Bed Bath & Beyond Inc. (BBBY) Q2 2020 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to the Q2 2020 Overstock.com, Inc. 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 speaker today, Ms. Alexis Callahan. Thank you. Please go ahead.

Thank you, operator. Good morning, and welcome to our Second Quarter 2020 Earnings Conference Call. Joining me today are Jonathan Johnson, CEO of Overstock and President of Medici Ventures; and Adrianne Lee, CFO of Overstock. Dave Nielsen, President of Overstock Retail; and Saum Noursalehi, CEO of tZERO, will be available for Q&A. Please note that we are conducting today's call remotely. Let me remind you that the following discussion and our responses to your questions reflect management's views as of today, July 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-Q for Q1 2020, 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. Please note that today's presentation is available for download on our Investor Relations website, and our summary slide contains instructions for asking questions during our Q&A session. And with that, let me turn the call over to you, Jonathan.

Thank you, Alexis. Good morning to all. It's good to be up early in Salt Lake City to share our second quarter results and provide updates on our business. I'll follow this agenda shown on Slide 3. Slide 4, please. We continue to strengthen the Overstock team. On June 15, we added a sixth director to our Board. William Nettles is the co-founder and managing partner of a private equity group in San Francisco that invests in and advises automation-enabled tech companies. He has 25 years of experience in technology, capital markets, strategy and Investor Relations. William is a great fit for Overstock and a strong addition to our Board, which now has 5 independent directors. He will represent our shareholders well. We continue to look to add another independent board member, one with e-commerce and retail expertise. I hope to have something to announce about that soon. Slide 5, please. Last month, Overstock was one of 3 vendors awarded a contract for a proof-of-concept pilot with the U.S. Federal and Government General Services Administration. We will provide a commercial e-commerce platform on which participating government agencies can make micro purchases, purchases less than $10,000 for items their employees need, things like office equipment and supplies, Overstock's core offerings. These government agencies, which make roughly $6 billion in annual micro purchases, will also have access to a robust analytics dashboard and reporting system that provides granular insight into agency spending, including whether they are meeting certain quotas. This award is a validation of the robustness of our supply chain, long-standing partner relationships and site infrastructure, and the strength of our underlying data and analytics capabilities. Aside from any potential P&L impact, this award has reputational importance to Overstock and could lead to additional B2B opportunities. I do note there's no guarantee of how much of the potential pie of federal government micro purchase spending Overstock will win. Slide 6, please. Unfortunately, this virus isn't over yet. In fact, it's looking like it might be with us for some time. So I want to keep you apprised of its continuing impact on our organization. The Overstock retail business model is well suited for the current environment, which is arguably becoming the new normal. That is now abundantly evident in our sales numbers, which increased more than 100% in the second quarter year-over-year. Because of our focus on technology and automation embedded in our systems, our model scales effectively and cost efficiently, even when sales double. Customers are buying our core products, home furnishings, one of the most relevant categories, as we spend so much of our times in our homes, and they're buying them easily from the safety of their homes. Our 20-plus years of long-standing partner-supplier relationships and drop-ship model have allowed us to be nimble. Importantly, Overstock's value proposition is particularly attractive during uncertain financial times. We offer great products at great prices. As an organization, we are still nearly 100% work from home. That continues to go well. We've hired aggressively in customer care to keep up with demand. We're also taking advantage of talent in the market from businesses disrupted by the pandemic. It's no secret that, throughout this pandemic, we've also faced our own set of challenges. Increased sales, strained logistics resulting in higher customer contact volume, our inventory levels dipped with a doubling in sales and fulfillment lagged. We have hired and launched automation initiatives to improve customer self-service options and are beginning to recover in inventory and fulfillment. Our employees were nimble and adaptive, and we are resilient as an organization. Slide 7, please. A quick corporate update. We regained our WKSI status during the second quarter with the increase in our market capitalization. We filed a shelf registration statement to reflect that, and a prospective supplement to reestablish our ATM under the new shelf. I should note, we still have not used the ATM in 2020. We distributed our digital dividend on May 19. This is a preferred share of stock that trades on the tZERO alternative trading system, under the symbol OSTKO. It closed yesterday at $41.50 per share. It pays an annual cash dividend. We announced earlier this month that the Delaware Supreme Court reversed an $8.6 million judgment against us in the gift card case. I'm pleased the court agreed with our arguments. There's nothing of substance to report on the regulatory front. We continue to cooperate fully and engage with regulators to address any questions they may have. Slide 8, please. I'll now turn it over to Adrianne to discuss our second quarter financial results.

