Good morning, ladies and gentlemen. My name is Julie and I will be your host operator on this call. At this time, I'd like to welcome everyone to the Wayfair Q3 2017 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 Corporate Finance at Wayfair.

Good morning and thank you for joining us. Today we will review our third quarter 2017 results. With me are Niraj Shah, Co-Founder, Chief Executive Officer and Co-Chairman; 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 fourth 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 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 Web-site 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 Web-site. Now I would like to turn the call over to Niraj.

Thanks, Julia, and thank you all for joining us this morning. In Q3, Direct Retail revenue was up 42% year-over-year with total net revenue growing by 39% year-over-year. This represents year-over-year dollar growth of approximately $350 million in the Direct Retail business. We saw continued growth in both our U.S. and International businesses, with U.S. Direct Retail revenue up 36% versus Q3 last year and International Direct Retail revenue up 103% versus Q3 last year. We are delighted to see our offering continue to engage more and more people, with over 10 million shoppers buying from us over the last year and LTM revenue per active customer reaching an all-time high this quarter. Today, I will provide brief updates across a few key areas of our business and then I'll turn it over to Steve and Michael before we take your questions. Last quarter I updated you on our international business and we remain very excited on the investments we're making there and the response we're seeing from customers in Canada, the U.K. and Germany. Our continued strong growth in these markets and improvements in our international core KPIs give us great confidence in continuing the long-term investment cycle we're making there in the customer experience, advertising dollars, and our teams. Two other major strategic areas of focus that you've heard us talk a lot about that I want to focus on today are growing house brands program and our transformational supply chain network which is comprised of CastleGate and the Wayfair Delivery Network or WDN. In Q3, we continued to build out our house brands offering in the U.S., Canada and Europe. We now have a portfolio of more than 70 house brands and we're investing further in the visual imagery that is so important in helping our customers…

Thanks Niraj. In previous calls, we have talked about our approach to advertising spend, and today I want to tell you more about the role that technology plays in how we market to new and existing customers. In the early days of Wayfair, we used both external agencies and in-house programs to create, deliver and track our marketing initiatives. As our business scaled, we saw compelling opportunities to take more and more of our marketing in-house by building our own advertising technology stack, and today all our marketing spend is managed in-house leveraging our proprietary technology. The investment in proprietary technology has equipped us not only to take cost out of the system by reducing the need to work with intermediaries, but also enabled us to be more effective in how we spend marketing dollars by giving us more control over the pace of innovation. We have a team of more than 60 engineers and data scientists dedicated to supporting this technology infrastructure, equipping us to effectively execute and innovate continuously. Paid search is one channel that is often outsourced by e-commerce businesses to agencies, given the analytical complexity and competitive pressures inherent in the channel. In 2014, we took all our paid search activity in-house. As our marketing team is managing this platform internally, we can utilize our wealth of historical intelligence on the 20 million or more keywords that we may be bidding on to predict the value of that traffic more accurately and hone our bidding tactics accordingly. When searching for a furniture or decor product for the home, the purchase decision is often one of high consideration, with customers browsing widely before completing an order. If a customer has browsed on Wayfair but not yet placed an order, we are able to continue to market to…

Thanks, Steve, and good morning everyone. I will now provide some highlights 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 Q3, our Direct Retail business increased 42% year-over-year to $1,181 million, representing year-over-year dollar growth of approximately $350 million. Our total net revenue increased 39% year-over-year to $1,198 million. Our other business, which primarily includes revenue from our retail partners, but also includes revenue from our small media business, decreased as expected to $17 million as we continue to scale down our retail partner business. Our KPIs, which we report on a consolidated global basis, continued at strong levels in Q3, many at all-time highs. LTM active customers increased to 10.3 million customers, up 39% year-over-year and up 703,000 net new active customers sequentially versus Q2. Purchase frequency, as measured by LTM orders per active customer, continued the growth we have seen in each quarter of this year to a new high of 1.75. Average order value for the quarter was $250. In the U.S., our Direct Retail business increased to $1,034 million in Q3, up 36% year-over-year. This represents year-over-year dollar growth in the quarter of approximately $275 million in U.S. Direct Retail revenue. Internationally, Direct Retail revenue from our Canadian, U.K. and German businesses collectively increased to $148 million, up 103% versus Q3 last year. In our International business, we are benefiting from continued growth in the proportion of orders from repeat customers and we are excited by the opportunity to ramp our overall penetration in these markets in the future. I will share the remaining financials on a non-GAAP basis, excluding the impact of equity based compensation and related taxes which totaled $20 million in Q3 2017. For…

