Good morning. My name is Leandra and I will be your conference operator today. At this time, I'd like to welcome everyone to the Wayfair Q4 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] Mr. Joe Wilson, Associate Director of Investor Relations and Strategic Finance at Wayfair, you may begin your conference.

Good morning and thank you for joining us. Today we will review our fourth quarter 2017 results. With me are Niraj Shah, Co-Founder, Chief Executive Officer and Co-Chairman; Steve Conine, Co-Founder and Co-Chairman; Michael Fleisher, Chief Financial Officer and Julia Donnelly, Head of Corporate Finance. 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 2018. 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 2017 which we expect to file in the near future 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, Joe and thank you all for joining us this morning. Steve and I are excited to be sharing our fourth quarter and full year 2017 results with you today. We're very proud of what Wayfair has achieved in 2017 and the strength with which we've entered 2018. For the full year 2018, we generated $4.7 billion of total net revenue. This represents year-over-year dollar growth of $1.3 billion and growth of 40% on 2016. Our results in Q4 were particularly strong. In Q4, our direct retail business increased 48% year-over-year to $1.4 billion. This represents year-over-year direct retail dollar growth of $460 million in the quarter. The largest increase in our history and over $100 million higher than the year-over-year dollar growth in Q3, 2017, which at the time was also a company record. We're continuing to win with customers with the number of active customers at the end of 2017 growing to approximately 11 million. We're also capturing a higher share of our customer spend with Q4 LTM revenue per active customer growing by approximately 7% year-over-year to a new high of $422. With the online portion of the home category growing annually and approximately 15% in the US, it's clear that we are not only benefiting from that shift of dollars from stores to online, but also considerably outpacing that shift and taking share. The success we're seeing is a result of many initiatives with the central driver being our long-term approach to investing in our business. Over the last 18 months, we've talked a lot about our three main investment areas; building out our international capabilities, developing our proprietary logistics network and increasing penetration of categories within our total addressable market, where we have historically under indexed. We've been investing in these areas because of the…

Thanks, Niraj. The holiday period is the busiest time of year for our business and I wanted to tell you more about how our approach to technology enables us to be prepared for the volume we see in Q4. We are constantly innovating to make the shopping experience as engaging and convenient as possible for our customers. We have built a wide range of shopping tools on our sites and mobile apps to address the unique challenges of shopping online for home, allowing us to offer an experience that is at the forefront of e-commerce in our category. Features such as idea boards, viewing room 3D and search with photo have enabled our customers to discover products they love on Wayfair and make informed purchase decisions in a way that historically has been challenging when shopping for the home online. When we launched new features like these or make smaller changes to our sites such as user interface changes, promotional events or backend performance improvements, we do so in such a way that we can track customer responses in real time and make rapid incremental changes to further optimize the experience. This test and learn approach has made it possible for us to constantly improve the experience on Wayfair, while we scale our operations at pace. By constantly innovating across our site, we benefit from these improvements as early as possible and generate learnings in advance of periods of elevated demand, such as the holidays. During cyber five, our in-house ad tech platform sent over 100 million uniquely customized e-mails, directing customers to specific promotions throughout the weekend. Traffic peaks at approximately 1.6 million hits per second to our site, which is more than twice the peak traffic in 2016. We can successfully manage this growth in volume due 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 Q4, our direct retail business increased 48% year-over-year to $1.419 billion, representing year-over-year dollar growth of $460 million, which as Niraj highlighted earlier was the largest increase in our history. Our total net revenue increased 46% year-over-year to $1.439 billion. Our other business, which primarily includes revenue from our retail partners but also includes revenue from our small media business, decreased year-over-year as expected to $20 million as we continue to scale down our retail partner business. Our KPIs, which we report on a consolidated global basis, demonstrated continued strength in Q4, many at all-time highs. In addition to growth in active customers and revenue per active customers that Niraj highlighted earlier, purchase frequency as measured by LTM orders per active customer continued the growth we saw throughout 2017, reaching a new high of 1.77 in Q4. Average order value was $229, which was lower than Q3, in line with the seasonal trend of lower ticket holiday items being purchased in Q4. Orders from repeat customers in Q4 grew year-over-year at more than twice the rate of orders from new customers. Turning now to just our US business, our direct retail business increased to $1.228 billion in Q4, up 43% year-over-year. This represents year-over-year dollar growth in the quarter of $369 million in US direct retail revenue. Direct retail revenue from our international businesses in Canada, the UK and Germany, collectively increased to 192 million, up 91% versus Q4 last year. Our customer offering in international markets continues to strengthen and we are very pleased with the market share we're gaining…

