Wayfair Inc. (W) Q4 2015 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. My name is Jonathan and I will be your host operator on this call. At this time, I would like to welcome everyone to the Wayfair Q4 2015 Earnings Release and Conference Call. [Operator Instructions]. Thank you. And at this time, I would like to introduce Miss Kate Gulliver, Head of Investor Relations at Wayfair. Please go ahead.

Good morning and thank you for joining us. Today, we will review our fourth quarter and full year 2015 results. With me are Niraj Shah, Co-Founder, Chief Executive Officer and Co-Chairman, Steven Conine, Co-Founder and Co-Chairman and Michael Fleisher, Chief Financial Officer. We will all be available for Q&A following today's prepared remarks. I would like to remind you that we will make forward-looking statements during this call regarding future event and financial performance including for the first quarter of 2016. These statements are only predictions based on assumptions that are believed to be reasonable at the time they are made and are subject to significant risks and uncertainties. You should not rely on these forward-looking statements as representing our views in the future. Except as required by law, we undertake no obligation to publicly update or revise these statements. Our actual results may differ materially and adversely from any forward-looking statements discussed on this call. For a discussion of factors that could affect our future performance, results and business, please refer to our annual report or Form 10-K which we expect to file in the near future and other reports we have on file from time to time with the SEC. Also please note that during the course of this conference call, we may discuss certain non-GAAP financial measures as we review the company's performance. Please refer to the Investor Relations section of our website to obtain a copy of our earnings release which contains descriptions of our non-GAAP financial measures and reconciliations of non-GAAP measures to the nearest comparable GAAP measures. This call is being recorded and a webcast is available for replay on our IR website. Now, I would like to turn the call over to Niraj.

Thanks, Kate and thank you all for joining this morning. Our business continued to significantly outperform Q4 2015 caps off a year of accelerating revenue growth. We generated $740 million in net revenue in Q4, up 81% year over year. Our direct retail business which is now 93% of our total net revenue grew 98% year over year to $686 million in the fourth quarter. For FY '15, we generated $2.25 billion of total net revenue, up 71% year over year. In addition to this phenomenal revenue growth, I'm excited to announce that we generated our first quarter of positive adjusted EBITDA as a public company with adjusted EBITDA of $2.8 million. As a reminder, for the first 9 years, Steve and I operated the business profitably and we financed the company's growth out of cash flow and we did not take on outside investment until 2011 when we rebranded as Wayfair.com. That's 9 years after we started the company. Running Wayfair profitably over time is central to our beliefs and our business philosophy. And frankly, it's why Steve and I together own almost half of the business today and are committed to the long term growth and profitability of the company. Since our IPO, we have told you that we would be at break-even adjusted EBITDA by the end of 2016. However, due to the exceptional growth our business throughout 2015, we were able to achieve and exceed this goal much faster than previously anticipated. And importantly, this positive adjusted EBITDA was generated while we maintained our ongoing investment into the business. We built brand awareness, now at 72%. We added more new customers than ever before, ending the quarter with 5.4 million active customers, up 67% percent from Q4 2014. And the lifetime value of our customers continued to improve, with orders for active customer up to 1.71 from 1.69 in the prior quarter. In the fourth quarter, some of this outsize growth and the resulting positive adjusted EBITDA was driven by a very successful holiday season. As we announced in December for the five day period from Thanksgiving to Cyber Monday, direct retail growth sales which is defined as order intake, increased 130% year over year. While this five day period was clearly the peak of our growth rate, we saw strength throughout the holiday period. We started our promotions earlier this holiday, with the first events launching October 1. This allowed us to take advantage of early shopping that our customer does to prepare a home for the holiday season and it allowed us time to refine our offering in response to customer demand as the quarter progressed. In total, we featured approximately 68,000 items across 115 different merchandising programs which ranged from editorial content, to functional solutions, to curated seasonal decor. We started working with our suppliers last spring to both ensure that the products we featured would be at compelling price points and to enable us to photograph and merchandise these products in an engaging and exciting format. Our strong relationships with our suppliers and the learnings of success of our 2014 holiday season allowed us to source a more popular and deeper set of items this year. Successful products ranged from a leather recliner, the most popular item sold on Black Friday, to Christmas garland used to decorate our customers' home for the holiday. The combination of an earlier, broader and deeper promotional cadence helped drive new customer acquisition, repeat and sustained revenue acceleration that we have seen since the beginning of this year. Now since this is the first call of 2016, I would like to touch on our strategy for the coming year. 2015 by any measure was incredibly successful for the company. We grew total net revenue 71%, we added over 2 million net new customers, we grew orders from repeat customers 96% year over year which increased our ship to repeat orders by 400 basis points. Revenue per active customer grew by 11% year over year, we strengthened our relationships with our suppliers, maintaining our balance sheet inventory position flat while growing our range of exclusive products, our private label offering and growing our business. And we continued to build out our industry-leading logistics network, offering more 2-day delivery product than ever before and improving speed and efficiency across the network. These improvements to our offering and customer experience allowed us to successfully take advantage of the secular shift to online, resulting in significant share gain. Everything combined resulted in outsize growth, a much faster path to positive adjusted EBITDA than we previously thought and significant cash flow. Our model is clearly working. To highlight this, I would like to point out that in Q4 our total net revenue increased approximately $330 million over Q4 2014. Annualized, this means that we're taking $1.3 billion of share in what is approximately a $250 billion market. This success occurred in what is primarily today a U.S. business. In 2016, we want to broaden our reach and also focus on growth in our international markets, Canada and Western Europe. We believe these markets represent a tremendous opportunity for us. Western Europe has a total addressable market size similar to that of the U.S. of nearly $250 billion, Canada, while much smaller, is highly fragmented and we believe underserved today. We have proven that our model works in the U.S. Some of our earlier stage international markets like the UK are showing the same strength and we're excited to fully go execute our model. As we always do, we will start with a very focused approach. In this case, that means Canada, the UK and Germany. We think of our UK and Germany businesses as similar to our U.S. business in 2013. As with the U.S., before turning up the dial in marketing, we worked to establish our European supplier base and our core operations infrastructure in Europe. Over the past year, we have invested heavily in building out our team. As of December 31, approximately 12% of our work force was in Europe, a business that is less than 5% of annual net revenues. That is approximately 450 people in Europe. In late 2015, we started implementing the U.S. advertising playbook with a particular focus on the UK and results in the market are very promising. Year to date in 2016, the UK business is growing at a multiple of the U.S. growth rate. As we have seen success in the UK, we have started to execute the playbook in Germany. Like we did with the U.S. in 2014, over the course of this year, we plan to significantly ramp both advertising spend and the continued buildout of our team in Europe. Our opportunity in Canada is smaller, but also exciting. Until January, we served the Canadian market from our U.S. website. Customers had to purchase in U.S. dollars, there was no free shipping, the site was in no way tailored to the Canadian customer. Although it is extremely early in Canada, our .ca site only launched on January 4, we're already seeing a significant ramp in Canadian orders from simply tailoring the site to the local market. We now price items in Canadian dollars. We have parts of the site in French, we offer free shipping on orders over CAD75. Because of the proximity of the Canadian market to the United States, we can utilize our U.S. supplier network and logistics infrastructure to serve this market. And over the next year, we're going to roll out more direct Canadian suppliers and some of our own proprietary logistics network in Canada. Additionally, like in the UK and Germany, we will invest in brand building and customer acquisition and retention through our advertising spend. In aggregate, these markets represent a compelling opportunity to unlock an incremental wave of growth for the business. Obviously, the investments we intend to make in these markets are significant. As you will hear from Michael, we will be investing our growing profitability back into these markets. As with our investments in the U.S. in 2014 and 2015, we believe this is the right long term strategy for the business and we will closely monitor our advertising spend to ensure that we're getting the appropriate paybacks and efficiency. We have a unique opportunity to continue gaining share in the United States and to win in several specifically identified new markets. We're excited that the business is growing rapidly, that we generated positive adjusted EBITDA and that we're free cash flow positive and that we're continuing to increase our leadership position in a very large market. I will now turn the call over to Steve who will speak to how the technology we developed in the U.S. is helping us execute in these markets.

