Good morning ladies and gentlemen. My name is Emily and I will be your host operator on this 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, Director of Investor Relations and Strategic Finance at Wayfair. Please go ahead.

Good morning and thank you for joining us. Today, we will review our second quarter 2017 results. With me are, Niraj Shah, Co-Founder, Chief Executive Officer and Co-Chairman; and Michael Fleisher, Chief Financial Officer. Steve Conine, Co-Founder and Co-Chairman is joining us remotely by phone. We will all be available for Q&A following today's prepared remarks. I'd like to remind you that we will be making forward-looking statements during this call regarding future events and financial performance, including guidance for the third quarter of 2017. We cannot guarantee that any forward-looking statement will be accurate, although we believe that we have been reasonable in our expectations and assumptions. Our 10-K for 2016 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, Julia and thank you all for joining us this morning. Our second quarter result were very strong. On our last call, we talked about being thrilled with the momentum in our business both in terms of revenue growth and profitability and I’m pleased to report that those trends have continued. In Q2, we generated $1,102 billion in direct retail revenue, up 46% year-over-year and $1,123 million in total net revenue up 43% year-over-year. This represents year-over-year dollar growth of approximately $350 million in the direct retail business and the first quarter in our history where total net revenue has surpassed the billion dollars. We thought top-line strength in both our US and international segments with US direct-to-retail revenue up 39% year-over-year and international direct retail revenue up 136% year-over-year. First, I’d like to update you on our US business. We believe that they are many factors contributing to the impressive growth we are seeing. The first is that there remains a secular shift underway as consumers began purchasing more of their home goods online. We believe the home goods market in the US is only about 10% online today but that this online portion is growing at about 15% annually while the offline portion is fairly growing. As we put, the wind is at our backs if consumers increasingly embrace the selection and convenience of shopping online instead of in physical brick and mortar stores. The customer experience that we offer and the consumer brand that we’ve created are resonating, allowing us to continue to acquire new customers within our payback targets and stimulate more repeat purchases from our existing base of customers. With the year-over-year direct retail revenue growth in the US accelerating to 39% in Q2, we know some investors will ask what’s the one thing that’s…

Thanks, Niraj. Earlier this year, we introduced search with photo capability enabling shoppers to much more conveniently find the product that they are looking for in Wayfair. Our customers draw inspiration for their home from many sources, however if shoppers feel look or product that they love in a friend’s house or an Instagram post or in a magazine, it can be difficult to find and purchase that product in real life. Wayfair shoppers are now able to simply take a photo or upload an image of a product they like and Wayfair will leverage artificial intelligence to find similar items from our selection of more than 8 million products. As we’ve mentioned before, rich visual imagery is integral to the online purchase decision in the home goods category. We’ve always placed considerable importance on ensuring that we have great imagery on every product we sell, enabling customers to buy in an engaged and informed way. The resulting depth of imagery already in place across our product range puts our customers in a great position to utilize the search with photo capability we’ve recently introduced. Our search with photo feature is still in its early days but the machine learning algorithm will continue to improve from the scale of both our active customer base and the large library of product images we can offer to satisfy shopper searches. Search with photo is just one example of why we’re excited about how visual search can further improve the Wayfair shopping experience. We have a team of people across the company focused on the use of new technology to make it easier for our customers to create looks and purchase products for their home. Visual search is playing a major part in these product developments and our customers are already benefitting from…

Thanks, Steve and good morning everyone. As always, I will highlight some of the key financial information for the quarter with more detailed information available in our earnings release and in our investor presentation on our IR site. In Q2, our Direct Retail business increased 46% year-over-year to $1.102 billion and our total net revenue increased 43% year-over-year to $1.123 billion. Our other business, which primarily includes revenue from our retail partners, but also includes revenue from our small media business decreased as expected to $20 million as we continue to ramp down our retail partner business. Our KPIs which we report on a consolidated global basis, also showed strength across the board in Q2. LTM Active customers increased to 9.5 million customers up 43% year-over-year and up 692,000 net new active customers sequentially compared to Q1. LTM revenue per active customer reached $402 up $8 versus Q1 as we feel like we have struck the right balance again between frequency and average order value. Frequency as measured by LTM orders per active customer reached a new high of 1.74 and average order value for the quarter was $258 up 16% versus Q1 and flat year-over-year. Please note that the sequential increase in average quarter value this quarter is partly due to the seasonal impact of the outdoor category, which tends to have a higher AOV, also please remember that we view AOV as an output not an input to our planning model. Repeat orders in the second quarter increased 55% year-over-year driving the percent of orders from repeat customers to a new high of 61%. On a housekeeping note, please note that next year when we refresh our investor presentation and material, we will no longer include our wafer.com customer cohort slide in our investor presentation. We may update…

