Wednesday, July 13, 2005

Don't Shoot Me, I'm Only The Messenger


Have you ever run a business? You're grading these projects in less than 12 months. You expect instant blockbuster success, that seems a little rediculous to me. Most successful businesses and projects are not overnight successes, they take time. You gotta be more realistic and objective before you start throwin the tomatoes in my opinion.

Thus writes a reader in response to yesterday’s “Overstock Cruises in With a Cool 14”—in which I noted the flat-lining of Overstock.com’s “Build Your Own Jewelry” site as well as the failure of the Overstock.com auction site to attract much in the way of actual paying bidders, despite what appears to be a whole lotta listings going on.

It’s a worthwhile point to make: most of us Wall Street types have never run an actual business, let alone coped with the day to day stress of working for a start-up with no customers, no revenues, and no idea what tomorrow will bring.

But, for starters, I have in fact run a business...for twelve years. And more importantly, I’m not the one who expected “instant blockbuster success” for anything Patrick M. Byrne had something to do with.

Personally—and I say this with complete candor—I expect very little from whatever businesses Patrick M. Byrne initiates, because I don’t believe 1/10th of what he says. And for that reason I certainly never expected “instant blockbuster success” of any kind from Project Ocean or Project Propeller, Build Your Own Jewelry or Worldstock...earnest and well-meaning and high-minded as those efforts might be.

That’s my own personal point of view, and it may not be shared by anybody else on the planet, which is fine. (It also has nothing to do with the valuation of Overstock.com shares, about which I have never ventured an opinion here, positively or negatively, because valuation is inherently subjective; and what we’re talking about here are demonstrable, quantifiable facts.)

The one who might be blamed for raising expectations of “instant blockbuster success” is Patrick M. Byrne himself, who wrote the following words during last fall’s launch of Overstock’s auction site:

9/30/04: just giving an idea of how fast this is taking off...since our launch last Friday: …Sometime around 5 A.M. this morning we passed the mark of 4,000 auctions. 66% of completed auctions are clearing (I think eBay is 44%?)

Three weeks later, Byrne again compared his site to eBay:

10/22/04: It's-- so far, my belief is, it's far faster growth than eBay saw in their first 15 days or 20 days.

And three months on, Byrne was still claiming great things for Overstock Auctions, including a “closing rate” which, for any online auction site, would confer the kind of “blockbuster success” Wall Street seemed to expect from Overstock:

1/28/05: [Our auction conversion rate is back] to the 35 to 40 range…. They [eBay] say that they have a closing rate in the 40s…. But if you remember they count it differently than us. …I wouldn't say we are higher than them but…

Believe me: I never expected “instant blockbuster success” for Overstock auctions. The man who raised the great expectations on Wall Street was Patrick M. Byrne.

Which brings us to Mr. Byrne’s latest public utterings in yesterday’s press release explaining the reason for the delay of Overstock’s second quarter earnings:

Overstock.com President Patrick Byrne said: "Please excuse the schedule change. I understand that this is an inconvenience for those who follow Overstock. The fact is, however, that in July we are completing our Oracle and Teradata system installations, integrating our recent Ski West acquisition, and relocating our corporate headquarters: thus, we simply need some additional time to complete our quarterly financial closing process."

Now, we know Teradata’s Phase #1 completion date was expected to be last month, or at least that’s what Patrick wrote to shareholders in the first quarter letter:


Teradata -- Data warehouse noted above. Expected Phase #1 completion: June.

And the Oracle “system installations” were expected to be completed in May-June, or at least that’s what Patrick wrote to shareholders in the first quarter letter:

Oracle 10g -- Our auction site runs on Oracle 10g. We will roll our B2C site from Oracle 9i to 10g. Expected benefit: faster recovery times and ability to hook disparate computers into one "grid" cluster. Expected completion: May - June.

It is now July 13.

One other thing. Back on April 22, Patrick wrote to his shareholders, "In June we will move from our current space to a much larger building being completed a few hundred yards away." Yesterday, July 12th, he blamed part of the earnings delay on "relocating the corporate headquarters."

Looks like a few more great expectations in the rich tapestry of Overstock.com are unraveling. But don't shoot me, I'm only the messenger.


Jeff Matthews
I Am Not Making This Up



The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


18 comments:

nukeydog said...
This comment has been removed by a blog administrator.
Jeff Matthews said...

"nukeydog"'s post has been deleted, which is unfortunate because it made a good point.

No message board language is allowed here: if you want to say something, say it without cursing.

"nukeydog" is welcome to re-post.

Its_strange said...

Are you suggesting there is another reason the earnings are being delayed ?

Jeff Matthews said...

"its strange" asks: "Are you suggesting there is another reason the earnings are being delayed ?"

Interesting question.

