Ladies and gentlemen, thank you for standing by and welcome to the Q3 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 speaker today, Ms. Alexis Callahan. Thank you. Please go ahead, madam.

Thank you, operator. Good morning, and welcome to our third 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, October 29, 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 Q2 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. With that, let me turn the call over to you, Jonathan.

Thank you, Alexis, and good morning to all. I am excited to be sharing our third quarter results and providing updates on our business. I'll follow the agenda on Slide 3. Next slide, please. Because many of you are new to Overstock, I'm going to start with an overview of who we are. We are a leading and innovative e-commerce company. We view ourselves as a tech company at our core, one that embeds automation in our processes and works to remove middleman. We were founded as an online liquidator in the late '90s, then worked into a general merchandiser and today are a home furnishings-focused online retailer. A lot has changed in Overstock over the last 14 months. We've significantly upgraded our leadership team. We've defined who we are and identified what we do well. We've carved out a strategic niche where we want to play, and we've introduced more and more discipline and focus into the organization. All that work is paying off. The operational improvements we've made have allowed us to take advantage of recent sector tailwinds. We've made good progress but we still have plenty of work to do. We're just getting started. I've never felt as confident about our ability to achieve what I said we would, sustainable, profitable growth. In fact, I'm so confident I will add something to that goal. From now on, our mantra is sustainable, profitable market share growth. Slide 5, please. We continue to strategically strengthen the Overstock team. On October 4, we added a seventh director to our Board. A past Chief Marketing Officer at Walmart and TripAdvisor, Barbara Messing is the Chief Marketing Officer at Roblox, the user-generated online gaming platform. Barbara has over 2 decades of experience in retail and e-commerce and is known for implementing data-driven…

Thank you, Jonathan. Next slide, please. As a reminder, we manage our business and report our financial results across 3 key segments: Overstock Retail, a pure-play e-commerce home furnishings retailer; Medici Ventures, our blockchain-focused incubator; and tZERO, our largest Medici Ventures business focused on financial innovation and liquidity for private companies. Our consolidated results aggregate these 3 segments. I will begin with a summary of our consolidated results, followed by a more in-depth review of Overstock Retail's third quarter performance. Next slide. On a consolidated basis, we delivered another strong quarter. Sales at Overstock Retail doubled for the second sequential quarter year-over-year. Trading volume on the tZERO ATS increased 20x compared to a year ago, and we maintained disciplined spending and investing across the organization. In summary, we posted 111% revenue growth year-over-year, adjusted EBITDA of $40 million and diluted earnings per share of $0.50. We also ended the quarter with a healthy balance sheet that included a cash balance of nearly $530 million, $193 million of which was the result of our successful and oversubscribed follow-on equity offering in August. Overall, we remain focused on executing against our key initiatives, and our recent financial performance reflects this commitment. Next slide. This slide provides a summary of Overstock Retail's exceptionally strong third quarter performance. New customers more than doubled, supporting our revenue growth and profitability as measured by adjusted EBITDA improved by $51 million versus the same period last year. Overstock's business model is highly scalable. Our pure-play e-commerce and partner supplier drop-ship model naturally supports growth. Our recent results illustrate our ability to generate significant operating leverage within our business. We remain focused on growing our top line at a faster pace than our operating expenses, and for the second consecutive quarter, we achieved that. Total revenue doubled in…

Thank you, Adrianne. I'm so pleased with these results. They represent disciplined focus and execution against our strategic initiatives. I thank everyone in the company for their hard work. Slide 18, please. I'll now discuss how we achieved these results, starting with Overstock Retail. Slide 19. Overstock is a top brand in the fast-growing home furnishings online market, a market that is now more relevant than ever and one we believe will remain relevant. After years of meager growth and online penetration, we've seen a significant spike this year and now estimate 35% of home furnishings are being purchased online. I'd like to emphasize that we were able to keep growing at over 100% even as brick-and-mortar began bouncing back in Q3. Slide 20, please. As I've discussed before, we've carved out our niche and are playing in our own distinct position of strength in the market, a position that is relevant in any market condition but especially during challenging or uncertain economic times. Our brand vision of Dream Homes for All differentiates on home good expertise and smart value. Our customers come to us to find quality home goods for a great value. We are not, nor do we strive to be, an everyday low price leader nor to be inspirational. We believe our value proposition uniquely meets the needs of many customers in the market, our customers who we focus on every day. Slide 21. During Q3, our customer count grew 141% year-over-year. Nearly 2/3 of these new customers were in our target customer segments, something which demonstrates success in our focused marketing efforts. It also gives confidence that we will be able to retain these customers. Our new customers in the last 2 quarters are making repeat purchases at a higher rate than they had in the…

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

Congratulations on another outstanding quarter. So my one question and one follow-up is, how should we think about your ability now that you have the Aspen token to add additional tokens to your ATS? Where are we in the BOX joint venture? And then my follow-up is, I'm very curious on why you decided to make incremental investment in Bitt. What did you see in their results that made you think it was worth making incremental investment?

