The Critical 'I'

Read. React. Repeat.

Thursday, January 29, 2004

THE TAO OF THE QUARTERLY EARNINGS REPORT
Most people consider the company financial reports filed with the Securites and Exchange Commission to be dreary, bland collections of legalese mumbo-jumbo and indecipherable balance sheets. I suppose they're right, although personally I find even the most run-of-the-mill public company year-end filing to be an interesting, even fascinating, read. (Then again, it could be that I've read so many of them for so many years that my brain's short-circuited itself into believing that; it's a close call.)

Into this ocean of legally-mandated uniformity comes Patrick Byrne, President of Overstock.com, a plucky online discount retail company/Amazon wannabe. Tired of issuing the same-old same-old in his company's annual earnings statement--especially when it lost $3 million in a quarter--Byrne wove Taoist philosophy, among other oddball stuff, into his official discussion letter attached to the company's report.

Hopefully, Byrne's approach will usher in a new, cheerier style of financial reporting throughout corporate America. If he doesn't get sued over it, that is.

The actual text of Byrne's flowin' prose is too good not to share, at least in part:

2003 Q4

"The rhythm of the Dao is like the drawing of a bow."

Lao-zi Dear Owners:

My colleagues executed well this quarter. Were 2003's four quarters a boxing match, I'd say we were dropped to our knees in the first, cleared our head in the second, got on our toes again in the third, and won the fourth on a decision. In this letter I will describe how my colleagues accomplished this, and detail some mistakes your chairman made that prevented victory by a knockout.

First, I will explain why I am appending this letter to our earnings release. Simply put, I want owners to understand their business: they entrust capital to me and I owe them no less.

I am warned that a letter such as this has risks. A lawyer told me that my use of this more colloquial style may be misconstrued, saying: "everything you write will be Exhibit A in a lawsuit against you," (but lawyers say that about most things). Bill Mann of The Motley Fool says that we live in a time when, if things go passably well, CEOs say, "Everything is super-de-duper," and when they go poorly they say, "Everything is just super-duper." In such a climate, if I write, "X went pretty well, but I could do better on Y and Z," the former is read as an admission of mediocrity, and the latter, calamity. Lastly, cynics claim that my candor is but an attempt to pump my stock by drawing investors looking for someone who does not pump his stock: I am flattered to have attributed to me such Machiavellian subtlety! (And I suggest they look up Popper's Falsification Principle.)

For six quarters I have struggled to reconcile my desire to report in this fashion to Overstock's owners with the more traditional approach used by most companies. Trying to mold a murky reality into a few lines of happy quotes has always been difficult. I have thus decided (when able and time permitting) to write lengthier and more informative letters to owners, filtering out points that concern individuals, details, or strategies that might bore readers or advantage competitors. Note, then, shareholder, that when I write, "X is going pretty well," just because I did not say, "X is super-de-duper" it does not mean, "X is a disaster." Sometimes a cigar is just a cigar. The journalists, lawyers, and cynics will find their own way...

Operations - We had a few sleepless nights here. At this point I suppose I should mention that, as Team Overstock's player/coach, it is my occasional and regrettable duty to reposition, bench, trade, and sometimes cut teammates, alas. "Benching" takes the form of sending people home on paid leave to recoup and to allow us to rearrange. For example, two summers ago I benched someone by sending him and his family to Hawaii while I took his job myself: when he returned I gave him a different job (in fact, things like this happen often enough that "getting sent to Hawaii" is synonymous around here with "getting a last chance"). This Christmas season an executive moved to the bench: I did not put out a press release about it, partially out of respect for him, but also because his future role in the game was unclear. As I have noted recently, he is no longer with the company. While I acknowledge that losing one's COO during the Christmas rush is discomforting (as I know better than anyone), I hope that this clarifies my thinking satisfactorily...

A man crosses a desert by shooting an arrow from his bow and retrieving it as he walks. He must cross the desert with the fewest shots possible. At times he strains the bow with all his strength and lets his arrow fly, but sacrifices accuracy, at times shooting the arrow wildly off course. Other times he aims carefully and draws timidly, attempting little but guaranteeing himself small, solid progress. In time he finds the balance of draw and aim that covers the most ground in the fewest shots.

I have not yet found such balance. Yet in 2003 Q4 we drew the bow deeply, and our shot went far and fairly straight. On such a deep draw I could have blundered the shot (as I have before), and only the excellent work of my colleagues prevented mishap. I do not enjoy chancing so much on each shot. Yet I saw an opportunity to let one fly, and we still have much ground to cover.

Pure poetry in motion. I say, forget about spam as an artistic medium; Patrick Byrne shows us how corporate communications can truly enlighten the mind and enliven the soul. As well as forecast revenue potential.

What makes all this even more unlikely is that Overstock.com is based in Salt Lake City, the heart of Mormon country, not exactly the most open-minded environment.