Thanks, Michael. As you can tell, Steve and I are very excited about the momentum in our business and our ability to take advantage of the opportunity we see ahead of us both in the U.S. and internationally. We cannot be prouder of our over 6000 employees and the initiatives they are driving to make a customer experience better and better. The secular tailwind from offline to online is certainly in our favor but we still have to win the customers' trust and repeat purchases. Everything we are working on is focused on continuing to push the edge to deliver the best home shopping experience possible. And therefore, put ourselves in the best position to take those dollars as they move online. With that, I’ll now ask the operator to open up the lines so we can answer a few of your questions.

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

My first question is just making sure I understand some of the Direct Retail revenue trends that you’re talking about. Since your last earnings call it seems like revenue growth accelerate further and quarter to date you talked to over 40% growth. Can you give a little bit more color on how much more than 40% you’re growing quarter-to-date?

I think our quote about the revenue growth at the earnings call last quarter was similar to what we just have said quarter-to-date was. So, we've been growing at a good clip for a while now. You know there is a lot of things underway in our business, you know we got the CastleGate ramp, the exclusive brands are ramping, the Wayfair delivery network is ramping. So, these are all driving really good results and then you see them in numbers.

And then you can see some of the confidence we have in where we’re at where we are if you see through the comparison of the guidance last quarter versus this quarter. I know we’re giving you the same color about where we’re at quarter-to-date, right north of 40% but obviously we were guiding more conservatively against that last quarter, this quarter we’re guiding 37 to 40. So, we obviously have a greater confidence about where we’re at.

Got it. Okay, and then second and last question is as we think about the advertising spend outlook in the near-term here, you intend to ramp that. When do you expect to bring down that payback period threshold to drive even higher advertising leverage?

This is Niraj. The key to where the advertising leverage comes from, it actually doesn’t come from pulling back the ad spend, it actually comes from the mix towards repeat customer and then if repeat customers come back and if you look for years now every quarter the repeat business grows faster than the new, that repeat runs a significantly lower ad cost and so that’s what drives the leverage. The unit cost of getting a new customer hasn’t really changed, so we’re still getting a new customer at a very economical rate as we improve the customer experience that actually opens up a larger addressable market of customers we can get for that same unit cost per customer. And then based on experiencing strong and stronger, we’re able to earn more and more of the repeat business from them over time which gives us the ad cost leverage. So, it's not really that we’re going to pull back on advertising, it's that the ad cost as a percentage keeps falling because of the mix shift towards repeat. Occasionally you have things that where you’re seeing right now where you’re going to see this combination of what the international business providing some deleverage and us improving the experience in the US that opens up a whole new tranche of customers when you get very economically but these things may cause it not to de-lever every single quarter but you basically if you look at it overtime that trend lines of leverage will continue.

And Seth just to clarify one thing, we did say that we’ll see some increase in ad spend as a percent of revenue sequentially. I just want people to note that, I think year-over-year we try to be clear that we should be at or maybe slightly above last year’s level but pretty close to last year’s levels.

Your next question comes from the line of Peter Keith from Piper Jaffray. Your line is open.

Hi, thanks good morning and good quarter. You guys had very nice flow through on the strong revenue growth. And I guess in the past you've talked about moving past some of the key cost builds around international and logistics. So, I was curious if is going to be puts and takes every quarter but is this type of flow through representative of what we would see on a call it 40% plus direct revenue growth going forward?

Hey Peter it's Niraj. Let me try to address that and then Michael may chime in with some more thoughts. What I would say, so on international, perhaps we did say that, I don't recall saying that. I think on international I think the commentary we try to provide is more to expect this kind of level of losses to actually continue for some time because the reality is international is a mix of multiple different countries, they are in different phases of their ramp up. And the initial phase of ramp up is quite expensive because you don’t yet have a repeat base. We've not yet ramped from Germany for example, UK is in the middle of ramp up, Canada is nowhere in ramp up. So international I wouldn't say we're past the peak of the cost. In logistics, I think we didn't make that comment specifically with regards to going from 1 million to 7 million square feet. Because basically as we have virtually none of our volume going through an asset based network and we've ramped up the asset based network definition and we hope in a 1 million square foot warehouse that's empty day one but you're paying the same rent that you'd pay day X1 it's full. The initial part of the ramp up is much more expensive than once you are kind of running at a good clip even if you add incremental couple million, few [ph] million square feet, the reality is its much lower cost on a relative basis. So, we made that comment, but I wouldn’t say we've necessarily come off that cost level, I'd say that it's not kind of continuing to grow. And then on OpEx hiring, we've hired a tremendous number of people end of '15 beginning of…

