Wayfair Inc (W) 2014 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Mike and I will be your host operator on this call. (Operator Instructions) Please note that this call is being recorded today, Monday, November 10, 2014 at 4.30 Eastern time. I would now like to turn the meeting over to your host for today's call, Kate Gulliver, Director of Investor Relations at Wayfair. Please go ahead.

Good afternoon and thank you, everyone, for joining us on our first call as a public company. Today, we will review our third-quarter 2014 results. With me are Niraj Shah, Cofounder, Chief Executive Officer, and Cochairman, Steve Conine, Chief Technology Officer, Cofounder, and Cochairman, and Michael Fleisher, Chief Financial Officer. We will all be available for Q&A following today's prepared remarks.

Before we begin, 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 2014. These statements are only predictions based on assumptions that are believed to be meaningful at the time they are made, and they are subject to significant risks and uncertainties. You should not rely on these forward-looking statements as representative of our views in the future.

Except as required by law, we undertake no obligation to publicly update or revise these statements. Our actual results may differ materially and adversely from any forward-looking statements discussed on this call and for a discussion of factors that could affect our future performance, results, and business, please refer to our IPO prospectus, our Quarterly Report or Form 10-Q, which we expect to file in the near future, and other reports we have on file from time to time with the SEC.

Also please note that during the course of this conference call we may discuss certain non-GAAP financial measures as we review the Company's performance. 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 measure. This call is being recorded and a webcast is available for replay on our IR website. Now I would like to turn the call over to Niraj.

Thanks Kate. And thank you, everyone, for joining us today on our first earnings call as a public company. We are pleased to report strong Q3 results, which we believe reflect the ongoing strength of our brands and business model.

Net revenue for the quarter was $336.2 million, reflecting total growth of 41.7% over the prior year. Our direct retail business, consisting of sales generated primarily through the sites of our five brands grew 57.1% versus last year, with 2.9 million active customers as of the quarter end. As a reminder, our brands include Wayfair.com, Joss & Main, AllModern, DwellStudio, and Birch Lane.

Michael will, of course, provide you with more detail in context as he walks you through the financials in just a few minutes.

Since this is our first call as a public company, I thought I would just take a few minutes to provide some background on the Company, our market opportunity, and the key drivers of our growth. We designed Wayfair to transform the way that the mass-market customer shops for her home. Since our launch in 2002, we have built one of the largest online destinations for the home offering over 7 million products from 7,000 suppliers across a range of styles and price points.

We estimate that the total home goods market in the United States is over $230 billion. We believe that the mass-market (technical difficulty) the largest piece of the market and that it's underserved today.

The home business category is unique, relative to other product categories, because the purchase decision is very personal. Our homes are an expression of self and identity. Customers approach this market differently than others as they look for uniqueness and originality when selecting a bedside table or chandelier and they need both vast selection and inspiring content to help guide their purchase decision. Additionally, brands don't really exist in this category, making visual inspiration even more important to the customer.

Our online low inventory model provides several advantages relative to our competitors. Traditional brick-and-mortar retailers and other online players do not offer the selection or the engaging merchandising that the customer desires. Inventory-based retailers are limited in their ability to offer a vast array of products due to structural and capital constraints on space and high inventory carrying costs. Traditional search-based e-commerce sites that rely on direct brand search for product search don't work well in our category, because there is little to no brand awareness for these products and these sites have a difficult time providing customers with the visually inspiring and emotive browsing experiences they need to aid product discovery.

A lot of it boils down to the fact that in this category, a lot of customers will tell you that they don't really know what they are looking for until they see it.

To help illustrate the importance of broad selection in the challenges with inventory and merchandising home goods products, I wanted to highlight a couple of our product categories.

In our decorative pillow category, for example, we currently offer thousands of pillows. The top 25 of these accounted for just 5% of revenue in the category in the nine months ending September 30. In contrast, the category such as small kitchen appliances, one of the few categories we carry where purchases tend to be driven by brand, has much greater SKU concentration. For the small kitchen appliances in the nine months ended September 30, the top 25 SKUs in the category represented 24% of the revenues in that category, nearly five times as much as in decorative pillows. This makes sense when you realize many of us have the same KitchenAid stand mixer on our counter.