Thank you, Jonathan. I look forward to discussing our second quarter results. Next slide. Before we dive into the numbers, I would like to reiterate how we managed the business and segment our financial results. As this chart illustrates, we report our financial results across 3 segments: Overstock Retail, a pure-play e commerce retailer; tZERO, which is focused on driving adoption of blockchain technology and capital markets; and Medici Ventures, which includes several blockchain-focused companies that are aligned with our foundational pillars. Our consolidated results aggregate these 3 segments. I will begin with a summary of Overstock.com, which includes our consolidated results, followed by a more in-depth discussion of Overstock Retail's second quarter performance. Next slide. On a consolidated basis, we delivered strong results last quarter, driven by a record revenue at Overstock Retail, record trading volume on our tZERO ATS and disciplined spending and investing across our 3 segments. In summary, we posted 109% revenue growth year-over-year, positive adjusted EBITDA of $42 million, diluted earnings per share of $0.84 and ended the quarter with a healthy balance sheet that included a cash balance of over $300 million. The organization is focused and continues to execute against its key initiatives. Importantly, these efforts are becoming increasingly evident in our financial performance. Next slide. This chart provides a summary of Overstock Retail's exceptionally strong second quarter performance. Our business supported a 200% increase in new customers, and our profitability as measured by adjusted EBITDA improved by $51 million year-over-year. As Jonathan will discuss shortly, a key takeaway here is the scalability of our pure-play e-commerce model and efficiencies created through our partner drop-ship program. As we mentioned during our recent Investor Day, our overarching goal is to create operating leverage by growing our top line at a faster pace than operating expenses. On that note, we doubled the total revenue last quarter, which was accompanied by a 62% increase in total operating expenses, and this included sales and marketing efforts. As these results demonstrate, we are profitably gaining new customers and making progress towards achieving sustainable, profitable growth long term. Next slide. Last quarter, revenue from our Retail business was a record $767 million or an increase of 109% compared to Q2 last year. Customers are increasingly finding us and purchasing products in our core home furnishings categories. Compared to the second quarter of 2019, new customer growth increased over 200%, and we have experienced strong customer purchase repeat behavior, which Jonathan will discuss later. While it is difficult to predict trends right now, we currently believe that some of the shift to online home furnishings purchasing will continue and should serve as a tailwind for our revenue growth, outpacing the growth of the overall U.S. online home furnishings market, a long-term goal of ours. Next slide. Retail gross profit increased to $178 million, a $100 million increase compared to second quarter last year. Furthermore, gross margin improved by almost 350 basis points year-over-year. While we are pleased with the improvement, it is important to note that results were driven by operational efficiencies as well as several onetime items unique to the second quarter of 2020. Our onetime items included lower costs from being understaffed in the customer care organization as we adjusted to increased sales volumes, a benefit from fulfillment related charges as part of our service level agreements to protect our customers' experience and lower discounting activity as we strategically balanced marketing efforts against product availability and stockouts. Going forward, we do not expect gross margin to be similarly impacted by these onetime items just discussed, and I would expect performance to be more in line with our first quarter 2020 results. Next slide. This chart illustrates our Overstock Retail operating expenses in absolute dollars and as a percent of revenue. Of note, operating expenses include sales and marketing, general and administrative and tech expenses. As a percent of revenue, excluding special items that benefited the quarter, operating expenses improved almost 500 basis points as we were able to leverage our G&A and technology expenses, illustrating the strong operating leverage inherent in our business. We can grow the top line without adding significant G&A expense into the business. Next slide. I am pleased to report our operating leverage carried through to the bottom line. As you can see, Overstock Retail posted $53 million in adjusted EBITDA during the quarter, an increase of $51 million year-over-year, following 3 sequential quarters of adjusted EBITDA loss. Adjusted EBITDA margin was a record 6.9%, an improvement of 650 basis points year-over-year. As I discussed on the gross margin chart, our record revenue, coupled with onetime items unique to the second quarter, means investors and analysts should not expect adjusted EBITDA margin to be quite as high as it was in the second quarter. Our long-term goal remains to consistently deliver an adjusted EBITDA margin in the mid-single digits. Next slide. And that summarizes our second quarter financial results. Jonathan, I will now turn the call back to you.

