Overstock.com, Inc.

Good morning. My name is Pam Bass and I will be your conference moderator today.

I would like to welcome everyone to Overstock.com's fourth quarter 2004 financial results conference call. At this time, all lines are in a listen only mode.

Later, we will announce the opportunity for questions and instructions will be given at that time. (OPERATOR INSTRUCTIONS) This call is being recorded and will be available for replay beginning today through Friday, February 4th.

The replay can be accessed by dialing 888 203-1112 and entering the access code of 300488. At this time I would like to turn the conference over to the Vice President of Finance of Overstock.com, Mr.

David Chidester. Mr.

Chidester, you may begin. David Chidester, Overstock.com - VP, Finance Thank you, Pam.

Good morning and welcome to Overstock.com's fourth quarter 2004 conference call. In addition to myself, participating on the call today is Dr.

Patrick Byrne, Chairman and President. Before I turn to the financial results, please keep in mind that the following discussion and the responses to your questions reflect management's views as of today, January 28, 2005 only.

As you listen to today's call, I encourage you to have our press release in front of you, since our financial results, detailed commentary and the President's letter to shareholders are included and will correspond to much of the discussion that follows. As we share information today to help you better understand our business, it is important to keep in mind that we will make statements in the course of this conference call that state our intentions, hopes, beliefs, expectations or predictions of the future.

These constitute forward-looking statements for the purpose of the Safe Harbor provisions under the Private Securities Litigation Reform within the meanings of section 12 A of the Securities Act of 1933 and section 21 E of the Securities Exchange Act of 1934. These forward-looking statements involve certain risks and uncertainties that could cause Overstock.com's actual results to differ materially from those projected in these forward-looking statements.

Overstock.com disclaims any intention or obligation to revise any forward-looking statements. Additional information concerning important factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in documents that the Company files with the SEC including, but not limited to, its most recent reports on Forms 10-K, 10-Q, 8-K and F1.

I will now review the financial highlights for the quarter and the 2004 year. Unless otherwise stated, all comparisons will be against our results for the comparable period of 2003.

Total revenue in the quarter was up 80 percent to 221 million; for the full year revenue was up 107 percent to 495 million. Excluding auctions, gross bookings were up 82 percent to 237 million.

However, within gross bookings, B2C gross bookings grew 95 percent to 233 million. For the full year, gross bookings grew 84 percent to 541 million but B2C bookings grew an even faster 106 percent to 522 million.

Gross margins were 15.2 percent in the quarter, up from 9.6 percent, as a result, gross profit dollars increased 186 percent to 34 million. For the full year, gross margins were 13.3 percent, which translates to 158 percent growth in gross profit dollars compared to a smaller 88 percent growth in operating expenses.

In Q4, net income was 2.5 million or 12 cents per share compared to a net loss of 3.2 million or 19 cents per share. For the year, our net loss was 5 million or 1 percent of revenue.

This was a 400 basis point improvement from a $12 million loss or 5 percent of revenue in 2003. And also resulted in a loss per share improvement from 75 cents to 29 cents.

We ended the year with 287 million in cash and marketable securities, with positive operating cash flow of 37 million in Q4 and just under 25 million for the full year. Lastly, I will give a couple of metrics that Patrick won't be covering in the webcast.

Average invoice was $92 in the quarter. Repeat revenue was 52 percent of total revenue in Q4; and the BMV business was 11 percent of our total gross bookings in the quarter and 11 percent for the full year down from 14 percent in 2003.

That covers my overview. I will turn the call over to Patrick.

Patrick Byrne, Overstock.com - Chairman and President Good morning, everybody. This is Patrick.

I have four quick preliminary points. One is, if you are listening and want to join the PowerPoint presentation I will be going through, go to our website on the lower left-hand side.

In the Features, there is a button that you can click through that takes you through the PowerPoint. It says Earnings Report Conference Call.

Secondly, Club O Gold. I am going to make a quick commercial pitch.

