Julia Donnelly - Investor Relations Niraj Shah - Co-Founder, CEO and Co-Chairman Steve Conine - Co-Founder and Co-Chairman Michael Fleisher - CFO

Seth Basham - Wedbush Securities Matt Fassler - Goldman Sachs Chris Horvers - JPMorgan Oli Wintermantel - Evercore ISI John Blackledge - Cowen and Company Michael Graham - Canaccord Genuity

Good morning, ladies and gentlemen. My name is Melissa and I will be your host operator on this call. At this time, I would like to welcome everyone to the Wayfair Q4 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 Julia Donnelly, Head of Investor Relations at Way fair.

Good morning and thank you for joining us. Today, we will review our fourth quarter and full year 2016 results. With me are Niraj Shah, Co-Founder, Chief Executive Officer and Co-Chairman; and Steve 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 events and financial performance, including guidance for the first quarter of 2017. 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 SEC filings including our 10-K for 2016, which we expect to file in the near future identifies certain factors that could cause our 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 is available for replay on our IR website. Now, I would like to turn the call over to Niraj.

Thanks, Julia, and thank you all for joining the call. I’m pleased to share our fourth quarter and full year 2016 results with you this morning. I want to begin by telling you how proud and excited Steve and I are of what Wayfair accomplished in 2016. In part, that shows in the numbers we will share with you today. But the results are larger than that. These calls are unfortunately focused on extraordinarily near-term results. To us 2016 showcases what we’ve been building for the last 15 years. At the end of the day it’s all tied to our focus on serving our customers and having an amazing team of over 5,000 people. We just finished writing our annual shareholder letter that shares some of these thoughts. We posted this letter to our investor relations website today as part of our investor presentation. We cannot be more excited to continue the journey in 2017 and beyond. For the full year 2016, we generated $3.4 billion of total net revenue, up $1.1 billion and up 50% from 2015. At $3.4 billion in revenue, we believe we are just starting to penetrate the approximately $600 billion market opportunity we have in the home category in the US, Canada and Europe. In Q4 2016, we generated $959 million of net revenue in our direct retail business, up 40% year-over-year and $985 million of total net revenue, up 33% year-over-year. We saw a direct retail growth across our US and International businesses and across many categories of the products we sell, but there are four particular areas that I’d like to update you on, holiday, new categories, international and logistics. The first is holiday, where we had another very successful season this year. As we have mentioned in the past, the holidays are…

Thanks Niraj and good morning everyone. We are always thinking of new ways to increase loyalty across our customer base. One example is our private label credit card, which fully launched in early 2016. We market the Wayfair credit card to our customer base by pre-screening customers at checkout to notify them if they are preapproved and through banner ads on our site and on our television commercials. Customers can also apply directly for the card through our site. Benefit of the card includes special financing offers, reward points and a discount off their initial order. We partner with Alliance Data for the card and its Alliance Data who bears all the credit risk, holds the receivables on their books and handles the customer payment process. Our results show that our private label credit card customers visit Wayfair more frequently and spend more than our average customer. We believe this is because the card attracts more loyal customers and further increases their loyalty by spurring higher activation and repeat once they are our card holder. Though it is still early, private label credit card sales in Q4 accounted for approximately 10% of our US direct revenue, and we expect that percentage will continue to grow. We also recently introduced a financing offer with a firm to help those customers who wish to finance larger purchases, but do not want or qualify for our private label credit card. Similar to the card, we do not bear any of the credit risk with these financing transactions. While the firm is a relatively new offering, we are excited by the customer reaction so far. These programs are the beginning steps of our larger loyalty rollout. For example, the private label credit is a great platform to give our best customers special benefits which…