Thanks, Niraj and good morning, everyone. We've spent the last 14 years custom developing technology to meet the unique needs of the home market. From front-end innovations like personalization, search, mobile web and apps, to our supplier interface, to our advertising stack, to our logistics network. Our systems are largely home grown and developed utilizing our scale and proprietary data to build the best tools to serve our suppliers and customers. One of the many reasons we believe we will be successful in Canada, the UK and Germany is our ability to leverage our existing single-technology platform. With some local market tailoring, we're utilizing this core infrastructure for our non-U.S. operations For example, you may have recently seen the press release regarding the launch of our proprietary search engine marketing platform, Athena, in Europe. Athena, like the rest of our advertising technology, uses our knowledge of the industry, products, customer and the advertising market combined with the vast amount of data we collect to improve the efficiency and effectiveness of our ad spend. We spent several years refining our advertising technology stack in the U.S. market and are excited to be able to leverage this investment for Europe. Selection is, of course, a critical part of our differentiating customer offering. Our 7 million item product catalog is now increasingly globalized, meaning we can launch a single SKU in any currency and language and market we work in. For example, in the UK and Germany, two countries that share a supplier base, we can launch a SKU one time and have it appear in English and German, pounds and euros. This allows us to fully utilize the supplier network we've built in North America and Europe to quickly upload new product as it is sourced. Per our press release a few weeks ago, mobile technology is another area where we've utilized our engineering work in the U.S. to make the shopping experience better and faster for our international customers. We initially designed and developed our apps for the U.S. market. After strong success in the U.S. with some local modifications, we have launched the apps in Canada, Germany and the UK. These are just three examples of how our engineers are able to leverage our scale, infrastructure and existing platform to launch products and features faster and more efficiently. I'm incredibly excited about the potential our business has in Europe and Canada. Our core engineering team along with some in-region personnel and dedicated infrastructure is well positioned to help us roll out the U.S. playbook in our less-developed markets. I will now turn the call over to Michael who will walk through the financials.