Thank you, Adrianne. We're thrilled with these results. They represent disciplined focus and a lot of hard work by people throughout the company. Slide 17, please. Let me walk you through how we achieved these results, starting with Overstock Retail. Slide 18, please. Overstock is a top player in the growing home furnishings online market, a market that is now more relevant than ever. Online penetration was steadily increasing prior to the pandemic, where recent pandemic-related shifts in consumer behavior have accelerated that growth. We estimate that the online penetration was 36% at the end of Q2. Slide 19, please. We are playing to our distinct position of strength in the market, a position that is relevant in any market condition, but especially during challenging economic times. Our brand vision of Dream Homes for All differentiates on the home goods expertise and smart value. Our customers come to us to find high-quality home goods for a great value. We are not, nor do we strive to be, an everyday-low-price leader, such as the generalists you see at the bottom of this chart, nor do we strive to be inspirational. We believe our position uniquely meets the needs of many customers in the market, customers we focus on every day. Slide 20, please. During Q2, many customers discovered Overstock for the first time. Our new customers tripled year-over-year, and our 28-day repeat rate increased 16% year-over-year. New customers are finding us in products they love, and they are having a good experience. This gives us confidence that these new customers are sticking with us and will continue to make future purchases. We are obsessively focused on retaining these new customers. Slide 21, please. We have built a strong foundation in our core competencies. First, we know our customers, what they want and how to reach them. The 49 million average monthly visits are not happenstance. They're driven by personalized e-mails to help them find the products they are looking for, a loyalty program with free returns and a price-match guarantee, and our offering of customer service to meet their logistical needs without phone calls. Second, we've been building and integrating innovative technology in online retail for 20 years. Beyond our scalable core infrastructure that has allowed us to handle the large increase in traffic and new customers this quarter, our improved SEO keyword rankings are bringing more customers, and our efforts in machine learning and computer vision are helping customers quickly find the products they are looking for. Third, we have a highly scalable business model. Our drop-ship model with thousands of partners and fulfillment centers, augmented by our own in-house distribution network, allows for efficient delivery and flexible inventory management. Our abundance of assortment, over 8 million products, allowed us to suddenly double our sales. We are now standing up a B2B site quickly for our recently awarded GSA contract. Slide 22, please. Now to our focused retail strategy. Broadly, Overstock's mission is to create Dream Homes for All, making beautiful, comfortable and well-appointed homes accessible by helping customers easily and confidently find just what they want for less. We've consolidated this vision and focus into a single page that everyone at Overstock Retail lives by. In order to achieve sustainable, profitable growth, we must focus on serving our customers' highest needs, and we know our customers are savvy shoppers and reluctant refreshers. Additionally, we've aligned our brand pillars to our customers' needs: product findability, smart value and easy delivery and support. These brand pillars provides the long-term guardrails and focus for innovation that we're -- so that we're only working on the things that improve experiences our customers love. Slide 23, please. We've done a great deal of customer research, and our findings have driven our focus. Two customer segments particularly fit our strength: savvy shoppers and reluctant refreshers. Together, they represent 40% of the home furnishings market or roughly $120 billion. This is a key point of differentiation for us. Selecting these strategic market segments was a function of opportunity size, industry space and existing customer alignment to what our brand naturally does so well. While other pure-play home good retailers focus more on inspiration, we've leaned into the white space of the 2 customer segments who already have a higher propensity to shop with us. These customers are deal-driven, want to feel great about their purchases and want a low-hassle shopping experience. Well, that's Overstock. We continue to leverage analytics and machine learning to ensure we provide the shopping experience these customers, our customers, desire. In the recent work-from-home period, most of our new customers were savvy shoppers and reluctant refreshers. This gives us added confidence that these new customers are here to stay. Slide 24, please. You can see here how our 2020 initiatives align with our 3 brand pillars. These initiatives have not changed during the pandemic. We remain focused on them through completion. The lone exception is the launch of free shipping on everything. This promotion has allowed us to serve our customers better during the pandemic. I won't dive specifically into each of the points here, but the next slides will show the progress from efforts, progress aligned with our 3 brand pillars. Slide 25, please. Mobile has long accounted for more than half of our visitors but lagged in conversion. As a result of our specific efforts to enhance our mobile experience, for the first time, mobile now represents a greater percentage of sales than desktop. Unique mobile visits were up 149%, and mobile sales were up 148% year-over-year in Q2. Mobile resonates with our customer, so we will continue to improve our mobile experience. Slide 26, please. This chart reinforces our primary focus on home furnishings, and that new and existing customers understand and like our primary focus. Our Q2 sales mix of home furnishings was 92.5%, up from 88.6% last year and 86.7% last quarter. Our customers know us for our core competencies in home furnishings. Slide 27, please. Organic search traffic has recovered and is now at an all-time high. As we previously talked about, we had a tough time with SEO a couple of years ago. In 2019, we really started homing in on the most relevant home-related keywords, and keyword rankings have showed a steady increase. So while the absolute volume of our top 3 keywords is not at an all-time high, all the focus, technology and content we put in place allowed us to take advantage of the influx of increased online shoppers, resulting in a favorable increase we now see in Q2. Slide 28, please. Two key elements of our brand pillars relate to shipping and promotions. Free shipping is a top purchase driver. We launched free shipping on all orders in response to COVID-19. It's nice to see our current customer rating of shipping charges is now 11% favorable compared to competition. Savvy shoppers recognize Overstock's promotional competitiveness. We are now 6% favorable compared to home furnishing retailer averages. These differentiators of smart value resonate with our customers. It's nice to see we have significantly moved the needle on each. Slide 29, please. During the work-from-home period, we've experienced multiple challenges in fulfillment