. The gods of economics think this is the right thing with a large brick and mortar, most likely, although there's a couple other kinds of companies that are interesting types of people to talk to too. Go ahead, Seth.

Seth Moore (Chief Strategy and Analytics Officer)

Yeah. And I think I would agree with that. I think as we've done the modeling and run the data, what we've seen is there are unique capabilities that live in bricks and mortars, particularly from a supply chain standpoint, and that live in pure-play e-commerce companies from a technology standpoint. I think what the market is increasingly realizing is that those qualities exist in the genes of the company. They're not something that's grown or synthetically created. It's sort of genetically coded. And I think that's what you've seen from Amazon and from others who have started doing these stem cell injections via acquisition to combine those two sets of genes to create new unique offerings. And I think there's tons of value in it. And I think in the long run, the market will converge that way.

Patrick Byrne (Founder and CEO)

Agreed. I see you've got more questions than I've ever seen emailed in.

Seth Moore (Chief Strategy and Analytics Officer)

1,300 people watching. It says, "In the event of a sale, how should investors think about the tax impact and how much of a tax would there be?" I think I can answer that one. That all depends on structure. We can't comment yet because that's still part of ongoing conversations. You recently acquired a small home-related website that consumers can use to find rentals. What was the strategy behind that acquisition?

Patrick Byrne (Founder and CEO)

Saum, you want to remain? We are very good with people who move homes and people who, when they move, is a very good time for us to reach them. We spend a lot of money and time trying to find people as they move. I've really always wanted some natural reason for people to come to our sites when I'm just buying traffic. And so you put those two things together and Rental Roost, a site that in the past has been able to build a good traffic base and that we can rebuild, seems to me it's going to give us great access to people who are likely customers.

Seth Moore (Chief Strategy and Analytics Officer)

What gives you confidence in your ability in general to offer consumers financial services to drive home e-commerce products?

Patrick Byrne (Founder and CEO)

Well, we actually have, since we've introduced financial products a couple, I don't know, a couple, four or five years ago, it's actually been, I mean, we saw hundreds of millions of dollars' worth of stuff on credit. Now we are refining the ways we offer credit. But people are okay. People already have this wonderful trusted relationship with us. And that's really the hurdle you got to get over. So now that they already have this trusted relationship, bringing them mortgages, bringing them stock advice, bringing them, I think, could be a very powerful way to get more integrated. And of course, the value of somebody as a financial customer is about 50 times their value as a customer who buys you five toasters from you. I saw a couple of years ago, somebody actually, there was an article by Somebody Smart.

I'm trying to think who it was, but pointing out why haven't e-commerce companies big play is an e-commerce company bringing in financial products. And it was really been my plan for about 11 years. I was worried someone else would get there first. But anyway, and we're already seeing people are signing up for Muriel Siebert accounts through us and all kinds of things.

Saum Noursalehi (Member of the Board of Directors)

Yeah. It's already such a significant part of our business. And they are some of the most valuable customers. So we're doubling down.

Patrick Byrne (Founder and CEO)

Yeah. Well said.

Seth Moore (Chief Strategy and Analytics Officer)

Regardless of potential for a pending sale of the home e-commerce business, why is it in the best interest of shareholders to invest or not in marketing spending to compete against Amazon and Wayfair? I think we've actually spoken at length about that. We think we've reached a point in our maturity in terms of our ability to retain customers and leverage our G&A where it now does make sense to start doing so, either as a standalone or as part of a sale. We think that's a strategy that adds value.

Patrick Byrne (Founder and CEO)

Now, someone's asking, why haven't we done this before, basically? Yeah, I think you're right. Maybe it was dumb of me not to do this before. We have a grand slam. If somebody builds out a smart model, they will see something interesting, that as we grow, we can spit out lots of cash. Not this year. It will consume some cash. But going forward, we can generate the cash we need to keep accelerating. So anyway, it probably is. I never adopted this strategy before. I'm a value investor by background. And everything is about making money and limited use of capital and all that stuff. But I've just got to recognize that the game is the three-point shot came along or the jump shot came along. It's about time we adjust our game to it.