Thanks, Steve and good morning, everyone. As always, I will highlight some of the key financial information for this quarter and full year 2015, with more detailed information available in our earnings release which can be found on our IR website. We had an absolutely fantastic quarter and year. In Q4, our total net revenue increased 81% year over year to $739.8 million. As Niraj described, this growth was driven by our direct retail business which increased 97.8% over Q4 last year to $685.6 million. Our other business which includes revenue from our small media business and from our retail partners, declined, as expected, 12.5% over Q4 2014 to $54.2 million. The continued acceleration of the direct retail business was driven in large part by the success of our holiday event. As we disclosed in an earlier press release, gross revenue, defined as dollars of order intake, for the five day period from Thanksgiving to Cyber Monday, grew 130% year over year. Adjusting for this growth, the quarter would have grown at a similar rate to Q3 2015. Our gross profit for the quarter which is net of all product costs, delivery and fulfillment expenses, was $175.7 million or 23.8% of total net revenue and it's within our near term target range of mid 23% to 24%. This is compared to 24.1% in the same quarter last year and 28.8% in Q3. The remaining financials I'll share on a non-GAAP basis excluding the impact of equity-based compensation and related taxes which totaled $9.7 million in Q4 2015 and $57.7 million in Q4 2014. As a reminder, the large equity-based compensation recognized in Q4 2014 included the catch-up equity-based comp and related taxes for the time vested equity that was triggered at the time of the IPO. For a reconciliation of GAAP to non-GAAP reporting, please refer to our earnings release on our IR website. Customer service and merchant fees were 3.5%, the same as Q3 2015. Advertising spend was 11.9% of revenue in the quarter or $88 million. Year over year, ad spend as a percentage of sales improved 150 basis points from Q4 2014 when it was 13.4% of revenue. This continues the trend we have seen throughout 2015 of year-over-year ad spend leverage each quarter as we benefit from the investments we've made in advertising to build our brand in the U.S. and acquire new customers. We added approximately 769,000 net new active customers this quarter. Over 200,000 more than we added last quarter, making it the largest quarter of net new customer acquisitions to date. Overall, customer dynamics remain incredibly strong. LTM net revenue per active customer increase 11.4% to $381 annually and LTM orders per active customers grew to 1.71 from 1.63 a year ago. Orders from repeat customers were 54.3% of total orders and up 397,000 orders sequentially. As you can see in the updated cohort chart we've posted to accompany this call, repeat dynamics across all our cohorts remain strong. We're very encouraged by the underlying trends we see in customer behavior. Our merchandising, marketing and sales spend are on a non-GAAP basis and was $27.1 million or 3.7% of net revenue compared to $13.8 million or 3.4% of net revenue in Q4 2014. Non-GAAP operations, technology and G&A expense was $41.2 million for the quarter or 5.6% of net revenue, compared to $28.3 million or 6.9% of net revenue in Q4 2014. As we explained last quarter, these two line items are primarily head count and the increase in the spend both on a year-over-year basis. And on a quarterly basis is due to the ongoing investment in our team globally. As our expanded recruiting team has ramped up, we have been able to accelerate our hiring pace, adding over 550 net new employees in the fourth quarter for a total of 3,809 employees as of December 31. Even with this increase in hiring, we did see leverage on the OTG&A line due to the significant revenue comp. Adjusted EBITDA for the quarter was positive $2.8 million or 0.4% of net revenue, compared to negative $7.2 million or negative 1.8% of net revenue in the same quarter a year ago. This is the first quarter of positive adjusted EBITDA since we began the ramp in our ad spend 2 years ago in the U.S. Adjusted EBITDA steadily improved throughout 2015 and the significant revenue growth in Q4 resulted in additional ad spend and head count leverage, driving to positive adjusted EBITDA. We're very excited about the strength in our business and the opportunities that this scale and profitability continue to create for us. In addition to the positive adjusted EBITDA, for the third quarter in a row, non-GAAP free cash flow was positive at $78 million. This positive free cash flow was driven by net cash provided by operations of $90.4 million primarily as a result of the favorable working capital dynamics in our business and net of our $12.4 million investment in capital expenditures for the quarter. Our inventory level was $19.9 million, 0.9% of LTM sales compared to 1.2% last quarter. It's important to note that while total net revenue in the quarter increased over $330 million from last year, inventory only increased $100,000. Non-GAAP diluted net loss per share was negative $0.07 on 84.2 million weighted common average shares outstanding. We achieved similar results for FY '15. Total net revenue of $2.25 billion represented a 70.6% growth rate over 2014, with our direct retail business growing 85.2% to over $2 billion. Adjusted EBITDA for the full year was negative $15.9 million, up from negative $62.5 million for FY '14. Importantly, we were also free cash flow positive for the full year, with $72.9 million of free cash flow. This resulted in approximately $466 million of cash, cash equivalents and short- and long term investments as of December 31, 2015 and means that the business is self-funding as it was for the first 9 years of the company's history. We're extremely encouraged by the strength of our brand, customer base and business model. We have a rapidly growing business that is generating significant free cash flow and achieved our adjusted EBITDA targets a full year in advance of the commitment we made at the time of our IPO. Given this context, we believe the right next step for Wayfair is to continue our growth and successful market share gain in the U.S. and to replicate our strategy in Canada, the UK and Germany areas where, as Niraj previously laid out, we see significant market potential. This means we will be investing more heavily in brand building and head count in those geographies in 2016. And we're not forecasting positive adjusted EBITDA again until the fourth quarter of 2016, as we originally committed to at the time of our IPO, but now including a substantial investment in new markets. Specifically for Q1 2016, we forecast direct retail revenue of $630 million to $665 million, an increase of approximately $260 million to $295 million over the same quarter last year and a growth rate of approximately 70% to 80%. The trends of our business have remained strong into the first quarter and we anticipate ongoing revenue strength. I know in the recent past, our actual direct retail revenue has significantly beat our guidance. We're currently almost 2 months into the quarter and I want to share with you what we're seeing for revenue trends. Quarter to date, the direct retail business is growing faster than the top end of our guidance. However, we're seeing lower comps than last quarter which obviously included the holiday spike. Though we continue to see incredible levels of growth, we do not expect growth to inflect up again this quarter in light of the exceptionally strong fourth quarter and the fact that as we enter 2016, we start to face more challenging comps against 2015. We forecast other revenue to be between $30 million and $35 million, for a total net revenue of $660 million to $700 million for the quarter. As Niraj described, we're making significant marketing and people investments in our international business. We have an opportunity to roll out our U.S. playbook in additional markets and to continue to efficiently invest in the U.S. As we have said since our IPO, we believe the right long term strategy for the business is to invest in a very disciplined way and gain share today. We will continue to spend on advertising which we know is efficient and effective and in head count across our geographies to unlock an additional phase of growth. Also, in the U.S., we're taking advantage of more efficient ad rates in the first quarter, as we do each year in Q1, to continue to spend on new customer acquisition and brand building. We continue to be laser focused on advertising payback. And while we see an opportunity and intend to ramp spend, we have not seen any changes in the current environment to historical payback targets in ROI. We do forecast ongoing year-over-year ad spend leverage, however, this will be at a slower pace in 2016 due to our investments in Canada and Europe. Just to be clear, this means our ad cost as a percent of revenue will continue to decline, even after investing significant dollars in these international markets because of this near term investment, we forecast adjusted EBITDA margins of negative 3% to negative 3.5% for Q1 2016. For modeling purposes for Q1, please assume equity-based comp expense of $11.5 million, average weighted shares outstanding of 84.4 million, depreciation and amortization of approximately $10 million and CapEx of approximately 3% to 4% of sales. Now let me turn the call over to Niraj before we take your questions.

