OSTK (2020 - Q2)

Thank you for standing by and welcome to the Q2 2020 Overstock.com Inc. Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. 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. Alexis C

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’re 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 30th, 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-K 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 two 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 three. Slide four, please. We continue to strengthen the Overstock team. On June 15th, 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 advisors 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 have five 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 five, please. Last month, Overstock was one of three vendors awarded a contract for a proof-of-concept pilot with the U.S. Federal 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, inside 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 know there's no guarantee how much of the potential Federal government micro purchase spending Overstock will win. Slide six, 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 as 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 models 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 dropship 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 grow well. We've hired aggressively in customer care to keep up with demand. We are 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 seven, please. A quick corporate update. We regained our WKSI status during the second quarter with the increase in our market capitalization. We found the shelf registration statement to reflect that and a perspective supplement to reestablish our ATM under the new shell. I should note we still have not use the ATM in 2020. We distributed our digital dividends on May 19th. This is a preferred share of stock that trades on the tZERO alternative trading system under the symbol OSTKO. We 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 a 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 eight, please. I'll 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 manage the business and segment our financial results. As this chart illustrates, we report our financial across three 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 three 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 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 discipline spending and investing across our three 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 dropship program. As we mentioned during our recent Investor Day, our overarching goal is to create operating leverage by growing our topline at a faster pace than operating expenses. On that note, we've doubled 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're 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 with 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's 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 profits 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. Well, we are pleased with the improvement, it is important to note that results were driven by operational efficiencies as well as several one-time items unique to the second quarter of 2020. Our one-time items included lower costs from being understaffed in the customer care organization as we adjusted to increase 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 treat strategically balanced marketing efforts against product availability and stock-outs. Going forward, we do not expect gross margin to be similarly impacted by these one-time 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 levered -- 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 topline 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 and adjusted EBITDA during the quarter, an increase of $51 million year-over-year following three 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 one-time 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 discipline, focus, and a lot of hard work by people throughout the company. Slide 17, please. Let me walk you through how we achieve 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 as steadily increasing prior to the pandemic, but 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 green homes for all differentiates on the home good expertise and smart value. Our customers come to us to find high quality homes goods for a great value. We are not, nor do we strive to be an everyday low price leader, such as the generals 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've built a strong foundation in our core competencies. First, we know our customers what they want and how to reach them. 49 million average monthly visits are not happenstance. They're driven by personalized emails that help them find the products they're looking for, a loyalty program with three 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 and online retail to 20 years. Beyond our scalable core infrastructure that has allowed us to handle the large increase in traffic and new customer 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're looking for. Third, we have a highly scalable business model. Our dropship model with thousands of partners in 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 do our focus 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 customer's 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 of support. These brand pillars provides a long-term guardrails focus for innovation that -- so we're only working on the things that improve experiences, our customers want. 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 at home good retailers focus more on inspiration, we've leaned into the whitespace of the two 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 three 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 three 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 desktops. 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 three 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 proposed promotional competitiveness. We're 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 and fulfillment capabilities. Ours is not a unique story. While our collective delivery increased, we put our customers first and made sure we set realistic expectations on delivery time, plus our percentage of orders delivered on time or early remained consistent with our customers' expectations. Slide 30 please. 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. [Indiscernible] 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 in to our vision. I'll start with tZERO. Slide 33, please. From the successful distribution of OSTKO to record ATF volume in 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 ATF volume, which I will highlight more in detail on the next slide, tZERO now accounts for roughly 95% of all security token volume, and tZEROP and 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, 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 ATF volume last quarter. May and June were our two 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 ATF was up 77% and more importantly, continues to grow. During 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 ATF 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 the users to its retail broker dealer tZERO market 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 to tokenization of trading agreement with the luxury St. Regis property in Aspen. This asset should be trading soon and it will be tZERO's first third-party token. That's an exciting milestone. We also had two new broker dealers go live on the ATF last quarter, one of which is a publicly traded company. Last driven by recent increase in equity volumes tZERO’s broker dealer subsidiaries SpeedRoute has generated record revenue. May through June tZERO generated $23 million in revenue, exceeding revenue for all of 2019. I hope this trend continues to grows, tZERO grows the digital security side of the business. Slide 38, please. I will again reiterate the tZERO roadmap. Our tZERO recently hit some key milestones. It's overarching priorities remain the same. These include adding more assets, increasing liquidity on the ATF, and improving the investor experience across the ecosystem. One area, I'll add more color is the assets side. tZERO initially targeted companies looking to raise capital and then trade on the platform. It has shifted its focus toward companies, particularly those with deep cap tables that are interested in direct trading on a tZERO ATF. Since trading is not contingent on a successful capital raised, this category of issuers is able to trade more quickly. tZERO has already begun reaching out to several private companies in the early feedback is encouraging. So stay tuned. I'm pleased with tZERO recent progress and encouraged by its prospects. Slide 39, please. Matter a few of our other managed venture 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 the immutability of the blockchain. To enable safe and secure mobile voting. It recently became the first remote voting platform verified is complying with federal voting security guidelines. This is a big deal. Voatz also recently conducted elections for the Arizona, South Dakota State conventions. Bringing the turning 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 Evers group as a top startup and low code platforms. SettleMint scalable low code solution makes blockchain use case development and integration highly accessible to organizations and developers, which accelerates the much needed digital whole overall 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 business. We are executing against the focus and discipline strategy. Those efforts are beginning to show in our financial results. We've reacted quickly to adapt to the challenging market conditions and customer and consumer demands. Our business model and our employees have demonstrated remarkable resilience. We resolve many of the challenges posed by the quick move to a nation working from home. We're 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 line of Thomas Forte with Davidson.

