Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 Overstock.com Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your host for today, Alexis Callahan. You may begin.

Thank you. Good morning, and welcome to our first quarter 2020 earnings conference call. Joining me today are Jonathan Johnson, CEO of Overstock and President of Medici Ventures; Adrianne Lee, CFO of Overstock; Dave Nielsen, President of Overstock Retail; and Saum Noursalehi, CEO of tZERO. Please note that we are conducting today's call remotely. Let me remind you that the following discussions and our responses to your questions reflect management's views as of today, April 30, 2020, 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 our Form 10-K for 2019, our subsequent filings with the SEC and in our press release filed this morning. Please review the forward-looking statements disclosure on Slide 2 of today's presentation. 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. With that, Jonathan, let me turn the call over to you.

Thank you, Alexis. Good morning to all listening. I'm pleased to be talking with you again. I'll first provide a few corporate updates, including the impact of COVID-19 on our business. We'll then discuss the Overstock Retail business followed by an update on tZERO and some of our other Medici Ventures companies. We'll finish by taking questions. Slide 4, please. Let me start by welcoming the newest addition to our executive team, Adrianne Lee, our new CFO, who joined us last month. Welcome, Adrianne.

Thank you, Jonathan. I'm thrilled to join Overstock, which has been such a pioneer in 2 tech-based industries, e-commerce and blockchain. My focus has been working for companies that are innovators in the B2C world, most recently in the travel industry where at Hertz, I was the CFO of its North America rent-a-car business and managed key metrics to drive revenue and productivity. Prior to that, I spent time at Best Buy and then at multinational brand environment of Pepsi. I'm excited to get back into the direct-to-consumer retail space. 2020 is a pivotal year for both our -- areas of our business and thus far has proven to be a year of progress and results. Our retail team is continuing its focus on sustainable, profitable growth, built on a strong technological foundation, brand and culture of innovation. And as Jonathan will discuss now, now more than ever the world needs blockchain technology. Overstock has a unique opportunity to move up in the consumer and investor mindset. That is why I joined the team and is what I will be focused on achieving as CFO.

Thanks, Adrianne. It's great to have you on the team. Now let's turn to corporate updates. Slide 5, please. I want to talk at length about something that is top of mind for everyone: the impact of COVID-19 on the business and how we view the shifting paradigm in which we now live and operate. Overstock as a company was well positioned for and has generally been operating well in this new environment. We are 100% work from home other than at Overstock Retail's 3 distribution centers where crews work socially distanced and in shifts. As I mentioned last quarter, we did a company-wide trial run of work from home in early March to make sure our systems and processes could function seamlessly, and it has worked. There has been minimal disruptions to our business due from -- due to working from home. Overstock hasn't made any layoffs. Instead we're hiring, particularly in customer care, to keep up with increased sales. The Overstock business model couldn't be better suited to operate in the current environment. Overstock Retail's April sales are up significantly, over 120% year-over-year. Our model scales so effectively and cost efficiently because of our focus on technology and automation embedded in our systems. Our principal offerings, home furnishings, are increasingly in demand. Home goods are one of the most relevant categories under the current stay-at-home mandates. Because we are a pure-play e-commerce retailer, customers can buy what they need from us from the safety of their homes. Our 20-plus years of long-standing partner and supplier relationships and our drop-ship model have allowed us to be nimble and to diversify our geographic and sourcing risks. Importantly, Overstock's value proposition is particularly attractive during uncertain financial times. We offer great products at great prices. Next slide. The retail industry landscape…

Thanks, Jonathan. I'm eager to discuss our first quarter performance. It was a solid quarter for Overstock, and I'm pleased with the progress we've made in strengthening our cycling legs, as you put it. I'd like to reiterate the warm welcome to our new CFO, Adrianne Lee, and ask that she review our first quarter financial performance.

