Good morning. My name is Amy and I will be your conference operator today. At this time, I would like to welcome everyone to the Wayfair Q4 2019 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] Thank you. Jane Gelfand, Head of Investor Relations and Special Projects you may begin your conference.

Good morning and thank you for joining us. Today we will review our fourth quarter 2019 results. With me are Niraj Shah, Co-founder, 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 first quarter of 2020. 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 2019 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. I would now like to turn the call over to Niraj.

Thanks, Jane, and good morning, everyone. We're pleased to speak with you all today. This juncture in our history is particularly interesting, given we just celebrated five years as a public company and closed out an exciting decade of transformation and progress. Wayfair's journey thus far has been remarkable. But in truth, we're even more enthusiastic about the opportunity ahead. In many ways, we think what has to come will be even more exciting as we solidify our position as the leader in the home category and begin to reap the benefits of our large strategic investment. To that end, we're using the opportunity of this year-end to reach you not just through this conference call, but also through our annual shareholder letter posted on our IR website. We hope that you'll take the time to read the letter since in it, we share some longer-term reflections on our history, and we talk about our operating philosophy and priorities as we look ahead to the next 10 years. As you know, we managed the business over years, not quarters. And so I'll focus most of my remarks here on 2019 as a whole and our forward view of 2020. But first, we'll briefly go through our performance for the fiscal fourth quarter. In Q4 2019, we generated $2.5 billion in net revenue, representing 26% growth year-over-year and also year-over-year growth of $519 million. This momentum was broad-based across U.S. and international, and our operating performance in the holiday was strong. Over the key Cyber five period, we saw strong consumer engagement with Black Friday and Cyber Monday, both taking equal share of the holiday with consumers increasingly seeing online as integral to how they shop our category. We grew to 20.3 million active customers with orders from repeat customers up…

Thanks, Niraj. In fiscal 2020 we have something new in mind for the format for this section of the call. Over the past few years, we have typically used this time to highlight some of our investment categories and in-house technologies. For the next few quarters we'll invite some of our senior leaders to talk to you firsthand about their part of the business. This will afford you a deeper dive into pivotal parts of Wayfair such as marketing, category management, merchandising Europe, supply chain and numerous others, as well as the ability to ask our leaders questions. We're excited to make this transition next quarter. But before doing so, it's appropriate to come full circle and briefly highlight a category we featured before to give you a sense of how far we've come and how much we have overcome at a micro level in a relatively short two years. We wish we could give you this update for every single one of the categories we've discussed in the past, but we think Vanities which we'll talk about today is a great representation of the strides we've made across the spectrum of home goods categories which we've seeded. We originally provided an introduction to Vanities in early 2018. At that point it had just over $100 million run rate in annual gross revenue. A small team was shepherding the business and was tasked with navigating a challenging category to bring it online. Vanities were burdened by long lead times, high shipping costs and high damage rates, all of which hampered the customer experience and constrained margin. In the beginning it was also lacking robust selection and merchandising which made it difficult to build the confidence our customers needed to buy Vanities online. It was our team's objective to address each…

Thanks, Steve. And good morning, everyone. I will provide some highlights of the key financial results for the fourth quarter of 2019 with more detailed information available in our earnings release and in our investor presentation on our IR site. In Q4 our net revenue grew 26% year-over-year to $2.533 billion. In other words we added approximately $519 million in sales relative to Q4 2018. Given we have historically referenced our other net revenue line and that it has now become immaterial, we will be transitioning our commentary and forward-looking guidance to focus on total net revenue only. However since we provided Q4 guidance on a direct retail net revenue basis in October, I'll now detail our direct retail results for Q4 before transitioning to our new format with the Q1 guide. Q4 total direct retail net revenue was $2.526 billion, representing roughly 27% growth year-over-year. In the U.S. segment direct retail net revenue increased to $2.132 billion, up 25% or $423 million year-over-year. Direct retail net revenue in the International segment increased 37% year-over-year to $394 million. Currency movements year-over-year were neutral to international direct retail net revenue in Q4. Our KPIs remained healthy. As Niraj mentioned LTM active customers totaled $20.3 million this quarter, up 34% year-over-year, reflecting both solid new customer acquisition and strong repeat behavior. In the quarter orders from repeat customers represented 69% of the consolidated mix. LTM net revenue per active customer and LTM orders per active customer were roughly flat year-over-year at $448 and 1.86 respectively. As we move down the P&L, I'll be referencing the remaining financials on a non-GAAP basis, excluding the impact of equity-based compensation and related taxes which totaled $67 million in the fourth quarter. Our gross profit for the quarter was $579 million or 22.9% of net revenue.…

Thanks, Michael. Steve and I are very excited about the year ahead. All of Wayfair is focused on improving what we offer to our customers so that we can continue to capitalize on the secular tailwind from offline to online in our category. That includes refocusing parts of our organization on the most significant highest ROI projects, while minimizing the work and expense that is less impactful. These efforts will enhance the customers' experience, strengthen our supplier partnerships and further propel us down the path to profitability without compromising our ability to invest behind the initiatives that really matter. We thank you all for listening, and now we're ready to answer some of your questions.