Thanks, Michael. 2017 was a great year for Wayfair and we're delighted to have started 2018 with strong momentum across our business. This time last year, Steve and I wrote an annual shareholder letter that reflected on the progress of the business and our objectives for the future. This year, when we thought about writing the shareholder letter, we looked at last year’s and not surprisingly, the themes remain the same. Our focus remains unchanged, the long term success of our business rests on our ability to continue and delight and serve our customers. And we take a long term view in investing in our business to do just that. Instead of writing another formal letter, Steve and I decided the better way to give investors insight into our thinking would be to share an email that I sent to employees just last month. In it, I highlighted the progress we made in 2017 and the competitive advantages we have built that put us in a great position to keep winning in our category. You can find this email on our Investor website. Steve and I are very proud of what our team of over 7,000 employees is achieving and the response we're seeing from our customers and we're excited by the opportunity we're capturing in the US and internationally. With that, I'll now turn the call over to the operator so that we can take some of your questions.

[Operator Instructions] And our first question comes from the line of Peter Keith with Piper Jaffray.

Congrats on a nice revenue quarter. I want to just ask a little bit about the profitability, maybe looking specifically at the US segment. So you showed very nice EBITDA margin improvement year-on-year every quarter in the US Q1 to Q3 and Q4 took a little bit of a step back. I was curious if there was a seasonal aspect to Q4 that may have put a little downward pressure or if it's more around some of the continued investments that you're making to drive the future growth.

Hey, Peter. Thanks. It’s Niraj. Yes. So, I guess a few thoughts. One, I think year-over-year, obviously, it matters for certain seasonal trends and things like that, but it also, with the way in which we're growing, the way in which we're certainly trying to take an aggressive posture around being the customer's favorite destination to effectively be the big market share winner. So year-over-year at the rate of growth we have doesn't always give you as much insight as sequentially. So you kind of need to look at both. And so, what I'd tell you, in Q4, one is, gross margin had been coming in a little high prior to that and we’ve been saying 23 to 24. Q4 came in in that range. Q4 is typically a little lower than other quarters. But sequentially that's a delta that would be a piece of it. The second is, we’ve talked a lot about these three major investment areas; logistics, the international business and really fully penetrating the TAM. And so our focus hasn't changed. The economic return we’re seeing from all of the things we're doing is actually incredibly high, but we are continuing to build out those teams. And so from a headcount, from an OpEx standpoint, that’s something else that is ramping and so again you got to think about that sequentially, because we effectively hire people, right, they join payroll, the economic return while very fast is not immediate. So, you got to go out a couple, a few quarters for that so on and so forth. And so we have a period of slower hiring. The next few quarters have the slower benefits, but they have the lower payroll, right, and then they have a period of higher hiring, payroll starts to increase, but the benefits are out a couple of few quarters, whatever way you want to think about it. So I think that's really the dynamic more than anything else and so we don't worry about a particular quarter in and of itself. We don't really worry about the year-over-year compare as much as we worry about sort of the strategy and are we playing for the right long-term win and are we being highly quantitative in how we're doing it, measuring the return, making sure that each dollar we spend is getting the return that we're being very thoughtful.

And maybe just to piggyback on that, not looking at quarter, but looking at a full year basis, you did show very nice EBITDA margin improvement on a full year basis of about 100 basis points. I know you don't like to look at too far with guidance, but what would be the puts and takes as we look out to ’18 that could either put pressure on that expansion or perhaps allow further expansion, greater than 100 basis points for the full year?

Let me just share a couple of thoughts and let Michael comment, because he really discusses the guidance portion. At a high level, what I would tell you, what Michael said in the script in the comments a few minutes ago was that if you think about when we went public to now, right, so it’s only about 3.5 years, we've over tripled in size and but the business has changed fairly dramatically. We have a much stronger brand now. We have this asset based logistics. We have significantly larger team or much larger customer base with better repeat economics. So, very positive things, right. So if you think about the US going forward, I think Michael made some comments about how we've had five quarters of profitability. And if you look forward over the next X quarters, we don't foresee that really changing and that in a given quarter, it may or may not be profitable, but that trajectory, because of the amount of growth and the fact that we protected the unit economics, the flow through is sufficiently large that despite having a very growth oriented posture and being willing to invest into our team and a customer acquisition, despite all that, effectively get flow through, right, so that drives the profitability. So when you look forward, you said, a year is a question for arbitrary quarters, right, but so when you -- so year-over-year on a year, still the same kind of argument I would make, but when you look forward, I think what you're going to see is the business continues to grow the way we would expect, you would have a lot of flow through and in general, you're going to see some of that flow through. That said, we're not afraid to spend money where it makes sense and we're in a midst of ramping up a bunch of these teams, headcount, where we're seeing really great returns and there's a lot we want to do and one of the questions I sort of anticipate someone may ask later might be about transportation and trucking. So that's become a talk in the retail industry. We’re two years in to building out asset based logistics that frankly led us take control transportation costs in a way that our competitors can't. So, there's a lot of things we're doing that we're going to continue to drive and so there's no magic number of basis points we're looking for year-over-year versus the long term. But Michael, do you have any specific guidance thoughts?

