Good morning. My name is Lisa and I will be your host operator today. At this time, I'd like to welcome everyone to the Wayfair First Quarter 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 Joe Wilson, Associate Director of Strategic Finance and Investor Relations at Wayfair. Please go ahead.

Good morning and thank you for joining us. Today we will review our first quarter 2018 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 second 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 10-K for 2017 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, Joe and thank you all for joining us this morning. In Q1, direct retail revenue was up 48% year-over-year with total net revenue growing by 46% year-over-year. This represents year-over-year dollar growth of approximately $450 million in the direct retail business, as we continue to capture a significant share of the dollars as they move online in the home category. We saw continued growth in both our US and international businesses with US direct retail revenue up approximately $350 million or 42% versus Q1 last year and international direct retail revenue up $100 million or 97% versus Q1 last year. These strong results in Q1 follow the $460 million of direct retail revenue we added year-over-year in Q4, 2017. As Michael will share with you later in the call, we're guiding to another high level of dollar growth for the second quarter. Needless to say, we are excited to see that our offering is resonating more and more with our customers and that they're rewarding us with their dollars. LTM orders per active customer and LTM net revenue per active customer both grew to new all-time highs this quarter. This morning, I will provide brief updates across a few key areas of our business and then I'll turn the call over to Steve and Michael before we take your questions. We're taking a large number of steps across our business to bring customers the best possible offering in our category online and we are being rewarded with the outsized growth in market share that we're seeing in our business. These investments span a variety of different areas across our business, but today, I wanted to focus on three in particular to give you a sense of the great work that our teams are doing, namely our Canadian expansion, our…

Thanks, Niraj. On previous earnings calls, we've spoken about the data driven approach we take across our business and today, I wanted to tell you more about how we are constantly using data to drive our business forward. Data science is a term that is often overused in e-commerce. At Wayfair, we believe we are at the forefront of using data to improve the decision making of our employees and ultimately to enhance the experience of our customers and our suppliers. Our investments in this area have been a core driver of our success to date. Often, we talk about the overall investment we have made in building our team of almost 1600 engineers and data scientists. And today, I wanted to give more color on our data science work specifically. Over the last four years, we have built a sizable team of data scientists, hiring highly quantitative individuals from top academic research programs as well as experienced industry practitioners of machine learning and data science. We believe we offer driven people the chance to work on complex and rewarding problems in an environment where they develop quickly and drive impact across our business. We place great importance on our ability to develop algorithmic technology in-house at a fast pace and we see this as a competitive advantage of our business. There are several aspects of our business that have enabled us to do this. First, we have an integrated data infrastructure. Our long term investment in business intelligence, technology infrastructure and custom software equips our data scientists to -- with ready access to data across our business, enabling them to act on real time marketing, customer product and logistics data. We have been able to build multiple platforms in-house at a strong ROI as a result. Second is the…

Thanks, Steve and good morning, everyone. I will 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, which as we mentioned several quarters ago, we have refreshed this quarter with a new format and content. In Q1, our direct retail business increased 48% year-over-year to $1.389 billion, representing year-over-year dollar growth of approximately 450 million. Our total net revenue increased 46% year-over-year to $1.404 billion. Our KPIs, which we report on a consolidated global basis, continued at healthy levels in Q1, many reaching all-time highs. LTM active customers increased to 11.8 million customers, up 33% year-over-year. Purchase frequency, as measured by LTM orders per active customer continued the growth we saw in each quarter of last year to reach a new high of 1.79 and orders from repeat customers continues to grow more quickly than orders from new customers. In the US, our direct retail business increased to $1.186 billion in Q1, up 42% year-over-year. This represents year-over-year dollar growth in the quarter of approximately $350 million in US direct retail revenue. As Niraj highlighted earlier, internationally, direct retail revenue from our Canadian, UK and German businesses collectively reached 203 million, up $100 million versus Q1 last year. We're delighted with the response we're seeing from our international customers and the strategic progress we're making in building our business outside the US. I’ll share the remaining financials on a non-GAAP basis, excluding the impact of equity based compensation and related taxes, which totaled $27 million in Q1 2018. For a reconciliation of GAAP to non-GAAP reporting, please refer to our earnings release on our IR site. Our gross profit for the quarter, which is net of all product cost, delivery and fulfilment expenses was…