Tom, thank you, and thanks for the congratulations. We're certainly excited about our third quarter results. Saum, I'll let you talk about where we are on adding additional tokens and the status of the BOX JV, and then I'll address the Bitt question.

Sure. Thank you, Jonathan. So Tom, our top priority is finding more assets. And as you heard, so we got Aspen live this quarter. That's probably one of the top-quality digital securities that exists today. We also just yesterday announced that we -- a tokenization agreement with a fund called Tynton Capital. They're well-respected fund, raising $300 million. We also have past announcements like River Plaza, which are now doing their raise and we hope to trade probably early next year. So we've announced several assets. There's several more in the works. But just to be kind of frank is most of the assets that exist today don't pass our diligence. And we don't want to launch assets out there that aren't the quality that meet our standards. So we're being quite selective about what we're willing to trade. But the new assets that we're getting, we feel very good about, like Tynton Capital. I'd also note, we are shifting our strategy a bit to direct listing rather than these offerings, which have the lead time of having to build offering memorandums, have a successful raise and then sometimes lock-up periods before they trade. So we're shifting to direct listing where we feel we can get assets up and running much faster. On the JV question with BSTX, our joint venture with BOX Digital, the rulebook was filed, as you know. There's been very positive back and forth with regulators, and we're optimistic we'll get a positive answer as far as moving forward with the exchange in late November. Their deadline, the SEC's deadline to get back to us is late at the end of January, but we're hopeful we'll see something positive maybe late November. But one way or another, we'll hear an answer by the end of January. Jonathan?

Thanks, Saum. And on Bitt, the market opportunity for Central Bank Digital Currency or CBDC is enormous. And it is a focus of almost every central bank around the world. The pandemic has increased and accelerated that focus. So in our view, the market opportunity is right in Bitt's crosshairs. And this additional investment enables Bitt to pursue the market opportunities today. When the pilot in the Eastern Caribbean launches -- when it goes live next month, and it was delayed slightly because testing during the COVID -- user testing during the COVID period was slowed, but when it goes live next month, we think Central Bank guys from around the world will be watching it. We believe in this mission. We are bullish on CBDC, and we think it's only a matter of time until digital currency will be the norm as central banks around the world are exploring it right now. So to have a controlling interest in the company that allows for that just seems like an easy decision for us.

Your next question comes from the line of Seth Sigman with Crédit Suisse.

Congrats on the quarter. I wanted to focus a little bit on the retail business. Very good performance this quarter despite some industry constraints that we heard about, right? Inventory seemed tight and may be worse in the second quarter for the industry. There are also incremental supply chain and shipping costs. So I was hoping you could discuss those 2 factors. How are you able to manage that so well in the third quarter? And then what do you see, as you move into the fourth quarter, whether those headwinds are better or worse?

Great questions. Dave, I'll let you address those initially. I may have something to add.

Okay. Thanks, Jonathan. Thanks, Brad (sic) [ Seth ]. Yes, regarding both inventory and carriers and the challenges we faced, I'll touch on inventory first. From an inventory standpoint, our business model is very resilient, with over 8 million products on our website. So we recognize that we missed out on some opportunity to really make hay with some of our top-performing products that were out of stock. But with the trade-off sales and the incremental inventory assortment that we have, customers were trading off and we had an increased percentage of our breadth of assortment selling and we also sold more units per item with that. So the business model is resilient. Regarding the carrier challenges, Jonathan mentioned it earlier, shipageddon is coming. We've really been through that for the last 6 months, working to understand how to get trailers and trucks in place with 100-plus percent growth in the last 6 months. And those trucks know their way to our warehouses. We've been working very closely with our carriers. We've provided them forecast and we continue to work on that. We're in good shape there, confident that we have our commitments in place with our carriers and looking forward to a solid Q4.

