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StockTalk
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TMF Interview With Onsale President & CEO Jerry Kaplan
February 11, 1999
With Yi-Hsin Chang (TMF Puck)
Onsale Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ONSL)") else Response.Write("(Nasdaq: ONSL)") end if %> is an online discount retailer that conducts live auctions 24 hours a day through its Onsale atAuction website, selling excess merchandise and services such as personal computers, consumer electronics, and vacation packages. Last month the Menlo Park, California-based firm launched a new companion website, Onsale atCost, which sells products at wholesale prices. Yesterday, Onsale reported that its fourth quarter revenue jumped 79% to $59 million from a year ago, but it posted a wider-than-expected loss of $0.16 per share versus a loss of $0.09 per share last year.
TMF: Let's start with your fourth quarter earnings report. The $0.16 per share loss was actually a slight improvement over the $0.17 per share loss you reported in the previous quarter. Are you on track in terms of earnings performance, and when do you expect to start making a profit?
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"The number of unique visitors per day rose 22% from the third quarter to the fourth quarter."
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Kaplan: Well, I think we've, generally speaking, met analysts' expectations with respect to our earnings. Really, the progress that we're making can probably best be measured by looking at the expenses as a percentage of revenue, and that has dropped significantly over the past several quarters. The operating expenses as a percentage of sales have come down from 21% in the second quarter to 15% in the fourth quarter.
Also, our expenses in absolute terms have dropped significantly going into the fourth quarter from $9.9 million in the third quarter to $9.1 million in the fourth quarter. This was primarily a result of being able to get a better bang for our buck in terms of our advertising budget. The number of unique visitors per day rose 22% from the third quarter to the fourth quarter, so, obviously, we're getting much more efficient use out of our promotional and marketing dollars.
In terms of profitability, it's not appropriate for me to make specific projections on that, but I'll just say we're comfortable with what the analysts have suggested in their models. At this point, the investment community is still encouraging investment and building market share and revenue. So our primary focus has been on solidifying our leadership position in the computers, consumer electronics, and sporting goods area.
TMF: Do you think that for Internet companies, revenue growth is the only thing that matters?
Kaplan: No, I don't at all. As a matter of fact, I think that perhaps the more important measure of a company is the pattern of growth in its gross profit. But clearly, sales as a measure of market share is an important factor as well.
TMF: You were talking about the expenses as a percentage of revenue, do you think this new business, atCost, will drive that up a bit in the coming quarter?
Kaplan: You have to understand that an important difference between the atCost business versus the atAuction business is that the atCost business is demand-constrained whereas the auction business is supply-constrained. The consequence of that is it's much more appropriate to make significant promotional and advertising expenditures now that we've launched atCost because driving additional traffic to the site then increases demand for the products at atCost, and therefore can increase sales and drive us toward profitability sooner.
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"Despite the fact that atCost has only been up and running for three weeks, it has already grown to 22% of our revenue. We're very encouraged by that performance."
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As a result, we've started a significant promotional campaign, particularly in print media and radio, and obviously that's an expense that we were not incurring as heavily in the fourth quarter. So, the answer to your question is yes, but I think it's entirely appropriate to expand the branding of the company and continue to drive customer awareness to the atCost proposition.
TMF: Will atCost primarily feature computer-related products, or are you trying to expand beyond that?
Kaplan: At the moment we have a single supplier which is Tech Data <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TECD)") else Response.Write("(Nasdaq: TECD)") end if %>, which is a full-line computer products supplier, and so, obviously, that's where we're starting. But the number one request we get from customers that we've surveyed on the site is to expand into other areas, in particular consumer electronics, and so we are now seriously evaluating how to go about that.
TMF: How is atCost doing?
Kaplan: Well, we announced yesterday on the conference call that despite the fact that atCost has only been up and running for three weeks, it has already grown to 22% of our revenue. We're very encouraged by that performance.
TMF: Do you see it becoming a bigger business than atAuction?
Kaplan: I think it's a horse race. It's a question of which business can grow more quickly. I think it's very difficult to tell.
TMF: And you're rooting for both, right?
Kaplan: I'm betting that both will win.
TMF: The idea behind atCost is that you'll make profit from advertising. Is that right?
Kaplan: Well, there are several sources of potential profit to us. Advertising as broadly construed is one of them -- sales of banners on the site but also what are called market development funds from manufacturers, which are basically promotional funds for showcasing or promoting their products on our site. That's a form of advertising that we can sell to them, and both of those I think will be significant sources of revenue but by no means the only source of revenue. Obviously, we are charging a transaction fee as well, which is a significant source of revenue. Another area is that we can get discounts on shipping. In the future, we hope to offer leases and warranties, which we believe will also be a profit center.