At Wayfair, most categories are more akin to decorative pillows than kitchen appliances. Customers want unique products, they don't know the brand names, and so this requires the retailers to offer both a vast selection of little-known or unknown brands in an engaging visual way to explore the offering. Ultimately, we believe that Wayfair is uniquely positioned to win and grow in the mass-market for several weeks.

First, our purpose built technology designed specifically to serve the needs of the home goods customer allows us to showcase millions of products in an intuitive and easy-to-use interface, helping our customer find the perfect item for her home. Second, our long-standing partnerships with suppliers, coupled with our proprietary logistics platform enables a capital-efficient low inventory business model with fast time to ship. Third, we believe that there continues to be significant opportunity to build the Wayfair brand, first launched a little over three years ago in September of 2011.

Over the past year, we've been increasingly focused on driving brand awareness and improving our customer lifetime value by acquiring high-value customers who are more likely to make repeat purchases. We believe that these efforts, while requiring significant investment, are the right steps to drive long-term profitable growth for the business. N

ow before I turn the call over to Michael, I just want to touch briefly on some recent activities we undertook in the quarter to show a few of the many ways we are working to drive customer growth, increase repeat rates, and improve lifetime value.

In the summer of 2013, we acquired DwellStudio, now a key part of our more curated lifestyle brand offering that includes AllModern and Birch Lane. We were impressed by the design talent we found at DwellStudio and we wanted to work to bring the high-quality midcentury modern inspired products to a broader customer base. To do this, we turned to Skyline Furniture, a longtime supplier partner of ours. Together, the Skyline and DwellStudio teams created a line of proprietary upholstered headboards, bed frames, and children's furniture. The product is designed by DwellStudio, consistent with the brand's high quality standards and manufactured by Skyline exclusively under the DwellStudio brand name.

Through this partnership, we've been able to offer the DwellStudio look and quality at more competitive prices with shorter lead times and with no inventory. Though we just introduced, the offering is already resonating with our customers. Since launch in September we've seen a threefold improvement in average monthly bed sales at DwellStudio. This is just one example of how we are able to leverage our deep supplier relationships to offer unique products and better value for our customers.

We continue to believe that offering world-class customer service is a key part of the customer value proposition and one of our competitive advantages. Accordingly in August, we opened a new call center in Orem, Utah that we plan to staff with approximately 90 customer service agents by year-end and which has seating capacity for up to 400 agents. This facility is in addition to our existing customer service centers in Ogden, Utah; Boston, Massachusetts; Galway, Ireland; and Sydney, Australia where in total we have over 450 agents as of September 30.

The location in Orem allows us to expand our recruiting base for call center talent to both north and south of Salt Lake City, while leveraging the management team in our facility in Ogden, and enables us to better meet the needs of the business as it grows.

The last thing I would like to touch on is our continued effort in expanding our brand presence in the market. Through our ongoing relationship with Scripps Network, we partnered with HDTV on two of the network's top shows of the year. Wayfair.com was featured on the popular competition series, Brother vs. Brother, while Joss & Main was featured in Flipping the Block, one of the network's new primetime series. HDTV highlighted our product on both shows with tie-ins on our site and on HDTV's website to enable viewers to shop and explore the products featured.

Now TV and online marketing is not the only branding work we do. If you live in the New York City area, for example, keep an eye out for our Wayfair branded delivery trucks that will launch this week. For those of you not in New York, you can see some photos of the trucks on our IR website. Our density in New York enables us to run fully dedicated delivery trucks with our home delivery partner in the area, creating some unique branding opportunities that can be rolled up to the geographies, all at no additional cost to us.

But even more important is the opportunity to continue providing differentiated level of service to our customers. Having Wayfair dedicated trucks and drivers who are committed to our delivery experience standards is a big opportunity that comes from our continued growth, scale, and density and is a direct result of the more than 20,000 orders on average we are delivering every day.

Going forward, we remain highly focused on driving growth by acquiring new customers and increasing our existing customers' frequency of purchase at our sites. As in the past, we will do this by investing in our brands and the customer experience through improved site experiences, product offering, and logistics. Overall, we're excited about the quarter's performance and the continued growth of Wayfair.

I would now like to turn the call over to Michael to walk through the quarterly financials in more detail.

Thanks, Niraj, and thank you all for joining our call today. As a process note for this call and future earnings calls, I will highlight some financial key information each quarter but will try to leave the maximum amount of time for your questions. More detailed information on the quarter is available in our quarterly press release which can be found on our investor website.