Yes. I would just -- Seth, I'd just add on to what David said. Because our growth started happening 6 months ago, we've -- the carriers have adjusted, they know our needs. We've given them our forecast. We have commitments from them for what we think we'll need. I think shipageddon is going to affect people that are more holiday-focused, that haven't had the huge increase in sales we've had for the past 6, 7 months.

Okay. That's really helpful. I appreciate that. And then I think you suggested early on that holiday sales, they could come early, and we've heard that from a lot of companies as well. Can you talk a little bit more about what you are seeing early here in October and whether some of the momentum from Q3 has continued? And then just related, you did mention higher discounting in Q4. I just want to clarify that's higher versus Q3, but is it also higher year-over-year versus the fourth quarter? If you could just sort of elaborate on that, too, that would be helpful.

I'll start with the question about what Q4 looks like thus far and then turn it over to Dave or Adrianne to discuss the rest of the question. We have been hesitant and do not give guidance on what we see in Q4. I will say that, thus far in Q4, sales remain strong. Demand is high. So Dave or Adrianne, do you want to talk about the discounting?

Sure. I'll talk about discounting and some of the promotions we're looking at being pulled forward, as Brad mentioned. So Brad, what we've seen is a lot of talk and a lot of articles from -- probably driven, frankly, by the carriers to encourage everyone to release Black Friday deals in October and push promotions up. We've been -- we're not the market dictator in this case, and so we wanted to make sure that we were ready to go. We're nimble. We've got our content set, but we're not seeing a large uptick in holiday early from our competitive set either. We're seeing some and continue to monitor that on a daily basis. In terms of our promotional discounting in the fourth quarter, we do not anticipate that being at greater levels than last year's. But we do anticipate it being -- as we get into the fourth quarter into our doorbuster deals and our daily deals, we're going to become more promotional with that because you have to be in the fourth quarter. But I hope that answers your question there.

Yes, that's great.

Your next question comes from Rick Patel with Needham & Company.

I'll add my congrats on the strong execution as well. Can you provide additional color on the repeat business? It looks like it was up 19% in the third quarter, which is an acceleration. What do you attribute that to? And how should we think about the runway you have to continue driving that higher?

Thank you, Rick, and that's a great question. We are extremely focused on the repeat rate. In the second quarter, as new customers tripled and in this quarter, third quarter, as they more than doubled, we need to be able to take advantage of this new set of Overstock customers and make them Overstock loyalists. What do we attribute it to? I think it is several things. It's our focused marketing. We know who our customers are. We've divided the market into 6 different customer segments. We focus on 2 of them, those that we call savvy shoppers and those what we call reluctant refreshers. They represent 40% of the market. They're predisposed to shop at Overstock. When they come and find us, we're working hard to delight them. And so I think it's knowing we have to increase our repeat rate and knowing who we're marketing to, that's what I attribute the growth to. And it's what we're going to be looking at next quarter and all next year. Dave, what would you add to that?

The word personalization, to add to that, Jonathan. It really is about knowing our customers, knowing what they want and when they want it. And using machine learning and our marketing models and our e-mails and our different campaigns is super important for us as we think about how to get that customer to reengage.

And you talked about 2/3 of your new customers being within your target base. So that implies a pretty material increase in customers that could be considered outside of your umbrella, so to speak. So what's your confidence in being able to retain those new customers that perhaps aren't savvy shoppers or reluctant refreshers and that your TAM is perhaps wider than the $120 billion?

Dave, you want to take a first cut at that and then I'll add?

Sure. Thanks, Jonathan. Rick, what gives me confidence is that repeat rate increase in 28-day new customer repeat. When you see that -- we have a statistic internally that we look at with our deliveries. And when a delivery goes well, a customer has a high likelihood of repeating when that experience is solid. And that's why you'll hear us talking so much about our operations and our customer experience because when the customer has a great experience, regardless of whether they're one of our target customer segments or any customer, if they have a good experience and they like what they see, we have a lot of customers shopping on our website every day that are not our target customers that need a sofa or need a coffee table.

Yes. I think there's 3 metrics that we look at every day and if any one of them is dipping, a flurry of e-mail and activity ensues. One is a fulfillment score that we monitor. Another is a customer care response score, and then the third is the customer post-incident and NPS score. Those are not broken out by customer segments. Those are for all of our customers. And our goal is to delight anybody who shops on our site, not just the savvy shopper, not just the reluctant refresher, but everyone. And I think that operations aspect that Dave mentioned is why we think anyone that comes to shop with us is going to have a great experience.