TMF: Just from taking a look yesterday it seems that you're in the very early stages in terms of attracting advertisers.
Kaplan: I wouldn't say that at all. In fact, we were sold out in the fourth quarter. The reason it may look like that -- I guess I should do this myself and go take a look. Since we just launched atCost, that suddenly opened up a whole new set of places where we could put ads. If you were looking at the atCost site, it may be the case that they're not filled up yet because it's been three weeks, and we've just started selling that space. But we have as many bookings to date in the first quarter as we had in all of the fourth quarter for advertising.
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"We now have a joint agreement with Yahoo! where we are actually operating the Yahoo! auction service, which is a competitor to eBay."
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TMF: Are you at all concerned that atCost will cannibalize atAuction?
Kaplan: I think there is some cannibalization evident. However, I believe this is more than offset by the potential of this new initiative.
TMF: The eBay <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EBAY)") else Response.Write("(Nasdaq: EBAY)") end if %> model has gotten a lot of press lately, not to mention a vote of confidence from investors. Do you plan to introduce a similar service whereby individual users would be able to put things up for auction?
Kaplan: No, actually we've come full circle on that. We used to offer such a service, but it was called the Onsale Exchange. We now have a joint agreement with Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> where we are actually operating the Yahoo! auction service, which is a competitor to eBay.
TMF: Do you see eBay as your biggest competitor?
Kaplan: No, not at all. I don't think we compete with them. It's the difference between a discount retailer and a flea market.
TMF: What are you doing to better position yourself against various competitors?
Kaplan: Well, the first is to differentiate our selling proposition. In most forms of retailing, the interest of the customer and the retailer are opposed in that if the price is higher the retailer wins and if the price is lower the customer wins. In our case, because we are displaying our actual wholesale cost to the customer and charging a transaction fee as a primary means of generating a profit on this, we make our money by generating more and more transactions, and that means we've aligned our interest and the customer's interest to negotiate the lowest possible price on the goods that we sell. So that's a real strong point of differentiation from the traditional retail mark-up model where you buy, mark up, and sell. We buy, pass that price along to the customer and add a fee for our service, so there's a significant differentiation in the customer's mind with respect to our selling proposition.
TMF: Well, you've been an innovator in this area. Are you at all concerned that there'll be copycats that will just come along and steal your business?
Kaplan: I always take competition seriously. I suppose that others could engage in the same proposition. However, we've invented the concept, as far as we know. We are the largest Internet-based reseller of computers, consumer electronics, and sporting goods, according to a recent survey by Computer Reseller Week, and a competitor would have to catch up to us -- which I think would be a difficult task in a market like this where a disproportionate share of the market tends to go to the market leaders.
TMF: You recently announced that more than 1 million people have registered to bid or buy at onsale.com. Do you have plans to leverage that by introducing auxiliary services such as email or chat and thus becoming more of a portal than just a retailing site?
Kaplan: No, we don't. I do believe that we have emerged as a destination site in and of ourselves because less than 20% of our traffic comes through trackable paid referrals of some kind. But expanding into competing with the media businesses, the portal business is certainly not part of the company's DNA. I think we have a very clear focus as a discount retailer on the Internet, and we have a leadership position in the selling of hard-goods, and I think that's a properly pure brand identity to be able to become a major force in retailing over the next several years.
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"We've aligned our interest and the customer's interest to negotiate the lowest possible price on the goods that we sell."
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TMF: Do you think that some of your users consider that auction atmosphere as a form of entertainment?
Kaplan: Yes, we do. We find, in particular, that consumer purchasers enjoy the game, if you will, the fun and excitement of participating in an auction because we've created a format where we're empowering the buyer to become an active participant in the price-setting process, and our customers are those kinds of people. They're active, take-control types, and they prefer that challenge to simply being told what the price is, and having only the binary choice of taking it or not taking it.
TMF: Considering the recent trend of acquisitions and consolidation among Internet companies, do you intend to be an acquirer or an acquiree or to remain independent?
Kaplan: I think that we will take whatever actions we believe are in the best interest of our stockholders and are certainly open both to acquiring and acquirers as we continue to watch the Internet evolve.
TMF: Is there anything else you'd like to add?
Kaplan: Yes. If you believe as I do that the Web is emerging as a major new distribution channel, and that the leaders in this area are likely to take a disproportionate market share, Onsale is in an excellent position to develop into a major force in discount retailing of hard goods.
TMF: Great. Thank you so much. I enjoyed talking to you.
Kaplan: Great, good questions. Thanks so much.
TMF: Thank you.
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