Overstock.com (OSTK) Reports Q2 Loss of $2.20, Revenues Beat

Overstock.com (NASDAQ: OSTK) reported Q2 EPS of ($2.20), versus ($0.82) reported last year. Revenue for the quarter came in at $483 million versus the consensus estimate of $474.15 million.

• Total net revenue - Total net revenue was $483.1 million and $432.0 million for Q2 2018 and 2017, respectively, a 12% increase. This growth was primarily driven by increased marketing expenses as we more aggressively pursued revenue growth and new customers. Our increased marketing expenses resulted in a 9% increase in orders in Q2 2018, and we had a 7% increase in average order size (excluding promotional activities) primarily due to a continued sales mix shift into home and garden products. These increases were partially offset by increased promotional activities, including coupons and site sales (which we recognize as a reduction of revenue) due to our driving a higher proportion of our sales using such promotions, and an increase in marketplace sales (for which we record only our commission as revenue). We continue to face challenges in our natural search marketing, which have significantly limited our efforts to grow revenue efficiently.
• Gross profit - Gross profit was $91.7 million and $84.2 million for Q2 2018 and 2017, respectively, a 9% increase, representing 19.0% and 19.5% gross margin for those respective periods. The decrease in gross margin was primarily due to increased promotional activities, partially offset by a continued shift in sales mix into higher margin home and garden products and an increase in marketplace sales (for which we record only our commission as revenue).
• Sales and marketing expenses - Sales and marketing expenses totaled $94.4 million and $43.3 million for Q2 2018 and 2017, respectively, a 118% increase, and representing 19.5% and 10.0% of total net revenue for those respective periods. This significant increase in sales and marketing expenses was primarily due to our effort to aggressively pursue increased revenue and new customers through increased spending in the sponsored search, television, and display ads on social media marketing channels, as well as increased staff-related costs.
• Technology expenses - Technology expenses totaled $32.4 million and $28.2 million for Q2 2018 and 2017, respectively, a 15% increase, and representing 6.7% and 6.5% of total revenue for those respective periods. The increase was primarily due to an increase in staff-related costs of $3.8 million and an increase in technology licenses and maintenance costs of $1.5 million, partially offset by a decrease in depreciation of $891,000.
• General and administrative ("G&A") expenses - G&A expenses totaled $31.4 million and $22.4 million for Q2 2018 and 2017, respectively, a 41% increase, and representing 6.5% and 5.2% of total revenue for those respective periods. The increase was primarily due to a $5.0 million increase in legal fees primarily in tZERO related to the SEC investigation, a $4.8 million increase in consulting and outside services, a $3.5 million increase in staff-related costs, and a $1.2 million increase in travel expenses. These increases were partially offset by a $6.8 million realized gain on the sale of cryptocurrencies on which we recognized a large impairment loss in Q1 2018.
• We continue to seek opportunities for growth in our retail business, through our Medici blockchain and financial technology initiatives, and through other means. As a result of these initiatives, we will continue to incur additional expenses and expect to purchase interests in, or make acquisitions of, other technologies and businesses. We anticipate that our initiatives will cause us to incur losses in the foreseeable future. These losses, additional expenses, acquisitions or purchases may be material, and, coupled with existing marketing expense trends, increased marketing and branding expenditures, and strategic changes in our retail business, may lead to increased consolidated losses in some periods, and to reduced liquidity. Additionally, we may recognize additional impairment charges from our ownership interest in other entities.
• Other income, net - Other income, net totaled $368,000 and $593,000 for Q2 2018 and 2017, respectively. The decrease is primarily due to a $1.0 million equity method loss, a $560,000 decrease in Club O and gift card breakage which we began recognizing as a component of revenue in 2018 following the adoption of ASC 606, and $283,000 in debt retirement costs related to our building loan repayment. These decreases to other income, net were largely offset by $1.8 million in unrealized gains on investments in equity securities.
• Net cash (used in) provided by operating activities - Net cash (used in) provided by operating activities was ($59.5) million and $20.3 million for the twelve months ended June 30, 2018 and 2017, respectively. The $79.8 million decrease is primarily due to increased losses.
• Free cash flow (a non-GAAP financial measure) - Free cash flow totaled ($79.4) million and ($25.6) million for the twelve months ended June 30, 2018 and 2017, respectively. The $53.8 million decrease was due to a $79.8 million decrease in operating cash flow, partially offset by a $26.0 million decrease in capital expenditures including costs related to the development of our new corporate headquarters.

For earnings history and earnings-related data on Overstock.com (OSTK) click here.

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