Thank you, Dave. I'm happy to cover the first quarter results. As a reminder, most of the accelerated growth in our online sales from stay-at-home mandates will fall into the second quarter. In the first quarter, our revenue trend improved, and we expanded our margins, demonstrating our focus on sustainable, profitable growth and execution against our supporting initiatives. Next slide. Our first quarter revenue came in at $340 million. While this is a decrease of 6% year-over-year, I would like to highlight the sequential improvement. We realized double-digit declines over the last several quarters, so this improvement is both meaningful and reflects our commitment to growth. It's important to note that we were gaining growth momentum prior to the mid-March stay-at-home mandates, which accelerated our online sales. Next slide. Our first quarter gross profit came in at $74 million with a margin of 21.9%, a 200 basis point improvement year-over-year. This increase is the result of focused initiatives that lowered shipping and returns costs and drove higher volume through our sponsored products platform. Next slide. Our first quarter contribution came in at $38 million with a margin of 11.2%, an improvement of 40 basis points year-over-year, reflecting solid operational performance and the team's commitment to disciplined spending. Next slide. Adjusted EBITDA improved 24% year-over-year, posting a loss of $1.9 million. While not yet positive earnings, the team continues to focus on our customer experience, promotional model improvements that leverage AI and machine learnings, while we execute against disciplined and efficient spending. Next slide, please. As we've previously discussed, Overstock is in a $300 billion market, which has seen steady low single-digit annual online migration. As Jonathan mentioned in his remarks, until mid-March, the percentage transaction transacted online was approximately 23%, with the balance of purchases in brick-and-mortar. The stay-at-home mandates shifted this landscape, and according to various third-party sources, show the percentage transacted online doubling to over 40%. While we are uncertain to what the landscape will ultimately look like, increases in the adoption level for online furnishing purchases that were anticipated to play out over a number of years could have potentially happened over the course of the last several weeks. Now with that, I'll turn it back over to Dave to discuss our customer segments, strategy, brand pillars and initiatives.

Thank you, Adrianne. Next slide. As we've shared previously, we've done a great deal of customer research, and our findings continue to drive our focus. Two customer segments in particular play to our strengths, which together represent 40% of the home furnishings market or roughly $120 billion. These 2 customer segments already over-index for shopping with Overstock. They are deal-driven, want to feel great about their purchases and want a low-hassle experience. We continue to leverage analytics and machine learning to ensure we provide the shopping experience they desire. Our entire strategy is designed with this end in mind. Next slide. Overstock's mission is to create dream homes for all. We've consolidated that vision and focus onto a single slide. We know that in order to achieve sustainable, profitable growth, we must focus on serving our customers' highest needs. We remain relentlessly focused on our 3 brand pillars: product findability; smart value; and easy delivery and support. They provide the guardrails for innovation, so we're only working on those things that improve the experience our customers want. On the following slides, we'll share metrics we use to evaluate our progress against these objectives. Next slide. We measure product findability in 2 ways: speed and relevance. Relevance makes it easy for customers to find the products they want. As you'll see on the chart on the left, we've made site search improvements over the past year that continue to lead to higher site search conversion. And you can see it's favorable 8% year-over-year. Speed also matters. Research continues to indicate that customers are highly sensitive to page load speed. As you can see by the chart on the right, we are continuing to make improvements in our page load time, particularly in mobile, where we have the most room for improvement.…

Thanks, Dave. I'm pleased with the progress Overstock Retail has made in the quarter and thrilled with how it's performed in April. Our focus has resulted in operational improvements being seen in our results, independent of the current market conditions. Our legs are getting stronger. Slide 36. Let's now turn to Medici Ventures to discuss the progress being made there. Slide 37, please. As we typically do, let's begin by discussing tZERO. Saum Noursalehi will talk about tZERO's recent progress and priorities. Next slide.

Thank you, Jonathan. Overall, tZERO had a nice first quarter. Like most businesses, we were not immune to the challenges stemming from COVID-19. However, I am encouraged by the start to the year and excited about the road map. I would like to begin by highlighting a couple of key results we achieved last quarter, then dive into our priorities. Slide 39. The recent market volatility has had a positive impact on equity trading volumes, which are highly correlated with the revenue generation of SpeedRoute, our order routing business. The company is responsible for routing up to 1.5% of U.S. equity markets. I am also pleased to report last quarter was the company's strongest quarter ever. We traded over 6.9 billion shares, resulting in a year-over-year revenue growth of 131%, all with 0 downtime. This demonstrates the scale and resilience of the technology, which is also used by the tZERO ATS to trade digital securities. Slide 40. Our Crypto app also experienced robust growth last quarter. The [ proved ] accounts increased 40% since Q4, resulting in over 6,400 users on the platform. The growth is important for a couple of reasons. First, volumes will increase as we introduce more users, which is directly tied to the revenue generation of this business. And second, we anticipate migrating these users into tZERO markets, our retail broker-dealer, once it receives regulatory approval. This will enable our users to trade cryptocurrencies, security tokens and even trade traditional stocks, making it the first regulated platform to offer this. Slide 41. As we laid out on our last call, we have 3 overarching priorities this year: list more assets on the ATS, enhance the liquidity on the ATS and improve the overall investor experience. Slide 42. As we mentioned previously, we are in discussions with…

