Overstock.com (OSTK) Q4 2018 Earnings Conference Call Transcript

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Overstock.com (NASDAQ:OSTK) Q4 2018 Earnings Conference CallMarch 18, 2019 8:30 a.m. ET

Contents:
Prepared Remarks Questions and Answers Call Participants
Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Overstock.com Q4 2018 earnings conference call. [Operator Instructions] As a reminder, this conference call may be recorded. It is now my pleasure to hand the conference over to Mr. Greg Iverson, chief financial officer.

Sir, you may begin.

Greg Iverson — Chief Financial Officer

Thank you. Good morning, and welcome to our fourth-quarter 2018 earnings conference call. Joining me today are Dr. Patrick Byrne, founder, CEO and president; Saum Noursalehi, CEO of tZERO; Jonathan Johnson, president of Medici Ventures; Seth Moore, chief strategy officer; J.P. Knab, chief marketing officer; and Dave Nielsen, chief sourcing and operations officer.

Let me remind you that the following discussion and our responses to your questions reflect management’s view as of today, March 18, 2019, and may include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in our Form 10-K for 2018 and in the press release filed today.

Please review the forward-looking statements disclosed on Slide 2 of today’s presentation. During this call, we will discuss certain non-GAAP financial measures. The slides accompanying this webcast and our filings with the SEC, each posted on our Investor Relations website, contain additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures. With that, I will turn the call over to Patrick.

Patrick Byrne — Founder, Chief Executive Officer, and President

Thank you, Greg, and good morning, shareholders. Behold our agenda. Today, we will be discussing Medici Ventures, both giving you the big-picture vision and discussing our progress. And in addition, we’ll discuss retail where we’re emphasizing our new course to generating $10 million of positive cash flow this year.

Then we will discuss strategic alternatives, which I know are on everyone’s mind and then what our plan is for 2019 before we have a Q&A period. Slide. First comes our vision for Medici. We — for competitive reasons, we’ve never really laid it out fully and we’re still keeping a detail or two hidden, but I want — what follows is the full vision for Medici. Slide. This is a 3,000-year-old Chinese character that means country. Slide. In it, they see mouths.

Slide. Land. Slide. And a spear.

Slide. When you put — mouths represents people in Chinese. So when you put people and land and military together, that’s — those are the constituents of a country in the Chinese worldview. Five years ago, we became aware of the potential of blockchain.

If you look at my interviews from back then when I said we are taking Bitcoin, I said repeatedly, it’s really not about Bitcoin. It’s about letting our engineers get experienced with blockchain. That’s because we understood then that there’s a new era coming to humanity riding on a blockchain, and we wanted to have a stake in some of the most fundamental processes of that new era. So by that, we mean; Slide, people; Slide, capital; Slide, currency; Slide, capital markets, commerce and voting.

Put those together in a box and just like the Chinese see the box on the left as a country, we saw these processes as — you put them together and you have a tech stack, on which a country could operate. Slide. What this leads to is our vision in Medici of government as a service, where we can build the components of government that are clean, efficient and incorruptible. So by that, I mean, when I say — and if you agree that if you take the elements of people and capital and money and capital markets and commerce and voting together, that’s sort of a society.

Well, what we’re saying is, we want to have a play wherein blockchain meets identity and blockchain meets land titling and blockchain meets banking and currency. And capital markets from commerce that is blockchain meets supply chain. And lastly, blockchain meets voting. That was the blueprint that was turned over to Jonathan with the request that we build-out stable companies that fit this blueprint.

Jonathan?

Jonathan Johnson — President of Medici Ventures

Thanks, Patrick. Next slide. So to execute on this vision of building a blockchain tech stack for civilization, Medici has worked to define cutting-edge blockchain companies that fit within each of these verticals. In some cases, we found the companies to bring into the fold.

In others, we invented the companies from scratch. As you can see from this slide, we have at least two companies in each vertical. Lots of blockchain companies talk about the promise and the possibilities of blockchain technology. But these 19 great companies are each focused on getting blockchain products into production.

They are doing, not just talking. Next slide. During the call, we will highlight what five of these companies are doing in the blockchain space. We’ll start with the crown jewel tZERO.

Saum?

Saum Noursalehi — Chief Executive Officer of tZERO

Great. Thank you, Jonathan. Since our last call, we have made significant progress toward building our end-to-end security token ecosystem. I wanted to start by touching on a couple of the reasons why security token is such a compelling advance in capital markets.

Next slide. Security tokens offer issuer the cost-effective way to customize their securities. It provides the ability to automate the way administrative costs with smart contracts, provide preferred equity dividend with custom voting rights as well as make utility or loyalty offerings feasible. They also reduce friction costs by eliminating middlemen and automating the compliance of security laws, which can actually be coded into the tokens themselves through smart contract.

Today, this compliance is an annual $425 billion industry. Security token also enhances liquidity of traditionally illiquid assets. Private securities, funds, real estate are all examples. I’m going to turn it over to Patrick now to discuss the opportunity — really, the market size and market opportunity of securities.

Patrick?

Patrick Byrne — Founder, Chief Executive Officer, and President

Thank you, Saum. The market opportunity is huge. Bob Greifeld, the retired CEO of Nasdaq has said that 100% of the stocks and bonds trading on Wall Street could be tokenized. And in five years, 100% will be tokenized.