Thanks, Michael. We're very excited about the performance in our business. Revenue growth has outperformed even our own expectations driven by the significant growth in the repeat business. Our recent cohorts continue to outperform prior ones as we strengthen our brand and customer experience. For the third quarter in a row, we generated significant free cash flow and we now have positive adjusted EBITDA. I know some of our peers have spoken about consumer softening and an increasingly promotional environment. We frankly have not seen these trends. Our customer base remains incredibly strong, it is in fact because of this customer dynamic and the success of our business model we believe the right approach for our business is to continue our investment in building the leading site for the home. Unlike in the brick-and-mortar home goods market, where inventory constraints necessitated a high degree of fragmentation, we believe that the online market for home, like much of e-commerce, will be a winner take most industry. We believe home is one of the few segments of general merchandise that is both unbranded and where much of the share shift to online is still to come creating a very compelling opportunity. Our vast selection, engaging product discovery and exceptional customer service, all powered by technology, has enabled us to take significant share. There remains a huge opportunity to capture increasing share as the consumer shifts per spend on line. We're excited about the opportunities for growth over the next several quarters. We remain committed to our near- and long term profitability targets and we look forward to continuing to bring you more strong results. We will be happy to now take your questions, so I will turn the call over to the operator.

[Operator Instructions]. Your first question comes from the line of Neely Tamminga with Piper Jaffray. Please go ahead.

Niraj, can we dig a little bit more to this growth in Europe as well as Canada. It's really a three-part question. We're looking to understand a little bit more in terms of the buckets of spending in terms of the financial impact, it sounds like, obviously advertising will go higher, but it also sounds like you have already pre-spent on human capital. So if you can kind of reframe that up a little bit in terms of key buckets of investment for the year and/or maybe specifically for the quarter that would be helpful and then just higher level strategic questions that we have about those markets. First, if we think about the trade interior design and decorator trade market is a great seed to the brand over here in the U.S., do they have similar situations like that in the interior decorator market for Canada, UK and Germany? How does that part of the industry work? And then on the expansion side, does it help to expand now in terms of your volume pricing to your existing sourcing structure and supplier network now, both in the U.S. so ultimately your gross margins can go higher, earlier too? We're just trying to understand that dynamic. Thank you.

