Good morning ladies and gentlemen. My name is Suzanne, and I will be your host operator for this call. At this time, I would like to welcome everyone to the Wayfair Q1 2019 Earnings Release and Conference Call. [Operator Instructions] Thank you. At this time I would like introduce Julia Donnelly, Head of Corporate Finance at Wayfair. Please begin.

Good morning and thank you for joining us. Today, we will review our first quarter 2019 results. With me are Niraj Shah, Cofounder, Chief Executive Officer and Co-Chairman; Steve Conine, Cofounder 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 second quarter of 2019. 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 2018 and our subsequent SEC filings, identify certain factors that could cause the Company's actual results to differ materially from those projected in any forward-looking statements made today. Except as required by law, we undertake no obligation to publicly update or revise these statements, whether as a result of any new information, future events or otherwise. Also, please note that during this call, we will discuss certain non-GAAP financial measures as we review the company's performance. These non-GAAP financial measures should not be considered replacements for and should be read together with GAAP results. Please refer to the Investor Relations section of our website to obtain a copy of our earnings release, which contains descriptions of our non-GAAP financial measures and reconciliations of non-GAAP measures to the nearest comparable GAAP measures. This call is being recorded, and a webcast will be available for replay on our IR website. Now I would like to turn the call over to Niraj.

Thanks Julia. And thank you all for joining us this morning. Today I would like to provide a few updates on some of the exciting areas we are investing in and the progress we are seeing across the business. In Q1 direct retail net revenue grew by $542 million or 39% year-over-year and total net revenue grew by 38% year-over-year. We're thrilled to continue our strong record of year-over-year dollar growth as the market for home continues to move online and customers increasingly reward us with their dollars. Clearly our offering of broad selection, inspiring visual merchandising and superior customer service and delivery are resonating with customers, particularly as we see ongoing improvements to the customer experience as a result of the investments we have been making. Even I touched on Canada and Europe at length during our last earnings call. So today I will focus primarily on our two other large investment areas, our logistics network and the hiring we've done to deepen our offering in the categories within our addressable market where we have historically under indexed. I also will briefly touch upon the success of our second Way Day event last month and address some of the questions about our new retail store that is opening later this year. Again, our international business continues to perform and we continue to believe in the long-term market opportunity and our ability to succeed in these geographies, leveraging our playbook developed in the U.S. over many years and building the best possible experience in the home category online. Michael, will also touch on the performance of our international business later on this call. First, let me start with our logistics network. As I described on our last earnings call, we finished 2018 with approximately 12 million square feet of space…

Thanks, Niraj. It's been more than a year since we've updated you on a mobile app. So I'd like to briefly give you an update on the app before turning the call over to Michael. Designing an amazing shopping experience is at the core of everything we do and creating an effortless offering across multiple interfaces is an integral part of our overall value proposition. We know that we need to routinely inspire customers by giving them the ability to visualize our products in their homes, which ultimately leads to the confidence they need to buy for the home online. We believe our app is an important aspect of our offering and provides an efficient channel to market to customers, which is why we are dedicating substantial engineering, product management and data science resources to enhance this capability. When we last updated you in September of 2017, the Wayfair app had been downloaded over 11 billion times globally. In 2018 alone customers downloaded the app nearly 13 million times, bringing our cumulative Wayfair app downloads as of Q1 to over 31 million. The app continues to grow as a substantial part of our business with roughly 20% of gross revenue for Wayfair.com now coming from the app. Each year, we continue to reach new milestones of success as our app win the People's Voice vote for the Webbys best shopping app, for the second year in a row in 2019. While we are thrilled with the quantity of downloads, we are also excited by the growth in our monthly active user base, which increased by over 80% year-over-year in March 2019. Another reason that we are so excited about the growth of our app customer base is the favorable economics that we see for customers using the app. We find…