No. The only thing I might add to that is that, Niraj mentioned the OpEx side and how we’re thinking about the US business in terms of profitability, I might add that on the international business, we continue to see that business gaining traction with customers and because of that, we continue to be more than comfortable making increased investments there, those investments are coming in the form of people as well as growing a business that's got a lower gross margin and higher ad cost. And increasing the ad spend in those businesses as we start to see the flywheel turning with our customers.

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

Just a couple of questions. First, maybe for Niraj. How are the investments in fulfilment and logistics driving conversion rates and you just kind of alluded in your last reply, how do you kind of view the investments in fulfilment and logistics as a competitive advantage over the longer term? And then just a question on international expansion, just wondering if you're contemplating any new markets in 2018?

So first, let me talk about the logistics piece. So, the fulfilment and logistics, so we started ramping that about two years ago. So we tested in 2015, we were happy with the results we saw from the customer, sort of excitement around fast delivery, the two day delivery promised as well as on the large parcel, the WDN, the home delivery experience. And so what we then started doing in ’16 was ramping it. So, we have over 7 million square feet of warehouse, now, you still have small parcel numbers, approaching 20%. You saw that we have 20 large parcel home delivery operations that’s approaching 60% of the US. And you that continuing to move forward. I think what may not be as well understood, when we talk about the benefits of logistics, we tend to focus on the customer benefit and the customer benefits are really important to highlight because we try to make everything we do logically driven by what customers ideally would like and then we track, how to achieve it in an economically rational way that works for us and for the customer. And logistics is one which enables the customer to get faster delivery, more convenient delivery, more transparent delivery. So a lot of positive things. But embedded in that are two other big advantages for us. One, I guess, three. One is that, it can reduce our transportation costs, because we can make the whole value chain of where our suppliers are making the goods, a lot of which are imported from Asia all on the way to where the customer is getting delivery. We can make that chain much more efficient and any efficiency reduces in results in less moves, less mileage so on and so forth. So that's a cost…

Your next question comes from the line of Seth Basham with Wedbush Securities.

My first question is about flow through. Niraj, you talked about being able to get flow through on incremental contribution margin as you grow that base of customers. In the fourth quarter, you beat your revenue guidance handily, the flow through and the incremental revenue upside looked kind of soft. I'm just wondering about your philosophy here. Do you plan on continuing to spend that contribution margin upside or will we see a drop to bottom line at some point soon?

Yes. So we don't actually think about it as suspending the flow through. We decide what we're going to spend without necessarily deciding what the revenue number is, right. So we decide, in other words, if we're looking at building up a team on an initiative, like I say our transportation a few minutes ago, right, so we're talking about building the inbound ocean freight operation or the drage operation or we're going to do in consolidation brokerage or if I talk about the WDN rollouts, some new models we want to test there. We decide if we think that’s sensible, we find a way to test and if it's good, and it shows good customer benefits, good economics, we’ll scale it up and we'll do that sort of regardless of what revenue in a given quarter is going to be. Right. So that's just the headcount growth. The advertising and advertising growth is driven by again customer economics around paybacks. And so if a team on the advertising side and channel figures out a breakthrough that let’s just acquire a bunch more customers very economically, they can go do that and we're very excited about that. So, those are the cost sides, right. And then separately, this all should have impacts on customers. Now, the customer impacts are not linear day in, day out, one to one. So there's lags and different investments and so on and so forth. But then those customers create revenue and repeat revenue and we make sure that we protect the unit economics. So we get the contribution margin. And then you add those together, but when it's not decided, tied to the other. And so that's why I also say we don't care about a given quarter, because if you start talking about a given quarter, you start making short term decisions and you basically find the companies who make short-term decisions are the ones that end up basically losing to those that basically focus on customers and make good long term decisions. That's what we believe. Now, we're very economically practical and quantitatively prudent. So we're not going to make -- we're not going to chase growth, but within the confines of these very conservative payback frameworks and very high ROI frameworks, we absolutely will pursue those opportunities.

Perhaps another way of asking the question then, looking at the fourth quarter results, where there are specific cost areas that ran higher than you planned when you provided guidance for EBITDA margins for the quarter.