Yeah, the only thing I'd add that is, I think if you look at the flow through in Q2, the one thing that I think we anticipate it might have come in stronger would have been hiring. And so, and now actually sitting here in early August through July which we like to be sort of pickup that pace to the place we want to be. But I would have had more OpEx expense and less flow through because that would have had hiring be heavier than the 160 OpEx people we added in Q2, we anticipate having more focus than that.

Okay, that's helpful guys. And one other follow up question I want to address is exclusive brands. I think in the past you've said you're at about 45% of sales. Could you give us an update on where you are currently and maybe even where you think that the total penetration could go overtime.

Yeah sure, so we update that number every couple of quarters, every few quarters. So, we didn’t update it this quarter but you know when you can see from the data points here in the past is continue to ramp very quickly and I think what we said in the past which is still absolutely true is that, it is ramping and we expect that it will continue to ramp quite quickly. The program is working very well and so I think the expectation that you can have is that for the categories which are the vast majority of our categories that are non-brand categories, we expect it to be the dominant share of volumes in those categories. And so, we’ll keep updating you on that every couple of quarters but that’s going very well and continue to take share at a fast clip.

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

Great, thank you. Just a couple of questions. For Niraj, just given the secular tailwinds that you discussed and investments you’re making, is it possible for the company to maintain kind of getting that $0.30 or $0.40 of every new dollar spent in the category over the long-term and kind of what would kind of upset that trend? And then just wondering how selection has grown for the CastleGate program maybe over the past year or so is a big part of that program going forward?

Sure John, the first question, this is a thing I think we’re really excited about is that you know the internet, the shares are not given out equally and so whoever the big winner are maybe in some ways [ph] couple winners but it's very concentrated. Whoever they are, they take the vast majority of the shares that moves online. And in home we believe we can be that company and if you look at everything we are investing in, if you look at how its playing out, I think right now certainly in US, in Canada, the markets were more developed and you’re seeing that happen and we’re certainly working very hard to make sure that continues to happen. So, we’ve very bullish on that, the $350 million year-over-year in Direct Retail growth, I think if we just talk about that, that’s a $1.4 billion rate that we’re taking share at year-end and then we’re looking for that number to grow. So, we’re very optimistic of the long cycle investments we’re making are paying off are providing a very valuable customer experience that is manifesting and not just the customer acquisition working but in the repeat which is really driving the leverage in the model. So, the answer is we’re very bullish about the prospects for that. On CastleGate, the selection there is ramped very nicely and so when we built these additional warehouses, on one hand it certainly allows us to position goods in more locations but the reality is the other things that frankly just allows us to have more selection in these buildings because we are constrained on space at the 1 million square feet as we continue to ramp it we have now very significant portion of the country on next day delivery, we have more or less the whole country on two day delivery with significant portion in Canada on two day delivery and the number of items continue to increase at a fast clip. You can see that on our site if you browser around and look at what’s badged with next day and two-day delivery and obviously changed depending on you zip code but you can get a feel for it, you'll see that the selection is quite vast. And that will continue to grow as well, so would not give an exact number of items, maybe we’ll do that next quarter but it’s a fair amount you can see that on the site today.

Your next question comes from the line of Justin Post from Merrill Lynch. Your line is open.

Couple of questions. First when you look at the US growth, can you help us understand how much is new categories. I know you’ve entered some new areas versus growth in your traditional categories and categories of around more than a year. And has that also accelerated the categories that have been more than a year. And then secondly a lot of companies in this sector have been talking about GAAP reporting. How do you think about that and evaluating the U.S. business on a GAAP basis? And then finally of course there has a been a lot of news about Amazon expanding their capabilities in the category. Maybe just some high-level thoughts about that, thank you.