I did not set out to suggest there is another reason behind the Overstock earnings delay: I was simply pointing out that 3 of the reasons cited for the earnings delay (Teradata, Oracle and headquarters move) were supposed to have been implemented in June, and therefore should not be an issue in July, as stated in yesterday's press release.

The fact that these projects have apparently been delayed does not surprise me in the least, because, as I said, I don't believe 1/10th of what Patrick Byrne says--and that includes whatever deadlines he previously discussed for things like Teradata and Oracle and the corporate move.

However, to the question posed by "its strange," it likewise would not surprise me to discover that these issues are not the real reason for the earnings delay.

After all, the Patrick Byrne making excuses in yesterday's press release is the same Patrick Byrne who repeatedly boasted of Overstock's technology capabilities--in letter after letter to his shareholders and on conference call after conference call with investors--and then dropped a massive technology overhaul spending bomb in the first quarter of 2005, saying Overstock's systems were "decrapitating."

Thus, I would not be surprised in the least if the reason for the earnings reporting delay were only tangentially related to the Oracle and Teradata and headquarters issues; and I would not be surprised if the delay is not related at all to these issues.

In the realm of Patrick Byrne, absolutely nothing would surprise me.

If anybody out there has more specific information about what might be behind the delay, and wishes to share it, they are welcome to post.

I am not going to speculate.

Dan said...

Overstock sure is TRYING to direct attention to their auctions. I saw this today, "As a special promotional offer, any person who becomes a verified registered user at Overstock.com Auctions between July 1-31, 2005 and clicks below on the Register Now button will receive a $10 shopping credit.
This credit can be applied towards your purchase on the shopping site. The offer runs from 12:00 am on 7/1/2005 until 11:59 pm on 7/31/2005, Overstock.com Time (MST). "

I wonder how many people will register, but never use the service? I'd guess most.

DaleW said...

I would wager the delay has something to do with the diamond deal and the SPE set up to house those dealings.

Its_strange said...

Dalew...help me out please. What is a SPE ? Thanks

telemusor said...

SPE= Special Purpose Entity

Its_strange said...

telemusor, thanks. ..Alot of unanswered questions about that diamond deal and i'm sure all would welcome some . Perhaps even the regulators.........

Hey Jeff, why don't you try to locate Billy ...We would love to see him post a word or two

bsilly said...

Jeff,

I'm not shooting anyone. I wasn't trying to throw any jabs at you. I was serious with my question. You may very well be right that all those projects will fail, I just think you've got to give it more time before you say they're all failures. In my experiance running a business, and studying quite a few as well, 95% of the time things don't end up going exactly how you origanally planned, or in your expected time frame. You inevitably have to tweak and adjust things as you get feedback over time. It usually takes a while to figure out the various value drivers and levers to pull. That's my experiance anyway.


From what I've heard multiple times, I don't think Patrick has ever said that all these projects will be a big success. In fact I think he's said a few times on CC's that some will work and some will fail.


With regards to the timing of things getting completed, again I think that's business. I think Patrick tries to be candid and tells you the time frames that ostk as a team is shooting for internally. There's always delays and setbacks. Regarding ostk's move to a new headquarters, how do you know it's not on the lessors end who is holding things up? maybe the construction is behind schedule and it's not possible to move in.

Anyway, I didn't mean to come off as being hostile, I just thought you weren't giving Patrick a fair shake and didn't sound objective about the situation.

bsilly

2pay said...

Something is starting to smell at (OSTK). I am watching closely!

k9thunder said...

Let's see...

Now what will Patrick blame for 2nd qtr woes and shortfalls?

1. IT - Blame it on once rising "star" IT guru Shawn. Partick said on last con call that IT system is "DECRAPTITATING" (SAY WHAT? - credit to Jeff's blog) and called it “an enormous ball of spaghetti” (credit to Jeff's blog).

1 of 3 reason for 1 week delay in reporting earnings (reports on 7/7 that it's gonna be on 7/27 then 5 days later corrects it by saying 8/3).

Or perhaps rows of hard drive CRASHED or lost harddrive/tape during recent move?

Yeah blame it on the computer. Well do this Patrick! Turn the damn thing OFF and restart, OK?

2. We were diverted due to intense nego and due diligence over Ski West acquisition and planning the all important move (what's the matter, did your own move using Uhaul?).

Patrick maybe you should have paid more atention to running this just another e retailer biz rather than focusing on helping out 3rd world, kids who can't read or attacking shorts with your buddy Bobo?

3. Damn customers! They just won't buy our CRAP! So we offered tons of coupons up to 10% off (last ditch effort on last 10 days of qtr).

4. Uh, we had to give way the house with $1 shipping. Ya know with fuel surcharge, we had to eat it. BUT HEY, revenue is GROWING. BUT LOSS is growing FASTER!