capabilities. Ours is not a unique story. While our click to delivery increased, we've put our customers first and made sure we set realistic expectations on delivery time. Thus, our percentage of orders delivered on time or early remain consistent with our customers' expectations. Slide 30, please. Due to our increase in sales, we've received a high volume of customer contacts, the highest in our history. The good news is that customer service contacts as a percentage of orders continue to decline and is 37% lower than last year. Even better, a lot of contacts are now through self service. You can see we had a 4x increase in the percentage of self-service contacts year-over-year. This means customers can solve their own problems, which avoids the cost of a customer service contact. Our customer satisfaction, which dipped during the height of our sales increase, continues to increase as we tweak and make improvements. Our technology routes have shown as we innovate through automation. Slide 31, please. All this to say, we are well positioned for continued growth. Our revenue growth is outpacing the industry, driven by our technology, customer focus and our business model. Our normalized gross margins have improved. Our expense rate is growing slower than revenue, driving operational leverage that Adrianne talked about. This flows through to produce long-term adjusted EBITDA margins in the mid-single digits, and we are generating positive free cash flow. We are driving sustainable, profitable growth for Overstock Retail by enabling our vision of Dream Homes for All. Slide 32, please. I now turn to our Medici Ventures business. This slide shows Medici Ventures' areas of focus and where each of our blockchain companies fits into our vision. I'll start with tZERO. Slide 33, please. From the successful distribution of OSTKO, to record ATS volume and Crypto app account growth, it has been an exciting quarter for tZERO. Importantly, I believe tZERO's recent achievements will serve as catalysts for future growth and adoption of the platform. Slide 34, please. With the recent increase in tZERO's ATS volume, which I will highlight in more detail on the next slide, tZERO now accounts for roughly 95% of all security token volume. And TZROP in OSTKO currently account for over 80% of the total value of security tokens trading today. This data is encouraging as it demonstrates our market-leading position and has encouraged the team to broaden the types of private companies and assets it targets. I will get into this more in a moment. As noted on this slide, tZERO was named Best Blockchain Solution of the Year by FTF News, a fintech-focused media outlook. If someone is thinking about issuing a security token, they need to consider using tZERO. Slide 35, please. Following the successful distribution of OSTKO, tZERO delivered record ATS volume last quarter. May and June were our 2 strongest months since launching the platform last year, with 423,000 and 391,000 tokens traded in those months. It was also worth mentioning that June was the first full month of OSTKO trading, which represented 32% of June's trading volume. Year-to-date, volume on the tZERO ATS is up 77% and, more importantly, continues to grow. Between July 1 and July 24, over 625,000 tokens have traded on the platform, far exceeding our previous records. Because tZERO generates revenue from trading commissions, higher volume means higher revenue. Slide 36, please. In addition to record ATS volume, our Crypto app experienced record user growth in Q2, adding over 2,600 users, with over 1,000 new accounts in May alone. As you may recall, tZERO intends to migrate these users to its retail broker-dealer, tZERO Markets, upon approval, which will allow these users to trade our digital securities. Slide 37, please. It has been a busy and exciting few months for tZERO. Most recently, tZERO signed a tokenization and trading agreement with the luxury St. Regis property in Aspen. This asset should be trading soon and will be tZERO's first third-party token. That's an exciting milestone. We also had 2 new broker-dealers go live on the ATS last quarter, one of which is a publicly traded company. And last, driven by recent increase in equity volumes, tZERO's broker-dealer subsidiary, SpeedRoute, has generated record revenue. Year-to-date through June, tZERO generated $23 million in revenue, exceeding revenue for all of 2019. I hope this trend continues to grow as tZERO grows the digital security side of the business. Slide 38, please. I will again reiterate the tZERO road map. While tZERO recently hit some key milestones, its overarching priorities remain the same. These include adding more assets, increasing liquidity on the ATS and improving the investor experience across its ecosystem. One area I'll add more color on is the asset side. tZERO initially targeted companies looking to raise capital and then trade on our platform. It has shifted its focus toward companies, particularly those with deep cap tables, that are interested in direct trading on the tZERO ATS. Since trading is not contingent on a successful capital raise, this category of issuers is able to trade more quickly. tZERO has already begun reaching out to several private companies and the early feedback is encouraging. So stay tuned. I'm pleased with tZERO's recent progress and encouraged by its prospects. Slide 39, please. Here are a few of our other Medici Ventures companies with notable news in progress. Slide 40, please. Voatz, based in Boston, has a mobile voting app that uses built-in security of smartphone technology and immutability of the blockchain to enable safe and secure mobile voting. We recently became the first remote voting platform verified as compliant with federal voting security guidelines. This is a big deal. Voatz also recently conducted elections for the Arizona and South Dakota state conventions, bringing the total of successful election conducted to nearly 70. Voatz has the perfect solution to our outdated current systems, particularly in the COVID-19 area. Everyone on both sides of the aisle should be clamoring for Voatz. And check out its new website, which launched yesterday. Slide 41, please. SettleMint, based in Belgium, is one of our utility players crossing several verticals. It provides licensed enterprise-grade distributed middleware. The company was recently recognized by Everest Group as a top start-up in low-code platforms. SettleMint's scalable low-code solution makes blockchain use case development and integration highly accessible to organizations and developers, which accelerates the much-needed digital home overhaul of outdated centralized systems we currently rely on. Slide 42, please. I'll briefly recap before we move to Q&A. Slide 43, please. We have made a lot of progress, thus far, in 2020 across all our businesses. We are executing against a focused and disciplined strategy. Those efforts are beginning to show in our financial results. We've reacted quickly to adapt to the challenging market conditions and consumer demands. Our business model and our employees have demonstrated remarkable resilience. We've resolved many of the challenges posed by the quick move to a nation working from home. We are stronger than ever. We are positioned well to continue our growth trajectory, and I'm excited to see just how far we can go. With that, let's take some questions. And Alexis, let's start with live questions.