Thank you [Operator Instructions] Your first question comes from the line of Peter Keith with Piper Sandler. Peter, your line is open.

Good morning, everyone.

Hey, Peter.

I wanted to just kind of tie together few of the comments you made around leveraging the P&L at the current growth rate in your path to get to positive EBITDA in the U.S. by 2021. What type of growth rate would that be? Are we looking at the Q4 growth rate of 26% or we - you're positioning now if this - the high-teens growth rate that continues for the next couple of quarters?

Hey, Peter, it's Michael. We were assuming the current growth rate, Q1 quarter-to-date that I described.

Okay. Thank you. And then I think on - Niraj, on the ad spend adjustment, it's good you guys are looking at the spending more efficiently. I will tell you, I think there's going to be a lot of skepticism on pulling back on ad spending and then the subsequent revenue deceleration, which does seem to be happening now. So if you can give us any time frame on when you think sort of this adjustment sort of being normalizes within the model as they roll out for the revenues to re-accelerate?

Yeah, sure, Peter. Thanks for the question. So, I guess, let me kind of try to tie it back together for you just to make sure you understand exactly what we're trying to describe. So what we're trying to describe is, so if you look back over the 20 years we've been in business, we've had these periods of time where as we grow quickly, we either particularly around ramping headcount really fast, but generally through growing very fast, we end up feeling like we've become inefficient. And then often what we do is we try to basically focus on driving efficiency by not hiring new people, making sure the people we have get up the curve, making sure the initiatives are the right initiatives, so on and so forth. As we've gotten bigger, we've gotten very focused on making sure we do that in a less jarring way, where we used to kind of purposely ramp headcount really fast and purposely go through an absorption cycle. We've really tried to slow that down. And the 2016, 2017 period would be like the best example when we were still reasonably large and we did that and we realized, man, that's not the right way to do it. So a lot of what we put in place were things that basically prevent that. When we look back now in the last couple of years, we can see that we grew headcount at a tremendously fast rate. And one of the reasons was that we were optimizing each thing for its own unit economics and making sure it was customer-oriented, but in aggregate, what happens, the sure amount of things caused a lot of demands on the system. So, specifically now on ad spend, what does that mean? On ad spend, when…

Okay. Appreciate all the feedback and good luck, guys.

Thanks.

Your next question comes from the line of Heath Terry with Goldman Sachs. Heath, your line is open.

Great, thanks. Interested to dig a little bit deeper into the marketing question. Can you give us a sense in terms of how you would disaggregate the pieces of this? How much of this is higher costs of traffic, meaning that that traffic is becoming more expensive potentially because the category is becoming more competitive versus lower conversion rates within that traffic? I know you talked about the product itself becoming more expensive, which assuming - I would imagine is having an impact on conversion. If you could just sort of break down what's driving this and ultimately what you think is within your control?

Yeah. So what I would say, the primary driver is neither of those two. The primary driver is if you basically pick a target amount of leverage you want to see, you're basically constraining your spend and that's what's driving you down. So, in other words, if you look at conversion, our conversion is actually - you've seen headwinds, as you said, from tariffs, but then we've seen tailwinds from a lot of things we've worked on for the customer experience. So, the conversion overall net is flattish. We actually expect conversion to expand and so some of the things that we feel like we haven't executed as well as we could have, as we roll through this year, we think will actually drive conversion up. Our conversion right now is flattish when you look at it year-over-year. So, you're not seeing it net down. On your point about costs, on the competitive side, we're not really seeing that either and the marketing costs, there's generally been market inflation. We've offset that with some of the targeting and other optimization we do. That continues to be the story there. I just went to a ton of trade shows, because the trade shows are basically in the first quarter of the year across a whole bunch of our categories in North America and in Europe, and what we're even seeing from our suppliers is that they're not seeing the competitive field really changing and we're still generally their Number one customer in e-commerce and really far up their customer rank. So the biggest thing is, we've effectively imposed a view that we want to drive more leverage on the ad cost, so that would manifest as ad cost as a percentage of revenue. So, as you roll in over time, you would see that number going down faster than it would just naturally drift down through just the repeat base if we then spent in each channel for payback. And because we want to drive it down faster, which we think will be productive for us because of the innovation that will come out of scarcity, that effectively is us proactively pulling back. So, hopefully that answers your question.