So the first question having to do with investments outside of the United States and Europe and Canada, a few thoughts there so certainly to ramp up the business there now that we feel like particularly in the UK and Canada we have got the offering to where we're seeing really good customer traction [Technical Difficulty] there's an investment in advertising. I do want to highlight with that investment internationally, we still foresee our year-over-year ad spend as a percentage of net revenue total company to be going down. So embedded in the fact it will still go down, we actually have a large amount of investments in these countries so that's clearly one area. The human capital side is where you start your investment early on because you have to built the transportation network and enhance the supplier network, the product selection, you have to have those things in place before you can actually have something you want to market. So that's obviously is a leading investment and we mentioned we have roughly 450 people in Europe and that sort of gives you a feeling of -- if you think about 450 people and the amount of activity that they can be engaged in and what they can do, it's obviously significant. And the other place where you invest is when you think about gross margin, obviously the gross margin you’ve when your smaller is not as good as the gross margin you get when you're larger and you’re buying much larger quantities from your suppliers, you’re getting discount, you’re transformation cost efficiencies and all the things that we increasingly keep getting in the United States and so the early days gross margin is going to be a lot lower than the later days gross margins. And so embedded in our gross margins obviously also what is an investment outside of the United States. So I think you can think of it as investing in these different areas, we highlighted the human capital piece because obviously that's something we have already done and it just kind of gives you some context when you think of the international [indiscernible] 5% of the revenue and the 450 to 12% of head count that gives you some prospective. And then just a little more color on the advertising piece, you know, so, for example, in the U.S. last year, we spend 40 million in TV and when we think about what we’re going to be doing this year in TV, outside of the U.S., we think of it sort of like 10 million in TV. So it's not obviously at the same level but the business is not as large and it's growing that was only a fraction of our spend because last year we spent 200 million plus in advertising in the U.S. and 40 million was TV. So it's a portion of the spend. The advertising is the same kind of mix where you’ve TV, you’ve got the online and you’ve got sort of other things you are doing. Your second question was about do you believe there's a designer or decorator trade business in Europe? Absolutely. It's the same dynamic, most consumers in this category, the goods are non-branded in the U.S. they are non-branded in Europe. It's super fragmented in the U.S., it's super fragmented in Europe in terms of who the retailers are. What we bring by amassing the huge selection of affordable goods under one roof with the great service delivery promise that we do basically lends itself to being a great platform for designers, decorators and trade customers and that dynamic is exactly the same in Europe. And then the third question, with regards to our supplier base and sort of pricing leverage. Frankly as we keep growing, our suppliers are seeing us as their key way to take advantage of the internet opportunity. They are very excited to grow with us and as we’ve mentioned the gross margin has significant opportunities to grow over time, ranging from private label to suppliers giving us better pricing as our quantity of volume goes up to transportation cost efficiencies we can unlock and all three are happening, continuing to happen. So the whole point about supplier pricing being one of the levers is absolutely true.

Your next question comes Deb Schwartz with Goldman Sachs. Please go ahead.

You are seeing great customer traction this year. Was all the outperformance coming from the Wayfair brand or more broadly can you give us a sense of how the different brands are doing either on a relative growth basis or contribution for the brands and one follow-up on Europe, can you give us a sense of your view on the competitive landscape in the markets you're going to drive toward this year?

Yes, sure. So the first question about our different brands. I mean the thing there -- so it's a tricky question and answer because the truth is that the Wayfair brand is so much bigger than all the other brands, it really matters to what much lower degree how the other brands do. We have some of our other brands that are smaller that are growing at a fantastically high growth rates but frankly they are so small relative to Wayfair when you look at the aggregate numbers you're really seeing the story of Wayfair.com. So what I would say is we believe all our brands have a role and we're seeing really nice traction in terms of where we're investing. We're investing measuring payback not an aggregate but very granularly, but Wayfair is by far the biggest brand. I think that's important to keep in mind as you kind of think of how you model it because that’s sort of the story of how the numbers work. In terms of your second question about the competitive landscape in Europe, it's similar to the U.S., meaning that you have brick and mortar regional furniture folks. You’ve sort of the equivalent of national big box folks that focus on other categories for home as ancillary, you’ve have some pure internet folks, but it's super fragmented and in the U.S. you tend to have the perception that IKEA is a dominant furniture [indiscernible] in Europe. While IKEA is large in Europe, while IKEA is actually large in the U.S and in U.S. if you just look at the furniture piece it may be 4% share, well if you look at Europe they have 7% share. It's not a much more share. It's more share but still a super fragmented market that's basically the case as you go through in Europe in each country, they reflect sort of the similar thing that you see in the U.S. as you go through each region. The dominant furniture players vary and part of it's that the styles vary. When you look kind of other goods, it's a similar dynamic and again these are generally unbranded items. So it's very similar, the retail landscape is very similar for basically the same reason.

Your next question comes from Seth Basham with Wedbush Securities. Please go ahead.

I would like to touch base first on the international expansion. Given that you guys only have about 1% market share in the U.S. and are very early in your growth as a result of that here in the U.S. Could you just give us a little bit more prospective on why right now is the best time to spend a lot of your time and attention growing internationally?