Thanks Michael. Steve and I are extremely proud of the headway our Company of just under 7,000 people is making in transforming how customer shop for their home. While our year-over-year growth rate in Direct Retail revenue was 42% in Q3, I want to point out that this represents $1.2 billion of growth in Direct Retail revenue in the 12 months ending September 30. To just put that into context, our Direct Retail revenue in the full year of 2014, which is the year we went public, it was only $1.1 billion. Now, less than three years later, we've grown our business by more than that amount in a single year and have reached a revenue run rate of just shy of $5 billion. As dollars in the home category continue to move online, we believe we can keep taking an outsized share by delivering the best customer experience with vast selection, inspiring visual merchandising, fast and convenient delivery, and world-class customer service. With that, I'll now ask the operator to open up the line so we can answer a few of your questions.

[Operator Instructions] Your first question comes from the line of John Blackledge from Cowen. John, your line is now open.

Just a couple of questions. The repeat rate at 61% was a bit lower than we expected, a touch below Q2 2017 levels. Any callout here and could you discuss perhaps the difference in repeat rates between U.S. and International, and do you kind of view generally repeat rate as a critical component of long-term leverage in the business? And then I have one follow-up on the EBITDA guide.

First on repeat customer, remember on that metric, because I tried to point out to everybody, it's a combination of how many orders are coming from repeat customers but also how many new customers are coming in, right, and we obviously had a good quarter from adding new customers. So we feel quite good about that. There is also some seasonality to that as well. So, I think it's basically the same as it was last quarter. And I think the other metric that I would focus people on when they are thinking about repeat is really looking at that 1.75 orders per active customer. And as you pointed out, we know that the International business runs well below that. The International business is continuing to gain share. We don't break out the number between U.S. and International, but the U.S. business is running at a repeat rate far better than that 1.75. And that number, the 1.75, is an all-time high and the U.S. business is at an all-time high.

John, this is Niraj. So just to clarify, the 61% is not the repeat rate, it's the share of the orders that are repeat orders, and then the close that you get to a repeat rate is what Michael was referring to where you derive the number of orders per customer, which would be an indication of frequency.

Okay, great. And on the U.S. EBITDA guide, it's typically the margin, though at least the last couple of years was the highest in 4Q perhaps given the seasonality, I think margins given Michael's guidance it's going to decline a little bit, maybe you could just give any callouts or further details on the U.S. EBITDA guide?

Sure. Since it's guidance, let me let Michael answer.

So, John, I think that we talked a lot last quarter about trying to guide gross margin. In particular, I think as you go into Q4 with more of the revenue in front of us than behind us in a typical quarter, and so I think there's that piece. And then I think the other piece that we always take into account in Q4, I think if you went back and looked at our Q3 call from the last couple of years, you'd hear me say the same thing, which is, it's very hard to anticipate what the promotional environment is going to look like in fourth quarter going into the holiday. We always anticipate that it's going to be intense. In some years it's been super-intense, in some years it's been less so. You will remember though that the way we build our business, when other folks are being promotional, they own that product already, right, they've brought that product in inventory and then have to go discount it and sell it at a much lower gross margin, that's not our business model. But at the same time, we still work very hard to be market priced, and so we want to leave ourselves the room to make sure that from a gross margin perspective we can sort of do the right thing for our customers in that period.

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

Thanks for all the detail on the call. I was curious, during the third quarter would the hurricane dynamics that other companies have called out here in recent weeks, did you guys see any impact on your business perhaps in late August or parts of September?