Your next question comes from the line of Peter Keith with Piper Sandler.

It's Bobby Friedner on for Peter. Congratulations on the continued success. First, I wanted to ask about your recent announcements to offer permanent free shipping on all orders. Can you discuss what went into this decision-making? Have you been seeing notably higher conversions since implementing this in March? And also, going forward, should we expect any adverse impact on gross margin as a result of the decision?

Bobby, thanks for the question, and I'll give a brief answer and have Dave provide more detail. A lot of analysis went into it. It's something we've talked about for months and even years before we did it. The pandemic was a nice catalyst to do it. It has -- the worry was it would cost us money because in the past, it was free shipping for items over $45. That has proved not to be the case because incremental sales more than made up for any dip on shipping costs on those lower-cost items. Dave, what else -- Dave or Adrianne, what else would you add on this one?

Yes. Thanks, Jonathan. I would add that free shipping is identified by our customers as the #1 customer benefit that they wanted. And as we survey our customers frequently, that free shipping awareness has grown 9 percentage points in just a mere 6 months, with one of the quickest moving metrics of awareness topics that we've had. For our customers, it really has resonated with them and given us the confidence to move forward.

Great. Appreciate the detail there. Just separately I want to ask around gross margin. So we continue to see strength there, Q3 at 23.3% was above Q2 at 23%, even though you thought Q3 would be a little bit lower as you restaff your customer support center, among other things, what led to the upside in Q3 versus earlier expectations. And are you rethinking your near-term gross margin potential, given the operational improvements you're seeing?

Well, we want -- I think as Adrianne noted, and I'll have Adrianne address this one, but we do think Q3 is probably a little higher than people should expect in Q4. But Adrianne, why don't you talk about gross margins and what we're doing on that front?

Yes, certainly. Thanks, Jonathan. In the Q3, and I had said this a bit in my prepared remarks, there was a couple of unique items that continued to prevail from Q2. Notably, we did do less discounting. We discussed that. And you'll see when we file our Q, our advertising costs in retail were up 70 basis points. So we were opportunistic with advertising and did do less discounting, which is kind of a similar phenomenon that we did in Q2. And then the other item is we did continue to see a bit of SLA charges in the third quarter, similar to Q3. So I'd say the 2 takeaways are: we don't expect our discounting to remain at the levels we saw in Q2 and Q3; and we're already seeing a lot of improvements within kind of our SLA fees, as I mentioned. So those are the 2 key things that persisted into Q3 from Q2 that we really don't expect to continue.

Good luck in Q4.

Thanks, Bobby.

Your next question comes from the line of Ryan Gee with Bank of America.

So I'm trying to get a sense for what 2Q and 3Q, when you're doubling sales year-over-year and in an unprecedented demand environment, means at all for 2021 and your business going forward. So can you just take an opportunity to talk about your confidence in growing the business next year, capitalizing on this awareness in Overstock? And then as a follow-up to that, what product or site enhancements should we be looking for the rest of this year, maybe into next year that will kind of sustain the KPIs as you're seeing them today? Is there some improvements to the site or the customer experiences that we should be aware of?

Thank you, Ryan. I appreciate the question and the interest. Let me first say, as I've said in the past, I think the focus that we began bringing to the business in the fourth quarter of last year paid off in the first quarter. And I think there was a lot of operational strength and muscle that we had built that we were able to take advantage of when the pandemic tailwind kicked in. Some of the growth, like in mobile, I think is more operationally derived than pandemic derived. And so yes, we will rise against significant comps and starting in Q2 of 2021, but I think the operational focus and the initiatives we've been working on and that we've got slated for 2021 should help continue to drive growth. And it's why I've added 2 words to the company's mantra, which is sustainable, profitable market share growth. We see this as a big market. We like the white space we're in, where we're competing with others but in a different space. And so we think we can -- we think 2021 does have market share growth possibilities that we can achieve. Dave, what would you add to that?

I would just tag on to your comment on the unique white space we're in. I think that we have focused on differentiating ourselves from those top competitors. And as the market moves forward, it's a large U.S. home furnishings market. We expect to continue to grab and grab more than our fair share of our -- of that market. And with a focused team and a focused strategy, we're confident in our abilities to do that.