Seth Moore (Chief Strategy and Analytics Officer)

How should investors think about the importance of two-day shipping for home purchases? And would it be worthwhile to add additional fulfillment centers beyond the ones we have in Salt Lake City? I think I can take that one. We think it's valuable. We have added additional fulfillment centers. We fulfill products for our dropship partners. That business is growing nicely. And we intend to expand it in the coming year.

Patrick Byrne (Founder and CEO)

We took that slide out, but we should have shown that slide with a business that a supplier always that competes basically with Amazon fulfillment services. Only it's better in the sense of Amazon fulfillment services. You put your inventory in their warehouse, and then you sell them on Amazon, and they'll fulfill on Amazon. But if you sell on eBay, the last I checked, they wouldn't support your sales on eBay. And our system.

Seth Moore (Chief Strategy and Analytics Officer)

Or they charge you an arm and a leg for it.

Patrick Byrne (Founder and CEO)

Yeah, that's what they do. They charge you the way up charge you. In our system, you put it in our warehouse, and we'll support sales through any of the channels. Most of those sales do come through us. That has actually taken our warehouse utilization to 80%, over 80%. You don't want warehouses really to get to at about 85%, everything starts gridlocking. So we actually now that this is working, and it's a significant part of our warehouse utilization, it is time. We can expand a couple of warehouses and fill them up. We have sort of gotten over the hump on that.

Seth Moore (Chief Strategy and Analytics Officer)

Now pivoting to Medici and Fintech. After tZERO, Bitt, and Voatz, which of your holdings, in your view, has the greatest likelihood of driving shareholder value and why?

Patrick Byrne (Founder and CEO)

This is like asking which of my children I love most. I guess I shouldn't answer. What can I say here?

Seth Moore (Chief Strategy and Analytics Officer)

I think we've had a pretty fulsome discussion of a number of them that we think are going to add a lot of value. So how should your investors think about?

Patrick Byrne (Founder and CEO)

I'm just saying before we go on, JJ, the question is about these beautiful 12 love children you and I have made in Medici. After tZERO, Bitt and De Soto, which one do you love the most?

Jonathan Johnson (CEO)

I can't say which one I love the most, but I will tell you, I think our recent purchase of an ownership interest in Voatz is really exciting. I think the world of voting is just screaming for blockchain. And it's an area where I think the adoption curve will not be a gentle S, but a steep S. Once it's proven, it should just flourish.

Patrick Byrne (Founder and CEO)

Jonathan, who I shall mention ran for governor a couple of years ago in Utah and lost in a squeaker, developed some political connections that he helped. Anyway, people in Utah have opened their minds to this. Isn't there an election that's just been held somewhere in Utah using the system?

Jonathan Johnson (CEO)

Next week, there'll be neighborhood caucus meetings, which are part of a unique way that Utah does elections. It will happen next week, and one of the larger counties in Utah will be using the Voatz application.

Patrick Byrne (Founder and CEO)

Good. There's a lot of things in Utah that are a little strange.

Seth Moore (Chief Strategy and Analytics Officer)

All right. How should your investors think about the SEC investigating ICOs, including yours?

Patrick Byrne (Founder and CEO)

I love it. The more the harder they look, the better we look. I was shocked all last year. People are out there. They're putting a term paper up online, and they raised $100 million, and I was kind of shocked that the SEC was not acting, and they really did so on the flimsy of excuses, so everybody who understands what's gone on in the token world, there are two kinds of tokens: utility tokens and security tokens. Imagine somebody comes to you and says, "I'm going to build a video game parlor in your village. I'm going to sell a million dollars' worth of tokens for $700,000 to you.