Sure, Peter. I mean any time you have events like that, there is no question that we look at sales and the states impacted and so on and so forth. You definitely see kind of dislocation from recent trends. That said, the one thing I do want to point out, our business, when you think about the total business growing over 40% and the overall market only growing a couple of percent, couple of few percent, really the obvious biggest thing that's happening is there is a secular shift to online from offline. So, total market is growing 2% or 3%, offline is growing less than that, online is growing 15%, and then we're growing over 40% relative to the 15%. So, what happens is we do see those effects because those macro effects are so large, but their impact to us in total from a quantitative basis is heavily muted by that secular shift. But we definitely see the trends where there is a little bit of freezing up and then there's a rebound, and the same kind of trends others would see.

Okay, thanks guys. And one quick follow-up then, just looking at how you had guided Q3, it looks like you exceeded your sales guidance, but then the EBITDA margin came in at the midpoint. Was there any expense line item that came in a little bit heavier than you thought?

It's Michael. A couple of thoughts there. One is, as I mentioned in my prepared remarks, we feel really good about the hiring and the pace at which we're hiring. And so that stepped up quite dramatically in the quarter, and I think that was – so I think the OpEx headcount adds were probably a little more than we anticipated. I would also note that as I talked about, the customer unit economics continue to be very strong, right, that 1.75 orders per active customer, that $408 trailing 12 month's revenue per active customer, which means that from an ad spend perspective we've continued to be lean forward, because every dollar of ad spend we're spending is getting us a really strong customer at this point. And so I think the combination of those two, plus as I pointed out last time, trying to sort of pinpoint gross margin is a complex task in our business based on the nature of our business model. And so, movement of 10 basis points or 20 basis points seems like sort of super-fine detail.

Okay, good enough, and good luck with the holiday season.

Your next question comes from the line of Seth Basham from Wedbush. Seth, your line is now open.

My question is around customer acquisition costs. They seem to have picked up a bit. I see you were leaning in on advertising. You're investing to drive growth up to that one-year payback period. But at this point, how long should we be expecting customer acquisition cost to remain in this relatively elevated rate?

It's Niraj. So I guess to kind of I guess try to help explain the customer acquisition costs, I don't know that it would be fair to characterize it as elevated. I think basically what you have is that earlier in the first question we talked about that 61%, the mix of repeat orders relative to new orders. As the business increasingly – there's two mix effects that are happening in the business. One is an impact of the business shifting increasingly to repeat versus new, and the second is the mix of international relative to domestic. And if you isolate for those mix effects, you would see something different. The calculation that we gave you years ago where we say, take every dollar of ad spend and hit the new with it, that obviously becomes a less effective proxy method as new becomes a smaller portion of the total. As you're taking very efficient ad spend that's for the repeat base that runs at a low percentage of revenue, but you are counting that as zero percentage of revenue, you're taking those dollars which are growing larger in absolute dollar terms and hitting the new base with those larger and larger dollar amounts, which would then do what you said, which would make it look like it's rising, when in fact on a unit basis new customer acquisition costs are not necessarily changing in a way that you're seeing. So, I think as you model it going forward, you need to start assuming, or I don't want to say how to model it, but one way you could model it is to start to put in what we talked about, which is like this notion that repeat revenue runs at a very efficient ad cost but it's a low percentage of revenue, but don't run it at zero. And then that would let you I think get closer to a proxy for our customer acquisition costs.

That's helpful. So just to be clear, in the U.S., the customer acquisition costs are not rising on a year-over-year basis?

I think the customer acquisition costs, Seth, have remained in that sort of – the calculation that we do at the back of the investor deck, that calculation that Niraj just pointed out, why there are some challenges as the business becomes more repeat, those have run sort of between $65 and $75. And at the same time, I would point out that's during a period of time when revenue per active customer has gone from basically $350 to over $400.

This is Niraj. Just to say it in a different way I guess, the ad efficiency, so the time to get the payback has not changed in the domestic business. So, if you think about – the key thing on the ad cost is how long till the cohort breaks even, and I think what gets dangerous when you start extending the period you are allowing it to have, or the value of the contribution margin from the cohort covers off the ad cost, when you elongate that, and we've not changed that, in actual numbers that has not been extended, and I think that's kind of where you want to get at. So then the math you are doing, basically I tried to explain to you how you can get to seeing that in terms of understanding the number, the actual numbers as well as possible, given what we give you.

Fair enough. Thank you guys and good luck with holidays.