Thanks, Michael. Steve and I are very excited about the momentum in our business and our ability to capture the opportunity we see ahead of us, both in the US and internationally. We're extremely proud of the progress our company of over 8000 people is making in transforming the experience of shopping for the home, from the home. Customers are rewarding us with their dollars, as they increasingly benefit from the investments we've been making in our logistics and infrastructure and deepening the products and services we offer them and in strengthening our proposition and brand awareness internationally. All of our efforts are focused on continuing to improve what we can offer shoppers, so that we can capitalize on the secular tailwind from offline to online in our category and grow substantially in excess of the online market growth rate for the home category. And with that, I’ll now ask the operator to open up the lines so we can answer a few of your questions.

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

Congratulations on continued strong revenue growth. In looking at the quarter, certainly, the metrics were strong. It doesn't show much sign of the competitive impact at this point, although, the gross margins coming in at the lower end of your range. So I guess a kind of a two part question around gross margin. When you're in line now with Q4, which is seasonally low, why wouldn’t the gross margin start to be drifting up sequentially, particularly as you're getting some of the logistics benefits that should be helping that line? And as the second part of the question, would gross margin see any negative impact in Q2 as a result of Way Day? Thank you.

Thanks, Peter. Yeah. We're definitely excited with how the business is performing and you can see that in the metrics, right, you see advertising going down, while you have very strong revenue growth. And so to your point, despite a lot of noise about competitors, the reality is we're not seeing in actuality, we're seeing customers actually coming back with a significant increased momentum. So we're very excited with how things are going. On gross margin, let me just try to explain a couple of different factors that drive that number, because the mix of them is what's really the outcome here. And so the range is basically a range we consistently, we think we're in great shape to deliver. You heard Michael address that. And so yes, we were in the lower end of that this last quarter. Part of that is, there's a couple of dynamics there, where you have mix shift in international for example runs at a lower gross margin. So if that takes share, that's a little bit of downward pressure and we talk a lot about these emerging categories and we talk a lot about the OpEx hiring, a lot of that drives the emerging categories. And so when you take a look at our investor presentation, you'll see we were fresh this quarter, because it had been three, three and a half years. And on page 26, we talk a lot about some of the categories, some of the things we're doing to drive an increased customer experience and fully penetrate the TAM. When we really ramp a new category, it's effectively almost always at a significantly lower gross margin than our average. And as it scales up, it gets much higher. So that's one set of factors that this makeshift in international categories. The second is that and you'll see this in our Q, on the transportation logistics, there's definitely been some cost pressure there, however, we don't expect that to persist. In fact, we expect that to revert because of the logistics network we've built. So we believe in the industry side is going to continue upward pressure and we’ve certainly seen a little bit of that, a lot of what we've been rolling out actually basically counters that, but with the gains, we've gotten only a piece of the gain so far. So, there's a lot more gain to come. So the combination of these things has gross margin a little lower, but we don't foresee it staying there and that’s why kind of we gave you the range, we say it will stay there. In terms of Way Day, I’ll let Michael address it, because that’s the fact we're playing at guidance, but again you heard guidance, but Michael?

Yeah. Look, Way Day was a very strong day. You heard the details of sort of our perspectives on it in terms of the guide. From a gross margin perspective, nothing in Way Day’s performance would change our 23% to 24% guide for gross margin for Q2. And remember whenever we're doing promotional events, whether that be a Way Day, or Cyber Monday, Black Friday or any of the other seasonal promotional events, we work very closely well in advance with our supplier partners to make sure that we're getting the best deals from them and can pass the best deals on to our customers. And so there's always a mix in that, but generally, promotions, though they run at lower margin, they're not markedly lower margin when you think about the concessions we're getting from our suppliers in order to have their products move at those kinds of volumes.