Club O Gold costs $99, you save 20 percent on your office supplies. And if any of you 500 people out there, buy more than $500 a year of office supplies, join our Club O Gold, you'll make it back just in your office supply savings and you'll get killer deals everywhere else.

Third, if you want to ask questions, my partner here Rich Poungo (ph) has had -- just been having a technical glitch for a moment on the screen showing what colors are on the line and such. So in case he doesn't get that back up I want to announce to everybody if you want to ask questions, all you have to do is do what the operator said.

We have a screen here that will organize what's the right order to take people. (INSTRUCTIONS) So Q4.

Great Q4. I am absolutely thrilled with these results.

This is terrific. I, of course, have given up trying to understand how Wall Street views things; but for three quarters we have been writing earnings releases and I have been telling you about Building the Ark, I think I called it.

We are building this ark and we built the ark, the wave came, we rode, the ark rode the waters magnificently. You on the outside see the financial results.

We are always dealing with system issues. Our systems were just fantastic.

Secondly, we did what we said we were going to do. We walked the talk.

We said we were going to tighten operations. I remember, last year on the January call we were saying, "There's 200 to 250 basis points to take out in cost savings."

I was actually saying it may be as much as 400 and people were all looking at me like I was crazy. We pulled out almost 600 basis points in savings in our margins this year.

Quite a bit more than even my outlandish suggestion. We finished four stock work projects.

Launched Club O which is, I think, the best consumer loyalty program on the net. Club O Gold, which competes head-on with Costco but with better pricing, and it is just getting wider and wider.

We launched an auction tab that competes directly with eBay. Did it for a couple of million dollars and you may not think we have a snowball's chance of doing it but I think we have already become if there is anyone who is going to compete with eBay, it is -- maybe it is going to be us.

Fourth. As of this morning, I do think -- I think the press release went out about 30 minutes ago, but we have opened our own Build Your Own Ring site.

Something like Blue Nile. But it is where you can think of the diamond industry, up to $1000 is really controlled by Zales and Wal-Mart and mall jewelers and Blue Nile operates average order size is about $5500.

We intend to dominate in the $1000 to $5000 range. Fantastic pricing.

We did a $7 million deal on diamonds that was the steal of a lifetime. Just fantastic pricing in there.

Then of course, we developed, in the last year, our BMV tab to be fully competitive with Amazon. We got hundreds of thousands of new books -- generally 10 to 15 percent of Amazon.

So there are a bunch of skunk works projects that we said we were going to do. They all got delivered.

Two others have moved from the drawing board partially into production. One is travel.

On January 1st the tab went live again and now just has cruises, which are doing very nicely. You will see in the next four to 12 weeks, the rest of those categories fill in.

Third point, the income statement. People who know me think I am the last guy in the world to talk about pro forma, but I do want to tell you our view of the economics.

At one end, you can be completely literal and say, "Okay, our income statements says we made $2.5 million." A different way of looking and let's say, the other extreme, is we view internally sort of about $9 million of earnings power late in our system from this last quarter.

We did a number of things that you don't see. First of all, we launched auctions, which cost just about $2 million.

We bought the online distribution rights to a movie that answered Michael Moore's movie, "Fahrenheit 911". This was called "Fahrenhype" and in interest of fairness we were always completely neutral, always showed on one side of the page Michael Moore's movie, on the other side of the page, the "Fahrenhype" movie.

We lost $700,000 on that transaction so far. I mean it is just getting better as we sell more units.

We are down 700,000. On the other hand, we got 70,000 new customers for it.

That was a $700,000 hit. Next, we had a vendor comp charge of almost $1 million.

We have a number of vendors that we've made special arrangements with and we've kind of sweetened things for them with some stock options in the past. Those options, since they are not employees, the way we expense them is different; and there was almost $1 million, over $700,000 of that.

Then two more things. I decided in December, I am sort of a fanatic on not letting our warehouse ever turn into a museum.

I decided in early December, let's just flush everything that has been around more than a few months. Our inventory has never been this clean.

We just marked down, promoted, did whatever we had to do to blow out the older inventory. I lost $1.5 million on that inventory to move it all.