So I don't think it's necessarily that there were sort of specific areas that ran higher than when we created guidance a quarter ago, the areas I’d point to are one, we've talked about gross margin for several quarters now as something that we expect to run in that 23% to 24% range in part because of what Niraj was talking about earlier, the increased investments we've made over the last couple of years and the logistics build out, now that it's built out, we’re not yet running that network at efficiency and so we've always said those costs are going to increase before they come back down to below their baseline level and we're clearly in that period now and you'll see that in the delivery cost details. And then I think the other piece which I tried to note on the call is that we are -- we have continued to sort of ramp hiring. I think that went well in Q4. It's really ramped up in Q1 and so when we crafted our guidance for Q1, I mean that's a perfect example of an area of, hey, we entered 2018 with a very clear plan of here all the teams who want to staff, so we think are the highest ROI initiatives. We've got the recruiting team going after that, if they can fill those folks faster, sooner, better, we want them to. If that means that I'm going to end up with more OpEx cost in Q1 than I otherwise would have, which pushes the US business as an example into an EBITDA negative position for a quarter, we’re quite comfortable with that. And then, digest those folks and they'll be doing good work and generate the things that generate more customers and more revenue.

My follow-up question is just around activated customers. The year-over-year growth rate in activated customers slowed in the last two quarters and the number of activated customers actually declined about 17% year-over-year in the fourth quarter by my calculation. Is that a trend that we should expect to see continually, is that a matter of law of large numbers or how do you think about growing the customer file going forward?

At a high level – I’ll let Michael comment on some of the derivative analytics from our numbers, but at a high level, I’d say we continue to acquire customers at a good pace. The brand recognition we have in the markets we're in continues to grow really nicely. The active customer count being at 11 million, growing nicely and then the behavior of those customers, the repeat and repeat spend, we're quite happy with it. I'm not exactly sure what number you see declining, maybe I’ll let Michael comment.

Yeah. So I noted on the active customer number, I think the way we – you have to think about this and we talked about this sort of last several quarters right, we now have a very large base of repeating customers, right. So even though, it's a much lower percentage of net revenue, we spend a substantial amount of our ad dollars against repeat customers and trying to unlock, right, the most efficient way to get that customer to come back again and again and again as a sort of key focus for the marketing teams. We continue to go out and spend ad dollars within our one year payback framework, which I talked about in the prepared remarks and which we've talked about every quarter and continue to see really good efficient use of that and we're under our one year paybacks and we'll keep doing that. So I think there's a little bit of our law of large numbers, there is a little bit of where we're placing that spend and then the other piece that I always know when people look at the specifics of a quarter or a couple of quarters is, our ad spend that we talk about it in a way as if it's sort of like happens in a quarter and the customer shows up in a quarter, that's not the way it works in reality, right, we're often running ads better a display ad that gets a customer to click in, that gets the customer to come to the site but we know that the best customers we can get are top, top, top of funnel, the folks who are just beginning their search for a product. And so oftentimes the ad dollars we’re spending generate a customer in the next quarter or the next quarter. So I think it's a balance of all of those things, but I think we feel extremely good about the customer growth, both on the new side and driving incremental purchases from repeat customers.

Your next question comes from the line of Oliver Wintermantel with [indiscernible].

I had a question regarding the network build out. So after you guys build out and I think you said 4 million square feet this year, can you maybe tell us where you think you are in the build out of that, I don’t know if you want to put an innings or where do you think you want to be in the build out there?

It’s Niraj. So two thoughts there, which I think hopefully will help answer your question. So one is, a lot of the initial build out is the ramp from effectively zero of our volume going through our network to X percent of our volume going to our network, right. And so you have to build the network fairly quickly because your penetration rises and so the amount of just growth is significant. And so we’ve given you different numbers, we have the percentage of home deliveries going to the home delivery network of close to 60 and the percent going to the middle mile and you got the percent of small parcels coming on the way. It is always different penetration number. So I’m wanting and willing for that to continue to grow. But then the second growth is assuming the penetration doesn't grow, just what's our rate of our business growing. And so just as the business grows at X rate, which last year was 40%, if you didn't add any penetration but you want to hold penetration in theory, just linear math, you need 40%, may not technically be exactly true, but you understand the concept. And so, you're going to end up with build out sort of for that reason alone, the 4 million square feet on top of the network we have right now is not a huge amount when you factor our growth rate into account. In addition to the fact that we have penetration goals. And the reason that's not a huge amount is that we do have unutilized space right now, which we have talked about and we have a new life space because there is a network footprint we wanted to build out. So just having one warehouse and it being full doesn't really allow us to strategically achieve our objectives. So we needed to build out different locations, which will then achieve our objectives, but then you have unutilized space, which we consider fine, consider that part of the investment, but then as we ramp, we can start to utilize it, which makes the unutilized go down, but then you need to grow the network as you grow penetration, as you grow just your overall growth. And so you’re kind of seeing that number be lower this year, but then if you try to forecast past this year, a lot of that comes down to what amount of penetration growth do you want and what amount of growth you have in general and those really drive that number, because you're kind of through the unutilized being a big portion.