Also as a reminder, the financial results we are reporting today are as of September 30 and therefore represent pre-IPO results. We provided some financial information in the earnings release to show the impact of our IPO on a pro forma basis.

As you heard from Niraj, our total net revenue was $336.2 million representing year-over-year growth of 41.7%. Our direct retail revenue consisting of sales generated primarily through the sites of our firebrands was $285.5 million, a year-over-year growth rate of 57.1%. Net revenue from our other business totaled $50.7 million, a decline, as expected, of 8.9%. Our other business includes revenue from our small media business and from retail partners, third parties who sell Wayfair products through their sites.

As a reminder, we are focused primarily on growing our direct retail business where we own the customer relationship and can market to them on an ongoing basis.

Our gross profit for the quarter was $79 million compared to $58.6 million in the third quarter of 2013. Gross profit as a percentage of net revenue was 23.5% compared to 24.7% last year and 23.2% last quarter. Our gross profit is net of all product costs and delivery and fulfillment expenses. The changing gross margin this quarter was driven by changes in the mix of products sold, our pricing and promotions, and the year-over-year impact of an expansion of customer-friendly policies like easier returns and more free shipping.

We expect gross margin to remain relatively stable over time as a percentage of net revenue, but some quarterly fluctuations are normal due to the wide variety of products we sell.

Operating expenses in the third quarter reflect our ongoing commitment to investing in and building the brand and improving our customer experience. Our sales and marketing spend in the third quarter was $77.4 million or 23% of net revenue. This is up from $46.6 million or 19.6% of net revenue in the prior year.

Sales and marketing expenses include labor-related costs for our employees involved in sales and marketing and customer service activities, merchant processing fees, partner advertising fees, and advertising for our direct retail business. As anticipated, advertising is an area where we continue to invest both online and on TV, spending a total of $49.8 million or 14.8% of revenue in the quarter. This is in line with our spend last quarter and, as a percentage of sales, down from our peak in Q1 2014 of 15.9% of revenue.

We believe our continued investment in brand building and customer acquisition is helping us acquire a significant number of high-value customers, and we have already seen the benefit of this investment across a range of metrics.

First, the number of active customers in our direct retail business reached $2.9 million as of September 30, up 61% from September last year. Second, LTM net revenue proactive customer increased to $342, up 8.6% from the same period a year ago and up 3% from Q2. And third, orders per customer measured as LTM orders divided by active customers improved to 1.65 from 1.55 in the same quarter last year. We believe these metrics highlight improving order frequency and are indicative of the higher customer lifetime value we see in our newer customers.

In addition to our brand building efforts, we are continually working to drive customer engagement by making our best selection relevant for each individual user through increasingly personalized offerings. We currently send out over 1 million different permutations of our Wayfair.com daily sales email, helping each customer find the products that are right for her. This improved personalization has resulted in a 15% lift in email open rates for these messages. You can see some examples of these emails on our IR website.

To enable this kind of site and user experience improvement, we have continued to invest in our teen and infrastructure, focused on both the customer front and experience and our backend logistics and supplier integrations. This investment is reflected in our growth in G&A expense which was $25.2 million for the quarter or 7.5% of net revenue compared to $15.5 million or 6.5% in the same quarter in 2013.

The increase was primarily driven by growth in our engineering and operations teams, rent, and depreciation and amortization. Adjusted EBITDA for the quarter was negative $18.3 million or negative 5.4% of revenue compared to negative $0.2 million in Q3 2013. On a quarter-over-quarter basis, adjusted EBITDA as a percentage of revenue improved by approximately 50 basis points from Q2. The reduction in our adjusted EBITDA year over year reflects the strategic decision to continue investing in our brand and customer experience, to attract more customers, and improve lifetime value. Over time, we believe that this strategy will enable Wayfair to create substantial long-term shareholder value as the business continues to scale.

Non-GAAP free cash flow for the quarter was negative $22.4 million based on net cash provided by operating activities of negative $11.1 million less capital expenditures of $11.3 million.

GAAP net loss per share was $0.71 which compares to a net loss per share of $0.19 in the same period a year ago. As a reminder, this calculation is prior to the corporate reorganization that took place in conjunction with IPO and is based on 40.5 million weighted average common units outstanding. Non-GAAP and loss per share was $0.29 on a pro forma basis after including the impact of the share issuances and share conversions as a result of the IPO. And is based on 82.5 million weighted average shares outstanding.