He said that to me and confirmed that I can quote him on it. If he’s right, this means that the current architecture and plumbing of Wall Street will be deprecated over five years and replaced with the architecture of security tokens. And the only thing I would quibble with is this is not just about Wall Street, this is global. And my frequent flyer account can — is — testifies to how global this revolution is.

The entire world is coming in on this transition. So that leaves us to ask what’s going to be tokenized? If Greifeld is correct and we just consider equities, bonds and real estate, we’re talking about $508 trillion of value would be tokenized. And now, for example, we know in real estate, there’s three companies in the United States working on a security token method to disrupt the REIT industry. And the same thing is happening with equities and bonds, and the truth is, with fine art, with commodities and with derivatives, etc., etc.

But if we just take those three asset classes globally, that’s $508 trillion. Slide. What is it — what it be worth to create an exchange on which that much security tokenization could trade. Well, if we look at the value of exchanges today around the world and we look at these dozen major ones, they are worth $129 billion and they trade $73 trillion of assets — of instruments, and that is a ratio of 18 basis points.

And if you look, it’s fairly stable with a couple of outliers. But it looks like exchanges tend to run something like 18 basis points of the value of the instruments that trade on the exchange. So if we put these two last stocks together and we say if Greifeld is correct and we just see those first three asset classes tokenize up, globally, slide, then we’re talking about $508 trillion of things will get tokenized. And if the conventional rule of 18 basis points holds, that means that the exchanges on which this new world of security tokens will trade collectively will be worth $900 billion.

Now I can’t really stand by anything but the arithmetic here and the assumptions. And is Greifeld correct that everything will tokenize within five years, I think within five years, all new issuances will be tokenized. But who knows how long it takes for legacy to rollover. But in any case, this is our calculation that shows why we have devoted so much effort and capital to this project because we think it is a very, very large payoff that we are pursuing.

Slide. We are so far in front of the — this slide shows that we are so far in front of the pack as we’ve been at this for four years. We have accomplishment after accomplishment, both in mechanics of the trading platform and the work with the SEC to get various things done such as filing, S1s and S3s and getting blockchain securities actually issued and actually trading on a platform. And now you see that we are in a JV with a lit U.S.

exchange, the Boston Options Exchange. And we aim to have, by the end of this year, our joint venture live with them. So that’s our list of accomplishments — you — with our competitors. Just you have to do your own research and see how many checkbox they get.

We think that out of all those question marks, there are maybe two or three that could be a checkbox. But when it comes to actually moving the ball forward in this field, I don’t think there’s any argument that we’re not just the leaders, we’re so far ahead of the pack. Slide. In addition, we’ve received — since we last spoke, we received a wonderful patent on the work we’ve done.

It’s on the integration of crypto — of blockchain digital assets with the legacy financial system. We are pleased with both the breadth of this patent. And in our view, it’s quite a foundational patent to this field. So now I’ve explained to you why we think the opportunity is so big and how big it is, and that we have built something that is far ahead of the pack in pursuing that opportunity, and we have gotten the patent on it.

Now let me turn it over to Saum to explain more specifically what it is this — what is this thing that we’ve built.

Saum Noursalehi — Chief Executive Officer of tZERO

OK. One our last call, we showed you this diagram of the blockchain-based security token ecosystem we’re building. This system allows issuers to raise capital through the token offerings, the trading of security tokens on our ATS as well as our JV exchange and allows investors to participate in offerings and secondary trading. Next slide.

In this version of the diagram, we show components of the system that have been completed, including the launch of our ATS, which is trading Reg B and Reg S security tokens, the trading of — the trading platform front-end and back end as well as the integration of third-party broker-dealers such as Dinosaur. Next slide. This diagram shows a more detailed view of our system architecture of our ATS and trading platform, but with the names of the modules removed. Note that the two gray boxes on this are technologies we acquired through SpeedRoute, which were also modified to support security token trading.

Patrick Byrne — Founder, Chief Executive Officer, and President

I would like to put a footnote on that because Saum is so modest. But let me emphasize this, the silver boxes you see there, that’s what we bought in SpeedRoute and PRO Securities. That’s the piece of the Wall Street that we bought. All the colored boxes have been a Manhattan project of development that Saum has organized and done a superior job with.

Go ahead.

Saum Noursalehi — Chief Executive Officer of tZERO

Next slide. OK. You can see in the blue boxes additions to the ecosystem that are actively in progress. These include the issuance platform to power STOs or security token offerings, integrating a third-party issuance platform to bring additional tokens onto our trading system as well as starting the work to file to be our own retail broker-dealer, so that investors can trade directly on our mobile app.

We are also integrating additional broker-dealers. These additions will significantly increase the number of tokens on our platform and enhance their liquidity, which can be a crucial next step toward scaling tZERO. Next slide. We have a highly experienced leadership team comprised of the right mix of capital markets, legal and regulatory as well as product and technology.

I’d like to highlight the bottom section, which shows the various blue-chip companies that our team has experience in. Also, since our last call, we have appointed President, Steve Hopkins, who previously served as COO of Medici Ventures. He’s a strong leader and entrepreneur, and he’s the person — kind of person who gets things done. In addition to Hopkins, we — Ell

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