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 Q1, our direct retail business increased 39% year-over-year to $1,931 million, representing year-over-year dollar growth of approximately $540 million. Our total net revenue increased 38% year-over-year to $1,945 million. In the U.S. direct retail net revenue increased to $1,644 million in Q1, up 39% year-over-year, representing year-over-year dollar growth in the quarter of approximately $460 million. Direct retail net revenue from our international segment in Canada, the UK and Germany increased to $287 million, up 42% year-over-year and up approximately 51% year-over-year on a constant currency basis. As we described on past earnings calls, our revenue from Canada is significantly larger than our revenue coming from either the UK or Germany today. After launching in early 2016, the Canadian business surpassed our internal aggressive growth expectations, reaching brand awareness and market penetration comparable to our US business in just over two years. As it leveraged the supplier relationships and logistics infrastructure we had built in the U.S. Recently our Canadian business has been facing growth headwinds with revenue growth falling below the growth rate of our U.S. business. As we talk through last quarter, while we believe there have been some external macro headwinds over the last few quarters in Canada, such as exchange rate and weaker consumer spending, we believe we can reaccelerate our growth there, as we roll out our logistics operation, that will allow us to reduce our cost structure and lower our pricing to Canadian customers over time. So Canada is weighing on our international growth and we expect that to continue in near-term. Our UK and…

Thanks Michael. Steve and I are incredibly excited about the businesses start to 2019 and we're looking forward to building on the momentum we've gained early this year. Our ongoing investments in building our logistics infrastructure, deepening our product offering and finding new ways of engaging with our customer are the keys to building the momentum we're seeing today. We are continuing to remain very well positioned to take a significant share of the dollars that are coming online in the home category, as our team of over 13,000 people continue to make a meaningful impact in transforming the experience of shopping for the home online. With that, I will now ask the operator to open up the line, so we can answer a few of your questions.

Hi, thanks. Good morning everyone. Congrats on the nice start to the year. I did want to ask a two part question around gross margin, now that you guys have seen a presale of expansion two quarters in a row. So obviously a lot of puts and takes around gross margin. But I wonder if you could talk about the complexion of the drivers this quarter versus last quarter. And if you're beginning to see any emerging benefits from logistics or sponsored SKUs at this point.

Sure. Thanks, Peter. On that question. So what we talked about for years in how the 200 basis points to 300 basis points spread from where we are to our long-term target was basically these we cover by three factors. One is just scale buying power, second is logistics efficiencies as we grow and with the infrastructure we're building, and the third is as we build up the house brands with a higher quality merchandising and the pricing power we get there. And we sit on the past is that each one of those could close the gap. So in aggregate, as we unearth these gains, we would keep some and we would pass some back. But closing that gap would be very easy. Since then, we've also touched on the launch of newer things like advertising and some of the other services we provide, which are high gross margin offerings. Today though what you're seeing is, gross margins continues to hover in the range we've talked about 23% to 24% which is what we've said it will be for a while. But you will see like logistics for example starting to show some signs of benefits past what we've always had the benefits from day one were some of the customer benefits around the fast delivery, driving up conversion, driving up lifetime value. But we’re starting to see some of the cost benefits come in. And when you roll this forward over the next few years, I think all three of these, the house brands, the logistics and the buying power are going to start showing real performance in the number. And so I think we're on the cusp of really some exciting trends over the next few years. And then the new bucket, the advertising, what have you, we think will also be quite exciting. Today though, what I would say that the advertising, that bucket is still very small, not really driving any of the number today. And what I would say is we're in the super early days on logistics, on house brands and on buying power. So there's no single thing that's off to the races, but everything is primed for future gains and if you got out not a quarter or two, but you go out one, two, three years, I think you're going to see a lot of that, Peter.

Okay. That’s helpful.

And Peter, just specifically on – Peter, specifically on Q1, you’ll see that if you look at the year-over-year compare you'll see it, it shows up both on the product margin side and in the [indiscernible] side.

Okay. It’s helpful. Real quick follow-up in one point of a question we're getting from investors is on that private label side as a driver, you're already at 70% of sales I believe. So could you talk about where there's opportunity within that 70% as we look forward to the next two to three years as you state?