And then I'm going to take that $700,000 out, and I'm going to buy some video machines and run a parlor and stuff." If I already had the video game parlor and I was just selling you those little brass tokens, $1 million of them for $700,000, and you could come in and use them today, then I'm just giving you a discount, pre-booking some revenue, but if I'm taking that capital and going and building my business, it sure looks an awful lot like I've raised some money, some capital from the public, and it looks like a security to me, and since about 1933, you're not supposed to do that without a whole bunch of government holy water or deemed approval, so we were shocked last year, and we've found that that was going on. We never ourselves became part of it.

What we are building is, unfortunately, there are no security tokens out there yet other than I recently learned I was wrong. I thought we were issuing the first one. Ours, I think, is the second. Brock Pierce and Blockchain Capital issued a security token last May. But other than that, I think ours will be the next under Reg S, Reg D stuff. So anyway, that's your answer. So did I answer you sufficiently? How should I think about SEC investigating? Let them crack down. The more they crack down, the more all that capital formation is going to have to move to an SEC-compliant exchange, which no matter what anyone says, there's precisely one SEC-compliant blockchain trading platform in the world right now. And we own it. It's an ATS that they gave us deemed approval on April 1st, 2005, to go ahead and do this with 2015.

2015. Sorry.

Seth Moore (Chief Strategy and Analytics Officer)

Where do you stand on the Digital Locate Receipt efforts?

Patrick Byrne (Founder and CEO)

Love the product. Love the product. Incidentally, I think this market is about a $20 billion market, $20-$30 billion. The industry itself says it's $17 billion. But there's a repo market that's $100 billion, and I've been under the belief that the repo market actually includes some of the securities lending market. And there's some issues. So it's not enough, as someone pointed out. I thought $20-$30 billion might be enough to fix the pension crisis. It's not enough to fix the pension crisis. It would take $200-$300 billion to fix the pension crisis, and there's not enough in this market for that. But there is $20-ish billion, and it's over the counter in the dark now. And we can make it exchange-traded. We have a system up in not just test. I mean, actual consumers are doing it and getting locate.

Not consumers, but traders are getting locates and shorting stocks and so on and so forth. But to Seth's point, we want to get the system really refined. Because I know, I mean, look at these fines the SEC hands down. I won't mention the bank, but there was recently one that got caught for three years giving bad locates. It went right to the top, the SEC said. And this is a major, major bank, one of the biggest in the world. And the SEC fined them $1.25 million. And I know if we make one mistake, the SEC is going to fine me $100 million. So this has to be really locked tight.

Seth Moore (Chief Strategy and Analytics Officer)

Yeah. You've talked in the past about other companies taking a minority interest in tZERO. Can you update your thoughts?

Patrick Byrne (Founder and CEO)

People contact us. People contact us talking about valuations that right now they'd be interested in investing in. I don't want to have those conversations because it would so screw up our security token offering right now to go and take a big slug of money from somebody. However, the truth is there are people who are talking to us about putting money if they can they'll put money in the security token offering and money in at the tZERO level or at the Overstock level. Those are kind of the nature of the conversations. But at the moment, I'm trying to keep it all nice and clean and simple.

Seth Moore (Chief Strategy and Analytics Officer)

Yeah, and I think the key is we want good partners to work with.

Patrick Byrne (Founder and CEO)

Yeah. Exactly. We can get checks anywhere. I literally wake up some days with people calling me from overseas wanting to put in dramatic amounts of money. We're looking for the right partners who bring something to the party. And I also have gotten the message repeatedly. I'll let you know. I suppose I should disclose this. Repeatedly on Wall Street, I've gotten the message that, "Byrne, no one can be the minority partner to you. You've got to get out." Gosh, I thought people turn out to have long memories there. Well, we got 80% of this company. And I think it has cold fusion. And if it means it's getting its life in the world, then I will commit to we will get our ownership down from 80% down to 40% or something.

In the process, I'd like to sell those pieces off to those percentages off to three or four of the right partners who can take my daughter and take her to greatness, and I need, so it's really about finding the right partners, and at the moment, we are focused. I mean, the security token offering has been an immense amount of work.