Thanks, Saum. I like what you're doing at tZERO. Keep at it. Next slide. Let me now discuss some notable events that have happened at Medici Ventures. Slide 48, please. This slide shows our family of blockchain companies, with several highlighted which are helping to solve problems the pandemic has brought into the spotlight. Next slide. I'll start with a Medici Ventures foundational pillar: identity. [ Need ] to prove and control an immutable record of your own identity and credentials through blockchain technology and to be able to trust that same information provided by others. Two of our companies in the identity space, Evernym and Vital Chain, are working on projects to develop what are called immunity passports to help stop the virus. Evernym, along with 60 other organizations, is working to develop a digital certificate so users can prove, and request proof from others, that they've been tested positive for antibodies or have received a vaccination once one becomes available. These digital certificates would be issued by health care institutions but controlled by users. Being able to provide trustworthy and private immunity validation will help individuals return to everyday life. Vital Chain has pivoted to develop a health record digital validation tool. It has built a consortium interested in a COVID-19 antibody validation tool. It is aggressively working with Medici Venture developers to have an MVP within 30 days for Northeastern Ohio, with plans for a limited national rollout in 60 days. It's really exciting work. Next slide. Voting is another topic being discussed a lot right now. Always top of mind in an election year, the pandemic has voting in the spotlight. Mobile voting is the answer, especially because blockchain technology enables anonymous, safe and secure mobile voting. Yes, there is some skepticism about the reliability and…

Thank you, Jonathan. We've received a number of questions in advance of our call, and we'll address a few of those first. We'll then open up the line for live questions. Our first question is related to our dividend and asks whether we intend to continue issuing digital dividends in the future. Jonathan, can you please take this?

Yes. We do not have current plans to issue additional dividends, but we certainly have the ability to issue future dividends in the future at our discretion.

Our next question pertains to retail and says, "Given the sudden acceleration in growth, what strains has this placed on the organization?" Dave, can you please take this one?

Yes. Thanks, Alexis. As mentioned in our prepared remarks, our customer care team was not staffed to manage the significant increase in sales. We've hired more customer support agents, streamlined self-serve automation services and increased communication to our customers. Our carriers have been strained with increased packages and their prioritization of personal protective equipment has prevented them from providing tracking for all packages, leading to some customer frustration. Our partners have also been adjusting to statewide closures. We have millions of products on our website and as some sell through, others pick up. All that said, our platform has not slowed. Our technology is scalable. The majority of our packages are arriving on or before the estimated delivery date. I couldn't be more pleased with the execution from the whole team while working from home.

Thanks, Dave. Our next question asks, when can we expect to see more tokens trading on the tZERO platform? Saum, can you please take this one?

Sure. As I said, we had actually a couple of issuers close, and we were -- had done diligence, were ready to trade. But because of the market conditions, they asked that we wait, and wait for things to stabilize before they trade. So a lot of it depends on the conditions we're in on coronavirus, but we're hopeful that we could have -- get through that and hopefully later this quarter to early next quarter, have additional assets trading.

Thanks, Saum. Sawanda, we're ready to take our first question. Please open up the line.

Our first question comes from Thomas Forte, D.A. Davidson.

Great. So first off, I wanted to congratulate you, Jonathan. So I'll use a football reference. You took a lot of initiatives from the red zone to the end zone. So I think you've done an amazing job and deserve a lot of credit, and then welcome to Adrianne to the Overstock story. So a number of my questions you've already answered. But the first one I had was, can you discuss how historically Overstock's Retail business has been countercyclical?

Yes. And thank you, Tom. I appreciate the kind words at the beginning. Let's remember we are a low-price operator. We sell great products at a low price and so historically, in times where people have been pinching pennies, they've looked for deals. That's who we are. We provide great deals. And so in the past, when the economy has gone a little south, we've been able to do well in those times. So you're right, we have been countercyclical historically.

And then one follow-up question. So if I understand you correctly, is the gating factor on adoption for blockchain voting, so Voatz and Votem, is the gating factor just getting approval from local governments? Or is there a second gating factor in customer adoption?

The gating factor will be local County Clerks, state Secretaries of State signing up for this. Voting is a complicated and politicized industry and there are 3 large incumbents that dominate the market. The customers, like I said, are County Clerks or Secretaries of State, often with limited budgets for new technology. And incumbent politicians are leery of anything they think might keep them from being reelected. So I think the real question is what does it take for a paradigm shift? And perhaps it is the global pandemic that makes in-person voting hard, undesirable or impossible. And I will say that as a result of the pandemic, Voatz has been receiving a lot of inbound interest for its remote voting solution over the last 6 weeks and is currently in the process of executing on some of those opportunities.