Thanks Steve and good morning everyone. As always, I will highlight some of the key financial information for this quarter and full year 2016. A more detailed information is available in our earnings release which can be found on our IR website. In Q4, our direct retail net revenue increased 40% to 959 million, and our total net revenue increased 33% year-over-year to 985 million. Our other business which includes revenue primarily from our retail partners, it also includes revenue from our small media business continued to decline, reaching 26 million as we continue to ramp down our retail partner business overtime. As Niraj mentioned, we are particularly pleased with our holiday execution this quarter, as well as the ongoing growth throughout the year for both existing and new categories and from our US and International businesses. In full year 2016, we reached 3.4 billion in total net revenue adding $1.1 billion in net revenue compared to 2015. We believe our well-rounded consumer offering of extraordinary selection and visual merchandising, world class and personal customer services and a great delivery experience are making it easier than ever before to buy home goods online and we see that really resonating with our mass market customers. The remaining financials I’ll share on a non-GAAP basis excluding the impact of equity based compensation and related taxes which totaled 14.7 million in Q4 2016. For a reconciliation of GAAP to non-GAAP reporting, please refer to our earnings release on our investor relations website. Our gross profit for the quarter, which is net of all product cost, delivery and fulfillment expenses, was 239 million or 24.2% of total net revenue. Gross margin percentage ran a bit higher than we had initially expected for the quarter. We typically entered Q4 prepared for an intense promotional environment…

Thanks Michael. In closing, I’d like to reiterate how proud I am of what we have accomplished in 2016 and how we are positioned going forward. Shopping for home goods is moving online in North America and in Europe, and we think we will continue to be the beneficiary of that secular trend. We have a large addressable market and we are still in the early innings of online penetration, with approximately 9% of the category sold online today in the US. Our overall offering is increasingly complete with house private label brands, a significant Wayfair brand presence, and superior customer services. Our key investment areas will help us up our game even further by expanding next day and two day delivery coverage, adding new categories for our consumer to buy from us and expanding in to new geographies where we can leverage our experience. We are looking forward to a great 2017. We’d be happy now to take your questions, so I’ll turn the call over to the operator.

[Operator Instructions] Your first question comes from the line of Seth Basham from Wedbush Securities. Your line is open.

My question is just around the cadence of your sales for the last four months. It seems like through your last conference call you indicated you’re running north of 40% in terms of direct retail revenue growth. You had a very strong Cyber 5 and based on your quarterly results you suggest a slowdown in December and then a further slowdown in January basically you said. Could you help us understand what might be driving this slowdown and how you think about the outlook over the course of 2017?

Seth its Niraj thanks for giving us a call. In terms of your question, I think the Cyber 5 period is always a particularly strong period. So you got to just view that a little bit in isolation versus like a trajectory data point as you’re mapping through the numbers. I think what you’ve been seeing us guide is that growth from Europe where we have approximately 100% growth has decelerated more to sort of normal numbers, but we are taking the significant share but at a rate lot lower than that. And that trajectory is playing out. I would just view that guidance is sort of part of that trend where you’re settling in to rate that’s good a growth rate, particularly in light of the fact that a bulk of the money we’re investing is actually for a long cycle investments that aren’t showing up in the growth rate today. And so I don’t think there’s anything cute in the last few months where a one month or two months are showing a very deteriorating trend or something like that. I’ll let Michael comment, because there’s always some uncertainty about macro based on what we hear from others, but to be honest we usually have a pretty hard time reading it (inaudible).

I think that’s right, and just to be clear last quarter I think we said that we were growing quarter-to-date at the time of earnings about 40%. I don’t think we implied that we were north of that. I think we came in pretty much where we growing at that time through the balance of the quarter. And obviously you try and pickup sort of what’s going in your own business and then also what’s going on in the macro environment. As I noted in my comments, I personally believe the macro environment for retail is unclear. There’s certainly something out there that looked like the macro environment is quite strong, and there’s other factors that looked like the consumer is not as strong. And the one piece I’d love to make this quarter for us, one macro piece I’m watching certainly is the IRS is getting early refund checks out to consumers. If you think about the nature of our consumer write a 45 year old woman with an $80,000 household income, she is someone might have a $500 bedroom set in her idea or ready to purchase when she gets here IRS $1,000 refund [done].

And as you think about the outlet for 2017 moving to the EBITDA line, would you expect an inflection deposited at some point this year?

Michael loves it when I give out guidance, so I generally leave that to him. But what I’ve said a number of times, we absolutely want to be in a position where we are self-financing the business. We’ve been there for over a decade of our history. So that’s the way I would describe it. Michael do you want to give some --?