Seth Moore (Chief Strategy and Analytics Officer)

Should we expect sales and profits from tZERO to be reported in the future as provided in the white paper and offering memorandum?

Patrick Byrne (Founder and CEO)

Everything will be reported just as described in the white paper. By the way, go ahead, Rob.

Rob Hughes (CFO and SVP of Finance and Risk Management)

Yeah. I think what the question is referring to is in the offering memorandum, they did include standalone financials for tZERO. Today, in Overstock's overall financials, tZERO is part of the segment data. So you can actually see that. But that's tZERO and other aspects of Medici as noted in the offering memorandum. It may be that next year, tZERO needs to do public 10-K-like reporting. And so then you would see it in that fashion next year, 2019 for 2018.

Seth Moore (Chief Strategy and Analytics Officer)

How should we think about the ability of your discounted brokerage efforts? Oh, sorry. Wrong one. You made some investments to date. Can you walk us through the rationale of each one?

Patrick Byrne (Founder and CEO)

In tZERO?

Seth Moore (Chief Strategy and Analytics Officer)

This one was just open-ended.

Patrick Byrne (Founder and CEO)

Okay. If you're talking about presumably, this is about if it's about tZERO, if you lay out these different pieces we have invested in and you line them up the right way, you will see the pieces of this jigsaw puzzle turn into something. Really, well, I've described it. An alternative capital market system, but there are pieces that are not blockchain, and it all fits together very nicely. If you're talking about the bigger picture of blockchain, the rationale for the investments are first, those five areas of interest we identified, and then looking for the best companies within each or looking or growing.

Seth Moore (Chief Strategy and Analytics Officer)

Assuming you raise $250 million-$300 million in the ICO, will that cover your capital needs?

Patrick Byrne (Founder and CEO)

For tZERO?

Seth Moore (Chief Strategy and Analytics Officer)

Yes.

Patrick Byrne (Founder and CEO)

I believe so. With plenty of operating capital, we have immense opportunities in tZERO if we had some capital, not for acquisition, but just for underlying some trading. There's real opportunities, and we've cost ourselves money by not having the capital to put under it, but yeah, there's some real opportunities to put some capital work under trading.

Seth Moore (Chief Strategy and Analytics Officer)

The options exercised in BIT brought your ownership stake to what percentage from 11%?

Patrick Byrne (Founder and CEO)

I think we went to about 19% plus or minus 1% would be my estimate.

Seth Moore (Chief Strategy and Analytics Officer)

Your thoughts on exercising more options?

Patrick Byrne (Founder and CEO)

I think if they continue the next options we have a five-year tail. There's no point in exercising them before they need to, giving up the optionality value. But they would take us to about 34% if we exercise them. Bitt is on a wonderful roll. Listen, digitizing fiat currency is an enormous opportunity. And they are the leaders. I mean, once again, I don't think we get credit for this. There's one place you can go buy a blockchain public security. And there's one place you can use a blockchain fiat currency to go buy a drumstick. And we're that. That's tZERO and Bitt. And okay. Go ahead.

Seth Moore (Chief Strategy and Analytics Officer)

Why isn't Bitt going after larger markets? No disrespect to our friends in Barbados and Montserrat.

Patrick Byrne (Founder and CEO)

As Montserrat goes, so goes St. Kitts. Montserrat, we are going after bigger targets. I forget how many central banks from around the world have reached out. We think getting started in a country with 35,000 people and nice and manageable is a lovely way to start. And now that your Eastern Caribbean Central Bank with, I think, eight countries under it is adopting our system as well, you're going to have a couple hundred thousand people who can be using our system. I think that's just the right amount for a couple months.

Seth Moore (Chief Strategy and Analytics Officer)

How, if at all, is Bitt like PayPal? And how, if at all, is it like Coinbase or other crypto wallets?