Yes, sure. So I think the truth is that we're very ambitious as a Company, but we're very pragmatic. So on one hand, there's a lot we want to do, on the other hand, we try to stay to the realm of what we think we can do well. If you stretch your resources too thin, you end up getting -- you're doing a lot, but you're not actually making headway basically anywhere. So the way we think about it is, in the U.S., we feel like we've not just put in place the key value prop that drives customers, but we're pretty far along on building the brand. We're at 72% awareness and that continues to grow really nicely. If you look at the repeat rate, our repeat orders were up 96% year over year in the U.S., new orders were up 67%. So you're seeing really good traction, the new is cruising right along. But repeat spend has been the reason growth has accelerated over the course of 2015. And we uploaded a presentation this morning which is our standard slides but with a couple new things thrown in. And slide 11 when you get a chance to look at it, we talk about the concept of market share and one of the things you'd look at. And this would understate the market share we're taking because it's a lagging -- it looks back at the whole year and obviously our growth accelerated through the year. So if you try to do it quarterly, you would actually see some progress I think. But it basically implies that we took a third of the dollar growth of the online home market which that would be primarily in the U.S. given that our business is primarily in the U.S. So we feel very good about where we're in the U.S. We have a long list of things we're doing to further compound what we believe our advantages are in the U.S. And we believe past that, we do have the ability to do additional things but not necessarily endless amounts of things. And so the markets we're very focused on are Canada and western Europe. We think we can do that well. And to be honest, that's where our focus is, we're not really looking at adding markets to that.

Understanding that you expect that's good to investments in these areas, but still expect to leverage advertising spend. Should we also expect customer positioning costs to remain flat or go down and payback periods to remain flat or go down in 2016?

Yes, so the way I have looked at that, obviously, you have an imperfect view of it relative to the much more nuanced view we have. So I would think in aggregate which is the view you have, I would say that over the last five, six quarters, you've seen it be flat. And I would say you're going to continue to see that, so bounces up or down in the couple buck range and I think the answer is, yes, you should fully expect to see that.

Your next question comes from Oliver Wintermantel with Evercore ISI. Please go ahead.

I had a question regarding the guidance, probably one for Michael. So strong revenue growth, but then the EBITDA margin rate is certainly a little weaker than we all thought probably. Can you give us some details on how we get there? What the gross margin rate is, what the leverage is on SG&A? And then to follow up there, maybe also some details on the growth margin rate in the fourth quarter, what drove that? Thank you.

I think the gross margin is coming in really exactly where we have been targeting it. I think as you heard from us two maybe three quarters ago now that we're targeting mid 23%s to 24%, so coming in at 23.8% is I think right where we want to be. And I think when you look at the year-over-year guidance, I do think that gross margin at mid 23%s versus last year's Q1 of 24.2%, that is obviously one of the places. And as we talked about that 24.2% in Q1 and Q2 margin got ahead of where we really wanted it to be. So that's when we brought everybody to the mid 23%s place. And so we're still targeting that. We feel confident about that and we think that's the right balance even as we make investments in the international business, as Niraj just commented. We will show ad spend leverage as I noticed in my earlier comments, the as spend leverage year over year will be lower than it was last year. Last year obviously it was extraordinary coming off the high water mark of 14%, but we will still show some ad spend leverage largely because we're getting really great ad spend leverage in the U.S. business. And in fact, investing that back into the ad spend that we're ramping up in our international operations. And then we will continue to hire people. You saw this quarter a little bit of leverage on the OTG&A line, the opposite on the merchandising, marketing and sales line. I think that's a little lumpier depending on just how the hiring and recruiting efforts go. We have ramped that up nicely now. We hired 550 net new people last quarter, but I would say those areas I think you will probably see similar levels on a percent of revenue basis. So that's how you can model yourself to the compare of our guidance of negative 3% to 3.5% in the EBITDA line versus last year negative 2.8%.

And just lastly, if you could maybe just give us some economics about maybe the international markets that you go in, not from a revenue growth but just how you think about the economics of these markets compared to the early stages in the U.S.?

I think they look very similar. If you look back to our business in 2013 and then 2014 when we really ramped up ad spend, I think that's the place that, as an example, the UK business would look like today. I think the difference is that in the U.S. at that time, we did have a big base of built customers from the pre-Wayfair days. And so you were spending ad spend, but you had some existing base of customers. That's different in the international markets where they're still much earlier stage. So I think the leverage point there is leveraging the success we have had in the U.S. to now go and fund the investment of building out these international markets. But I think from a straight up economics perspective over time, we expect these businesses to look extraordinarily similar. And I think that's true on what the payback trends will look like, gross margin will look like, et cetera.

Your next question comes from Paul Bieber with Bank of America Merrill Lynch. Please go ahead.

How should we think about the magnitude of positive EBITDA in 4Q later this year? And then secondly, from a high level, can you provide some color on the evolving category mix at Wayfair? Is the outsized growth being driven by category expansion, as well as just the fast customer, active customer and the repeat purchase behavior? Just some color on category mix would be really helpful. Thank you.