Sure, thanks Justin. Let me tackle the first and the third, I am going to let Michael tackle the GAAP question. On the first, on the U.S. growth, what I would tell you is that, we're happy with how the new categories are performing but the reality is they are still quite small in the scheme of the business they're quite small. So, when you look at the amount of growth that's being driven in our total business it's -- the load is being carried by furniture and décor and it's not that the new categories that we're proud [ph] on that they're not working, but it's not very big yet. So even though they're growing at a nice rate it will be some time before they can be very significant contributors. So, if you play that overtime, I think they can be really nice drivers of the business but that's more in the future than today. In terms of your question about Amazon, what I would say as much as anyone in physical goods retail is going to have to contend with Amazon, because Amazon is the general merchandiser who wants to be in every category. I think the reality is the certain categories are a much more natural fit for them than others. I think these consumable categories where we're doing replenishment type ordering is going to be very good for them, paper towels and toilet papers and AA batteries and groceries and even anything that's like a branded kind of good that everyone wants the same one, so 42-inch Samsung TV. It's huge to get into categories that are more loaded more visual, people want unique items, the delivery requires a unique type of handling, so it's not a small item with kind a U.S. postal service type delivery. I think it's not necessarily where their engine is tuned for and we purposely focus on a category that fits that very well, which is that home people want unique items it's non-branded, it's highly visual, it's a motive it's a [indiscernible] damage it's a whole series of things that frankly we've oriented around and vertically integrated around. So, I think we're seeing the growth in the business because not because our customers not choose Amazon they're all Amazon, they're all Prime members, they enjoy Amazon but because the experience we offer is highly differentiated in the category that's particularly interesting to them and it's one of the very few that's different enough that they're going to buy from someone else. So, we feel pretty good about where we sit but we obviously pay attention to it. Let me turn it over to Michael for the GAAP.

Yeah, maybe I'm not sure 100% I understand the GAAP question but we obviously report all of the GAAP measures, we give a bunch of incremental information around equity based comp, EBITDA, the adjusted EBITDA numbers, largely because we have almost every investor I talk to calculates it and wants to look at it in a slightly different way. And so, goal has always been to sort of provide as full as transparency as possible to give the GAAP. So, we got to get full prominent and sort of use the right straight up accounting. And then this here a whole bunch of other measures that if you want to include equity based comp as a cost or not include equity based comp as a real cost, you can sort of pick and choose to do it however you want.

Your next question comes from the line of Adrienne Yih from Wolfe Research. Your line is open.

Good morning. Let me add my congratulations. You had mentioned that the net promoter scores after using [indiscernible] were up about 20%. I'm wondering if you can give a little bit more color on what particular categories of each markets return satisfaction? And then if you can also talk a little bit about the house brand and update us on kind of the penetration there? And if you could give any color historically on how much better the margin profile is in the House brand? Thank you very much.

Sure. Yeah, happy to answer those questions. So basically CastleGate, the penetration is sort of is going up at a good clip but it's across all of the categories. So it doesn’t really have a particular category concentration in terms of the goods that are being bought there and then in terms of the satisfaction what we’re seeing is that, we checked the net promoter score and we’re trying to encompass customer satisfaction into two different ways, we also look at customers repeat propensity in terms of 30 days and 90 days how likely are they to come back if they experience X or Y and what we see is that the capacity of program drives meaningful gains for us not just on that initial conversion but on things around customer satisfaction repeat as well. So, the program has many benefits to us and has other side benefits as well in terms of how we handle the goods and reduce damage and other things as well. On exclusive brands, the penetration we announced last quarter was up to 45%, we didn’t give you an exact number this quarter but that’s continued to grow. And there the margin profile of the items is not terribly different than the margin profile of other items. So, we’re not necessarily using that program to take excess margin although we’ve tested the price elasticity and what we found is that we do have the ability to what we’ve chosen so far is not to. And so that’s something that frankly we view as an opportunity we have in the future where we can frankly we could take margin there but a lot of what we’re orienting those programs around is really about helping the customer find what they’re looking for. So, if you look at the photography we do in that program, we show a lamp, with a table, with a rug, with a sofa and everything in that picture is from that brand. And so, we’re doing a lot of it around basically navigation, browse, product discovery as well as frankly eliminating price competition for these exact items.

Your next question comes from the line of Charles Grom from Gordon Haskett. Your line is open.

Hi, thanks and good morning. In the past, you guys have provided long-term adjusted EBITDA guidance of I believe 8% to 10%. I am curious when you provided that forecast, what was the embedded assumption for repeat customers because clearly at 61.3% which is about 400 basis points year-over-year. You’re getting some nice traction upfront so just wanting to see the opportunity for leverage in the model?

Sure, can you say the first sentence, I missed the first sentence what you said. I heard the part about the repeat growing.