That helps. I did also want to dig deeper into your comments around China and around coronovirus. One, you mentioned that you're now just over half of your - and I believe it was inventory, maybe it was sales, coming from China. I believe you had said in the past that that was closer to the industry at around 60%. If you were to look at the trajectory of that, where do you see that going? And then, you've mentioned a couple of times now the time that you've spent at trade shows. Even if it's just anecdotal, any color that you can provide on supply chain disruptions that those partners of yours at those trade shows are seeing or expect to see understanding that at least right now you're not expecting it to have an impact on your ability to sell the customers?

Yeah, sure. So yeah, historically, China, we've been closer to 60%, which is more or less the industry average in our categories. And then based on the tariffs that really in our categories kicked in in 2018, we started seeing suppliers proactively in a lot of categories setting up sourcing or manufacturing operations in other countries. And so because of that, over the ensuing year-and-a half, it's come down into the low 50s. And I think that's a trend that's going to continue to play out, because I think folks are moving, not just because of the tariffs in China, but because they now sort of proceed being in China as a kind of - they don't want to have that sole country risk, what if the tariffs went from 25% to 35%, so on and so forth. So, they want to have a broader geographic base. Now, 50% still a lot of product coming from China. And so when you talk about the coronovirus, there's no question that that create supply side disruptions. The benefit of being a big customer of our suppliers is that we do a lot of joint inventory planning. And so one of the things we've been doing frankly is just identifying what inventory do they have in country, what inventory do they not, which products are - do they have a reliable supply line still right now, whereas which products are going to have kind of a multi-month disruption in terms of quantities coming in. And so, what we've been trying to do is down at the category and class level, how are we going to make sure we have enough selections and so, when you talk about some items that are maybe seasonal in the outdoor season through the spring and the summer, those would be goods where you'd have a lot of disruption, if they're not already in the country, for example. And so, what we've been doing is trying to make sure that we believe, in aggregate, we're going to have enough selection and the reality is we're pretty advantaged, right? Because we more or less work with everyone in the industry, we have a huge amount of selection on site. So given supplier having significant supply disruption generally just creates opportunities for other of our suppliers, but there is no question that this is going to hit the industry by and large in a meaningful way. And so I think those who don't have deep relations with our suppliers and don't have the reach to do that advanced planning, they're going to -- some of these things are going to hit them with surprises.

Great. Thanks, Niraj. I appreciate the color.

Sure. Thanks, Heath.

Your next question comes from the line of Jonathan Matuszewski with Jefferies. Jonathan, your line is open.

Yeah, thanks for taking my questions. I guess just the first one on the recent corporate workforce reduction. I realize it's a sensitive subject, but if you could just comment on kind of what inning you feel you're in there as it relates to eliminating some of the inefficiencies and redundancies? And, I guess, just any further commentary in terms of guard rails in place to maybe prevent some of that excess hiring in the future. And then maybe just kind of touch on - I think it did impact some of the international regions, which are obviously experiencing some really nice growth, so just kind of thinking there. That's my first question.

Sure, John. Thanks. So in terms of the reduction in force and tackling the inefficiencies, so on and so forth. The way to think about that there is what we realized in the fall around inefficiencies manifested in a few different ways and one was basically that in certain groups, they'd grown to a point, where instead of just focusing on - let's make it up, the three key priorities, priorities four, and five, and six are getting kind of equal share of attention and focus, and so that was distracting from items one through three. But then the other issue is that by that group having six initiatives and each initiative needs something, say on average from three other groups, and say that other group then needs to support all these other different groups that have maybe 50% or 70% more initiatives than the priority one, those interactions then cause inefficiency and the prioritization in the order of operations getting things done, particularly when you talk a lot of this advancement being through us building scalable technology platforms. So what we've done is we've already gotten through the phase of identifying what we want to focus on and the whole reduction force was really around organizing teams around the priorities, which unfortunately meant, in some cases, it wasn't that the caliber of the people we brought on was the problem, the reality was that we didn't actually have a role for them when we said, we're only going to focus on A, B, C, and D, and we're not going to do E here or not going to do E & F here. And so that's behind us. So the good news is what is everyone’s focus? They focus on the right priority things. Well, when do you see…

Great. I appreciate all that color. And then just a quick follow-up, obviously, all the color on the tweaked philosophy regarding advertising ahead has been helpful. I know you mentioned some media marketing channel mix experimentation, I believe, this past quarter. Just elaborate on that a little bit, whether you plan to use less expensive mediums ahead, whether that's leaning in more on the app or other kind of methods and then - and obviously maybe just tie that in with the announcement regarding the first brand ambassador in the U.S. and how that's informing kind of just the overall marketing mix strategy ahead. Thanks so much.