I'm certainly not going to guide what Q4 EBITDA numbers are going to look like, but what I would say is this. At the time of the IPO, we were very clear that we committed that we would be profitable by the fourth quarter of 2016 and we have stuck to that commitment. What we're saying now is, we have gotten the whole business, in effect the U.S. business, because it represents 95% of the business. We have gotten the whole business to profitability a year earlier and even with continuing to show ad spend leverage, et cetera, we're going to make some investments in the international business. So by the time we get to Q4 2016, you're going to end up with a business that meets our original expectations and commitments to everybody. But at the same time, now has a substantial investment in what we believe will be a growing and next phase or additional phase of growth from some key international markets. So, too early to call a number in Q4, but we're highly committed to that.

This is Niraj, let me just jump in on the category expansion and category mix question. So I think the way to think about that, Paul, is we just like talk about international being an investment and if you run it out into the future there could be a very high return there, both in terms of revenue and profits. Well new categories basically represent the very similar thinking to that, in the sense that today they are very small. So they could be growing at a very high rate, but they are so small that the business is still really dominated by the categories you'd primarily think of us for which is furniture, decor, the soft goods. But it's less that some of the categories we've talked about recently in some of the things we're growing in home improvements, some of the things we're growing in housewares. But those could be quite large for us in the future and the customer base that we have seems to be very engaged with it and that's a big opportunity for the future. So Our P&L today has investment in a whole number of areas that are actually not manifesting in today's return the P&L that you see. It has the costs, but it doesn't have the upside, so I would think of those as future upsides.

Your next question comes from Matt Nemer with Wells Fargo. Please go ahead.

In the UK, I'm wondering if you can talk to where you have ramped advertising and you started to roll out your U.S. playbook, could you talk to the customer acquisition cost and payback trends in that market? Are they similar to what you have seen in the U.S. and where would the I guess 2014 and 2015 UK cohorts fall relative to your cohort slide?

Sure, Matt. So what I would tell you is, if you wanted to think about where the UK is, think of it as basically the equivalent of the beginning of 2014 in the U.S. So we're early in that. We don't have the 2014 and 2015 cohorts yet, we have the 2013 cohorts. So what I would tell you is, what we have seen is that we have customers that are very engaged. We feel like we have a selection that is working. We have a lot of metrics that are showing us that the customer engagement and all the other follow-on metrics you would want to see are repeated, so on and so forth. We're very happy with where they are and where they're trending. We're not going to get into really specific detail breaking out UK from the total in terms of metrics, but I just wanted to make sure you frame it as the right time frame as it's still pretty early. And what we're telling you is that we have been investing into getting the offering to where it makes sense to aggressively market it. And we feel like we have crossed that threshold and we're seeing the same things we were seeing at Wayfair in early 2014 in Wayfair. com in the U.S. And so that's what gets us excited about it and also why it makes sense to push it forward from and advertising customer acquisition standpoint.

Are there any other major differences that we should be aware of in terms of order size or maybe the seasonality of that business in these markets?

Yes. Again, we're not going to break out a tremendous amount of detail. From a high level prospective, I would think of them as generally similar. Seasonality is similar, the customer's behavior is similar and the category size proportionate to other categories, similar, but we're not going to get into very specific guidance.

Okay. And then just switching topics, you launched two pretty big categories in the home improvement arena. Just wondering if you could talk about the long term opportunity in that market and if you have any sense for how incremental that could be to the $250 million TAM that you talk about in the home furnishings business?

Yes, I think the way to think about it is, when you look at furniture and decor, that's obviously a very big market in the U.S. Then if you look at what housewares represents, what the home improvement categories you just discussed represent, those represent a significant percentage of growth opportunity relative to furniture and decor. So in that sense, there's a lot of upside there. It gets even bigger when you realize that despite the fact we have very little share of furniture and decor, the share we have is way, way, way more share than we have in these new categories. So the outsize potential there is even higher. But the $250 billion actually does include some of these categories in it, so I just don't want you to double count.

And I know it's early days, but does that look like it is bringing in a new customer demographic for you or do you think it's your existing customer that is a type of customer that's broadening out their spend into these categories with you?

It's really about our core customer. Our core customer in the United States we define as the $50,000 to $250,000 household range. And from an income standpoint, the core shopper we have is typically a woman, the age range is really 35 to 65. When you look at that income range, you basically get 60 million households in the U.S., with 45 million below that, 7 million above that. The 60 million in the middle there, where the bulk of the spend is concentrated, those are really the folks that we're catering to. And those are the folks that not only are buying the offering you historically thought of us for, but those are the same customers who are interested in these categories that we're now discussing.

Your next question comes from Aaron Kessler with Raymond James. Please go ahead.

A couple of questions. First, on the gross margins, can you just talk about say the long term leverage there? I guess the long term range is about 25% to 27%, versus the 24% roughly today? Second, any plans to maybe break out the international investment versus domestic profitability in 2016? And finally, just maybe on CapEx the percent of revenues, any details there maybe where that trends longer term? Thank you.