5. It's hurricane and tornado season?

Keep up the good work Jeff!

Its_strange said...

The Taradata , Oracle and headquarters projects have been underway for months now so what happened between July 7 ( first earnings annoucement ) and July 12 ( revised earnings date ) that caused the change? I mean its a span of 5 days ...I find this odd . And the new day for earnings is all of 5 business days....OSTK changes its mind about the earnings date in a span of five days and than delays it for seven ? ...It seems very strange to me

Jeff Matthews said...

"bsilly": no offense taken. I fully agree that new business ventures are never easy, never obvious, and rarely go as smoothly as Wall Street would like to believe.

You are right that Patrick has allowed that some of his "Patrick flyers" will work and some will fail. But at the same time, he plays it up to Wall Street--what with all the "Project Rocket" and "Project Ocean" nonsense. (Remember, Wall Street's Finest are highly susceptible to hype, especially the subtle kind.)

And he's the guy who called his auction site "a long war of attrition with eBay" long after it was an obvious failure.

As for the headquarters move and the explanations for it--your guess is quite literally as good as mine. Nothing would surprise me--and that means the most innocent explanation in the world, like your example of not getting the space built out in time; or something more serious, like the "decrapitation" problems behind their technology.

I would hope we could get someone with actual knowledge to contribute here, because, as I said, I am not in the speculation business.

Thanks for your ideas.

bsilly said...

Jeff,

I appreciate the dialog. I'm long ostk and relish the opportunity to be proven wrong. I'd love to be talked out of this idea if it were to save me carnage down the road.

It's not Patricks fault that Wall Street is suceptible to things. The reason why he used code words like "project ocean" is fairly obvious - you don't want to telegraph your move to the competition -

Auctions
After what, 9 months, I wouldn't call auctions a complete failer. Did it only take Ebay 9 months to become the dominant player? OSTK auctions were at break even ex advetising when there were 100,000 fewer listings. I think it's way to early to say it's a complete failure, especially when it's not losing the company any $.

In all honesty I would love to hear a credible argument against OSTK's business model, not just character assasinations against the guy. I bet with almost any ceo in America if you went through everything they've ever said with a fine tooth comb you can find inconsistencies. In my opinion the key to investing is being able to ferrit out the key variables on which to focus. I don't think the jewlery business that's been live for 6 months is one of those key variables.

Thanks for the dialog
bsilly

Lyrical said...

bsilly-

hmm. with the massive 3%-5% conversion rate on the overstock auctions site, i really can't see how they're not losing money on this. some simple math - average 250,000 listings that die off every 7 days. So that's 1MM listings a month that rotate through (vs 500MM for eBay). They sell max 5% of those, so 50,000 listings in a month. On average $30-$40 per listing, so $2MM in products sold on the Overstock auction site.

Now, the vast majority of those listings are FREE. That's the issue. At least 60% of auction listings are with THREE sellers (adamhershauctions at 98K, moviemarz at 36K and lasercorner at 26K). All three are eBay Powersellers using Marketworks or Channeladvisor which have free listings through July.

So what's remaining is final value fees on $2MM in inventory that sold. A whopping 3%-4%. 4% of $2MM is $80K a month.

In order to be profitable (assuming NO development cost or marketing spend), Overstock Auctions would need to be run by no more than 10 people averaging $100K a month in salary and benefits on average. Holly probably gets paid twice or three times that.

Now bake in development cost and marketing spend (it costs money to put listings on Shopping.com) and you have a money loser for the big O.

bsilly said...

lyrical,

I don't think OSTK auctions will ever overtake ebay or even come close. The thing you've got to consider is that their customer bases are very similar, "DISCOUNT SHOPPERS". So if your traffic is very similar and it costs very little to try why not give it a go. Basically their risking very few $ for a potentially huge payoff. It seems it would be stupid not to try considering the similarities in their customer bases.

As far as the 10 people making 100k, that's very unlikely considering that salaries are capped at 100k for the EXECUTIVES, and Patricks salary is $0. That's part of the reason I like being partners with these guys, they don't fleece the shareholders by paying exorborant amounts of money to the management.

Also, I said they are at break even excluding marketing. However, auctions is not a huge cash drain, and improves the shopping experiance for OSTK's customers. It's way too early to say it's a failure. How long did it take ebay to dominate the market? They were not the first to enter, they were swimming upstream when they started. According to what you and Jeff are saying Ebay wouldn't even be around today cause they should have killed it if after 9 months it wasn't generating profits. I think you've got to give it more time.

Also, going back to my previous post, I don't think auctions is one of those key factors to focus on. If it works that's gravy, if not, the core business is still firing on all cylinders.

bsilly

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