Operator, can you open the line?

[Operator Instructions] Your first question comes from the line of Thomas Forte with Davidson.

First off, Jonathan, Adrianne, Dave, Alexis and Saum, congratulations on an amazing performance. So I have one question and one follow-up. So you touched on this a little, but I wanted to put it in sports terms to see if I could drive the prize home. Can you talk about your ability to achieve mid-teens sales growth post pandemic, whenever that is? So using a sports comparison, we'll go to basketball. Is it a lay-up? Is it a slam dunk? Is it a free throw? A 3-pointer?

Great. Nice to hear the sports analogy. And Tom, thank you for the kind words. Dave, I'll ask you to address that mid-teens sales growth post pandemic, recognizing that post pandemic may be something that never actually comes.

Yes. Thanks, Tom. Great question. But right now, we are in turbulent times. And to predict something right now, to give any kind of a forecast, would be errant on our part. That said, we maintain our strategy. We maintain our goal of outpacing the home furnishings industry market growth and continuing to improve on our operating strategy.

Excellent.

Alexis, do you want to add anything to that?

No.

Okay. I'm sorry. Go ahead.

Right. So second question for tZERO. I wanted to talk about tZERO's efforts to add tokens to its ATS. And can you remind us the current status of your efforts to create a joint venture with BOX?

Sure. Jonathan, do you want me to jump in?

Yes, jump in. That's your question, Saum.

Okay. So on new assets, you guys heard Aspen Digital will be the third -- the first third-party token that trades on our platform. COVID did slow down the trading of new assets with the market volatility, but we've now seen issuers reengage. We do have several others in the pipeline. They're kind of from a wide spectrum of industries, with a bulk of them being in real estate. So following Aspen, we hope to have some additional assets live, hopefully, this quarter and next. As far as BSTX, they're having ongoing dialogue with the regulators, and they're actually about to make an amendment to their rule book. So they're making progress and moving along, and we hope to get an approval sometime later this year, early next year.