But our inventory has never been this pristine. And then, lastly, something I wanted to tell you is I paid a $2 million bonus around the Company; took $2 million and sprinkled it all around the Company.

I did that because these folks have coughed up a lung for five years. They are way underpaid compared with the industry, way underpaid compared with the qualifications and must have been here for many years and have coughed up a lung; and I think this was a banner quarter for us.

When I looked at the results I said, "It is time I do something nice." I took $2 million and I really touched people and people here are ecstatic.

You have never had such happy employees. You put all that stuff together, it is about $6.5 million.

So, one, I'm not doing this to say, "Well if you just set aside these onetime charges and this and that and pro forma, we have made $9 million." I don't play that game.

But I am always trying to show good or bad, what the real economics are and if you want to understand about real economics, sort of at one extreme, you can say almost as much as $9 million of latent power was earnings power, has now been demonstrated to us in the model and we did a whole bunch of Patrick fliers. Some of the fliers are going to work out and some of them aren't.

"Fahrenhype" didn't work out; I think the 2 million on auctions were the great great deal and that's just that -- or a different way of putting it is, if I just wanted to sit on my hands and do nothing, we probably could have squeezed quite a bit more earnings out of the system. There are some fliers in there.

With that said, I'm going to hit the slide show and this is -- I'm going through this briskly. And then take questions.

But this is probably a 10-minute slide show. We have a huge audience.

Many times, what we've ever done. Safe Harbor, David walked you through.

Quarterly results. The numbers I would look at here are first, the gross profit line, going from 11 to 33, almost triple.

Line No. 6 and net income breaking through to 2.5 million and that is even given all those sort of, well I just can't get my mouth around the word, onetime charge, but all those fliers; and we still made $2.5 million and we are really convinced of our model.

The gross margin, line 7 again. Last year we were saying at 9.6, we will add 200, 250 basis points and I always think that it was 400.

We added almost 600. I am sure there will be questions about gross margins going forward.

Next slide, I would just really good things happen when we make this business double year after year. Really good things happen.

I see that there is a slight delay on the technology. That's fine.

On this I would say, this is just the same information weekly for those of you interested in logistics. You see that we have got to -- now we have really got to stretch our system to that spike and not the dark shaded area.

Which really means that we have the logistics system of $1 billion company which lets you handle the Christmas of a $.5 billion company and now we have to build the logistics system for a $2 billion company to handle the Christmas of a $1 billion company. Which of course I'm not promising that we are going to do $1 billion this year, but -- .

Gross margins. As they say in golf, this is the money shot.

Business doubles but its value is more than double because we have been keeping 50 percent more of every dollar we sell. This has been -- you noticed I cut this off in Q3 2003 because of the whole change of accounting before that; and it wouldn't be apples to apples.

This is just good management on the part of my colleagues. You can't imagine how many tens of thousands of hours of work are in there, getting that slide.

That slide to look like that. Gross profit per transaction has gone 812 to 1380.

Actually if you do the math for the third quarter, of last year on, I think that it would have come out, I'm just going off the top of my head. So I think on the third quarter of 2003, it would have been about 650, 650 or 700.

So in that case the gross profit per transaction doubled. Now it is true our CPAs (ph) went from 12 to 16, our cost for customer acquisition went from 12 to 16 and the gross profit per transaction more than doubled.

If there is a second great slide in here, it is the, this is our GAAP net margins. This is not pro forma, operating income, this is our GAAP net margins.

After five years of sucking exhaust fumes, I could stare at this all day. I'm not, well, I've gone over the difference between the 2.5 and the 9 million.

We are convinced at this point we got the right model. We have a model that works.

I think this shows that this is clearly a breakthrough quarter for us. Unique customer growth.

I will point out that the number of unique people who bought in the quarter grew 73 percent and yet our overall set, B2C sales were up 106 percent. That is an interesting thing to note.

Also note that in 2003 Q3, that is where we began branding. That is when we figured we had, there were reasons -- strategic reasons -- to bid in the branding.