So the thing I might point to is, obviously this quarter we’ve now broken out two segment, the US business and the international business, obviously the international business with substantial investment. You could see that its now - we are investing in that business at the EBITDA line in a fairly consistent way, and so I think it’s fair to assume that that’s going to continue. And it’s the same time I think the US business as I noted on my prepared remarks that was profitable in the fourth quarter and makes sense it’s a big quarter for us and there’s certain stuff holiday with no inflexion. I expect the US business to swing to a modest adjusted EBITDA loss in Q1. But you can see now in the economics of that business is that as that business continues to grow at this pace the flow-through will be there. So I think it’s not hard to rent out the numbers, what’s going on in the US business, the investment bubbles we’re making and the international business sort of get to a place where you can see the inflexion point first the US business to be riding at a profitable basis and the overtime the US business profitability in the higher cost recover it off the international cost.

Your next question comes from the line of Matt Fassler from Goldman Sachs. Your line is open.

I’ve got a quick two-parter on gross margin. The first relates to your comments on the promotional environment. You might be the only company in years to say that it wasn’t as bad as you fear. That was obviously worn out in the gross margin. But a little more color on what was better and where you saw the lack of pressure will be helpful. And then just also briefly on gross margin, as your mix tilts slightly towards some of those newer categories, if you could discuss the implications of our gross margin and contribution margin if you can get it down to that level for those new businesses.

Matt its Niraj. On the gross margin, the first question about the promotional environment. I guess the way we think about that holiday is the most acute time of the year for promotions. Although to be honest we live in an environment where promotions are always running and that’s part of your merchandising strategy. And when you enter Q4, you really don’t know what your competitors are planning to do and you can have cases where competitors frankly are giving away goods in certain areas just to stimulate their overall business or frankly drive a certain business line or whatever. So you’re not sure what you’re going to see. You have your own plan that you really like if you know what your customers want, if you like to know where you have the valued show. But what happens is you have a lot more uncertainty than you have with other times of the year. And what we’re saying is just that when we led with offers we thought we were great. We have saved the best of a huge supplier base. We don’t carry the inventory, but we work with our key partners to plan on what we think will work well. And we’ve just seen great success and what we didn’t see was a case where competitors were just giving away items, just try to buy that volume. And so it seems like a healthy environment to us where people were focused on making money and there wasn’t kind of that [attitude]. On the terms that (inaudible) in gross margin and in contribution margins, I’d almost tell you it’s a thing to think about exactly what you said is contribution margin. And the reason is, when you have a new category gross margin is going to be quite…

Your next question comes from Chris Horvers from JPMorgan. Your line is open.

A couple of follow-up questions, first on math; so on the gross margin it was up 40 and you had modeled it down 23 to 25, roughly a 100 basis points swing. Would you say that delta versus plan was evenly split between the promotional environment and the vendor support and related to that could you talk a bit more about what exactly vendor support is? Is that scaling the business, is that exclusive items and private label items that you’re offering and helping the mix and so forth.

It’s Michael. It’s a little hard to split it between the two because in some ways they work hand in hand. What I mean by that on the supplier side is that, we’ve gotten better and better and our relationship with our [partners] have got larger and larger, where we are much earlier in the year now planning with our key suppliers which products we think are going to have big value with our customers during the holiday and therefore (inaudible) that they have enough inventory on hand, but even more important related to this discussion is that we’re getting the sharpest possible wholesale on those items that we’re going to go highlighting to our customer as part of those promotions. And remember we talked on previous calls about during the some of the photography and the imagery during the initial merchandising much, much earlier in the year, so we’d be really prepared for that. So part of that is the relationship negotiations the supplier get through best possible wholesale and that’s really what helps in this environment because you already are in a place where you’re running at a great price for the customer, but you’ve got enough margin for us and enough margin for the supplier to make it work all the way through the chain.

This is Niraj, let me now just jump in with Chris. I think it’s important to note that a larger math of what you see when you look at our total company gross margin you see a little ground is actually a mix. You have mix from the differential international businesses that are in different places in their lifecycle, their reverse margin levels. You see mix between the different things happening in the US, different categories and the different retail brands. So there’s a huge amount of swing that actually, if you had all the counterparts you’d say it’s just a mix effect. And then if you isolated it and you’ve been to one area, you get in to what Michael was really discussing. But I think I’d be careful not to try to bucket it in to the (inaudible) that you have because it’s not factor related.