Yes. So we – I think the last that we gave was that we’re at 74%, it's not so much that the 74% becomes 100% or anything like that. There's a an upward limited that's higher than 74%, but we're getting close to it and there are certain categories we have, where they are branded categories and what we do there is we deeply partner with the brands, these are brands and things and categories like large appliances with folks like GE or categories like grills or plumbing or small electrics. And so there's a piece of our business that is branded as well. What I will say though is the benefits – the economic benefits in pricing and gross margins from private label is not a function of just what portion of the business is that, but it's also a derivative of the quality of merchandising support we're able to put behind those brands, those collections we create. So we're not doing the traditional thing of designing products and buying inventory and trying to make sourcing more lean, instead of what we're doing is we're partnering with all our suppliers, we're curating in literally 10s and 100s and 1,000s of items into these brands. But then what we're doing is we're putting our energy not in the product design and manufacturing, but in the curation, the merchandising. So a view of the quality of visual imagery, the portion of the catalog that has 3D models, what we're able to do with full environmental imagery as we get more models, the way in which navigation on the site let's you really explore rooms and styles, that is what we have found unlocks a lot of the pricing power. And I mean just to point out, if you said well we’re 200 basis points or 300 basis points away from our targeted gross margin say we want to close that whole gap with this alone, but the average order is $250, 300 basis points is what $7 or $8. $7 or $8 if I told you an item, it's $249 I told you the item is $259, which is a $10, $20, it’s 400 basis points, 500 basis points. You don't really know if an item is $249 or $259, so when the high quality merchandising is there with the user generated content and users uploading photos and really good detailed information, the whole collections are very well merchandised and you can see how items go together and all of a sudden that gross margin becomes easy to unlock, that's where the gains will come from.

Okay. That's very helpful feedback. Thanks a lot.

Thank you.

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

Great. Thank you. Just a couple of questions on fulfillment and one on Way Day. On fulfillment, how far long is the build-out of CastleGate in the U.S.? And maybe Niraj, can you talk about the difference in the customer value problem now relative to a couple of years ago, when CastleGate wasn’t scaled? And then whether Amazon going to one day prime, just any thoughts on Wayfair essentially going to one day delivery at some point and is that needed in your category? And then just on Way Day, any color on the impact or growth relative to last year? Thank you.

Sure. Great. On the – first question on fulfillment. So this is the way I would describe it, when we first tested fulfillment just to prove that there was a customer lift on both conversion and lifetime value, we tested it with these two warehouses in Kentucky and Utah. Now it goes back four or five years ago. But the network we started building after we successfully proved that had worked was actually a network that was meant for the future. And we think the future is actually next day and same-day, it's not two day. And so the way that you have an effective same-day and next-day network is you need a couple few things. One is you need significant volume and the second is you need the finished goods to be stored very close to the population centers. And I guess the third thing is you need to control your own transportation in ways that allow you to run on cycle times you want, not just on – you can use overnight delivery networks but also for things like our WDN network, you need to be able to control your cycle time and control your schedule. So if you look at what we've done over the last four or five years, we've increasingly opened warehouses in coastal locations. So the beauty of coastal locations, if you think about a few million square feet in Cranbury in New Jersey, well, Cranbury, New Jersey is very close to a major port. 80% of the goods come in from Asian countries, right? So if you think about being close to a port, you have the lowest inbound cost that you could possibly have. And then that – Cranbury, New Jersey happens to be halfway between the number one population center in…

Great. Thank you.

And your next question comes from the line of Aaron Kessler of Raymond James. Please go ahead, your line is open.

First on retail, should we view that more for kind of branding in select cities? Or potentially if these are successful, these cities they become a long-term potentially material sales channel? And how are you going to leverage stores to maybe further improve conversion rates on things like probably some conversion opportunities like swatch samples for furniture for example? Thank you.

Yes, absolutely. So the way we think about stores, Aaron, is if you think about the evolution of our marketing, if you go back just a handful of years ago, everything we did for marketing was effectively online. Right? And so way back when, we started with key research being the key mechanism. But four, five years ago, we were really more or less expansive in every online channel with kind of a huge competency in both the ad tech on how to traffic and target it but also how to measure it in quantitative models. And that was a huge strength of ours. The limitation though is, online, there are certain types of engagement you want to have with the customer that are limited. But the one channel we were able to figure out for example was direct mail. So now when you have a catalog that sits on the coffee table for a few months or a postcard that's in the mail that – it gets right in front of that person, there are things you could do that were harder to do online. There are some advantages, some disadvantages. But it's an incremental channel that lets you do different things and again with that competency to measure it, you're able to then figure out how to use the combination of the two to get even more effective from a reach, from an economic performance standpoint and so on and so forth. Well, then the third one we added was television. A 30 second television commercial lets you tell a story in a way that neither of our other channels, none of our other channels was able to do and so we figured out what the right use was for. We figured out how to measure it as…

Great, thank you.

Thanks, Aron.