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

I guess a lot of questions on customer acquisition cost. On a high level, when do you start seeing real leverage in that line, especially on the U.S. side? You're not seeing it in the bottom line guidance at this point. So can you talk about when you're going to start seeing leverage there? And then the second thing, a lot of questions out there about perhaps your largest long-term competitor getting more aggressive in product listing ads and other areas, so are you seeing ad costs go up on a unit basis and how you feel about competition? Thank you.

Sure, Justin. It's Niraj. So, what I'd say is, I mean this is what you're seeing in our numbers. You can see our rate of growth, like the online market is growing at 15%, and we've got U.S. Direct business growing at a multiple of that. It tells you that we're net taking share. We do not see ad cost on a unit basis really going up, and I think that a lot of that is frankly due to the fact that our brand is getting stronger, the experience is getting stronger, and we've built our own ad tech, and Steve spoke to that earlier, but basically that gives us a very significant advantage in terms of efficiency on the advertising side. So, I think the thing about seeing efficiency in the advertising line, I think there's like a misconception, because basically the ad cost could drop dramatically overnight if we were willing to not acquire new customers that have great economics and instead just try to grow at the market rate of 15%, effectively we wouldn't really need to spend very much money. If you can get customers though and they are going to pay back in less than a year and they are going to show productivity that's – if you look at the cohorts, it's better than any time in the past, it seems to us a little bit foolish not to want to acquire that customer. If you then take the cost to acquire that customer and expect the revenue to have shown up magically overnight, then of course it's not going to work. And that's effectively the analysis you're referring to where you are taking the current period revenue and then the acquisition costs for all these new customers, you're saying, it should have paid…

Your next question comes from the line of Brian Nagel from Oppenheimer. Brian, your line is open.

The first question I have, recognizing that growth at Wayfair is probably better than any other place out there, but the trajectory – that said, the trajectory revenue growth has been a bit choppy for the last few quarters or so with Q2 strengthening significantly but in Q3 moderating somewhat, as we look back at that, is there some takeaway as to why we had so to say that bump in Q2 and a slight moderation in Q3, and to what extent, if you can explain, is that simply under your control and reflective of the decisions you are making in building the business?

I think the way to think about what we care about is we care about the long term outcome. So in that sense we are not trying to manage like quarterly percentages or quarterly sort of results per se. But what I will say, the key number I think to look at is the dollar growth, and if you look at the dollar growth, you'll see that the Direct business had $350 million, and it's come back up after a period where it did slip down. And we talked about how when it slipped down, we believed that a lot of the hiring we did a year and a half ago was a lot all at once and we had a lot of different initiatives, and frankly, we're seeing those really pay off, but it created a period of time where our execution we don't think was necessarily as tight as we wanted. Now if you look at what's happened, with some kind of caliber, the talent we've hired is we think incredibly strong, and the execution naturally gets a little bit tighter over time. It has helped us learn how to scale the headcount in a wiser way, which we are now taking advantage of, and frankly, we see the dollar growth is basically an all-time high. What I would tell you to look for is if we do a good job, this dollar growth whole not exactly at a linear track, it should continue to grow, and that then depending on what happened a year ago in that same quarter gives you that year-over-year number. But that year-over-year number, it's fine if you are mature and the market is growing at 3% and you're growing at 7%, and you're saying in this mature market we're a share taker, but I don't think it works that well when you get a period of rapid change like what we have. So this is where we kind of try turning to the share of the dollars that came online and the dollar growth. These are sort of derivatives that really try to point to whether we are being effective while protecting the unit economics and the inherent profitability of the investments we are making and succeeding in the eyes of the customer with that dollar growth. And that's what we play for and that's what we are excited to see working out really well.

That's really helpful. Thank you. And then my follow-up question, Michael, you talked about the recent convert offering. The question I have there is, as we look at that deal on the capital that brought into the business, does that signal some type of maybe as a [indiscernible] to some shift you're going to make with it or is it simply just a cushion at this level?

I think it's the latter, Brian. I think we tried to be really clear that this should not be read by anyone as doing anything but us taking advantage of a very strong convert market and raising some really attractive low-cost financing.

Got it. Thank you.

Your next question comes from the line of Aaron Kessler from Raymond James. Aaron, your line is now open.

