Good morning. My name is Carol and I will be your conference operator today. At this time, I would like to welcome everyone to the Wayfair Q3 2016 Earnings Release and Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] At this time, I would like to introduce Michael Fleisher, Chief Financial Officer at Wayfair.

Good morning and thank you for joining us on election day. We hope everyone has the opportunity to get out and cat for vote. Today, we will review our third quarter 2016 results. With me are Niraj Shah, Co-Founder, Chief Executive Officer and Co-Chairman; and Steve Conine, Co-Founder and Co-Chairman. We will all be available for Q&A following today’s prepared remarks. Julia is on a maternity leave with her new daughter, Vin, and will be back with us for year-end. I would like to remind you that we will make forward-looking statements during this call regarding future events and financial performance, including guidance for the fourth quarter of 2016. We cannot guarantee that any forward-looking statements will be accurate, although we believe that we have been reasonable in our expectations and assumptions. Our 10-K for 2015 and our subsequent SEC filings identify certain factors that could cause the company’s actual results to differ materially from those projected in any forward-looking statements made today. Except as required by law, we undertake no obligation to publicly update or revise these statements whether as a result of any new information, future events or otherwise. Also please note that during this call, we will discuss certain non-GAAP financial measures as we review the company’s performance. These non-GAAP financial measures should not be considered replacements for and should be read together with GAAP results. 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 will be available for replay on our IR website. Now, I would like to turn the call over to Niraj.

Thanks, Michael, and thank you all for joining this morning. We’re pleased to report another great quarter and update you on some of the exciting initiatives we have underway. We generated net revenue of $862 million in Q3, up 45% year-over-year and $832 million in our Direct Retail business, up 53% year-over-year. This represents direct retail dollar growth of $287 million versus Q3 2015. As we have noted in the past, we believe that we are taking a third to 40% of the U.S. online dollar growth in our categories. There is a secular shift underway as consumers shift home purchases away from brick and mortar stores and towards online. We believe the strength of our offering, including vast product selection, inspiring visual merchandising, helpful customer service and fast shipping and delivery have positioned us as a beneficiary of that trend and allows us to take such a significant share of the dollars as they move online. I want to start this morning by updating everyone on our three main investment areas. First, building our international business; second, operationalizing our logistics network; and third, continuing to fully penetrate our TAM through our merchandising efforts in key areas. On this, I’ll later review two illustrative examples, registry and seasonal décor. These key areas in which we are investing have not changed. As we mentioned last quarter, we’re focused on these initiatives as they are the right investments to drive the long-term growth and profitability of Wayfair. Our market opportunity is very large, more than $500 billion across North America and Europe. While these investments weigh on our earnings today, we believe they will lead to continued sizable long-term revenue gains and significant levels of sustained profitability in the future. First, our most substantial investment by far is building out our international…

Thanks, Niraj. As you can tell from the rundown Niraj just went through, there are so many exciting areas, where we are enhancing the customer experience, all built on our technology expertise and the incredible inventiveness of our more than 1,000 engineers and data scientists. I’ll use this time to try and highlight just a couple of examples of the key investment areas Niraj mentioned. We have now fully launched our new wedding registry. Our registry provides features we think are most important for couples today. As an example, we provide group gifting to our customers. Many couples today already own the basic items most registries offer, but have not invested in larger ticket items. Group gifting allows couples to feel comfortable registering for more expensive items like furniture and décor that they really need, and wedding guests are able to contribute whatever amount they feel comfortable as a gift. Our registry couples have the ability to seamlessly track progress of their group guests due to Wayfair app, desktop, or mobile web experience, and they receive an e-mail notification once a group gift has been completed. If a group gift is not completed, the couple has the ability to apply the credit to another item or complete the gift himself. We believe, our registry appeals to millennials who are custom to shopping online and increasingly on their phone. Our team is constantly innovating and experimenting with new features and we expect our registry experience to continuously improve the same way our sites always have. So group gifting is more blocking and tackling and not some whiz-band new technology like our recent innovations in JavaScript single page applications or augmented reality. It is a nice example of our team working to understand how our customer lives and shop for her home…