Great. Thank you for taking my questions. First off, Jonathan, Adrian, Dave, Alexis and Saum congratulations on 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. See if I can drive the price home. I can talk about your ability to achieve mid team's sales growth post pandemic, whenever that is. So using a sports comparison will close basketball. Is it a layup? Is it a slam dunk? Is it free throw a three pointer?

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

Yeah, thanks, Tom. Great question. But right now, we are in turbulent times. And, you know, 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.

Alright. Thank you. So second question for tZERO. I wanted to talk about tZERO efforts to add tokens to a ATF. And can you remind us some the current status of your efforts to create a joint venture with Voatz?

Sir, Jonathan, do you want me to jump in?

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

,: As far as BFTX [ph], they're having ongoing dialogue with the regulators and they're actually about to make an amendment to their rulebook. So they're making progress and moving along and we hope to get an approval sometime later this year, early next year.

Great. Thanks for taking my questions. I'll get back in the queue and time permitting asking more. Thanks.

Thanks, Tom.

And your next question comes from Mark [indiscernible]. Excuse me.

Well, I knew the day would come and Jonathan, you deserve a lot of credit because you took an absolute shit 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?

Mark, that's the kind words. I want to come at the entire team at Overstock, at tZERO, at company has made this happen. It's nice to say kind words about me for this certain we've got a team efforts. On tightening the spread between Overstock common 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're working very hard to get more and more broker dealers, subscribed to the tZERO ATF; we think that will improve liquidity. We're working to find business incentives to get the Overstock preferred shares trade more for exclusively on the tZERO platform. I think those things should tie the spread. But ultimately, we're going to be focused on running the businesses and let the market determine, Howard values common versus preferred or vice versa.

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

We're exploring some options with the dividend with the tZERO RPO 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 race.

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

And finally, is 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 speed shift Overstock and if tZERO and other Medici assets get a little more time to it then this thing really humps

So great question, probably not a team at this point, but we are looking for will soon be posting a job description for someone that can help the companies in Medici family get that blockchain products to market. They can monitor the companies in the Medici family to determine which won additional than Medici Ventures capital. To help the companies in Medici Ventures family raised capital from third parties, particularly from well-known BC and to sit on some of the boards of a company or Medici Ventures family. I am stretched in the Overstock Board is recognized that they've asked us to ask me to focus on getting someone or some people to fill those roles. So we're working on it.

Well done, gang. And well done Jonathan bringing in people around you to help you out, the super job.

Thank you.

And your question comes from Brad Safalow with PAA Research.

Thanks for taking my questions. And let me add my congratulations on the execution. First question, I had really related to the GSA announcement. 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 and then 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 I will turn it to Dave and Adrianne to make any comments they want. GSA is big win for us. It is an unknown win and how it affects the P&L. We don't know exactly what these five government agencies, which we don't 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 just hard to answer, Dave?

Yeah. 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 will launch this in August. We're in conversations with new vendors, with new suppliers. Many in the commercial good 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, this, we're on-boarding 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 to the TAM of $6 billion that is not just random, everything they purchase, that's just in the categories that we specialize in.