Our next question comes from the line of John Blackledge from Cowen.

Two questions. So the advertising costs were a bit lower than expected. I think it was about 11.5% of total revenue and the guide for 2Q has been also a bit lower. Just wondering if you're seeing leverage from the rising repeat rate, which was much better than we thought. And then the second question would be the top line guide also a lot better than we expected against more difficult compare is from Q2 17. So any further color on the top line strength would be helpful. Thank you.

Thanks, John. So couple of things. So first on the ad spend, yeah, I mean I think that should hopefully help put some of the noise out there about this worry about ad spend, because you see the 80 basis points of year over year ad spend leverage that is going down 11.5%, despite the international mix shift. And what that is a function of is basically, you can see we're still getting a lot of new customers, 2.1 million new orders in the quarter, right. But the way it works is, as the experience gets stronger and the brand gets stronger, what happens is that as customers get exposed to Wayfair, the odds that over time they'll buy increase and then the whole separate factor is that the odds that want to come back increase, right. So you see repeat is the primary driver of our growth, because repeat grows faster than new, but what happens, the same thing that’s driving repeat, which is the experience drives effectively the sub function of the advertising turning into a new customer. So the reality is, we have international and other things that put pressure on that number, but we have things that help us on that number. And you're seeing that that's playing out. In terms of the top line guide, the tricky thing about percentages, right, is when we're growing at this rate and your percentage, it matters what happened last year in the same quarter and so we believe that that's not sort of the best number to focus on. Obviously, the percentage is really strong and that's great, but we believe that the dollars growth is actually a really interesting number and so when you see the year-over-year dollar growth in direct retail this quarter be $450 million,…

Our next question comes from the line of Oliver Wintermantel from MoffettNathanson.

I had a question regarding the top line growth and I want to focus on the US. So if you look back a few quarters and think about what is driving it, is it more the new -- driving new customers to your website or is it a better conversion rate, because you’re exceeding your guidance range. So I just want to see what is driving? Is it more traffic or more of a conversion?

Yes. So, first just to throw it out there, we've always exceeded our guidance range, but anyway, that's an aside. But what I would tell you, so if you look at the US, the year over year dollar growth is at $350 million. Right? And if you look back, sort of, that's a nice kind of growth climb and there's that period in ’16, in the beginning of ’16, where we had said, we had hired a lot of people at the end of ’15, beginning of ’16 and onboarding them was a challenge. So we've actually changed our rate of onboarding to basically, both on one hand ramp people, but digest them well, but frankly, what you actually see happening right now is it's dollar growth is actually kind of growing because of what I just said a minute ago in terms the experience basically being rewarded with the repeat business and that's really the flywheel is to repeat. So traffic certainly grows, but conversion is increasing. So that gets leverage on the traffic. If you’re thinking about new traffic and the conversion increasing, that gives you the leverage of getting new customers, you’re thinking about the experience getting better and the conversation on repeat, but also the propensity of someone to come back, that gets you leverage on repeat. And so repeat still grows faster than new and it's sustainable because of the cycle of continual improvement, which is basically creating a larger moat. They're getting about conversion on differential basis, relevant to our competitors getting stronger. That basically makes your advertising dollars go further, because Google doesn't say it's $3 for this click. It says, I want an affective CPM of Y dollars, staying with how you bid for display, like what is it worth to me, is it worth four cents or three cents. Well, if you're a stronger kind of converter because of the value of the experience and the value of the left hand value or the one year payback of a customer, well, you can pay four cents instead of three cents and two cents and you can actually get a higher return on that from the guidance of two cents. And so these different things fundamentally kind of makes the whole math come out. So it's not – it’s one thing, but it’s kind of these things multiply against each other I guess is basically the answer.

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

My question is around ad spend. In your presentation, you talked about 7% of direct retail ad spend on repeat revenue. Can you comment as to whether or not that was specific to Q1 2017 and what the trend has been over the last three years?