Before I turn the call over to Michael, I want to touch on two other exciting initiatives;. the growth of our private label brands, and our new TV show, The Way Home. Today, we have more than 40 private label brands on our sites encompassing a variety of styles and price points. One of the biggest challenges in our industry is helping the customer find what they are looking for, that special item for their home. Customers often don’t know what they are looking for until they see it. And home is largely a non-branded category, which makes it even more challenging for a customer to articulate what she is looking for. Our private label brand strategy is one initiative to help customers find the products they want. When a customer finds a product in a style and price point she likes, she can use the private label brand and the inspiring visual imagery on our site to explore other products of a similar design and price point. Key to our success here is our deep and long-term relationships with our suppliers and our ability to use our data and information about our customers to efficiently build private label brands that fit what our customer is shopping for. For example, Langley Street, one of our private label brands, offers a moderate price point in a mid-century modern aesthetic across close to 1,000 SKUs. If you go wayfair.com and search for Langley Street, you’ll see how it all comes together for the customer. Understanding our style and price point brought to life with inspiring imagery, while providing deep selection and fast delivery. Other great examples include Breakwater Bay, Lark Manor, and Mercury Row. We don’t expect our customers to limit themselves to only one of our brand, but it gives them…

Thanks, Niraj, and good morning, everyone. As always, I will highlight some of the key financial information for the third quarter with more detailed information available in our earnings release and an updated set of charts in our investor presentation, which can be found on our IR website. In Q3, our total net revenue increased 45% year-over-year to $861.5 million. As in recent quarters, this growth was driven by our Direct Retail business, which increased 52.7% over Q3 2015 to $832.4 million. Our other business, which primarily includes revenue from our retail partners, but also includes revenue from our small media business decreased, as expected, 40.6% year-over-year to $29.1 million, as we continue to ramp down our retail partner business. As Niraj mentioned, this quarter the Direct Retail business increased $287 million versus Q3 last year. We’re pleased to have maintained this strong momentum even as we reach a larger scale and increasingly comp of a larger base of revenue. As a reminder, the direct retail quarterly revenue comps in 2015 increased from 63% in Q1 to 91% in Q3 and then to 98% in Q4. In Q3 2016, our earlier stage international business in Europe and Canada also exhibited strong growth. Though still relatively small international direct revenue increased 224% versus Q3 2015, excluding the impact of other revenue from our international retail partners and the impact of our Australian business that we divested last year. Our total net revenue growth remained incredibly high on a dollar basis and we have been able to continue delivering this growth while maintaining compelling underlying unit economics. We have consistently held gross margin in or about the mid-23s since we went public. And the third quarter of 2016 represents the seventh quarter in a row, where we have demonstrated year-over-year ad spend…

Thanks, Michael. Before we take your questions, I want to reiterate how excited I’m about how well our business continues to resonate with our customers. We are making many important investments across our business to continue to deliver even higher levels of exceptional service and delight our growing audience of new and repeating Wayfair customers. I’m also proud of the energy, dedication, and inventiveness of our team. We’re singularly focused on delivering on the promise of being all things home for our millions of customers. Now, I ask the operator to open up the line, so we can answer a few of your questions. Thank you.

[Operator Instructions] Our first question this morning comes from Neely Tamminga from Piper Jaffray. Please go ahead.

Great, good morning. Thanks for sharing all these updates, Niraj. Just wondering if you could flush out a little bit more on costs around social, what we’re hearing from a lot of the retailers is that, customer acquisition, not necessarily retention, but acquisition is hyperbolic right now on social. We know that you guys have been working on this Magellan initiative. So just wondering, kind of what you’re seeing specifically for your business and how you guys are kind of attacking that component. Thank you.