You can see the effect that has had. New customer growth, again, had over 1 million new customers in the quarter.

First time that has ever happened. That is only 50 percent up from last year but again 106 percent B2C revenue growth.

A number of B2C orders. Again, not quite double.

I think that is about 80 percent growth. Aggregate unique customers.

Have over 5.5 million now. Now there have been claims that we don't do well -- stand by, I have someone bringing me a message.

We have got claims that some people failed -- someone just let me know that there is a 10 second lag when I click and when you see it. So we are now on slide 12.

I'm sorry about that -- -- that we don't manage our customers, or manage repeat behavior well. Clearly, there is room for improvement but if you have got all these other things going up 50 to 70 percent, 80 percent and the top line is going up 106 percent; clearly we are doing some things well.

What I am realizing is there's a lot of different metrics you can use to measure customer retention and on some of them we do not as well as I wish; and that is just what we are focusing on. But on some of them we actually do quite well.

It is kind of an odd multidimensional issue. I'm told that you are -- there's like a 10 second lag between when I click and when you see it.

So I have got to announce the slide numbers, I suppose. On 13.

People want to know a lot about auctions. We are going to go through this quickly.

There is a reason we are doing auctions. There's (indiscernible) proof as to why auctions can work for us.

Not certain that they are going to work but why they might work. It's very highly scientific, very mathematical, derivative of the work of Myron Scholes.

I don't expect to win the Nobel Prize for this but it is a very strict, scientific proof. Start with, imagine Joe has a scuba tank and Joe's scuba tank has a pressure gauge on it and Joe wants that pressure gauge to get as high as it can.

So he is going to drive the pressure up by building a fire underneath the scuba tank. Now the pressure in there, in that tank goes to -- let's say X -- and it is governed by as those people who remember their high school physics, Boyle's Law pressure equals temperature over volume.

So if temperature doubles, pressure doubles. If the volume doubles, the pressure halves.

Somebody else comes along with the scuba tank painted Overstock Red and his pressure is -- starts off as 0. But this fellow drills a hole into both sides of the scuba tank that connects them with a hose.

What is the pressure going to do over in the Red scuba tank? Well, the pressure has to equalize.

The molecules -- assume the hose is thick enough to allow friction with the flow of molecules both ways. The pressure of the Red scuba tank has to equalize.

Now the guy with the yellow scuba tank gets all ticked off, wants to drive his pressure higher and builds a bigger fire. The pressure in the yellow scuba tank goes up -- goes up higher, H -- now what's going to happen with the Red scuba tank?

Once again very quickly, that pressure has to equalize. And in fact if this Red scuba tank is built to scale so with the Red scuba tank can just keeps expanding it and as he does he is just sucking -- siphoning molecules off of the yellow scuba tank.

Why is this interesting? Well in our world, pressure is traffic over listings or traffic over products.

That is pressure. So let's walk through that calculation for Overstock vs.

eBay. I'm using numbers from comScore public numbers in December.

eBay had 13.1 billion page views, 7 to 8 million listings. Let's call that a pressure of 167.

For Overstock, we had 333 million page views with a million listings and products. That comes to a pressure of 333, just about double eBay.

Let's talk about Overstock Auctions specifically. Now here, I have to say our data at this point is a little fuzzy.

Our traffic data within our site on this new tab has some fuzziness in it. So I have to use an approximation and say that about 10 percent of our traffic is going in there.

That is 33 million over 388,000 listings. That is a pressure of 85.

So our pressure is about half of eBay's. Few other things to note about this though.

One is that 388,000 listings have -- we did some free listing days and suddenly we had 100,000 listings, 150,000 listings added of what I think was not very good listings. Somebody puts up 200 candles, the exact same candle in.

Bunch of keychains or something. It is not really fair.

So the pressure on -- well that is one thing to know. Second thing to know is for businesses only three months old to develop half the pressure of eBay is terrific.

The third thing is, if you look at the Overstock, the vast majority of our page users are actually still on our shopping site. They are not in listings.