Yeah. Sure. Thanks, Seth. So, one of the things we found that's been confusing for folks is just that when you talk about ad spend as a total percentage, it sort of doesn't help you understand repeat versus new and we've always said that the reason the number came down from Q1 of ’14 of being like 16% down to where it is today is because the repeat runs so efficiently and we talk about the long term model being at 6% to 8%, what that has in that is we already see how repeat runs at low rates and to be a little bit technical for a minute, your second order versus your third order versus your fourth order, the percentage cost keeps decreasing over time. So as customers become increasingly loyal, their actual ad spend keeps dropping. So we use 7% because it’s the midpoint of 6 to 8. So for -- it was really just a simplification for the purpose of modeling to give a way to break out repeat versus new, because the old model where we said repeat is free and you carry everything, well, we sort of explain that that's false, but that's super conservative. So why don’t you think about it that way, but it created some confusion. So we created a model that still somewhat simplified, but it gives you a way to break apart repeat versus new. And what you find in actuality on repeat is in fact your second order is a certain percentage or third order is at a lower percentage or fourth order is at a lower percentage and so the repeat in total averages down over time, as people continue to climb up that ladder, but -- and so I guess for the purposes of modeling right now, we’d encourage you to use something like a 7% number because that gets you to an outcome that sort of explains to you how we look at it, but that number actually decreases over time.

And Seth, just to be clear, the $46 number that you quote in the presentation is for all of 2017. It happens to be the same number if you read the calculation for the first quarter of 2018. It’s also $46. And I think what you'll find is if you run that quarterly going back in time using the 7% pass for repeat, that -- the cost -- the ad cost sort of remained in a very consistent band plus or minus $45 going back the last three years.

Just to be clear so that 7% number is the appropriate number to use going back to 2016, 15 and 14?

Yeah. I don't think the – I think the cost to add a repeat customer and the cost to add a new customer remain extremely consistent over the last few years. That's what we're saying.

Our next question comes from the line of Michael Graham from Canaccord.

Can you just give us a reminder, Niraj, on the competitive front? In the presentation, you basically say that you're getting sort of 25% of the market growth and can you just give us your thoughts on where you think the other 75% of that market growth in the US is going and what's the opportunity against that competitive set? And then just a real quick one, Michael, can you just remind us on the factors that drive the margin seasonality like Q2 last year was up a lot in the US and you just guided for a good margin in Q2 in the US this quarter. So just a quick thought on what drives that seasonality?

Thanks, Mike. Let me answer the competitive piece and then Michael can answer the second piece, but so what we did there as we showed in 2017, well, how many dollars we grew in the US and what the total online market growth was at that 15% number, right, and, we just showed what portion of it we would have. If you look at where we are now, we're actually at a dollar growth rate higher than that, right, so the percentage share if you take would be increasing. But what that is that sets all the dollar growth online. So in other words, if Walmart.com grows their online business and sells some in the category or in Amazon or, if they don't decline, if they grow 5%, even though the 5% for whoever or the 10% might be below the 15%, that's still part of the growth. And you have some folks who might be growing 15%, 20%, 25%, that's some of the growth and obviously you see us whatever we’re growing, whatever it was in the 40s, in low-40s in the US this quarter. So what happens is it's not that we're taking all the growth and others are shrinking. It’s that we're taking a disproportionate, an increasing portion of the pie as it's moving online, but others have different businesses where they have pieces, but it’s really at the opening price when commodity goods. So you add up all the folks, Home Depot and all of that growth is making up that other piece and we don't believe that other piece is really dominated in any particular place and we believe we also have it more concentrated and the more commoditized products as well.