Sure, Neely, thanks for your question. What we’re seeing, so just to reiterate the way we do customer acquisition. The vast majority of our spend is online, but it’s pretty diverse in terms of where it is, in terms of display on the rest of the Internet, native products on social display, units on social, what we do on Google’s various products, including search and NPLAs. And because of that and also, because we are always focused on, working on emerging ad units, whether it’s a new channel, or whether that’s developing new ad products with Google, or with Facebook, or with Pinterest, we generally are pretty well insulated from spikes, because the spikes and pricing tend to be on specific ad units in specific channels, ad specific times. That said, when you reference Magellan, which is our internal name for our display ad tech stack, which we built we’re not buying our own display advertising direct. And we built other technology like how we conduct our page search bidding that I think has helped us significantly in terms of controlling cost, but also frankly being able to use all the data we collect and put that to good use in terms of being very surgical. And so long story short, we’re not really seeing what you’re referencing, which is any sort of a real spike in the customer acquisition costs.

And, Neely, it’s at a very high level. But if you run the CAC calculation that we gave you all the data to create, you’ll see that the CAC is actually down this quarter sequentially. And we’re sort of well within our general target of having a one-year payback on a contribution margin basis for customer acquisition. So we feel, we actually feel really good about the customer acquisition side and from a cost perspective.

That’s great. And I just have one follow-up. You guys acquired a little company called Trumpet, I think, since you last spoke to us. Could you just give a sense of what that is and what you intend to do with it in the Wayfair ecosystem? Thank you.

Yes, sure. So Trumpet was a smaller tech company here in Boston and it’s a small acquisition from monetary – very small acquisition from a monetary standpoint. But what we were really excited about was a great team. So from a talent perspective, we really invest lot into our technology and we have over 1,000 engineers and data scientists on the team today, which is a significant portion of our just under 6,000 people. That give us a very significant competitive advantage. And so with the Trumpet acquisition, we both got a great team that’s able to help in a number of areas. And one of the areas that we’re actually working on is, what their product was focused on, which was a messaging stack, which we believe has some good potential in how we conduct interactions with customers, particularly on mobile. So that that team is both working on that and some other things internally.

Great. Thank you, guys, and best wishes for holiday season.

Thanks, Neely.

Our next question today comes from Seth Basham from Wedbush Securities. Please go ahead.

Thanks a lot and good morning.

Good morning, Seth.

My first question is just on the guidance for the fourth quarter, understanding that you wanted to give a healthy dose of conservatism. It does appear that you expect a pretty market deceleration even on two-year stacked basis. Is there something else besides AOV trends that leads you to be more conservative here?

I think besides AOV trends, it’s a little bit of just trying to look at the – well, there’s two factors here. One is, looking at the world at large right. So I think we’re hard-press to find anyone else sort of broadly in the consumer space who hasn’t seen some consumer pullback, or slowdown and is sort of reporting that, there’s a whole bunch of news out just in the last 24 hours about delayed holiday spending. So I think we have sort of that as a backdrop. And then the second piece is, as I mentioned on the call, Q4 is back-end loaded, right. I have a bunch of data today that actually feels quite good, right. And as I mentioned, we’re running well above our guidance range right now. But with the consumer backdrop, it just seems like, we should be thoughtful and conservative in the guide; which you doesn’t seem like there’s a whole lot of upside to push it.

Yes, just to add a little color on just some things around that, so I’d just point out if you look at the growth in active customers, we’re up to just under $7.4 million that’s a number we care a lot about. And AOV is a number we care a lot less about, because really what we’re really focused on is, growing the customer relations with us for the long-term customer value over time rather than the individual transaction value. So we’re seeing really great traction there. There’s a bunch of metrics in our business, which we’re leading metrics, which tend to have a down the road show up in the financial results. And what I’ll tell you is, we’re seeing very, very strong trends in the business. But to Michael’s point, when you’re guiding and in this quarter, which is definitely weighted ahead of us instead of behind us, obviously, Michael is going to take all that into account.