Turning to the balance sheet, we closed the quarter with $130.4 million of cash and investments. Pro forma for the IPO, the quarter would have closed with $366.3 million of cash and investments.

Despite our strong growth in sales, we closed the quarter with only $21.1 million of inventory or 1.8% of LTM sales, similar to the inventory levels from the same day in the year prior. Though low inventory level is consistent with our inventory light approach and capital-efficient business model. As a reminder, even with this limited inventory level, we were still able to ship to our customers in an average of 2.1 days due to our extensive supplier integrations and the proprietary delivery network we built.

Finally, I would like to offer some guidance on Q4 2014. We expect to continue to see strong but moderating net revenue growth as we comp off of the rapid growth experience in Q4 2013. We anticipate total net revenue of $355 million to $370 million, consisting of direct retail net revenue of $295 million to $305 million and other revenue of $60 million to $65 million, representing ongoing declines in the other business segment as we continue to focus on growing our direct retail business. On the expense side, as previously described, we are continuing to focus on brand building through TV and other advertising and on improvements to the customer experience by investing in our site in backend operation.

These initiatives require ongoing investments in marketing and G&A but we do anticipate starting to see some leverage. Accordingly, we expect an improvement in EBITDA losses to a negative 4.5% to 5% of net revenue. We continue to believe that these are the right investments to make now to build our brand and grow our market share, ultimately leading to continued growth and long-term profitability.

Now let me turn the call back over to Niraj before we take your questions.

Thanks, Michael. We are very pleased with the third-quarter results and Wayfair's trajectory and we're excited about the Company's future. We believe we are making the right investments today to drive long-term growth and we remain committed to both creating the best site for the home and to delivering long-term value for investors.

We are happy to take your questions now so I'll turn the call over to the operator.

(Operator Instructions) Deb Schwartz, Goldman Sachs.

Great, thanks and congrats on the quarter. Two questions. First, Niraj, the home category tends to be one with lower purchase frequency than others. Can you talk about some of the initiatives that you have to drive repeat purchases from your customer base? And then secondly, on marketing, I think you said it was close to $50 million in the quarter which was up, I believe, from the second quarter.

Can you talk about how you are thinking about returns and pay back on that spend and what your expectation is for marketing specifically in Q4?

Sure, Deb. Thanks for the questions. To answer your two questions, first the question about home with regards to what are we doing to drive frequency. There, I would say it's no one thing, it's actually a bunch of things and we think in aggregate we are happy with what we're seeing happen so some of the things for example have to do with, from a merchandising standpoint what we're doing with exclusive products that customers are starting to know that they can only get at Wayfair. Our loyalty program, which has given us a nice traction, we are continuing to do things with that that we think will further develop that.

Third, we are doing things around editorial content and inspirational imagery and tips and advice. Things that allow customers to come back to us or encourage them to come back to us even when they are not thinking of making a purchase.

And the last thing I just mentioned just kind of on-the-fly right now and by no means the least is obviously building up our brand. Making our brand top of mind for customers as their go-to place for the home. So I think there's actually a large number of things we are doing around frequency. I didn't even touch on what we're doing on mobile just now. These things really add up I think in terms of driving that.

In terms of market expand, which clearly is an area we've been investing in, in terms of what we're thinking in Q4, what would you say is in general, we've been thinking about marketing spend and what we showed during the offering period there with the cohort example we put in the materials is that we are investing in acquiring customers but we are investing in acquiring customers that we think really have a lifetime value that makes it very productive for us. And at the rate of growth of those customers, it is certainly causing us to operate at a loss but the underlying economics are very appealing. And that philosophy has not changed.

And then what we think is happening and will continue to happen is obviously the base of our customers -- as that base grows bigger and bigger, and you are seeing the things around customers coming back more and more, that repeat base of revenue changes the mix of new versus existing and that affects what advertising costs as a percentage of revenue looks like at a high level. So that philosophy is basically the same and so in Q4, I wouldn't expect necessarily to see it be any different.

Great, thank you.

Neely Tamminga, Piper Jaffray.

Great. Good afternoon. Let me add my congratulations as well. I do have just two different types of questions here.