They are not in Auctions and they're not in book, music, video. So you might say in December that we are probably 40 or 50,000 different actual products, but they got probably 85, 80 percent of that 333.

So if you do the math and for the Overstock site in general, the listings you'd consider to be 40 or 50,000 and you realize they probably kept about 3 million of the page views. You realize our pressure runs in the thousands.

I mention that because people often ask what happens if eBay gets into liquidations? They don't get at our pressure per product.

Our list page views for product in our site is so far higher that that is why we can liquidate the way we do. Just going to slip ahead.

Now these are listings to date. You see since we launched about three months ago we got to about 800,000 listings by the end of the year.

I believe wish someone could send me the research on this. I spent 20 minutes myself and couldn't find it.

I believe that eBay which launched in August of one year by the end of the year had done about 250,000 listings. I'm not completely sure on that.

Not sure it's apples to apples. I'd love it if somebody lets me know.

Now people ask me, what is Overstock? What is this thing we're building?

Well, first of all (indiscernible) names of the guess reality. There is the reality underneath and people get hung up on the names.

Don't worry about it. If you really have to ask what we are I'd say, first, we are the best outlet shopping on the net.

On top of that we have a BMV category that is second to none. It has got far more than a Barnes & Noble superstore has and everything is priced beneath Amazons.

4 or 500,000 actually over 500,000 SKUs now in books, CDs, DVDs. 99 percent of our books are priced below Amazon.

We check that constantly. We have loyalty clubs now.

'04 consumers and our business that rivals Costco. We have an auction site that is competitive with eBay.

Fees started off a third lower. They are probably about 50 percent now.

We have a travel site. We will have the lowest online lowest booking fee online and as of this morning we have a Build Your Own Ring site that compete with Blue Nile.

You put all these things together there is a common denominator. We are turning into Earth's Biggest Discounter.

Which, incidentally, we have trademarked. Now a few last points and then I will be done with this.

Again, I know there are some people who, oddly enough, hard as it may be to believe try to muddy the waters on my growth vs. profits story.

So I just want to take for an assumption that everybody understands anyone -- reasonable -- that we can be profitable now. If we want our car back on the road.

Well, that means that you can expend some amount of money, maximize your growth and if you spent every dollar of profit back into marketing you could maximize (ph) growth and have no profits. On the other hand you could say, "Hey let's cut way back on marketing," and have, just do enough marketing to sustain our current level, and maximize profits.

If you accept those two, there's clearly going to be places in between that could connect with a line. I think of this as our success frontier.

Now I have a very good idea of where this frontier is in my mind. I mean, I know where I believe it is.

But in my mind there is a line that, anywhere on that curve can really count as a success. Where is that curve in relation to maybe analysts?

I think the curve is well well to the right the analysts have us. I am very up.

I have never been so optimistic about what is going on in our business. This is the trade-off I grapple with every day in my job.

Now, in closing I will just summarize that. That for me people say, "Well, okay.

If you say there is a success frontier, what specifically counts as success? " For me success is did we create value?

Did we create value for owners? Did we create as much economic wait for the shareholders as we could?

Looking at this summary slide at the end. It just repeats some of those earlier slides.

I feel comfortable saying we did a really good job creating a ton of value for owners last year -- 2004. What you own is for more valuable than it was a year ago.

So what my guidance is going for is that we are just going to create value. It is one of the -- we are going to create a lot more value than people think is possible.

I believe. This is one of the most interesting case studies in my life.

That I just want to play this down the middle of the fairway. I am not at all sure that doing that is what gets rewarded.

The jury -- I acknowledge the jury is out of that. The tools of Satan are among us.

They are trying to ruin things. But I'm just sort of counting on, if I focus on creating value and can keep delivering slides like these slides you see in front of you, that's the long run that is, I hope, I think that is rewarded by the world.

That is how I define success -- is creating this value. With that, Operator, let's say who is on the phone?

Well let's take Douglas from Lehman then Bill Lennan from Hamrick, please.