Got it. Okay, that’s helpful color. Previously, you had the goal of getting to break-even in the fourth quarter here, obviously, seems like that’s unlikely, as you roll the clock forward to 2017, do you think you guys will be profitable on an adjusted EBITDA basis?

Seth, we’re going to be very thoughtful, but not comment on a specific timeframe around break-even. I think what we said time and again is, it is our intention in the near-term to get the business to free cash flow positive and EBITDA break-even, right. That that’s a control your own destiny place to be and the place we want to be. I also think that if you, without too much trouble, if you roll forward a set of reasonable growth rates, and as we’ve talked about the OpEx leverage now that we’re sort of fully staffed and sort of hiring at a slower pace. Even with the substantial investment we’re making in the international business right, which is obviously weighing on everything, you’d be hard-pressed not to model out the business to break-even and profitability in the not too distant future.

All right. Thank you very much.

Thanks, Seth.

Our next question comes from Matt Fassler from Goldman Sachs. Please go ahead.

Thanks a lot and good morning to you. A couple of quick questions. As you think about what you’re tracking today relative to your guide for the quarter, could you talk about how the fourth quarter progressed a year ago as you made your way through it?

You’re saying quarter-to-date Matt, how we progressed?

No, just sort of the cadence of the fourth quarter a year ago, you gave us how you’re tracking quarter-to-date just to understand whether the comparisons get notably easier over the course of the quarter, please?

I guess, I would say, there’s a period of harder comparisons and a period of easier comparisons in the forward part of the quarter.

So that’s not [Multiple Speakers]

No. And it’s not – yes, it’s not like the quarter got much harder in the back-half last year at all. But the big – obviously, revenue this quarter is spikes in a few periods, right, and so you have to…

Sure.

…and that’s all ahead of us.

Understood. And then a quick follow-up. Your comment on private label penetration reaching one-third, can you give us a sense of how that’s progressed? What that might be up from a year ago and the extent to which that has helped your gross margins here in 2016?

Sure, Matt, this is Niraj. I think the last time we gave an update on that was about 18 months ago, if I remember correctly. And at that time when we gave that update, we were mentioning that it was something we were pursuing and we mentioned it was mid single-digit, so around about 5% of the wayfair.com sales. And we said that it was starting to grow quickly. And then what we said in between is, we kept saying it’s growing quickly and now we’re saying, well, it’s gotten up to 33%, right, up from that 5%. So it’s taken significant share of the total. We think there’s still a lot of potential out ahead of us. To your point on gross margin, I would say that, it’s certainly an exercise that helps gross margin. We use a lot of technology, though, to figure out where we take price and where we don’t take price and we do that not just by surveying competitors for similar items, but also testing the price elasticity of items and then how, given the size of our catalog, we move demand between items through substitution based on how we price them relative to each other. And so we’re not running it like a linear margin exercise. Okay, well, we have this side on private label, add X amount of margin. We don’t really do it like that, it’s much more scientific.

Great. Thank you so much, guys. I appreciate it.

Thanks, Matt.

Our next question comes from Oli Wintermantel from Evercore ISI. Please go ahead.

Good morning, guys. It would be helpful if you could maybe breakdown that EBITDA loss of about $31 million this quarter in North America or US versus international? How much of that was contributed by international?

I mean, I think if you use the metrics we’ve sort of talked about in the past, you get to a place where you could calculate out that the vast majority of that probably $25 million plus of that is from the international business. And again, that’s taking it at a high-level sort of what the ad spend looks like, as we sort of detailed ad spend out there. And that that business runs at a lower gross margin at higher ad spend and a much lower repeat rate as it ramps.

Okay, great. And then on the – on your guidance, maybe it would be helpful if you could – because I think the last few quarters, I think that break-even EBITDA was always on the horizon for the end of the year. If you could maybe give us some details about what sales level do you think you would have to reach in the fourth quarter to get closer to that break-even from the guidance range – guided range?