Understood. And as we think about going forward, do you continue to advance the planning process with the vendors such that we could see continued gross margin improvement in 2017?

There’s a lot of opportunity in gross margin for three things. One is transportation savings; if you think about last or you look at the business, transportation, advertising and OpEx headcount were all round about $400 million cost. With that transportation $400 million, as you add a lot of finesse, as you have volume you can add finesse in terms of how you bring the product in more efficiently, how you manage the whole cost from the [ForEx] and location of the [back break] and to bring it in to the domestic market that you’re selling it in and getting it closer to the end customer and how about transportation through to the last mile. So there’s a significant amount of efficiency you get there. You’re expecting this fine car with suppliers as you mentioned. And the third, you also touched on, which is, if things are private label or your house brand, you start getting a lot more pricing leverage per statements that’s not (inaudible) on those items in the market. And so all of those unlock gross margin, and then what you tend to do is you’re giving some of that also back to the customer in various ways whether that be loyalty programs or that be certain types of - you might do things to reduce damage that have net cost savings, but basically may look in the near term as part of your gross margin a long term. So there’s all kinds of different puts and takes, but we do think there’s continued gross margin to get it’s a very significant magnitude.

And I think Chris to your point on near term I think we are still targeting the 23, I think that’s where we’d liked to be priced. So as Niraj just mentioned that through a litany of all these things that are positive to gross margins, we also want to then make sure we are sort of using those to price well in the market and that obviously there’s that balancing act in terms of driving growth penetration and customer satisfaction.

Your next question comes from the line of Oli Wintermantel from Evercore ISI. Your line is open.

Michael you mentioned CapEx is going to be 4% to 5% of revenue in the first half and then for the full year about 3%. Can you maybe help us break that out for international versus the US?

Sure. I’m little hard to hear, but I think the questions’ about CapEx and then sort of thinking about international versus the US. There’s probably sort of two primary bucket from a CapEx perspective, generally it’s the logistics where how its build out which is primarily - you know last thing I remember we had sort of a very low capital to be around these warehouses or building. You don’t have a lot of automation and can (inaudible) etcetera. And so there’s that piece. And then the other piece is sort of what I would call the more normal CapEx technology and infrastructure. The vast majority of that deployed has been in the US. We have sort of first CastleGate warehouse facility in the UK now and obviously we’ve invested on the technology infrastructure side in Europe as we’ve sort of built out a datacenter and sort of people there. But I would say the vast majority, it doesn’t look, I don’t have in front of me but I’m guessing it doesn’t look that dramatically different than the revenues for the right deal.

And then translating that in to maybe on the EBITDA level, so you mentioned the US swing to is slight negative in the first quarter and then assuming that probably in the fourth quarter of ’17 it should turn positive again like the last two years. Is it than the cadence also that maybe the second and third quarter we are wrapped around breakeven or slightly down and then turning positive fourth quarter, is that fair?

I’m going to be extra careful not be guiding the next few quarters as oppose to just guiding the current quarter that we are in. One of the reasons we gave everybody eight quarters back that’s what between US and international so that you can see some of the seasonal pattern. Obviously somewhat that interrupted by investments we’ve made. So you can see that investment line both international and US in the 2016 number. But I think it’s sort of a reasonable pattern when you start to think about what the business might look like going forward.

Your next question comes from the line of John Blackledge from Cowen and Company. Your line is open.

So with the strong repeat customer rate in the fourth quarter, how should we think about potential ad leverage in the US in 2017, any kind of sense of US ad spend as a percentage of total revenue? And then secondly on registry its seasonal, we’ve been hearing about it for a while, it should help in 2Q and 3Q. Is there any way to kind of frame or quantify the impact to the US business this year?

So on your first question about strong repeat customer rate and how does that translate in to ad spend in the US, so a couple of thoughts there. So one of the things we’ve mentioned a couple of times that if you look back over the last year, we actually have been constraining the US ad spend to actually even less in the payback period than we generally would allow it to go to. Because what we’ve been doing is we’ve been allocating more ad spend to international while overall looking for leverage on the ad spend line as a total company. And so you can that short sighted in the sense that we should spend more in the US, but we think it’s the best outcome for the long run to actually build these international businesses that’s been a long run benefit straight off we’ve made for the short term, less benefit in the US business. So what will happen in this coming year is that, I don’t know that we are interested in constraining it to the point where we’re really leaving a lot of low hanging fruit up there. So ad spend is not necessarily a place that I think you should look to see a lot of leverage. I think we want to continue to acquire customers at a really fast pace, where frankly we’re getting a really good payback. So, we’re not looking to add a huge amount deleverage either, but we’re not looking to squeeze ourselves to where we’re not taking advantage of good opportunities. So that’s business.