Patrick Byrne (Founder and CEO)

Bitt is quite a bit better. You can go and download mMoney. Go to bitt.com, download the wallet. You can see for yourself. It's the rails of crypto, but the wallet is for fiat currency. So you can imagine a time. You can be in Barbados, for example, and have Bajan - Bajan is the local word - Bajan dollars. And you want to send some to a friend of yours in Montserrat. And they're getting converted from your phone mobile money into something on the rail. A cryptocurrency is the rail, probably Bitcoin, maybe Ravencoin or something. Goes over to the guy in Barbados and gets turned into - I'm sorry - Montserrat and gets turned into their digital currency, which is, I think, the Eastern Caribbean dollar. And you take them out. Well, for one thing, the Caribbean is in a really bad position because of de-risking.

All these relations with U.S. banks have gotten snipped. Since the U.S. banks were the hubs to their spokes, now inter-island trade is really difficult because they can't even pay each other. If the central banks through the region adopt this, the islands can go back to trading with each other. It's devastating. Look at what's happening to the economy of Barbados and Belize. The de-risking thing, which I'm not fighting. I understand the U.S.'s KYC, AML concerns. It is really screwing up the economies of some developing countries.

Seth Moore (Chief Strategy and Analytics Officer)

Is it true that Bitt still has more money than when you first funded it because of its invested money in cryptocurrency?

Patrick Byrne (Founder and CEO)

Yes, it is. They've put a whole bunch of the money that we first invested into Bitcoin and Ether. And we put $4 million in. And it turned into $13 million or $14 million, of which they've spent $3 million or $4 million. So there's $10 million in. So there's $10 million in the bank, $10 million in the kitty. Last I heard.

Seth Moore (Chief Strategy and Analytics Officer)

All right. In his 2000 book, de Soto acknowledges that technology plays a role in unlocking dead capital, but so do legislation and politics. What will the blockchain do to fix the problem?

Patrick Byrne (Founder and CEO)

It's dramatically changed the nature of the problem because we can do through the wonders of digital marketing, social media, mobile apps, and blockchain, we can do very quickly what would have taken an army of government employees to do in the past. It just so happens that there's, I think, one place on earth where those four technologies intersect, like mobile apps and blockchain and digital marketing. There's one place on earth I know that's very good at all those technologies. I'm standing in it.

Seth Moore (Chief Strategy and Analytics Officer)

As a business, what could De Soto look like? And how will it generate revenue?

Patrick Byrne (Founder and CEO)

Don't want to talk about the business model yet other than while we did this expecting there to be a business model would come along. I think it's safe to say, "Well, we think we can unlock." Hernando thinks we can unlock tens of trillions or he thinks $170 trillion by one calculation of dead capital. If we can unlock tens of trillions of dollars of dead capital, I'm sure there's a few shekels that we can make in the process. It's not why we got into it. We think five billion people is—I mean, it's going to be historic what I think is going to happen here, and it's going to happen starting—you'll see something this year. Quite definitely, but there's going to be when we're unlocking that much capital, there's lots of places that we're going to be able to make money.

It's not why we, reminds me of that old joke. There's no, somebody said to Albert Schweitzer, "What are you doing in Africa, baby? There's no money in orphans." Somebody's asking me the question here. Why are you doing this? Well, there is actually going to be a lot of money. Well, there could be a lot of money in this de Soto project. But that's not why I flew to Peru four times last fall.

Seth Moore (Chief Strategy and Analytics Officer)

Okay. How should investors think about the problems with Bitcoin related to orders around the fork in Bitcoin? Was Overstock responsible for those issues?

Patrick Byrne (Founder and CEO)

No Overstock. Well, no, I don't want to rag anybody out. But a vendor had a problem. A cost vendor had a problem. Some software got updated. It wasn't. Anyway, it cost us about 1 BTC incidentally. So 1 BTC. For all the articles and blogs I've seen written about this, just to understand the effect on us was about 1 BTC.