If you can just maybe provide us an update on some of the newer businesses, kind of how they are tracking, such as the wedding registry? I'm sorry if I missed that. And then if you can maybe just geographic performance by country, just how that's performing versus expectations? Thank you.

This is Niraj. Yes, wedding registry, we didn't touch on that. That just finished sort of its first year. So there's an annual cycle there, we're through the fall and into the winter, couples are getting engaged, they are setting up their registry for the coming kind of spring-summer wedding season. We had a good first year. The plans for how to acquire customers for this coming second year are rolling out now. So that's something that will take a little longer to build because it has that annual cycle to it, but we are sort of really happy with what we are seeing there. We talked about Paragould I think a quarter ago. It's early days but we're seeing really nice traction there. Talking about different categories at different times in terms of we've talked about mattresses, we've talked about decorative accents, we've talked about – we just finished the outdoor season which we really had a spectacular season. So, we've got a lot of different areas that are really building up, some of which are relatively new in terms of investing in, some of which are a little older but continue to gain strength. And we have other programs like our private-label credit card in financing which we've not given out data on in a while but we will again sometime soon, but that continues to – kind of continue to gain steam. So, we've got a lot of different things we're very excited about, and what you're seeing is sort of the interplay of all of which is building the business really nicely and creating a lot of value for customers. In terms of your other question on geographic performance, in the International segment we have three countries of Canada, the U.K., and Germany, and they are…

Got it, great. Thanks for the update.

Our final question comes from the line of Mark May from Citi. Mark, your line is now open.

I kind of have a two-part question. One is, as the business shifts more and more towards the in-house brands, I think you said 60% and growing, does that impact some of the aspects of the business that we thought of kind of in the earlier days of Wayfair in terms of the levels of inventory, the service revenue opportunity at CastleGate, I'm sure there are a number of elements there, but just trying to understand how that shift kind of impacts some of those core elements of the business? And then kind of the second sub-question along those lines is, in terms of, as you've built out the CastleGate network and are in controlling more and more of the distribution for your customers, are you generating any meaningful CastleGate revenue, and can you remind us where that shows up in the P&L? Thanks.

Let me tackle the first one and then Michael can comment on the accounting, and then I can share some thoughts on CastleGate for the second one. So, on the first one, the beauty of the way we are doing the house brands for us, so you are right, we said it's up to 60% of Wayfair.com, so that's obviously the majority of the business. And there are certain categories where it's less relevant or there are brands in things like plumbing and large appliances, but the vast, vast majority of what we operate in are non-branded categories. And so, we've had great success building up these brands, and because they effectively house thousands of products that come from our supplier base, and we're curating them into these brands, providing visual imagery, methods of navigation, different things that really help the customers shop. But so as a result, because of the nature of how we do it, it actually does not have negative impacts on the way our business operates. So, in other words, we still do not carry inventory. These are items our suppliers are bringing to market, they are in line, where they are just making distribution choices on who they give them to and who they don't give them to, which incents us further to really drive them in the online channel and others may have some of these items in their stores or other places, but this really gives us the ability to lean in knowing that their item has some degrees of limited distribution while we still do not have inventory risk. Suppliers also, because we are leaning in when these items increasingly gain momentum, they are excited to use CastleGate. So this actually is an accelerant for CastleGate in the sense that CastleGate is…

The accounting, Mark, though CastleGate is obviously strategically very important and gaining share, the revenue is inconsequential in the P&L, and the place it shows up, just to understand the accounting, is it shows up in two places. It shows up a little bit in other revenue and some of it shows up in contract COGS, just sort of do the revenue recognition right because obviously we're providing a service to a supplier whose product we are then selling on to the customer. But it has no meaningful impact on the P&L.

Okay, thanks.

And on CastleGate, I'll just say that it's ramping quite nicely and you can see that because you can see all the facilities we have opened and you can see that the annualized rent has not really grown, which gives you sort of a feeling for the rate of growth of the utilization in the network, because it's been ramping at a rate that's been able to absorb the huge expansion of that network. And we're really excited about the footprint we've built out and how we think it's going to continue to ramp. Anyways, everyone, thanks for calling in. We appreciate your interest and have a good holiday season.

That concludes today's conference call. You may now disconnect.