The one thing I’d add to it. As the international businesses continue to mature and we’re obviously making substantial investment there still. But we would hope that as those businesses start getting repeat base of customers and start to feel that even though as their mix grows it hurts ad spend as a percent of revenue in total. Their level of ad spend as a percentage of revenue is getting better and therefore if we lessen that with US has to pick up lots of value.

The thing I’d point out on registry, the registry is a longer cycle of things, because you’re marketing post (inaudible). They set up their registry, they get married in the spring and summer and that’s really when the purchases occur. And because it is our first real annual cycle, what we’re doing there is we are frankly we are marketing it, we are advertising. But it’s one of the things where we have a quite a good plan, its reasonably ambitious. But should have worked well and then what you would do is you would increase it substantially, but that would be for the following year, because it really is an annual cycle. You don’t have the ability like we do it most of our adjustments is continually adjust and increase it because you kind of one specific period when you get the customers and then it takes quite a few months for you to see what the payback was and then adjust it again. So that one I wouldn’t expect to see huge impacts on the US financial performance this year, probably it’s because it’s so new and it takes a little while for that feedback cycle to work. But we really do like that business, because if you think about those customers and you talk about the millennial, 70 million people between 17 and 34, well they are just starting to get married. They are the folks who then for the next 20 years will be holding good buyers as they start their families and they buy their house and all of that. So, that’s really a strategic benefit of it, but I don’t think a few years it has to really (inaudible) in terms of our share of registry market and things like that.

Your last question comes from the line of Michael Graham from Canaccord. Your line is open.

Just wanted to ask on growth in the domestic business just going back to something. We first rough-in on a number for Q1, we sort of get high-teens growth for direct retail revenue for the domestic business. And I know Q1 last year was another tough comp. Wondering if you have line of sight on things that could help that domestic business reaccelerate at may be some of these new categories or new offerings that get big enough in the mix or do you more see the domestic business on a glide path to mid-teens and lower. Just any color there in general terms would be helpful.

A couple of thoughts, first, I don’t have obviously your model in front me. But some of those numbers you’re throwing out slightly is perhaps being a little low. The way I would rephrase it is, what we’ve been doing here is we’ve been allocating money away from the US in to international and then within the US we’ve been allocating money just proportionally more in the longer cycle of benefit than near-term benefits. Longer cycle meaning they’ll be up in these new categories, evenly switched two logistics network, cascade the way for delivery network, which actually are proving to have very substantial benefit, but they take longer to rollout and really scale back to a large percent of the business. But we think that and that’s actually we’ve been working on these things for a year and a half, two years in some cases and they’re starting to really take share quite well. So to answer your question, there are significant things that should affect US businesses build (inaudible) to drive repeat, to drive new customer acquisition, the overall corporate and that will continue to come on line that we would expect to be very simulative. That said, I also think your numbers are a little low and the way I would characterize where we would like to be is, we want to be a significant share taker. So if you believe that the overall market is growing at 15%, you would then want to be meaningfully above that. If you live to a market that’s growing at 10%, you want to be meaningfully above that. If the total market’s growing at 20%, you want to be meaningfully above that. We think the overall market online is growing around 15 plus (inaudible), and so we wouldn’t be very happy if we were growing at 15 raised or for a long period of time. We won’t be growing at a very significant rate above that while still preserving our unit economic, not using advertising to be cumulative to it, not using pricing to be cumulative to it. Rather through the strategic things like the logistics and like the merchandizing, building up these categories, the customer experience and mobile all of these types of things. So really that’s not may be a specific guidance for you, but that’s the way we think about it and that’s the way we look for it to play out.

Okay, that’s helpful. Thank you.

Everyone I think that wraps up the question. I’ll turn it over to the operator. But thank you for joining us this morning.

This does conclude today’s conference call. You may now disconnect.