Our next question comes from the line of Brad Safalow with PAA Research.

Congratulations on the excellent execution in a really dynamic period. First question is on gross margins. Obviously, you've had several quarters now of consecutive gross margin expansion. How are you guys thinking about the structural level of gross margins for the business on the retail side?

Dave, why don't I have you take the first crack at that?

You bet, Jonathan. Thanks, Brad. One of the key contributors, and Adrianne mentioned this, is the improved freight rates that go into our [ fixed costs of our ] products. As we continue to expand our footprint and pre-position our products closer to our customers, we eliminate the number of Zone 6 through Zone 8 or those long shipping costs that add up. And as we've been able to bring products and preposition them closer to customers, we've been able to significantly reduce those costs and improve our margins.

Okay. And then as we think about -- you guys, and I don't think this is well understood by anyone in the investment community, but for a while now, you've had tremendous organic tailwinds in terms of search traffic. I can see now that you've had a very strong uptick in paid traffic, but you certainly have a lot that you can capitalize on just from what's going on in the industry and what you have organically. But what I want to understand is, given this uptick in demand, how are you guys approaching marketing in terms of level of spend, channels, customer acquisition?

Dave, I know you've been all over this. Do you want to take this one, too?

Sure. Happy to, Jonathan. Thanks for the question, Brad. The marketing model, I will say, has been challenging to understand for our marketing team as we've focused in on so many of the changing dynamics. It has been nice to have a solid tailwind with our organic search and organic traffic coming in. As a team, we spend a lot of time. We have a lot of engineers focused on optimization of our organic search and organic traffic. As we dial in our models, we did see a bit of a reduction in costs of a new customer. So customer acquisition costs started to dip slightly, and this was obviously going to happen as many of the brick-and-mortars were backing off. Why would you acquire customers to send to closed doors? And we took advantage of that, increased some of our spend and have done some opportunistic spending to acquire more customers at a lower cost, as you could see from what Jonathan showed in a chart earlier with the nearly 250-ish, 249% growth in our customers. So we've been thoughtfully aggressive, but continue to monitor every day as the situation rolls forward.

Okay. And last question for me. How has the spend level differed between, let's say, existing customers, Club O members and what you're seeing from new customers?

Jonathan, I don't know if you'd like me to take that or not? I've...

Please, please.

Brad, and again, another great question. We watch this very closely. We balance our marketing mix model between acquisition of new customers and our existing customers. I will tell you that over the last 6 to 8-ish weeks, our Club O memberships have grown by 35%. So we've seen a significant growth there. Now you saw from the charts earlier that even in April, our revenues were growing -- our sales were growing upwards of 120%. So not pacing as quickly with new customers attaching themselves to Club O, as expected. Club O is seen as a value as the customer continues to repeat and purchase with us and sees the value of what Club O brings from the 5% rewards, from their free returns, for in-store credit. So many advantages to having Club O there. But the balance between those 2, that should give you some indication. They're both growing, existing customers and repeat rates, as well as new customers significantly growing, especially in April.

We have a follow-up from Thomas Forte.

Great. So Saum talked about your current backlog or current situation with new issuance for the ATS. Can you give us a reminder on how tZERO monetizes additional tokens that are listed on the ATS?

Saum, I'll let you take that one.

Yes, sure. So the way we monetize is, if it's a new offering, we today charge a fee to tokenize the assets and then distribute them to the existing holders, and then once they actually list their security for secondary trading on our ATS, there's a fee for listing it, a lot like an exchange does, listing fee. And that's an annual recurring fee, as well as transaction fees that are charged to the broker dealers. So those are the 3 ways. As soon as we're approved as a retail broker-dealer, which we're hoping to get a decision, [ hopefully ] this quarter, we will be able to start charging a percentage of capital raised, kind of like a placement fee. And so that will be an additional revenue stream for new assets.

Thank you. I'm showing no further questions in the queue. I would now like to turn the call over to Jonathan Johnson.

I want to thank our investors for listening in today, whether it's live or on a recording. I know we haven't been able to address all your questions today. We had a lot to present. So I've asked Alexis to schedule a virtual Investors' Day sometime in May, and look for details on that in the coming weeks. Until we talk again, stay safe and stay healthy. Thanks so much.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.