First for Niraj, could you talk a little bit more about what's going on for holiday? You guys have historically not really been a holiday destination per se but we are -- we've seen more holiday shops and I guess what we're trying to figure out here is is this really aimed toward that new customer acquisition and go in terms of bringing in a customer who is not normally a Wayfair customer or not yet one? Or is it really expanding the overall assortment for your existing Wayfair customers to purchase from you? And I have a follow-up please, thank you.

Sure. So on that first part in terms of holiday, holiday is really interesting for us. The category we are in is not traditionally a big holiday category but that said, obviously, the amount of spending for the holiday is very significant and as a result, even home does have a holiday bump. I would just say that historically, while we have done some things around holiday, nothing on the order of magnitude of what we're doing this year. If you look at the gift guide that, for example, launched on Joss & Main last night -- if you look at the Wayfair holiday sales which are featured throughout the season, they were actually featured yesterday also and they are accessible through the home page at Wayfair.com.

I think you'll see a lot of what we're doing on the merchandising side, I think, is appealing to customers, will help drive both increased frequency from the base and could be appealing for new customers in terms of what they might make as their first purchase. So we think a lot of the merchandising initiatives we have fit well into some of these seasonal opportunities and that is an opportunity for us that we historically have not taken advantage of like we're focusing on this year.

Thanks, Niraj and then for you or for Steve, could you talk a little bit more about mobile? So obviously, the Wayfair app launched this year. Just how are you thinking about people purchasing via mobile either through sourcing that traffic and for actually converting on that traffic? And I guess more of a technical question for Steve, it looks like you guys are averaging maybe about two updates for an update every two weeks on the iOS app. Just wondering how you feel about that cadence and if there are any major updates or functionalities on deck that we should be watching out for. Thanks.

Yes, thanks, so this is Steve Conine. So yes, we are definitely big believers that there's a continued opportunity in mobile to really create an offering that's great for our customers. And that cadence you are seeing with us sort of rapidly iterating on our mobile app, that's pretty -- I think you'll see us continue to do that. It's kind of our standard operating inside our engineering group. Here at Wayfair, we definitely have always continually tried to improve and use iteration to continue to get better and better with the products we have in the market.

We definitely have a very strong sort of mobile first approach to development inside the entire engineering group that delivers products to our customers today or that does the software that our customers use. So it's going to continue to be a serious area of focus.

Thank you. Best of luck.

Paul Beaver, Bank of America Merrill Lynch.

Hi guys. It's Paul for Justin. Congratulations on your first quarter. I was hoping you could provide some high-level commentary on the performance of Wayfair versus Joss & Main in the quarter and then how should we think about the contribution of those three other sites as we head into 2015?

Sure, Paul. This is Niraj. As you know we don't really divulge the exact details of them, but the statements we made in the past, I would say, are definitely the same which is Wayfair's by far our biggest brand and then you've got a big step down in size to Joss & Main, which then from there you have a big step down in size.

So in that sense, when you look at the total results, it would be impossible for them to not reflect to a very high degree what is happening at Wayfair.com. I don't know, Michael, do you want to add anything to that?

And in order to deliver the results that we are delivering, and the growth rate we are delivering, not only does Wayfair need to be delivering but all the business units really need to be delivering strong growth.

And a quick follow-up question, are you guys disclosing repeat orders and mobile orders going forward?

We are disclosing the four KPI metrics that we put in the press release and then some of those other metrics, like mobile and repeat order, we will do on a more ad hoc basis going forward at sort of appropriate points of time during the year.

What I would say, though, that is what we are doing from a disclosure standpoint. I would say though, when you think about repeat and mobile, these are things we are very focused on and we are seeing really nice traction in the business and we would definitely update you on that in the future.

Okay, thank you.

Matt Nemer, Wells Fargo Securities.

Afternoon, everyone. Just a couple of questions.

First on the gross margin percentage, it was a touch below what we were thinking. It was actually up sequentially though for the first time in a couple of years. You mentioned mix in pricing. I'm just wondering if you could provide more color on those. What in the mix may have given that this quarter and was there anything that you are doing and pricing that was either tactical or more of a response to the environments?

Thanks, Matt. I don't think there's anything really (inaudible) to point out. I think as you know we carry so many products across so many categories that to sort of say it was this pricing or that promotion. There's nothing, there's no one driver of this. As I did note, we are continuing to see debt year-over-year comps of offering better returns, more free shipping, some of those very customer-friendly policies.