Mike, on the question on gross margin and seasonality, there's obviously some Q4 seasonality, but beyond that, I would say the real drivers for gross margin are what Niraj covered earlier, right, today, it’s really impact of the international business weighing as it sort of continues to grow and gain scale and we've been very clear to run at the lower gross margin as we get that business going, as we continue to sort of do these categories where we're working hard to penetrate the TAM for those start out at lower gross margins. So those are the weights and then as we've always talked about, as we roll out CastleGate and WDN, those operations don't operate day one at full peak efficiency. We'll work our way into the efficiency of those over the course of the next 12 to 18 months and we'll start to see the gains from that, but we've always said on the logistics side that as we roll that out, the costs are actually going to rise a little before they fall back to their original level and then down to lower levels and we're starting to see that in the operations that have been running for the longest now. We're well into that and we feel extremely good about the trajectory of our delivery cost and the logistics networks we've invested in.

Our final question today will come from the line of Brian Nagel from Oppenheimer.

Mike, I have a couple of questions. I’ll confine into one. First off, just on Way Day. Recognizing it's still early, but as you look at the sale spike you saw that day, which you called out, was that – do you think that's more a function of people shopping that day or specific, I guess what I’m saying is, is it incremental sales where people just move shopping around to focus on that one day? And then what was the makeup, as you look at who was shopping, was it more skewed to new customers, existing customers or consistent with the business? And then I have a follow-up.

This is Niraj. Let me make a couple of comments and Michael can chime in. So, we saw a great mix of new and repeat that day. So, you see in the business the majority is repeat, but we have a nice base of new customers. We were encouraged that day with seeing both types of customers turn out in significant proportion. I think, it will take a little more time to definitively say whether it cannibalizes any other parts of the quarter, but we believe we did pick up significant incremental volume because of it and so we're very excited about that and time will prove that out definitively, but everything we've seen so far implies that actually the power of the wafer brand that we’ve built up, marketing the event and the quality of the event and the enjoyment associated with it actually let us take significant share through having it. So we believe it was very incremental. Michael, do you have anything you want to add?

Thank you. And then my follow-up and again we talk a lot here about gross margins and you guys have given a lot of color too about just the trajectory there and how it’s within your stated range. So the question I have, I guess more to Michael. You mentioned that one of the factors weighing upon that gross margin rate is the outsized sales growth. Have you considered or could you give us some color on how that gross margin would look, if you excluded the impact of international.

Yeah. I think at this point, we're not going to break out further KPIs or financial metrics between the international and the US business. I think we've put some color against it over time by noting that the gross margin in the international business runs substantially less than the US business and that's not surprising if you think about the early days we are there and the supplier network that we need to build. And when you're building a new supplier network, you're at a lower volume with those suppliers versus the US suppliers where we've been working with them for a long time and have massive volume at this point, but we've also pointed out that as the international business has grown, so it’s gaining share and creating a weight on gross margin because it runs at a lower gross margin, its gross margins have been getting better. And so I think the trajectory of the international business is showing exactly what we want to be showing for the investments we're making there, but obviously it's still running at a lower level and as it gains share of the total mix, it waits on the total gross margin to some extent.

This is Niraj. Maybe just to add a thought, just as we're wrapping up the call here, but so one of the things that encourage you to think about, I think there ends up being a lot of confusion about Wayfair partially because we're very growth oriented and we're investing into basically what will basically create huge long term return. What I want to make sure, there is kind of a good understanding of though is we're very, very quantitative in how we do that and we're very focused on protecting the unit economics. And so I think if you start thinking about what we're doing, the unit economics -- there's different types of unit economics. There's unit economics of revenue in terms of orders and so we don't want to buy revenues. So when you think about gross margin, one way to grow is to basically invest in pricing and we try to be very diligent and deliberate about how we’d price items, so that it's not that we're selling at a price that one day we need to raise. We’re actually selling at prices that we can sustain forever. Now when we enter a new category, gross margin is lower than we want, we have a trajectory in how we’ll get it where we want. In a new geography, we have it lower than what -- we have a trajectory and how we’ll get it where we want and a lot of that comes from scale and transportation and things that you just can't do without scale. So we -- but we know how we’ll get there. So, the unit economics around pricing, we keep intact. Another place that the unit economics around getting customers and so it’s advertising and that we've always kept these really right payback…

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