And your next question comes from Marc Cohodes with Alder Lane.

Well, I knew this day would come. And Jonathan, you deserve a lot of credit because you took an absolute s**t show, and you have made it something quite special. But I'm not all high fives yet. What is the plan to tighten the spread between the Overstock preferred, the OSTKO and the OSTK? OSTKO should theoretically be worth more than the common because it's worth the common plus dividend. And what and when should we hear about the OSTKO dividend and/or distribution?

Marc, thanks for the kind words. I want to comment that the entire team at Overstock, at tZERO, at the company has made this happen. It's nice for you to say kind words about me, but it's certainly been a team effort. On tightening the spread between Overstock.com and Overstock preferred, that's really something the market is going to have to figure out. What will we do to help the market? We are working very hard to get more broker-dealers subscribed to the tZERO ATS. We think that will improve liquidity. We're working to find business incentives to get the Overstock preferred share to trade more or exclusively on the tZERO platform. I think those things should tighten the spread. But ultimately, we're going to be focused on running the businesses and let the market determine how it values common versus preferred, or vice versa.

I also have a question for Saum. When might we see a dividend on the tokens with tZERO doing much better?

We're exploring some options with the dividend -- with the TZROP tokens. I don't have a date for dividends to announce right now, but there are some options we're looking to potentially apply to those tokens, which will make them much more valuable to the investors that participated in that raise.

And what...

Yes. And one of the things that -- Marc, one of the things that hampers us on declaring a -- on distributing a dividend on the TZROP token is, under Delaware law, a company must be profitable. And while tZERO is doing much better, it's still not to bottom line breakeven. And so under Delaware law, I can't do it. That's why, what Saum has mentioned, looking for ways to make it more valuable are important, and we've got our thinking caps on that.

And finally, has there been any thought given to hiring a full-time Chief Investment Officer or Chief Investment Officer and team to run Medici, rationalize Medici? Because you have your hands full running a speed-ship Overstock. And if tZERO and other Medici assets get a little more shine to it, then this thing really humps.

So great question. Probably not a team at this point. But we are looking for and we'll soon be posting a job description for someone that can help the companies in the Medici family get their blockchain products to market, that can monitor the companies in the Medici family to determine which warrant additional Medici Ventures' capital, to help the companies in the Medici Ventures' family raise capital from third parties, particularly from well-known VCs, and to sit on some of the Boards of the company and Medici Ventures' family. I am stretched in. The Overstock Board has recognized that, and they've asked us to -- they've asked me to focus on getting someone or some people to fill those roles. So we're working on them.

Well done, gang. And well done, Jonathan, bringing in people around you to help you out. It's a super job.

Thank you.

And your next question comes from Brad Safalow with PAA Research.

Let me add my congratulations on the execution. First question I had really related to the GSA announcement. I understand that, I guess, you're going to launch this portal sometime in the next few weeks. I wonder if you could dimensionalize the revenue opportunity. Obviously, $6 billion is a big number, but we don't really have any sense as to what amount of spending occurs in the product categories that you have a very strong presence in currently. And I know -- and I'm guessing that you are having extensive conversations with new vendors to the Overstock ecosystem as a result of this announcement. Can you somehow frame the GSA opportunity with a little more granularity?

Let me start, and then I'll turn it to Dave and Adrianne to make any comments they want. GSA is a big win for us. It is an unknown win and how it affects the P&L. We don't know exactly what these 5 government agencies, which we hope grow to more government agencies, will purchase from us. We do know that they really liked our platform. They like the product offering, and they liked the analytics they got. That's a hard question to answer, but I'll turn to Dave and Adrianne, because it's not like we haven't done some modeling, it's just hard to answer. Dave?

Yes. Thanks, Jonathan. Good question, Brad. As we look at this, the thing to keep in mind is that $6 billion TAM is in the product categories where we currently play, where we currently operate. But let me underscore, emphasize and highlight proof-of-concept pilot programs. We'll launch this in August. We're in conversations with new vendors, with new suppliers, many in the commercial goods side of things. Many of our current partners already operate or have dealings with the GSA, either present or in the past, and they know how to work in this environment. They know the product categories as well. And like I said, because we're onboarding new commercial partners in this area, we feel confident that we'll have a solid assortment to provide. As Jonathan mentioned, the GSA really liked our platform, our website. Our tech is strong. And we'll provide more updates along the way as we learn more with this program. But let me just emphasize, too, that the TAM of $6 billion, that is not just random, everything they purchased. That's just in the categories that we specialize in.