Seth Moore (Chief Strategy and Analytics Officer)

Who are the executives for De Soto?

Patrick Byrne (Founder and CEO)

Hernando de Soto is the Chairman. I am but a student, and I'm but clay in the master's hands, but I am the CEO, and Dr. Ali El-Husseini is the President, and there's a wonderful assembly of people we have brought together, both blockchain and other kinds of talents underneath him. Ali El-Husseini. He's a close family friend from Lebanon who came over here, went through college, and got his PhD here while working his way from the warehouse up in this company for about 12 years, and he recently ran global and got it turned around very nicely last year, and he's aristocratic. He's Arab. He's French-speaking. Hernando chose him as President, and he's going to be a great President of De Soto.

Seth Moore (Chief Strategy and Analytics Officer)

Another one. Please explain to the listeners the actual correlation between Bitcoin prices and the value of Medici?

Patrick Byrne (Founder and CEO)

Well.

Seth Moore (Chief Strategy and Analytics Officer)

I think this is implying both what's happening and should there be any correlation.

Patrick Byrne (Founder and CEO)

The value of Medici or the value of Overstock?

Seth Moore (Chief Strategy and Analytics Officer)

Both.

Patrick Byrne (Founder and CEO)

Listen, there's an enormous value. I happen to have just run this. Someone just texted that in. I happen to have just run this because I've noticed it. I almost included a slide. Going back to 2017, the correlation between Bitcoin's movements and Overstock's is 91%. Even in 2018, it's 70%. That's ridiculous. Just so people know. I mean, what you do is your own business. Just so you know, we don't have much Bitcoin. As we disclosed, we sold a whole bunch of it through the fall. And yes, we've been accumulating $700,000 again of it, probably. I don't know. But nothing massive. And if anyone's trading us as some sort of proxy on Bitcoin, up or down, it's silliness. What I suggest you do is you graph for the last 52 weeks the price of Bitcoin and the price of Overstock.

Lay them on top of each other. And you'll see that it's kind of a, to me, it explains like 91% of movement in our stock. And I feel like I got to warn people. If you think that there's a big Bitcoin bank, it's silly.

Seth Moore (Chief Strategy and Analytics Officer)

Yeah. Bitcoin also does not correlate to the technology underlying our Medici applications.

Patrick Byrne (Founder and CEO)

Yes.

Seth Moore (Chief Strategy and Analytics Officer)

What are your plans to scale tZERO? Will an institutional salesforce be hired to market the technology to pension funds and hedge funds?

Patrick Byrne (Founder and CEO)

Yes. An institutional salesforce is being hired. As world-class as I really understand the SpeedRoute tZERO folks to be, the surface area of this opportunity is so much bigger than there are people there to handle. They are out there scrambling to get in good industry talent, including a wonderful fellow I happened to meet two days ago who is an institutional sales guy. But in particular, a wonderful CFO as well whom Rob Hughes hand-selected, never a hair out of place, Rob Hughes. What can you say about this CFO?

Rob Hughes (CFO and SVP of Finance and Risk Management)

Great new hire. We're really pleased to have him join the tZERO team.

Patrick Byrne (Founder and CEO)

Industry experience, public company experience.

Rob Hughes (CFO and SVP of Finance and Risk Management)

Exactly. All the boxes we want to check.

Patrick Byrne (Founder and CEO)

Deep risk, risk control, all that kind of stuff. Okay, Seth?

Seth Moore (Chief Strategy and Analytics Officer)

Does tZERO still have a lead in the SEO-compliant token exchange race, particularly vis-à-vis Goldman and Poloniex?

Patrick Byrne (Founder and CEO)

I'd say Poloniex would first need an ATS that the SEC said you could trade blockchain on to even catch us. And in addition, people should understand we built and took public a public security based in blockchain. And to do that, we had to build certain functionality, certain blockchain functionality. Ether came out around the time we were doing that. And then ERC-20 came out, which is just a protocol that does that stuff that we wrote some internal code to do. So we can adopt the ERC-20 protocol. And it's like you're on Microsoft Word, but you've shifted from PC to Mac or something. But it's still Microsoft Word. There's nothing magic about token. We have deemed approval from the SEC to run an ATS, run a trading platform on blockchain instruments, which, and anything but ERC-20 is just a blockchain instrument.