Yes, what we have been saying repeatedly and it's absolutely I think the same answer right now. Is that there's three key levers to driving that gross measure up over time. One is as the private label offering which we're rapidly scaling becomes a bigger portion of the total which allows us more pricing latitude. The second is, as our volume grows with our suppliers, our ability to get better cost basis keeps increasing. Because our suppliers tend to think about the world as profit dollars versus percentage margin. And the third is that there's dramatic opportunities on transportation cost efficiencies as we keep growing our volume. and that transportation cost is not an insignificant cost. So those efficiencies are very significant. And I would point to that one also in the sense that that's not something that needs to come out of our supplier or out of consumer, that's something that's just an embedded cost in the whole chain. That as we make it more efficient and reduce that cost, that actually doesn't take value and transfer away from anybody, it accrues value to everyone. And we think those three actually amount to far more than the 300 basis points from where we're now, to what we talk about in our long term guidance. Then the reason it's far more and yet we only talk about the 300 points is that our general philosophy is that you're giving some back as you're keeping some. So we actually don't view that long term range and that 25% to 27% as particularly difficult to get to.

Aaron, we do disclose our international revenue in our financials and so that will show up in the K. I don't anticipate that we will do any additional disclosure around that near term as we grow the business. I don't think we caught your third question, so could you repeat that?

My third was just on FX and your revenues longer term.

Sorry, you broke up again.

Yes, on CapEx, a percentage of revenues long term?

Yes and as I said in my comments, we're guiding CapEx at 3% to 4% of revenues, we think that's the right way to look at it. If you look at the full year last year it was 2.8% of revenues. And as we continue to make some modest investments, I'd take the opportunity to remind everybody, that this is not a particularly capital intensive business. We grew the business dramatically on basically flat inventory and with basically no inventory and no stores. Our CapEx is really limited to the capitalized software that we're building, as well as what I would call low capital intensity warehouse space, where we don't have a lot of automation and capital costs there. It's just really for racking.

Your next question comes from Mark May with Citi. Please go ahead.

I know you have answered a lot of questions about how the international markets differ or are the same as the U.S., but just one more. In terms of order fulfillment, could you just tell us if it will be radically different the way your network is set up and you supplier and logistics partner relationships work? And then wondering if you could help us on a full-year basis this year. For the U.S. business, when you carve out the investments or incremental investments for international expansion. Do you expect the U.S. business to be operating income profitable on a full-year basis this year? Any color there would be helpful, thanks.

Sure, Mark. So just on the Europe question about the order fulfillment network and relationships, it's not going to be different. It's very analogous. So in other words, we're working with suppliers across their wide range of product selection. That gives us this uber-selection. A lot of what we've been able to build is the logistics to actually move goods efficiently from one place to the other and the way in which we do consolidation and the way in which we use different carriers. And in fact, some of the technology we've built where we clear a product from the U.S. into Canada automatically and the border clearances and the transportation network we've built, actually lend themselves well to Europe. Where you have different product selection originating in different countries and as you move goods between countries there's things you to deal with around transportation, border security, that. And what we have been able to do by doing this, is a massive selection that others don't have. Most folks work off a selection within country and each country is thought of as a discreet market. And while what will be available in that country will be some of the more popular styles, they will still have gaps for lot of customers' desires that frankly we can service as well because we have this uber-catalog. So it's the same analogous model and it's set up really well. On your next question about the U.S. operating can profit, I'm going to flip that back to Michael. But the only thing I will say is, what you did see in Q4, is that the total business was EBITDA positive with, I mentioned, 450 people in Europe and investments we're making. And so obviously with the U.S. being so big and then having all those investments and still netting out a positive EBITDA number, that bridge tells you something right there. But, Michael, maybe whatever you want to add.

So just to add to that, let me try and answer your question, Mark without giving guidance. I think as Niraj was just saying, 95% of the business is U.S. based today and obviously the business was profitable in Q4 on an EBITDA basis. And as you have now heard from us I think multiple times on the call, we expect to see continued leverage in that business on the ad spend line in particular. So I think if you think that through, obviously that's going to continue to play out and it's that success in that part of the business that is really funding the investment into other geographies.

[Operator Instructions]. And your final question comes from the line of Michael Graham with Canaccord. Please go ahead.

I just wanted to ask about your customer growth. Can you give us a little color on what was going on with the funnel underneath that metric? Traffic conversion, retention, just where are you seeing strength in that whole equation? Thanks.

Sure, Mike. I think the thing you're seeing is that there's strength along the whole chain. So you start at a super high level, our awareness continues to grow. I think a number of folks have looked at our comScore traffic. Our comScore traffic reports, we don't comment on traffic, but comScore reports strong numbers both desktop and mobile. And we're certainly very happy with how we're seeing traffic growth. We do a lot of survey work around customer awareness, but also customer preference data, we believe we're doing incredibly well there. Which both shows the new order growth was 67%, as I mentioned, but the repeat order growth was 96%. And if you think about a repeat customer and how that would tell you about new customer growth, is that you can market to someone and convince them to check you out and if the offering is engaging and interesting enough, they will buy and that gets you the new customer, but really only if everything goes well and they're really pleased does it get you the repeats. So when you see repeat growing faster than new, that to me is that repeat is the leading indicator for the future of new, in the way I tend to think about it. But I don't know if that helps you, but it's really strength everywhere.

And so I think that wraps up the call. So thank you, everyone, for taking the time to join us today. Sorry we didn't get to take any more questions and we appreciate your interest in Wayfair.

And ladies and gentlemen, this concludes today's conference call. You may now disconnect.