Yes, I think, we talked about it last quarter what we said explicitly was that whether we could deliver break-even in Q4 was highly dependent on what the revenue was going to look like in Q4, because the expense bases was basically fixed at this point, right, the investments we’re making across our logistics network, our international business, et cetera, are basically built into our cost structure. And that we weren’t going to change those just a sort of forced break-even in a particular quarter. And I think last quarter as we talked about, we said, you’d have to be sort of at the very high-end of the two-year stack and we’re obviously guiding low-end of the two-year stack at this point to be conservative. But I don’t think that’s still far off from what you’d have to believe to sort of push through the enough incrementally EBITDA to break-even. But again, I want to be clear, we are – we built the investments into the business that we need to build in, because we think there’s a huge opportunity there. And at the same time, we are extraordinarily bullish about the forward indicators, what’s happening in the business today, where the business is at quarter-to-date, the holiday, like we couldn’t feel better about Q4 right now. I just – I think we need to be thoughtful sitting here on November 8.

So is it fair to assume that your gross margin level is slightly down to – at the same level that we’ve seen in the first, second and third quarter on a total level and then the rest is more SG&A deleverage?

I think, as I mentioned in the guidance part of the prepared comments, we typically target a lower gross margin in Q4. So I suggested 23% to 23.5% is the range there. And just because you don’t know how sharply you’re going to need to be priced in the back-half of the quarter. And obviously, if we don’t need to do that, we won’t and we’ll take the gross margin. And then I think the place where you’re going to really start to see leverage in the business, both in Q4 and particularly as we roll into 2017, we’ll be in the OpEx line, because as you saw this quarter, we added only 212 net new people big chunk of those were actually in the variable cost lines, so very little incremental headcount in the OpEx lines now that we’ve got all the people in place we need to be building out the international business, the logistics infrastructure, and all the investment areas we’re investing in.

This is Niraj. Just to jump in, this is kind of related, but if you look just from – we went public basically two years ago. And if you just look at this Q3 over two years ago, you’ll see what’s changed in that two-year period. Well, the business has tripled, the direct business has tripled in that period. Okay, and if you look at the cycle you see growth from the time we went public, it basically decelerated then it accelerated and it decelerated right and it’s doing it at a big numbers. So there’s an element to which we’re growing the business with underlying unit economics and KPIs that are incredibly strong. But we’re growing it at a very fast rate. We have a mix shift going on underway with regards to international coming into the total, which is a set of numbers that average you down in a bunch of places, but have underlying KPIs that are quite strong and particularly when you project that to the future, you see some really exciting things. And a lot of the areas, where we’re penetrating the total addressable market some of these categories we’ve been underserved in are starting to really start to grow nicely, but they also average down some of these numbers. So one of the things we talked about is, starting with next year, we should probably do a fresh set of materials that talk about a business that’s now significantly larger than the one we took public two years ago that has a lot more going on, but that’s very, very exciting for the future, because a lot of the KPIs we get to watch every day are super strong. And I think it makes it hard to model when you’re thinking the same lens is basically a U.S. single brand business from two years ago. But we sort of get that modeling, it’s hard. So we’re going to work on how we help you on that in the future.

Okay. Thank you.

Our next question comes from John Blackledge from Cowen and Company. Please go ahead.

Great, thanks. The orders delivered growth was better than we thought. Was that in part driven by the CastleGate program and how is CastleGate driving conversion? And then second, recognizing the registry business is seasonal, are you getting any incremental leverage kind of in 4Q versus 3Q and fundamentally, is the registry business margins higher than kind of the core business at scale? Thanks.