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

Dave?

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, non-material really, in terms of what we can offer and the product categories. Most of the time and energy was spent in developing a platform that allows us to governments that are 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 governance infrastructure?

Yeah. So, on the engagement--?

Dave will talk to that. Yeah, go ahead.

Thanks, JJ. When you think about engagement, you have to think about it a little bit differently than on a B2C site. We're not allowed to promote directly and market directly to these users, their specific users, when you log in as 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.

Yeah. The government's been very clear on that, Brad, I think where we ultimately win on this is my providing these procurement officers the data, they need to see that they're meeting quotas from flying 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.

Just one last question on the GSA and we'll get back in the queue. You mentioned that you're having a lot of conversations with new vendors, some more 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 a 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 listen to those commercial goods on our on our B2C website. So yeah, there is there's opportunity there as well.

All right, I'll turn it over. Thank you.

Thanks Brad.

Next question comes from the line of Joseph Besecker with Emerald Asset Management.

Hi, this is Joe Besecker. How you doing? Here you go. The questions a lot of the questions I have were asked, but I have a couple quick ones, kind of a really kind of rapid. And first one is the work that we do here at Emerald Nathan Jones maybe on this call is the analyst that follows us. We've been following credit card data and the data that we see go in July so far has been exceptional as well. Can you can you comment on that? And then so if 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 let me take that one. We are in the practice of sharing infra 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 will comment on 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 can 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 -- a little bit of color on that?

Yeah, 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 reduce my pay by 60%. It was completely optional. It's, you know, 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 race. 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 -- Managing Director we got from KKR in Michael Gaviser, who's now supplemented and helping the team. And we really need more of those kind of leaders in our firm to complement my skill set, which is primarily product development and technology. And so those are the reasons I did it. I also think the team, myself included really believe in this mission and getting some equity incentives for salary. I'll take that trade.

Got you.

Those were the reasons.

And then a follow-up -- go ahead.

Joe, I view this is a big positive. There's a big positive.

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.

Completely voluntary.

Yes. And I think that shows the difference between the current thinking and the past thinking and your alongside the shareholders and I congratulate you for that. I did want to drill down on first of all, my buddy Marco Pérez [ph] who, I can't say enough good things about when he asked his 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 this I may be confused. Does that have that -- does that have anything to do with tZERO profits? Or does it have to do with Overstock's profits themselves?

Joe thanks for asking clarifying question. I answered that, for the Tier 4 tZERO Overstock can pay a dividend has every year paid a dividend on the series a preferred shares, the Board is not -- not to discuss that, but we paid every year. I don't know why we wouldn't pay it this year.

But there wasn't different, there is a difference. And when you're answering 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, 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.

Okay. Thank you guys. Great job.

Thanks, Joe.

And your next question comes from Thomas Forte with D.A. Davidson.

Great. Thanks for taking my follow ups. I have two margin questions. One Jonathan you talked about the government contract is 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 single-digit for your namesake retail? And then second, can you talk about your near-term and long-term gross margin goals for your basic retail business?

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

Great. Thanks. And yeah, 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 will 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 -- 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. Thank you very much.

And your next question comes from the line of William Woodruff from William K. Woodruff & Company. Mr. Woodruff, your line is open.

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

Thank you. Yeah. Good. We can be used to. Frankly, I don't understand why it's not being used during COVID by every county clerk or state -- secretary of state whoever's over voting. That said, governments are slow to adopt new things. The roadmap today for votes has been first use it for what are called EuroCave [ph] voters, uniform and overseas voters. People that are voting absentee, vendor expand it to people who have to have special voting compliance under the American with Disabilities Act. That's how it's been used in 70 different states and jurisdictions initially. It's having 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 -- to vote remotely using mobile phones. The roadmap is does continue to work with it. He hasn't, I would say, there's not a single purchaser. You don't go to a state and say, you're the voting guy buy or use this. It's every county clerk has the ability to do things. So you know, in Iowa, that's 99 counties, in Utah it's 29 counties. It's a long sales process, the vote uses is aggressive on that front and meets with the national state country organizations, and county clerks and that kind of thing. Looking at the votes website, vlatz.com, I think it's useful to see what they're doing. Government, already government change quickly, but we think this is a -- this is a great product and a great time for this great product.

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

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

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