Yeah, sure. So, I would say there is no real change in the philosophy of mix of saying, oh, we're moving away from more expensive channels or moving away from more transactional channels. I think we view them all as part of like the total that we view that or using all those different sort of arrows in the quiver is that the more arrows in the quiver allow us to optimize the mix even better. And one of the things we've done over the last two years is kind of continue to advance our own attribution model in a way that takes into account more and more of the channels in a way that captures interplay. So that's actually been quite an exciting thing. You mentioned the brand ambassador, I mean, Kelly Clarkson, we think is a perfect brand ambassador for Wayfair and so you're going to see her featured in a lot of our channels and television is obviously one of our major channels. So we're actually quite excited about everything we're doing. I think the thing to kind of convey on the ad cost is just we think you can, on one hand, experiment, innovate, and push forward and you can do that while still being relatively tight around the scarcity concept and around the constraints you provide the team with, which just puts more pressure to find breakthroughs. And we've historically had a - for 20 years now we've been creating a lot of breakthroughs and we've mentioned on past calls how Facebook has featured us as one of their most sophisticated advertiser, how Google has done the same or Pinterest, how we've been their partners on alphas and betas and the deep partnership we have with Discovery-Scripps. And so, I think that role is something we're very excited about. We continue to invest into the ad tech platforms we have. That's a team we've grown substantially. We have a big investment strategy there. And so, I'd try to disconnect those two concepts. So one, we're still staying very ambitious, we're looking to use a lot of technology innovation and a lot of creative innovation to scale the advertising and yet, we're comfortable at the same time saying, we're going to constrain the team's ability to invest thus driving more of necessity on them to drive innovation to unlock larger and larger tranches of money for them to spend. And we think those two are mutually compatible.

Excellent, that's helpful.

Thanks, John.

Your next question comes from the line of Oliver Wintermantel with Evercore ISI. Oliver, your line is open.

Yeah, thanks very much. I had a question regarding cash flow. In 2019, it looks like the use of cash accelerated to and I was just wondering -- maybe two-part question there, what do you think your annual use of cash rate will be going forward? And then we had -- the last three years, we had convertibles. Maybe a little bit of the how your -- how your new strategy in reducing the costs have an impact on the cash flow statement going forward? Thank you.

Hey, Oliver, let me just touch on one thing and then I'll turn it over to Michael for some of the more detailed parts of your question. We definitely - free cash flow is a key metric for us. I think what you'll find we talked a lot about how we think the EBITDA can expand as we roll forward based on a bunch of the decisions we've made and the way we see things playing out as we roll forward through time and the way we expect revenue growth to pick up, the way we expect leverage to come from things like OpEx and ad costs and what have you. Obviously, as that plays out, that - which impacts EBITDA will then actually impact free because a lot of the CapEx historically has been from building out the logistics network and some things that we've invested heavily in and are going to continue to provide gains. And, of course, we'll grow them over time too, but there should be leverage there. So, while we only guide the quarter, we do want to make sure you kind of a view to the trajectory. Let me let Michael answer your specific questions within the guidance he gave.

So a couple of thoughts here. One is, I think we - obviously, all of the things that Niraj has been talking about, both - and we both talked about it in the talk track and then now in the Q&A, would be positives, right? It would be - we have incremental positive flow through to future cash flow. We obviously also are increasingly tight on our CapEx spend, particularly noting that this year, we're not going open any new buildings but we're still spending CapEx to rack out our existing buildings. But over the - if you think about - if you think about it in a year-long time frame, 2020 time frame, I think that's going to be a benefit. And so I think you should - you can anticipate, I'm not going to guide forward, but 2020 cash flow will be a lower use of cash, markedly lower use of cash than 2019 was. The one thing I would just note there is that in Q1 historically, you'll know our seasonal pattern is that we have a larger outflow of cash in Q1 than any other quarter just because of the timing of holiday sales in the back-end of December, where they sit in the float. And then on the question on the convertible debt, I think at this point, we feel like with $1.1 billion of cash in the balance sheet as of December 31, we feel really good about where we're at and particularly with the plan we have going forward, all of what we've been talking about today. So, I don't think we feel like we have a burning need to raise additional capital. That said, in the past, we've always taken advantage of the markets, particularly the convertible debt markets, which has been very good. And so, I think we'll continue to keep an eye on that. If there is opportunities to put more capital on the balance sheet, we'll take advantage of it. And we obviously have a sort of a longer-term eye out to our 2022 notes, right, that will come due in 2022. Not something we're thinking about today, but something that we're certainly -- is in the planning horizon.

Right. Thanks very much. Good luck.

Thanks, Oliver. I think that's - I think we're out of time.

Ladies and gentlemen, this concludes today's conference. On behalf of Wayfair thank you for participating. You may now disconnect.