But gross margin is going to move around a little bit quarter to quarter. It's sort of the nature of the way our business runs but there's nothing particular or unique in pricing or promotions that was driving anything this quarter.

Okay, fair enough. And two -- I guess the question about to external factors that are out there, the first is fuel prices are down, diesel prices are down, and I'm wondering if we might see some benefit on that as your trucking partners -- distribution partners pass on some of the savings to you. And in the second piece of that is there's this issue on the West Coast with the ports. It's obviously more of the second derivative effect for you, given Wayfair has such an inventory light model, but I'm wondering if your vendors are on top of that are could feel -- you could feel some effect of that if they don't bring enough inventory in, in time.

On the fuel prices, Matt, I don't think we are anticipating any substantive changes near-term. I think we have good long-term rates with all of our partners and we didn't particularly feel the pain when the costs are going up and I'm not sure were going to see a near-term benefit, though it's something obviously we monitor in our ongoing negotiations and renewals of our deals with our big partners there in the supply chain.

Matt, this is Niraj. On the point about ports, they are obviously -- we are relying on our suppliers having inventory. That said, we do work with our key suppliers to make sure that they know the amount of product we're expecting to sell and in turn that they have available. What I will say is that that has been a topic of some concern for a while. We've been proactive in terms of trying to get ahead of any problems and, currently, we don't foresee having problems with access to product.

Okay, great, thanks so much, guys.

Michael Graham, Canaccord.

I just had a couple of quick ones. The first is about thinking about your Q4 guidance and I wanted to ask about revenue visibility and how you do your forecasting. Michael, can you just comment on, relative to other businesses that you've managed, is this a high visibility business or not and what are some of the factors that might contribute to coming in that the lower end of -- the higher end of that range? And secondly, I just wanted to get your philosophy about delivering any upside to revenue to profit or reinvesting that upside in marketing to grow the customer base? Just generally, what are your thoughts there? Thanks a lot.

Thanks, Mike. I think -- so let me answer the second question first. I think on the notion of reinvesting in the quarter -- this quarter, our plans are pretty well set for our ad spend and our marketing spend as well as the investments were making on infrastructure side. So I think over time as we watch our revenue performance play out, we will then take that into account in our ongoing marketing and advertising and investment. But I don't -- there's not a sort of near-term lever per se that we would be pulling there.

In terms of forecast ability, at the end of the day this is a consumer retail business. The consumer needs to show up and buy what we are selling. I think as we sit here in November, we have good visibility into our quarter but particularly in a holiday quarter, some of the new initiatives that Niraj talked about the holiday shops and what we're hoping for to come out of those, I wouldn't say we have perfect visibility and obviously our goal in guidance setting is really to put something out there that everybody can hang their hat on and look at.

But at the same time we are trying to be thoughtful based on particularly this year comping off of a extraordinary growth fourth quarter last year where the direct retail business grew 105% in Q4 2013. And so we are cognizant of that, trying to be thoughtful.

Okay, make sense, thanks a lot.

John Blackledge, Cowen and Company.

Great. Thanks. Just a couple questions. The revenue per active customer was better than we expected. Was that mostly driven by the higher order frequency or are there any other key drivers or calloffs? And then the customer account growth of over 60% was pretty much in line, great growth. Can you talk about the drivers again and then thoughts on customer growth in the fourth quarter and how we should maybe think about it for 2015? Thank you.

I'm sorry, repeat the first question? (multiple speakers) Revenue per active customer continues to look good. I think -- look, this is -- there's a combination of factors. We are continuing to see good repeat. You can see that in the number of orders per customer now at 1.65. And I think as we discussed in the past, AOV will move around a little bit, revenue practice customer will move around a little bit. We are very focused on driving new customers and more repeat of our existing customer base. And less focused on that -- the outputs of AOV and revenue per active customer.

And the customer account growth?

This is Niraj. I'm just going to chime in a little bit just there. We talk a lot about frequency. Our goal is to build a large base of customers that we believe are very loyal to us and we are doing a lot to drive that.

So as Michael said, some of the detailed metrics end up being outputs of the strategies we put in place that we are excited about like some of the merchandising things I mentioned. In terms of customer account growth, the way we think about that is obviously we are investing a lot in marketing to drive customer accounts. And we're trying to drive it though with the right customers. Not just -- so it's quality over quantity but, obviously, we are looking for a large quantity of high quality.

And we are seeing good success with that. Marketing is obviously the big investment line and we are happy with how the results are coming.

Great, thank you. Niraj, can I just ask one follow-up on how you think about competitive positioning as you enter 2015, given the brand building that the Company has done the last couple of years? Thoughts on competitive positioning in market share gains, 2015 and out. Thank you.

Sure. One of the things we talk a lot about is obviously the whole market is really, really large. The online piece of it is good-sized but it's actually growing at a nice clip and we think there's a big opportunity to be one of the folks who really take share as that happens. And we believe we are putting forth the right offering to do that. Competitive landscape in this category is tricky because everyone sells home bids, right, so there's no shortage of competitors.

What I would say is that I think if you really -- if you take it from a customer standpoint, what the customer would desire in terms of being able to find just the perfect item at a price you can afford. Hopefully a company will buy beautiful merchandising and get great service and fast delivery and this whole laundry list of things in home, which is what everyone else wants to own different items. We can't inventory it all and still provide it. I think we've got something particularly unique.

So we tend to not focus on executing strategies against competitors, and we would rather focus on doing things that we believe will drive against what our customer wants. And we feel like the customer -- the mass-market customer has historically been underserved because of the limitations to the business models with the other competitors and we're just focused on trying to provide her with things we think is much more preferable for her.

That's great. Thank you.

Aaron Kessler, Raymond James.

Yes, hi guys, good quarter. A couple questions. First on the partner channel, that came in a little above our expectations. Anything you would call out there in terms of maybe driving some outperformance on the partner channel? Secondly, just from an accounting perspective, the membership rewards, should we think about sales and marketing for contra revenues? And third, just in terms of maybe that checkout process, I know you have PayPal. Anybody else you would consider adding to maybe further reduce friction on the checkout process if that's an issue? Thank you.

I'm just going to jump in -- this is Niraj -- and just talk about the partners in the Michael can chime in on some of your other detailed questions. But on partners, what I would say -- that is a business where we certainly are primarily focused on growing our direct retail business. Those are our owned and operated sites, those are our brands where customers are coming to us directly. We build that direct customer relationship, and then, frankly, we can grow with them over time without constantly reacquiring them or paying a marketing fee, what have you.

So the partner business, we have some great partners in that business, but there's choices we make in that business in the sense that it's not our primary focus, it's our secondary focus. And so as a result, the revenue in that business, I wouldn't say is necessarily optimized around doing any last thing we can do to grow it. We make choices about who our partners are, so on and so forth. S

o that is not our primary focus. And that's going to result in maybe results that are a little more volatile there.

Aaron, on the question about how we do the accounting on the membership, it's effectively contra revenues, so we basically deduct from the revenue. We are taking the sort of expected future benefit of that reward and then account for it that way. So it's sort of -- we take it right up front effectively. There's no long-term impact. And then on the question around PayPal payments and PayPal, I think generally we're focused on -- with now 2.9 million customers, what we're really looking for is if there are payment methods that a big chunk of our customers, in a very popular way want to use, we will certainly work to make those available for them. We want to make it as easy as possible for people to check out, but I don't think you should be looking for us to be sort of at the leading edge of new technologies on checkout until we really start to see consumer adoption and it really making sense for our customers.

Great, thank you.

Chad Bartley, Pacific Crest.

So, relative to our expectations, it looks like you are able to reinvest most of the revenue upside in the quarter, so I was curious what types of advertising and marketing you deployed those dollars, particularly later in the quarter. And then one follow-up, thanks.

Yes, sure Chad, it's Narij. The way -- our marketing spend is heavily online so we have a very meaningful TV program for brand building, but then the vast majority of the dollar -- really you can think of it is online, really focused on new customer acquisition of the right types of customers. So the spend strategically has stayed on the same track that it's been on where we run TV at a certain level. We continue to do that build up our brand, and then we really are primarily acquiring customers through online advertising.

Okay. And then just looking at Q4 guidance, particularly for the direct revenue line, I think it implies 24% to 30% sequential growth. It's a little bit better than we saw last year so just curious if there's anything you would highlight in terms of what's different either internally or maybe externally that you guys are taking into account. Thanks.