Okay. And in terms of how you're approaching the launch, how much spending has evolved in this quarter? And how are you going to, I guess, promote engagement from government employees?

Dave?

Yes. From a -- thanks, Jonathan. From a spending standpoint, our tech is strong. When you think about what the GSA was looking for in the platform, it's assembling pieces and components of products that we've been pioneering for the last 20 years, just assembling all of that together. We've added some additional dev teams and some additional work, but it's nonmaterial, really, in terms of what we can offer in the product categories. Most of the time and energy was spent in developing a platform that allows the government for their specific invoicing and analytics and the things that they need to manage their program in this micro purchase arena. So not significant expenses right out of the gate, insignificant, really.

Okay. In terms of how you're going to promote engagement within the government infrastructure?

Yes. So the engagement...

Dave will talk to that. Yes, go ahead.

Thanks, JJ. When you think about engagement, you have to think about it a little bit differently than on our B2C sites. We're not allowed to promote directly and market directly to these users. They're specific users. When you log in, it's a private website, and they have access that is only for government agencies and these specific folks. So we'll continue to work closely with the GSA. We have opportunities to survey their users and learn more and communicate with them, but there is no direct marketing.

Yes. The government has been very clear on that, Brad. I think where we ultimately win on this is by providing these procurement officers the data they need to see that they're meeting quotas from buying from different types of businesses, that their costs are going down. If they're having a good experience purchasing and getting the kind of robust data, which we give them, I think that's what makes it grow.

And then just one last question on the GSA, and then we'll get back in the queue. You mentioned that you're having a lot of conversations with new vendors, some are -- that are commercially oriented. I would guess, and I just want to hear your thoughts on this, that conversations with new vendors as a result of the GSA, I would assume, also include potential listing of product on your traditional consumer-facing portal?

Yes. A lot of these are -- it's opened up an interesting segment for us. We've talked to several commercial suppliers who actually have some more large-scale contracts with the U.S. government, who have never been in the shipping business of fulfillment for online services. So as they have reached out to us, and we have reached out to some of them, and the more we've been in conversations, the more synergies we see with them actually being able to list some of those commercial goods on our B2C website. So yes, there is opportunity there as well.

And your next question comes from the line of Joseph Besecker with Emerald Asset Management.

Yes. This is Joe Besecker. The questions I -- a lot of the questions I have were asked, but I have a couple of quick ones, kind of -- really kind of rapid. And first one is, the work that we do here at Emerald -- Nate Jones, maybe on this call, is the analyst that follows us. We've been following credit card data. And the data that we see in July, so far, has been exceptional as well. Can you comment on that? And then -- so you could just give a quick, if you can, on that, any kind of color on that would be great. Our numbers are showing no signs of slowing whatsoever.

Well, let me take that one. We are in the practice of sharing intra-quarter information. We did so last quarter because early pandemic guidance from the SEC. You can see we had a strong second quarter, and I won't comment other than July -- on July, other than to say that sales remain strong.

Okay. And then a question for Saum. Saum, you put a letter out yesterday. And I just want you to give us some thinking as to how you came about reducing your salary and working for equity compensation. That could be looked at several different ways. But from my perspective, our perspective, that's a good thing. Can you give us a little bit of color on that?

Yes. So what I mentioned in my letter is our Board, as well as myself and some other management, took equity for salary. And the Board is just exclusively taking equity. I reduced my pay by 60%. It was completely optional. It's -- we're not dying for capital. You guys know Overstock is doing quite well, plus we have our own capital. So it's not for that reason. Part of it was because of COVID and just being responsible with the times. The other part of it is we're preparing for a capital raise. And I think just showing reductions in burn is probably a smart thing to do. In addition, we're adding some really strong capital markets talent. I mentioned in my letter, someone -- a Managing Director we got from KKR named Michael Gaviser, who's now supplemented in helping the team. And we really need more of those kind of leaders in our firm to complement my skill set, which isn't primarily product development and technology. And so those were the reasons I did it. I also think the team, myself included, really believe in this mission. And so getting some equity incentive for salary, I'll take that trade. Those were the reasons.

Got you. And then a follow-up...