Seth Moore (Chief Strategy and Analytics Officer)

Please address the SEC request for information pertaining to the tZERO ICO.

Patrick Byrne (Founder and CEO)

The SEC speaks for itself. I am looking forward to seeing them again. It's been a decade. I want to help them. I think that it's overdue. I've been jawboning publicly for about six months. Where the hell is the SEC? It's overdue. I'm looking forward to meeting with them soon.

Seth Moore (Chief Strategy and Analytics Officer)

Thoughts on timing to turn retail around to go positive free cash flow?

Patrick Byrne (Founder and CEO)

I think for one year, we have to suck up that we're going to have, so we've hit the jets. I think we're going to have wonderful growth that will emerge over quarters three and four. Quarter one, we've already indicated, is the wipeout. That's where the keel of our speed boat is dug deep as we hit the throttle. Quarter one is terrible. I think you'll see us making nice progress in quarter two. I think you'll see real growth being the kind of growth that people on Wall Street think of as growth growth. I think we're there by quarters three and four. And this year, the year that you switch from one strategy to another, you will note if you model this, there is this sort of effect of your speed boat's heel digging down in the water.

Once we get that growth going, I think we return to a satisfactory cash flow position next year. And then by the year after, it pukes cash, frankly, if we grow the kind of rates I think we're capable of. I'm playing other rules the other people play by.

Seth Moore (Chief Strategy and Analytics Officer)

Somebody else is asking the effect of a growth strategy on the potential of an acquisition. I think acquirers will be grateful that we've already hit the throttle and that we're already pulling the boat up onto the plane.

Patrick Byrne (Founder and CEO)

Especially because when hitting the throttle doesn't just mean doing something stupid and buying 13 times as many TV spots. It's really building out Saum and his team really building out the technology. So what we're investing in and what we're building now to achieve that growth is something that any potential acquirer is going to be glad we did. I mean, it's been pretty. I think it's been pretty eye-opening to some people who have seen what we have under the hood here. There's nothing. I think there are companies who understand they could work for 10 years and take a billion dollars, and they couldn't build what Saum and his guys have built here. Go ahead.

Seth Moore (Chief Strategy and Analytics Officer)

Let's see. Sorry. There's a bunch of them that are repeats of the DLR company.

Patrick Byrne (Founder and CEO)

A bunch of people are texting in, or what is this from?

Saum Noursalehi (Member of the Board of Directors)

Emailing in.

Patrick Byrne (Founder and CEO)

Emailing in. Anything else that we haven't covered already Seth?

Seth Moore (Chief Strategy and Analytics Officer)

That's what I'm going through to see.

Patrick Byrne (Founder and CEO)

I think that that's enough. If you don't have anything jumping out, this is enough. Okay. Folks, so this is what's happened. We have radically shifted our strategy for the first time in our 18 years. We're going to play the game that everyone else plays. And I believe we are technologically and in other ways a superior company. It has shown up in the past by what you've seen on your screen. The profitability, nobody seems to care. Nobody seems to care about the guys who lose the money. We're going to play the high growth and play for cash flow game that others have. And I think that same efficiency and technological edge will show up in much better numbers than they can deliver playing their game. Thank you very much. Nice working for Smart Owners.

There you have a team of people here working insanely hard for you. From Spock here, who's been for five months bringing in this Guggenheim process to Saum and his team. So thank you very much to a bunch of guys out there in the blockchain and our blockchain investments. Thank our shareholders very much. It's nice working for Smart Owners. Bye-bye.

Saum Noursalehi (Member of the Board of Directors)

Thank you.

Operator (participant)

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect.