Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wayfair Q3 Earnings Call. [Operator Instructions] I would now like to turn the call over to Mr. Joe Wilson. Please go ahead.

Good morning and thank you for joining us. Today, we will review our third 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 fourth 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 contain 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 Q3, Direct Retail net revenue grew by $511 million or 43% year-over-year, and total net revenue grew by 42% year-over-year. U.S. Direct Retail net revenue was up $426 million or 41% versus Q3 last year and international Direct Retail net revenue up $85 million or 58% versus Q3 last year. These strong results in Q3 followed the $538 million of Direct Retail net revenue we added year-over-year in Q2, which included our first way day, representing over $1 billion of Direct Retail net revenue growth year-over-year in the last two quarters alone. We're delighted to see our offering engage more and more people with 13.9 million shoppers buying from us over the last year and LTM net revenue per active customer continuing to grow, reaching an all-time high this quarter, up $443. We've built a customer proposition that is demonstrating increasing resonance with shoppers, as you can see in our KPIs. And we feel incredibly bullish about future growth, as a result. In Q3, when we saw attractive opportunities leaning on ad spend, while staying within our 12 month contribution margin payback threshold, we did that as we believe it will augment our long-term growth. We also continue to benefit from the growing strength of our employer brand, which we highlighted last quarter, and we capitalized on that by adding more great people across our business than we expected. By taking a long-term view in building our business, we're able to make near-term tactical and strategic decisions that will put us in the best possible position to keep winning with customers as dollars in our categories shipped online. From time to time, those steps may result in reduced EBITDA flow through in a given quarter or by putting…

Thanks, Niraj. This morning, I would like to talk about one of the innovative technologies we've been working on that we believe will bring exciting benefits to our customers over the long-term. Technology is a core part of our DNA, and has been central to our success in capturing an outsized share of consumer spending in our category as it shifts from brick-and-mortar channels to online. The decades long view we take to building our business, has served us incredibly well today and that is particularly true in technology. On prior calls, I've talked about the early investments we have made in our three and augmented reality capabilities, and the impact we expect this technology will have over time on how customers shop in Wayfair. Visualization technology continues to evolve and partnering deeply with leading companies in the space is a core element of our strategy. We were early investors in augmented reality, partnering closely with Google and Verizon in releasing Wayfair view on the Asus ZenFone AR in August 2017. The first smartphone with virtual-reality and augmented reality capabilities. Leveraging the same investment and technology, we were able to reach the mass-market when Apple made AR widely available by launching AR support on their phones and tablets in September of 2017. The partnership I want to highlight today is in the field of mixed reality and spatial computing. Mixed reality couples real and virtual worlds, enabling customers to interact with both physical and digital objects in their environment in real time. Spatial computing platforms utilize user space to show them information inside of the TV screen such as an iPhone or a computer screen. We believe this could have a huge impact on how people shop for the home online. And last year, we became the first e-commerce business…

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 the IR site. In Q3, our Direct Retail business increased 43% year-over-year to $1,692,000,000, representing year-over-year dollar growth of approximately $510 million. Our total net revenue increased 42% year-over-year to $1,706,000,000. Our KPIs, which we report on a consolidated global basis, continued at healthy levels in Q3, with many achieving all-time highs. In addition to the growth in the size of our active customer base in Q3, we're also seeing purchase frequency as measured by LTM orders per active customer continue to increase reaching 1.84 in the quarter. Additionally, orders from repeat customers continued to grow more quickly than orders from new customers, and accounted for approximately two thirds of orders placed in the quarter. Turning now to our U.S. business, Direct Retail net revenue increased to $1,450,000,000 in Q3, up 41% year-over-year, representing year-over-year dollar growth in the quarter of approximately $430 million. Direct Retail net revenue from our international businesses in Canada, the UK, and Germany collectively increased to $232 million, up 58% year-over-year. As Niraj highlighted earlier, we are thrilled to see customers increasingly shopping with us, as we invest to bring them the best possible experience in shopping the home category online both in the U.S. and internationally. I'll share the remaining financials on a non-GAAP basis, excluding the impact of equity-based compensation and related taxes, which totaled $36 million in Q3 2018. For reconciliation of GAAP to non-GAAP reporting, please refer to our earnings release on the IR site. Our gross profit for the quarter which is net of all product costs, delivery and fulfillment expenses was $393 million, or…

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 U.S. and internationally. We're delighted with the progress our company of almost 11,000 people is making in bringing customers the best possible experience in shopping the home category online. Customers are rewarding us with their dollars as they increasingly benefit from the investments we've been making in our logistics infrastructure and deepening the products and services we offer them and then strengthening our proposition and brand awareness internationally. All of our efforts are focused on continuing to improve what we can offer shoppers over the long-term, 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 line, so we can answer a few of your questions. Thank you.

[Operator Instructions] Your first question comes from Peter Keith from Piper Jaffray. Your line is open.

Congrats on the continued strong revenue growth and improving KPIs. I did want to dig into the EBITDA for the quarter, however. It did -- your total EBITDA margin came in below your guidance range despite the sales be. Michael, I know, you mentioned headcount maybe little bit above. But could you dig into that a little bit for us and help us understand where some of the profitability measures missed a bit?

Hi, Peter, it's Niraj. Thanks for your question. I guess on this one we want to start with Michael to answer your question.

Yes, hey, Peter. I think two key areas to look at in terms of EBITDA both of which I mentioned in the top tracked as well. One is ad spend. As we talked about, at the beginning or at last quarter's call, we did expect to show some ad spend leverage, but as we went through the quarter, we continue to see great opportunities within our payback, as everyone, I think, is aware we look for one year -- on average a one year payback on new customer acquisitions on ad spend. And we've said time and time again, it’s in the middle of the quarter. We see those opportunities and the team is finding that we're going to go lean and take advantage of it. And we're always going to do it from the perspective of what's in the right long-term returns of the business as opposed to sort of trying to make a particular number even if it's something that we guided. So I think you had ad spend basically flat year-over-year as oppose to showing 30 or 40 basis points leverage. And then on the other side is the OpEx headcount hiring. It came in stronger than we expected. We feel extremely good about the people we've added to the team and how we are growing the folks who are faced off against dozens and dozens of initiatives that are all about our future growth. And as we've talked about, I think, extensively on the last call, we were excited about that team of people we're adding, we're going to add them as we can. That employer brand has been very strong. But at the same time, we are going to step down the rate of net new ads in OpEx, in Q4. And we plan that starting at quarter ago, and we're sort of in the middle of that process right now in the fourth quarter. And I think, those two key factors were really the drivers of incremental expense versus even the sort of good revenue performance that we've led to the higher EBITDA loss.

I did have a question specifically for you on the -- so getting a lot of investor questions around tariffs. I'm curious on what your initial supplier discussions are like if with the 10% tariffs if you're starting to see any price increases on your website? Understand you guys aren’t directly impacted, but could you help us understand if there's any concern of demand destruction if there is some general price inflation across the marketplace?

Yes. So obviously, the 10%, we assume is basically by three waves, right. The first wave that went into effect earlier this summer was on raw materials that the raw materials has some trickle through effect on steel and some other materials. Then we have a 10% go into effect in September, and then there is the 20 -- that 10 goes up to 25 at the turn of the year. And so what we have been hearing from suppliers is that it does create a period of discontinuity, where they're all going back into their supply chains, seeing what costs they can take out because, obviously, they would love to not raise prices. And the dynamic we have, which is really advantages one for us is that as a platform these suppliers are effectively competing with each other to take care of the customer. And so they know that on a relative basis, even though something has happened, what you don't want to do is put yourself in a disadvantage position relative to the other suppliers. We are all trying to figure out how to contain our costs. So that gives us, obviously, a benefit versus if we were effectively a middleman, in which case, if things go against this, we obviously hurt. In terms of price increases, I think, the reality is that the amount of inflation raw materials coupled with the tariffs, it is driving price increases. And I think what we're seeing is that suppliers are all trying to feel their way through what exactly is going to happen when, how much can they take out in cost and what is going to be, then the net price increase they need to pass through to kind of keep things working as well as possible. So we are definitely hearing a lot of these conversations. And I think, I have kind of liking it a little bit to what happened with Brexit, where you had -- in that case, there was no notice period, whereas here, the tariffs have a notice period, but there you have the pound -- the FX on the currency change dramatically and the suppliers are generally buying products denominated in dollars or the material denominated in dollars. And there you had a fairly kind of abrupt period of mayhem where suppliers are trying to figure out what to do. And then coming out of that, we are significantly advantage then the mayhem period you found some suppliers sort of lose to other suppliers, and some suppliers be more aggressive on price increases quicker than others, and then it absolutely hurts from because the retails go up. So that’s kind of what we are seeing now.

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

Couple of questions. Niraj mentioned that sponsored products became -- I think they became widely available in September. Maybe could you provide some color on the ROI for beta customers experiences what sponsored products? And then, any color on the ramp of sponsored products, how it might impact 4Q '18 and longer-term? And then separately on EBITDA, so the U.S. biz, based on your guide, will run about minus 1% or so for full-year EBITDA margin in 2018. Could you kind of frame this number versus 8% to 10% long-term EBITDA margin? Like any color on how you get from minus 1% at $5.5 billion or so of annual U.S. revenue to that kind of long-term bogie? Thank you.

This is Niraj. Let me try to answer, and then Michael can -- maybe chime in if he has some other thoughts to add. First on sponsored products, so ROAS, the return on ad spend for the suppliers in the kind of beta we did and in the initial launch period since we made it generally available, it's been pretty much off the charts, a lot higher than what they're accustomed to elsewhere, which frankly to us means that as more participants enter, the economics for everyone can get better because the ROAS probably doesn't even need to be that high for folks who want to compete because it's -- but we're hearing, it's much higher than when you place it elsewhere. So that's one of thing that makes us feel good about the product. It's the combination of the suppliers who're seeing great economic return, if I need easy to use and they like the reporting, and we're into a lot more on that side. And the customer experience has been protected and customers are basically reacting very positively, and lot of the things that we can do around understanding customers and personalization or the things can help make sure the customer experience is a positive one versus, sometimes, you can have highly lucrative advertising that conclude a negative customer experience that you need to be very careful about for long-term effects. So that one we're -- it's in a great spot. In terms of your timing question, the benefits in this quarter and long-term, the reality, as we think, it'll take a little while to ramp up. So we obviously -- those volume there and it grows, but the volumes starts relatively small. And I think it's the real economics for everyone involved get good as it ramps.…

No, you have covered that.

Your next question comes from Maria Ripps from Canaccord. Your line is open.

Can you refresh us on your house brands strategy. Things like house brands increased substantially in the mix, just in a couple of years. Could you talk about some of the advantages of this program, both to you, consumers and suppliers. And to what extent does it help margins and where do you see house brands revenue contribution shifting over time?

So just to recap what house brands are for everyone and then I'll kind of give you some specific color on your question. So what we do, so we have certain categories where consumers do know the brands and so something like small electrics where they know brands of coffee makers are in plumbing word Kohler, Moen, Delta, probably these are brands they know. Well, obviously in those cases, large appliances with GE, we work with the supplier, we're promoting their brand. The reality is those categories are very small portion of our total business. So in the vast, vast, vast majority of our business, think about the bunk bed, or lighting or pillows or decorative accents or the fact we subcategories furniture, bathroom amenities, the consumer does not know any brand names and what they really want to do is they want to navigate the selection to find some that has the right styles for them, that is good quality based on the price point that they want to be in, that the esthetic really speak to them and is the look there, they want to have in the room or in their finished space. And so there, what we found is that, what we can do is, we can create a whole ontology of brand. So we have seven -- over 75 of these brands. And each brand can speak to a specific quality, style, price point, spot in the market, the way a good home brand would do. And what we can then do is, we can create items from our suppliers into the appropriate brand where they fit. And we can then do environmental imagery of rooms and spaces, which allow that item to come to life a lot more than a product silhouette priority item…

Your next question comes from Brian Nagel from Oppenheimer. Your line is open.

So two questions. First off, so I guess, first for Michael. In your prepared comments you discussed the overall macro environment, it sounds like you were indicating some concerns out there. So the question I have there is, are you seeing something now in the macro environment that is weighing upon your business or you just more or less the same simply given all that's going on in the world, there could be worries in that, you're having -- for that reason you're mentioned this we have for the holiday season. And then my second question for Niraj, just on the MyWay subscription plan, maybe little more color on that, the program and how we should over time expect that to enhance the key metrics we watch for your business? Thank you.

Look on the macro environment, and I think, part of it is that, it's just, there is so much volatility and noise right now, right. It's just an extremely uncertain period. And so when I sit down -- sit with the team, we try and figure out what guidance is and you're trying to look out a few months, particularly, a few months there is the holiday period and you had a lot of noise, leading up to elections all that other stuff. It just makes it harder. And so it's not a specific thing that I'm pointing to where that there's some sort of softness in our business that we've seen that we would point to. And remember, one of the challenges or I guess, the opportunities is, that the big driver in our business is the shift online. And so I think, if you're in a business that's a 3% grower, you're more likely to sort of instantly feel and understand and perceive macro environment changes, if you're in a business that's a 40% grower. And you're not -- and a big part of that growth is driven by this sort of massive shift, right this systemic movement of people from one shopping methodology to a whole another one. You're less -- you're going to feel that less and so, part of my job is a little bit of reading the TV's of what the macro environment as a whole and trying to understand how that may impact our business. But it's not type of some specific thing that I would comment for on.

And then, on the second -- Brian, on the second question, about MyWay, so -- so here's what we think about. So our whole focus on our business is to have the best customer experience, so that we basically earn loyalty from our customers and so all these different initiatives we have are basically meant to ease our customers' life and add value to their experience and make it more engaging, so that they frankly come back to us more and more, and that's what we've been seeing happen. So then, if you think about our loyalty program. Our loyalty program is effectively a vehicle to help further that, by effectively rewarding a customer with a bunch of benefits that make it advantageous for them to want to spend more time shopping with us and buying more from us relative to fragmenting that spend elsewhere. And so, there's a couple different kinds of membership programs out there. And the most common kind out there, it's effectively one that provides customers' discounts in exchange for some sort of membership kind of either earned or paid for it. And we're not a fan of those programs because effectively any time you discount, you, of course can get a little pop in revenue, it's very hard in the long run to have that be the basis for loyalty, because as the same thing, we are trying to be a price leader, you don't really earn long term loyalty by being a price leader, unless you believe they structurally you can always be the lowest cost player. And so what you're seeing and you're seeing this in the current environment, most of the folks who are offering discount led membership programs are challenged, because the truth is that lifted their everyday price in order…

This will conclude our Q&A question session at this time. I turn the call back over to the presenters for closing remarks.

Well, everyone, thank you for joining this morning, we're definitely very excited about the business and our future prospects and we talked a lot about the things we have under way. So anyways, have a great rest of the year and then thank you again.

Thank you, everyone. This will conclude today's conference call. You may now disconnect.