I think the, first of all, it’s good to have you back. I think the metaphor of sort of what inning is hard. The way I think about is like that we've built the foundation and the first floor right now as we grow, we're going to add to it. But building that foundation of first floor, you've got -- that is a very particular footprint and it has to be done a certain way in order to support the future and so I think we've done that. So, an example might be that we now talked about having a lot of our product coming in a CastleGate container direct. That container direct comes into two ports on the coast, right mostly So that's the place where you've got increased volume you're going to add to those boxes and you're going to need more space there, where we may have put 1 million square foot footprint building somewhere else in the network, right, that isn’t yet at full utilization, even though the ports you're going to need more space. And so it's not a perfect, no metaphor is perfect, but it's not like I built the best foundation, I have built one floor, one floor, one floor, there's pieces to it as we build out.

And just a very quick follow-up here, the buybacks comes probably at a surprising time in your operations here. Could you just maybe give us a few points on why you do a buyback now?

Yeah. I think it's just -- this is just -- we think this is just prudent right. It just feels to us like, feels to me like we're entering a period of increased market volatility. I think in a period of increased market volatility, having something on the shelf that the board has authorized so that if the company decided it wanted to take advantage of dislocations in the market, it could do so. It seems like a prudent thing to do. There's a complex process to sort of make sure you're ready and it's on the shelf and so that's what we've done, but I don't think people should read more into it than that.

And our last question comes from the line of Michael Graham with Canaccord.

Just one on international margins. Michael, ever since at least Q1 ’16, the trend has been gradually improving. I'm just wondering if you think as we get through this year that each quarter, would you expect international margins to keep improving and any high level thoughts on how many years it might take to get positive there and then Niraj, I just wanted to ask on your email, you mentioned that some things take longer, I imagine, you are referring to the international business and I just wonder if you could put another layer of depth like what about the international business, might have taken longer than you originally planned. Is it customer acquisition? Is it merchandising or whatever it might be just to give us a little more color on that would be helpful?

Yeah. I’ll start on the margins side. I think we’ve talked about in the past couple of quarters that we have made some progress in the international business on gross margin. It still runs well below the US business. I think we're in a place where we're seeing the combination of site experience, broad selection and supplier uptake sort of set the level of margins that we feel work near term, such that we can continue to sort of ramp up ad spend and people there to sort of build that business plus the greater losses in that business that we've guided to and so I think we're sort of at the right place there. Now the way our business works is as we unlock more scale, we unlock more margin, right. We become a more important volume buyer from our suppliers and we get flow through on the logistics side, all of the pieces that sort of work well on a scale perspective. And so I think as we continue to ramp those businesses, we should be able to unlock more gross margin there, but we're sort of presuming at this point that we're going to run at the gross margin levels that we're at right now in the international business as we -- and then as we have unlock scale, we’ll add to that.

Mike, on your question about the email, it’s just, so you know, obviously certain things take longer than others. On your question on international and obviously that's one of the things I would agree takes longer. If you think about it, you effectively need to build everything that we've built in the US where we’re 16 years old. And so even though we didn't have a brand for the first decade, we’ve built a lot of supplier relationships, a big product catalog, we had a transportation logistics infrastructure, a customer service infrastructure and we had a lot of things intact. And then we augmented them with more digital merchandising, more, the brand building. When you open up in a new geography, so Canada has a benefit, because it rides off a lot of that US infrastructure, but Europe for example, you're building supplier relationships from scratch. You’re building the product catalog from scratch, you’re building the transportation infrastructure from scratch. And so there's just a lot more you need to do and while you can hire a bigger team and do more in parallel, which is part of what we're doing, it’s still a lot more. So it still takes longer and I think it's kind of almost that simple and customer acquisition, things like that are, they're not a primary activity, they’re secondary activity. So until your customer offer is strong, you really aren’t in a position to go out and acquire customers and what the customer offers, well, customer offers based on selection and transportations, speed of delivery and customer service. And so it's really that first order that I'd say is where the time is really consumed.

Thanks, everybody. We appreciate your time and thanks for calling in. Take care.

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