Now as far as what you can expect to see improvements on the website and our operations, we've just gone through a pretty rigorous decision cycle on what we expect to work -- we focused on with initiatives next year. I think you will see that our website becomes easier to navigate. Finding products will become much easier. The more products you have on your site, the easier you have to make it for people to find them. So there's always a longer to-do list than things we can do, but part of what we're doing is picking the most important and moving forward on those.

Okay. And if I could just squeeze in a follow-up for Adrianne. I appreciate the margin commentary on 4Q. I was just curious, from a revenue perspective, can you compare what new Overstock looks like in a 4Q holiday period? Should we just rely on the historical seasonal trends? Or is there something we should be aware of whether or not revenue is flat, down, up sequentially in this new Overstock that we have?

Sure. Thanks. I think Jonathan mentioned in a previous Q&A, sales remain strong. I think one of the things we've said is Q4 will be seasonally more holiday, and Dave mentioned doorbusters and promotional so I would say some of the similar activities we've experienced in Q4s of past will prevail. And then as Jonathan noted, I think sales remain strong.

Your next question comes from the line of Marc Cohodes with Alder Lane.

Well, well, well. There's a lot of ways I can go on this but I think I want to hit on Medici. And I always say there's no greater motivator than disrespect. And the fact that the followers all value Medici collectively at 0 is a little bit of a slap in the face. May I suggest that instead of an analyst meeting going forward, maybe you have a Medici Day that brings in top management from your portfolio companies to discuss in greater detail, first of all, the size of their markets, their initiatives and how close they are to becoming stand-alone investable companies because I think the opportunities are very large. And my real question is, people seem to think that you're limited to home furnishings and that's your only vertical. What prevents you from expanding, especially with the GSA business, into other verticals? And when could we maybe expect to see something along those lines?

Marc, thanks for the questions and for the suggestion. We do know, as I mentioned in the prepared remarks, we can do a better job telling the Medici story. We did hold a Medici Day in second quarter but I think it's high time for another, and so that's something we can work on. We are bullish on so many of these companies in Medici. Which ones are the ones that are the Lotto tickets versus the Super Lotto versus the Powerball still remains to be seen, but there's some great companies in there. As far as other lines of business, I really think that's an interesting question and one that I think we are forced and focused, first, to think about and are focused on, given the GSA pilot and that may be a chance to grow things out. Dave, do you want to comment on additional business lines and what we're thinking we have, we are and I think, right, we're so focused on home? Where do you think things could go?

Yes. Thanks, Jonathan, and thanks, Marc. I would break it into 2 components, completely new businesses that we're not necessarily in and then expansion of some product categories. So as we think about it for Overstock, it probably would make -- it probably makes some sense to add medical and lab tech, commercial-grade safety supplies, those areas, theme of relevance in the GSA world of customers that we could be servicing there with that contract, and then I think expanding into more into commercial-grade office furniture and office supplies, janitorial, even office electronics, now things along the lines of chargers and monitors and monitor stands and more professional-grade and some of that. So it is on our minds and we are thinking about it. And as Jonathan mentioned, we're guardedly excited about this opportunity but trying to take advantage of every capability we can from the award of this contract.

And back in the day, it was sort of explained to me that your architecture can support something close to $10 billion in revenue. Is that still the case?

Well, we're always working on the architecture. We -- I would tell you this. The fact that we had this tsunami of sales come into early -- mid-March, early April and didn't miss a beat on it tells me that our architecture is, today, strong and ready for growth. I don't know that the number is $10 billion, I don't know that the number is not $20 billion. But I do know that the technology team is always upgrading, always building so that we're ready for the next surge, the next big thing and for growth, growth, growth.

Just stay focused, guys. Well done. Well done fighting through the adversity of the past years and I'm counting on you. Just keep it going and have that Medici Day at some point. That would be very helpful to people.

Thanks, Marc. Alexis, I think we've hit the hour. Should we wrap this up?

Yes, operator?

Yes. We have reached our time for allotted questions. Presenters, do you have any closing remarks?

Yes. Thank you, Marc. Just let me give a quick closing remark. I want to thank everyone for participating on today's call. I appreciate your interest in and ownership of Overstock. Until we talk again. Stay safe, stay healthy and rest assured we will be working to deliver a great fourth quarter. And let me be the first to wish each of you a happy holidays. Thanks so much.