Exciting info if you're long on COOL!
Company Cyberian Outpost
We Talked To Darryl Peck , CEO
IPO Date July 31
Offering Price $18
Stock High 26
Stock Low 5 15/16
Last Update: 5:03 PM ET Oct 3, 1998
Profile: Kent, Conn.-based Cyberian Outpost (COOL) sells computer-related products over the Internet.
Notable: Cyberian Outpost sold 4 million shares in an IPO headed by BT Alex. Brown. The stock didn't begin trading until late in the day, and some early momentum quickly faded. The stock has yet to recover and is still well under the $18 offering price.
On Thursday, the company reported fiscal-second-quarter sales of $17 million, an increase of approximately 47 percent above first-quarter results. Gross margins improved to 9.9 percent from 9 percent in the previous quarter. Losses grew to $5.6 million, or a pro forma 29 cents a share, from $4.2 million, but that beat analysts' consensus estimate by 14 cents a share.
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Let's start with the [quarterly results]. The reception from the market today was kind of negative early. Was that due to some incorrect headlines [that said Cyberian had missed analysts' estimates]?
Peck: There was an incorrect headline out yesterday. It was retracted, but you know how the Internet is. Once it gets out there, it's out there. It's wrong. We beat the analyst First Call consensus by 14 cents a share, and there's no way around that. That's a fact.
They were looking at the net loss as opposed to operating --
Peck: No, I think they were looking at the non pro forma, because in the first quarter as a public company, when you convert from preferred to common stock, you have to report both numbers. This isn't accounting trickery. This is actually how it's done. It's nothing we'll have to deal with next quarter because the conversion took place in that quarter. Unfortunately, some guy sitting in a room somewhere typed in the wrong number and it went out all over the world. Then they took it back, but you know how it is: You can't take it back. It's out there.
It's just another example of what, in a way, has been a rough ride [for Cyberian] early on. Obviously, the market environment as a whole hasn't been too friendly. And then, also, if we could talk about your IPO, the day you came out I think you began trading maybe two and a half hours before the weekend was to begin --
Peck: Actually, an hour and a half --
An hour and a half. I mean, that can be pretty damaging, don't you think?
Peck: Um, I don't know. The bottom line is whether the stock is at 8 or at 10 or at 12, the bottom line is we've built an incredible company here. No Internet retailer in history has ever beat the consensus estimate by 14 cents a share. I believe the highest ever is Amazon once by seven cents a share. I think our performance speaks for itself. Our business fundamentals are probably the best among Internet retailers at this point. We beat our revenue numbers, spending $2 million less in sales and marketing than the analysts thought we would. In the day and age of Internet retail companies reporting expenses way above expectations, I think it's an extraordinary performance, and the stock market will take care of itself.
But again, I talked to you on that first day, and there was some anxiety with how late the stock started trading. Was it a nerve-racking day?
Peck: I've only taken one company public, [but] I would imagine it's always a nerve-racking day when you go public. When I said to you I was on pins and needles, it was because I was really excited, not because I was upset it was taking long. Alex. Brown did their job. They got the company public. Frankly, look at the upside here: If we would have waited another week, we wouldn't have $70 million in the bank. So, from one perspective, it was an absolute miracle that we got it done at the right time. We got the money in the bank. ... We're thrilled that we got it done.
Anything else interesting happen with the IPO? What have you learned from the process?
Peck: The last day of the road show, we were 16 times oversubscribed, and it flowed 98 percent to the people we met with over the three-week period. That's an extraordinary performance for a road show. ...
The road show was actually a lot of fun for us. We get along extremely well around here, and three of us spent three whole weeks together. And we actually really enjoyed it, which was a surprise to us.
Slumber parties?
Peck: No, no. We did sleep in separate rooms, but we really enjoyed the process enormously. We really liked telling our story because we really believe that we have a fundamentally very strong business here.
Let's talk a little about that business. Repeat customers accounted again for 48 percent of the revenue [in the latest quarter]? Where do you see that percentage headed?
Peck: We actually see it headed up because, to be honest, we haven't done an enormous amount in the past to get those customers to come back. All we've done, which is actually very important, is to have a very good user experience. Customers can order till midnight, [and] they get it the next morning in the States. They get it in 48 hours overseas. We take orders later in the day and deliver faster than any other retailer on the Internet.
Frankly, it's not really until this coming quarter that we're really going to be personalizing the shopping experience and going after customers with targeted e-mails that we expect to start really working on building repeat business.
You mention $2 million less in sales and marketing. Where did that savings come from, and how were you able to build your customer base anyway?