Sure. Let me just touch on the registry a real quick and then I’ll go back to the first-half of your question. On the registry, it’s hard to tell right now whether the registry business margins are higher or not. It’s one of the big opportunities we have in the registry is that, over 60% of the registry share by the data we have today is held by Bed Bath & Beyond, Macy’s and Target, and we just see a lot of that coming up for grabs as the folks are getting married today. They’re much more mobile. They’re not necessarily wedded to those brands. They’re online shoppers. And so as we build that up over the next couple of years, we’ll see exactly what the mix is there. But what’s exciting is to get those customers early in their life cycle, get in front of all their friends and their guests. And honestly, we have a much broader selection, which more fits what they want, because a lot of these folks already have a kitchen set up, and they already have a place that they are living together. And so they may be wanting to use the registry for other purposes and we’re seeing great early traction with that. But very premature to say what the economics of it are, and ultimately, it’s real value, it’s much more in strategic nature rather than just the revenue it will add, which we think could also be meaningful. To go back to first part of your question, I think the way to think about CastleGate is in the quarter, we mentioned the 10%. 10% is still a pretty low amount of the total relative to where we think it can go, but it’s now starting to ramp very nicely. And we entered the year very constrained on space. We only had 1 million square feet of space. Most of these warehouses we’re occupying were built just for our use. So they take a year, a year plus to get set up. We now have a few million square feet of warehouse up and running, and it’s ramping, being filled very quickly. So I think we’ve got a lot of gains, but they’re mainly ahead of us, not behind us. But we are very excited about what we see with customer behavior around it, what we see with customer satisfaction around it. And so I think that’s actually something that will benefit us really, looking forward.

Great. Thank you.

Thanks, John. Operator, I think we probably have time for one more question.

Certainly. Our final question today comes from the line of Michael Graham from Canaccord. Please go ahead.

Yes. Thank you. My question goes back a little bit to the order frequency/AOV discussion. It looks like the orders per customer is what was sort of down the last two quarters year-over-year, and I’m looking at Slide 19, your cohort analysis where the 2016 cohort is sort of coming in line of the 2015 cohort spend pretty quickly. I’m just wondering like, is this a customer reengagement issue? Can you just talk a little about what’s going on with the customer reengagement and getting them to make as many orders as they did last year? Thanks so much.

Thanks, Mike. Just – so we’re clear on the 1.69 trailing 12 months orders per active customer. That number is also being impacted by increasing scale of the international business, which obviously, because it’s new or runs at a markedly lower orders per active customer. So I think if you took that out, you see that the U.S. business was basically flat. The degradation in that is being driven by the impact of the international business. It’s sort of piece number one. And then I think in terms of the cohort chart the thing I would remind you is the last data points on these are always the ones with the fewest data in the set right. We’re adding things that only have a few data points in it, a cohort that only has a few data points in it. And so they tend to move around the most obviously the 12 month ones are fixed. But the other thing is, we’ve always said that, we were going to get to a place where as you start to – as we start to work our way through the $60 million available households in the U.S., as an example, we’ve always said, we’ll get to a place where we expect the cohort to stack on top of each other that the incremental cohort is going to look like the one before it, right. We sort of ramped over the last three or four years to sort of this place. And so I – from our perspective, the performance of the 16 cohort on top of the 15 cohort is as expected, and it’s certainly as we’ve modeled in our own plans.

Okay, thanks. That’s helpful. Thank you, Michael.

Great. I think, Michael, hopefully that answered your question. But I think, I’d just recap something I just said earlier, which is just around, there is a lot of other indicators we have where we look at by customer, by brand, by acquisition channel, by period of age of life, what are – what behaviors are we seeing, for new customers, what’s the seven-day repeat rate, what’s the 15-day, 30-day? What I can tell you is, we’re actually seeing very good leading indicators for the business. So that’s why I sort of said well, with next year, one of the things we’ve internally been talking about is kind of how do we refresh the materials to give you some better insights? Because when you average all these things together, it’s sometimes hard to peel them apart. But the business is continuing to actually grow incredibly strongly with very good unit economics and customer behavior. So that’s what we are excited about. We think the holidays are set up to be a very good holiday and we think we’re going to enter next year with a lot of momentum. So anyways, thanks everyone for joining us today.

This concludes today’s conference. You may now disconnect.