Overstock.com 2010 Annual Report Download - page 58

Table of Contents
Comparison of Years Ended December 31, 2010 and 2009
Executive Commentary
This executive commentary is intended to provide investors with a view of our business through the eyes of our management. As an executive
commentary, it necessarily focuses on selected aspects of our business. This executive commentary is intended as a supplement to, but not a substitute for, the
more detailed discussion of our business included elsewhere herein, Investors are cautioned to read our entire "Management's Discussion and Analysis of
Financial Condition and Results of Operations", as well as our interim and audited financial statements, and the discussion of our business and risk factors
and other information included elsewhere or incorporated in this report. This executive commentary includes forward-looking statements, and investors are
cautioned to read the "Special Note Regarding Forward-Looking Statements" at the beginning of Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
During the recessionary cycle, inflation has been very low or almost non-existent due to many factors, including central bank actions, global competition,
the balance between supply and demand and the ability of the supply chain to pass along cost increases. We believe inflation is starting to increase and may be
higher over the next several months as market economics rebalance. We also believe rising political turmoil in oil-producing countries may lead to increased
energy costs near term. To protect against increased inflation, we are managing our finances conservatively and limiting investments to critical and growth
areas, such as systems development and supply chain efficiencies.
On February 22, 2011, Google Inc. notified us that it was penalizing us in our natural search results for noncompliance with some of Google's natural
search guidelines. As a result, we have dropped significantly in some Google natural search result rankings. We believe this incident stemmed in part from our
practice of enabling university webmasters to provide discount links to faculty and students. Google has now made clear to us that it believes these links
should not factor into the Google search algorithm. We understand Google's position and have made the appropriate changes to remain within Google's
guidelines. In fact, on February 10, 2011, we discontinued this program by notifying university webmasters and are working aggressively to get them either to
pull-down links or make links no-follow links. Unfortunately, we cannot control how quickly university webmasters work. We believe that the Google
penalty period may last between two to four weeks. We estimate that the lower Google natural search rankings may have as much as a 5% negative impact on
our revenue during the penalty period.
The key factors that affected financial results for the year ended December 31, 2010, were revenue growth, lower gross margin resulting from pricing
and marketing initiatives, expense management, and general improvement in Internet commerce.
Revenues in 2010 increased by 24% compared to 2009. Our pricing and marketing initiatives drove improvement in several key components of revenue
growth, including new customer growth, visits to our Website, conversion and average order size. Growth was broadly distributed across most of our major
product categories, and in both our direct and fulfillment partner business. Our direct business increased by 39%, and our fulfillment partner business
increased by 21%. The direct business was 19% of total revenue in 2010 compared to 17% in 2009, while our fulfillment partner business generated 81% of
our total revenue compared to 83% in 2009.
Revenue growth slowed over 2010 from 42% in Q1 to 8% in Q4. While this is partly explained by an increasing revenue growth pattern in 2009, we also
experienced softness during the holiday selling season that we believe was due in part to our decision to focus on contribution growth rather than revenue
growth, (see discussion of the non-GAAP financial measure "contribution" below), particularly by not heavily promoting our BMMG and consumer
electronics categories, both of which are popular holiday categories that typically have lower gross margin.
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