Peck: I think [that is] one of the real differentiating factors between us and most other Internet companies. If you look at our marketing strategy, we have not committed to any extensive, long-term strategic alliances. We've done one-year deals. The only large one we did was AOL for $5 million. The others were substantially less money than that. We don't have $20 million or $30 million committed to these deals going forward. As a matter of fact, out of $70 million we have in the bank right now, I think maybe $2 million is actually committed to deals. So we have tremendous flexibility of how we spend the capital raised in the IPO and the prior placement to put our marketing money where we think, at that moment, it will do the most good.
We're about to make a major announcement that we've hired what I think is the most creative ad agency in New York to roll out an offline branding campaign in television, radio and print starting in late November. We have the flexibility to spend money that way because we haven't committed to large deals on the Internet.
[What about] international? I didn't see how much it accounted for in this quarter.
Peck: International was 15 or 16 percent [of total sales] this past quarter. It grew 10 percent quarter over quarter. Obviously, most overseas markets are pretty weak right now. We're still growing it; we're just growing it a lot slower than we're growing domestic. We saw this coming quite a while ago and planned for a slowdown in international growth. Obviously, it's not affecting our numbers. We annihilated the analyst estimates anyway. We're continuing to lay the groundwork for international expansion. When the economies overseas rebound, whether it's 12 months, 18 months, 24 months, we'll certainly be there to leverage that growth.
I know you keep mentioning the analyst estimates. But obviously, at this stage of the game, a lot of the [analyst] legwork is done via management guidance. Why were the numbers different?
Peck: Why were the numbers different? Because we outperformed our expectations. We were able to generate far more revenue spending for less money than we thought we would. I gotta tell you, when we saw the numbers, we were overjoyed. It's not like this was some big plot all along. We're not that creative, I guess. We really were stunned when we saw the numbers, and we were overjoyed that we had done such a great job. This was not a long-term plan to set up the analysts at some amount and then beat it.
It's not a bad one, though.
Peck: I guess it's done. But it's not the way we do it.
Gross margins grew 10 percent. I think that's a significant thing, because I think most people who are concerned about the Internet commerce area still say, "I don't care where you sell these things, they're still low-margin products, and you need so much more revenue to drag it down to the bottom line." Where do you see gross margins headed, and how did you boost them? And when do you get to a level of sales where that can flow to the bottom line?
Peck: I believe the analysts are projecting a long-term -- five years out -- of 16 to 17 percent, and we're not uncomfortable with that. We think that's doable. There's no question that we're getting smarter and smarter about how to generate margin. We just started billing extended warranties, which is a high-margin business. We're trying to build up our accessories business, which is a high-margin business. We expect the trend in the second quarter of a 10 percent increase in margins to continue northward for the foreseeable future.
Yeah, people are right when they say you have to generate an enormous amount of revenue when you sell computer products in order to make money. But if you look at our growth -- 270 percent in this quarter, 40 percent quarter over quarter -- there is enormous growth possible. And if you look at other retailers of computer products, whether it's CompUSA or the catalog guys, you will see that they generally grow at a fantastic rate of revenue. This is a business, depending on who you listen to, [that] is a $600 billion marketplace growing 15 percent a year. That's a lot of growth.
Another way that seems to be a natural as far as building a revenue stream ... [would be] to provide premier placement on certain searches. I know you say in your prospectus that you have unlimited shelf space free ... but wouldn't it pay [to] offer that kind of merchandising opportunity to product manufacturers?
Peck: Absolutely. We started doing that in the last couple of quarters. Advertising did contribute to the increasing gross margins in the second quarter we just announced. And we expect to increase that advertising revenue, and thus margins, because it flows right down to the bottom line.
Talk about your competition for a second. Why [should e-commerce customers choose] Cyberian as opposed to Egghead or numerous computer-related sites out there?
Peck: Well, it seems like everyone's growing. The computer-products market is growing at a rapid rate. I don't have the exact numbers, but the number of storefronts in America where you can walk in and buy computer products has been reduced by 80 percent in the last decade, so people are having to go direct to the catalogs and, obviously, on the Internet.
Cyberian does have the advantage of [having been] one of the first retailers of any kind on the Internet, opening in May of '95. Even though we started the company with only $28,000, we were able to really use guerilla marketing and get the word out there and build a very loyal customer base. We carry 140,000 titles. As I said before, we take orders till midnight and deliver the following morning. We have very competitive pricing, and we provide an enormously high level of customer service. One of the most amazing statistics is that a third party that surveys our customers finds that in 98 percent of the cases, our performance exceeds their expectations. ...
I know you've gotten some flak for the [company's] name. Are you comfortable with it and how people respond to it?
Peck: Actually, to be honest, most of the feedback we get is people love the name. We have seen almost no negative feedback on the name. However, our URL is outpost.com; I expect when we roll out some mass-media marketing in the late third quarter, early fourth quarter, you'll see us really play up outpost.com more than Cyberian Outpost in order to make sure people don't have any trouble finding us. But we're certainly not changing our name, just to make that clear.
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