Joe, this is a big positive. It is a big positive. [indiscernible]

I think it's a huge positive. But in talking to some of the people in the Street yesterday, I think they were confused. And I just wanted to get some clarity on that.

No. We were completely voluntary.

Yes. And I think that shows the difference between the current thinking and the past thinking, and you're alongside the shareholders. And I congratulate you for that. I did want to drill down on -- first of all, my buddy, Marc Cohodes, who I can't say enough good things about. When he asked this question, and we were talking about the dividends, you answered it more on the tZERO as opposed to the Overstock preferred. The thinking of a dividend on the Overstock preferred, just -- I may be confused, does that have anything to do with tZERO's profits? Or does it have to do with Overstock's profits themselves?

Joe, thanks for asking the clarifying question. I answered that for the -- for TZROP. Overstock can pay a dividend. It has, every year, paid a dividend on the Series A preferred shares. The Board has not met to discuss that, but we've paid it every year. I don't know why we wouldn't pay it.

But there was a difference. There is a difference. And when you answered the question, at least the way I heard it, you were speaking more to the tZERO tokens as opposed to the Overstock tokens, the preferred.

That's correct. And a good clarification. Thank you, Joe.

So given the situation here, when you meet, I have not owned the preferred before because I was a shareholder and because I got some of these tokens. I think that -- I would suspect that, that would be on the -- as you said, on the current agenda.

Correct.

And your next question comes from Thomas Forte with Davidson.

Great. I had 2 margin questions. One, Jonathan, you talked about the government contract as potentially opening the door for more B2B. I would envision that B2B has the potential to potentially have a higher long-term margin than your mid-single digit for your namesake retail? And then second, can you talk about your near-term and long-term gross margin goals for your namesake retail business?

So I'll answer first, and I'll turn it to Adrianne to provide some comments. I think it's too early to comment on what margins might look for, for a nascent B2B business. We just haven't looked at it enough. It's not in our current focus. It will be as it grows, but I just can't answer that question. And Adrianne, I'll let you take the rest of it.

Great. Thanks. And yes, Tom, to echo with Jonathan, as we -- trends emerge, and we see more -- I think Dave also said this on the B2B and GSA side, we'll certainly provide color as we know more, but it's too early. As far as the gross margin thoughts, I think within my prepared remarks, I talked about the unique items to consider for 2Q. Hopefully, those were clear. And so kind of had the team think back to the Q1 performance of a place where we expect to be going forward. Does that answer your question, Tom?

It does.

Our next question comes from the line of William Woodruff from William K. Woodruff & Company.

I have a question on the secure mobile voting. I think you basically think it can be huge. And I was just curious, is there a -- anyway, how can we follow that? Is there a road map that you guys have thought through? Is it going to be -- it could it be adopted by states? I mean, I think, it could be huge also. Can you elaborate on any of that? Is it too early?

William, thank you. Yes, we think it could be huge, too. Frankly, I don't understand why it's not being used during COVID by every county clerk or state -- secretary of state, whoever is overvoting. That said, governments are slow to adopt new things. The road map to date for Voatz has been, first, use it for what are called the UOCAVA voters. It's uniformed and overseas voters, people that are voting absentee. Then they'll expand it to people who have to have special voting compliance under the Americans with Disabilities Act. That's how it's been used in 70 different states and jurisdictions initially. It's gotten broader use by parties at their conventions over the last 120 days as they haven't been able to meet, and they've been able to vote remotely using mobile phones. The road map is to continue to work with -- and the other thing I would say, William, is there's not a single purchaser. You don't go to a state and say, "You're the voting guy, buy -- use this." It's -- every county clerk has the ability to do things. So in Iowa, that's 99 counties; and Utah, it's 29 counties. It's a long sales process. The Voatz is aggressive on that front. It meets with the national and state county organizations and county clerks and that kind of thing. Looking at the Voatz website, voatz.com, I think it's useful to see what they're doing. Government -- it's hard to do governments to change quickly, but we think this is a great product and a great time for this great product.

And at this time, there are no further audio questions. Are there any closing remarks?

Thank you, Paula. We appreciate your moderating this for us. I want to thank everyone participating in today's call. I want to thank our team at Overstock, at tZERO and Medici Ventures. They have really worked hard over the last 120 days of work from home in a pandemic world. I appreciate our shareholders' interest in Overstock. Until we talk again. Stay safe, stay healthy, and we'll stay productive.

And thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.