Thank you. And your next question comes from the line of Oliver Wintermantel of Evercore ISI. Your line is open.

Yes good morning guys. I understand that EBITDA was in the guided range as a percent of sales. But if I were to model revenues close to 40% and then gross margins above the range as well that you gave, I would've thought that there's more leverage on the EBITDA line. Can you maybe explain why there was not more leverage on EBITDA with such good sales growth?

Yes sure. Let me chime and then Michael can add to that. So if you think about our cost structure, right, there’s three main components. So there's the gross margin, to your point, that actually expanded, then there's advertising and OpEx. And so basically, the way to think about it is advertising, we manage that and that can deliver a sort of particular targeted EBITDA but we manage that around the concept of payback. And the payback I think is a much stronger concept because of budgeted amount can turn out to be too little or too much relative to the economic return want, whereas when you keep the payback target very tight and you measure them very precisely, you know you're going to get economic return you want. And so one of the things that we’ve had a good opportunity to do is we continue to build our own ad tech and that the brands we have get stronger and stronger, we occasionally find pockets of advertising which allow us to get more customers on an economic return faster. So we can take advantage of those. And so the route on advertising leverage over time is not linear and that's one of the factors that would hit EBITDA in the near period but be very good economically over the long term. And then on the OpEx side, we talked about how we're slowing the rate of OpEx hiring but remember, the folks we added in the fourth quarter, you add over the course of the fourth quarter. And then in January, in the first quarter, you pay them for the full first quarter, right? So the rate of hirings really slowed as we've gotten into this year but what happens is it takes a little while for your payroll to normalize. In Q1, you have a little more incentive payroll taxes and some things, then there are some things around the red line and some accounting adjustments. So I think that's driving a little bit of it, but Michael can probably clarify that.

Yes, I think the only other thing I'd add, Oli, is as you know, we are never trying to time what the quarter results are. So if the marketing team sees the opportunity to spend within our payback thresholds on added spend, we're going to spend it. And I think throughout Q1, there was sort of real good strength there and we noted that when we guided that we were sort of going to create some deleverage there and that we were going to lean in. And I think that's helped all the way through the quarter.

Alright, thanks very much. Good luck.

Thanks, Oliver.

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

Hi good morning. Thanks for taking my questions. First of all, I'd like to add my congratulations for a nice start to the year. So two questions if I could first off, with regard to international and specifically UK and Germany, and I know you discussed this a bit in your prepared remarks as well as in the past. But as we look into the results, clearly those markets, the operations markets are going to drag upon the total company operating results. But what gives you the greatest confidence or what should we watch to really understand or convince us that the performance of those markets are tracking in line with what you saw historically in the United States, which is now tracking towards adjusted profitability? And then the second question I have, I guess shorter term in nature, and a follow-up to a prior question, but with regard to the announcement from Amazon, how much of your product right now is being shipped either same day or next day? Thanks.

Great, thanks Brian. Great. Thanks, Brian. So first on Europe. So Europe is actually an incredible opportunity. It's a same-sized market as the U.S. and Canada. And as we've gotten deeper into it, I would say if anything, the opportunity there is as large, you can even argue it might be bigger because of the historical fragmented nature of Europe that made kind of more limited selection that's available to any resident in any particular country. The way we know it's working well is basically the same way we know the U.S. is working well and so on and so forth, which is really, we look at customer conversion rate, we look at customers' repeat rates, we look at effectively the loyalty measured in directional things like engagement and traffic and what have you. And what we've been able to monitor over multi-year periods, we've seen how we steadily increased experience. As those things climb, there's a threshold at which you really want to see the customer conversion rate and the repeat rate at before you're really willing to lean in on marketing. And on marketing, you're then going to do the same way with payback peers that are very tight so you know you're not over your skis. And then you're going to look to see how those cohorts of those customers act on those metrics around repeat. And what has happened with the UK starting in 2015, which is why we kicked off the brand building then, is we hit those thresholds. And what we've seen in the years since is that those metrics continued to rise and they actually mirrored the U.S. rise over a series of years, just to offset by a number of years but rising at a very similar pace. We see ourselves gaining…

Got it, very helpful. Thank you.

Great. Thanks Brian and thank you everybody for joining us today. We’re out time. So that will be the last question. Thanks so much.

Thanks everyone.

And this concludes today’s conference call. You may now disconnect.