I’m just trying to get a sense when you guys have provided the 8 to 10% long-term EBITDA guidance, what was your assumption for repeat customers when you made that guidance?

Yeah, so the way to think about it is, it's not necessarily hinged solely to the amount of business that’s repeat because it’s also -- there is kind of two different things in that right, because you have the advertising leverage which has a lot to do with the repeat and new mix. But you also have a gross margin assumption which basically we’ve said this a few times in terms of, we think we can unlock more than the delta between where we are in the long-term gross margin through these things and many times the difference but its transportation efficiencies, it’s the private label and exclusive brands program I just talked about as well as the buying power would buy more and more volume. It's that, and then it’s also the OpEx leverage overtime, even though we continued to hire on the OpEx side the truth is the revenue growth is at such a heavy rate that the OpEx gets diluted as a percentage of revenue overtime. So, it’s a combination of the three and if there is no -- there is not, we’ve never said that it’s a x percent repeat will be this. So, we’ve never guided that specifically.

Okay, that’s helpful. And then LCM net revenue per customers was basically flat year-over-year. Can you share with us how that breaks down in the US versus international?

We actually don’t break that down between U.S. and international. As we did this quarter, where we talked about international repeat running at a different level than the U.S. repeat each quarter or every couple of quarters will give some additional flavor of what's going on in the international business. And so, we'll think about, talk about the four months revenue. But the thing to remember is the international business is sort of similar to what the U.S. business was some time ago right. So, you should expect that all of those statistics right, like top-line revenue, repeat rates, orders per active customers et cetera run lower in the international business than the U.S. business.

Your last question comes from the line of Chris Horvers from JPMorgan. Your line is open.

Thanks, good morning. Trying to understand or think about the medium-term growth rate of international revenues in the markets that you're in. I understand you're starting the comp markets lodges [ph] but at the same time, you started from further backwards in the U.S. you had websites prior to rolling into Wayfair and see. You knew the customers, you knew how the market operated, whereas in the Southern markets you came in later. So, wouldn’t that suggest that the growth rate in international should sustain itself at a higher level for a longer period of time?

Yeah, Chris. So, I think the answer is yes, but I don't know if we can do it on a percentage comp. but I think if you look at the rate at which the dollar growth will run, I would agree with you. So, the internationals are ramping like $60 million $65 million year-over-year add in the quarter the guide I think it gets up in there. And basically, the way to think about it is because we're effectively executing a whole playbook at once it's both on one hand more expensive and on the other hand you would expect to see that ramping much faster. And so that will be I think that's a fair expectation.

And I think Chris as we always point out there is a mix of what's going on right. We're in three different countries and they have slightly different profiles in terms of how fast they're growing, how much scale they would obtained. And to your point some of them have different levels of leveraging the existing infrastructure than others. The Canada business had a very steep ramp because it got to really leverage the U.S. business in a very aggressive way.

And then as a follow up. Can you talk about where you are from a returns and damages perspective? And then what you're seeing with WDN and CastleGate, is that improving, and then the final point to that is when you thought about that, 8% to 10% profitability target, so what was predicated in the returns and damages line to get to those levels?

Sure. So, we break those two apart, because there is sort of different -- they are different drivers, so returns are a number that’s kind of been running around 5% for a long time. And it's not a number we necessary -- and we try to bring it down in the sense that we try to make sure that photography is really feasibility illustrative of the item, we had product information, we do all that sorts of thing, but at the same time, we don't want someone to feel like they can't return items. So, we try to make it very easy and convenient on one hand for a customer returning item on the other hand if they are returning because it's not as expected or it's different than what they wanted, we certainly want to eliminate that, we want them to have a real feel for what they're ordering. That number though tends to stay in around that 5% range. And we don't necessarily expect that to necessarily move. The damages number is not a number we've ever fully disclosed but we've made the comment a number of times that the way people think about returns as being a vexing problem in apparel. The vexing problem in our category would be more damages than returns. Because these goods are kind of prone to damage and they're not necessarily the standard delivery that exists out there is not meant to handle these types of items. And so, a lot of what we built because CastleGate, WDN, our own presorting and transportation operation, our packaging engineers who work with our suppliers and some over packing operations we have and other things are basically meant to basically significantly reduce damage and we continue to see net gains there and so when we…

I think we’re well pass our 9’o clock time. So, thank you everybody for your participation today and we look forward to talking to everybody next quarter.

Thanks everyone.

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