I don't think there's any sort of particular difference. As Niraj said a minute ago, we are very thoughtful about that group of partners at this point and I think we have pretty good insight into what they can drive in the fourth quarter. So that's how we sort of built up that plan. But I don't think -- it's not like there's some substantive difference.

Obviously the one thing that has changed strategically year over year is that we are much more focused on driving our direct retail business as opposed to the partner business. And so, I think going forward will continue to look a little different than it did in the past.

Michael, sorry, I was actually asking about direct revenue which seems to imply stronger sequential growth in terms of your guidance, and I was just curious if there was anything that you guys would highlight whether it's something you're focused on in terms of maybe different initiatives or in the external environment.

Yes, again, I wouldn't point anything specific there. I think the guidance is, at this point, our best look at revenue for the quarter. And again, we take it -- obviously there's a much more detailed build up to get to that number. And I would continue to point out that we are comping off of a pretty extraordinary 2013 as the moment that the transition from the micro sites to Wayfair really took off.

Shawn Milne, Janney Capital Markets.

I wonder if you could go back to your advertising spend a bit and someone asked about fourth quarter, but I don't know if you could add maybe a little bit more color on how you see the breakout in terms of brand spend over the next few quarters versus more variable online. And I think there was some comments coming out of the road show that the brand number would begin to level off. If you can add a little more detail on that and I have one follow-up, thanks.

I think the way I would describe it is that the televisions, the Wayfair brand in the United States, we feel like we run television at a level that is a good level to build a national brand at, so we don't necessarily think that's going to go up at all in line with the revenue or anything of the sort. We think that could go off at a very moderate pace. So that television number, which has grown to be a pretty big number in a relatively short period of time. We feel like it really -- I think that's -- when you think about what could -- you think of as leveling off or going up at a very modest pace, that that would be that whereas we think of the online spend, the vast majority of the spend as being much more for direct customer acquisition. And there, we are trying to attract new customers that have a certain kind of lifetime value of behavior and there, we are spending X amount of dollars to get Y amount of customers on and so forth. And that is where the bulk of the dollar is. So I think that's the way to think about the two parts differently.

And in terms of just the online component, it would be great if you could add a little bit more color on where you are seeing signs of strength in customer acquisition and how you are deflecting some of the online inflation costs, which are pretty typical but certainly more pronounced in the social side of the business.

As you would surmise, we are very quantitative in our approach to how we do everything including, frankly, buying advertising. And so I think a lot of -- certain markets as they mature, end up being prone to inflation in certain periods of the cycle and we basically -- we won't -- there's not very much in the way of advertising that we will do because we feel like we have to be there. So we try to be very savvy about where we invest effort. We also try to stay on the early cutting edge of different channels and technologies because there's generally great opportunity there earlier rather than later. So I would say a lot -- we try to avoid inflation to a high degree and I would say to a good degree, we are very successful with that.

Just lastly for me, Michael, you talked a little bit about gross margins moving around quarter to quarter based on mix and that makes sense. I do believe though you were talking about some longer-term leverage in that line item. I don't know if the next several quarters, the next few years, is that just leverage over 3PL providers in your network and maybe a little bit more color on that? Thank you.

For the long-term gross margin, the way we think about it is that there is obviously a whole mix of things that are in there but we think that there is an opportunity as we gain additional scale, as our transportation delivery network becomes increasingly dense, and then frankly as we continue to have success with a lot of the exclusive or private label products, that we would still offer on a basically very light or no inventory basis but does get us better margin. Those things, we think, basically factor in and will increase the percentage gross margin over time.

That said, it's not a number we're very focused on moving up as fast as possible. There's a balance to it. We do want to see it rise but we also are making investments along the way. So we do think there's a good long-term gross margin story; but it's not a kind of acute near-term phenomena.

Okay, great, thank you.

Laura Champine, Canaccord.

Niraj, just to that point, what percentage of sales in Q3 were exclusive in private label products?

Yes, sure. So we haven't been disclosing the specific number on that but what I would say is it is still relatively small and historically even smaller than that. It's growing at a nice pace, but even today, it's not a big percentage. That -- we were optimistic about that growth, but that growth is still ahead of us. Got it?

Thank you.

Mark Miller, William Blair.

Could you -- you may not want to give the exact percentage of orders from repeat customers but could you give us some general sense? Is that something you expect to climb in line with the trend you saw on the first half or how should we think about that waiting between repeat and new customers?

I think, Mark, we continue to be very focused on repeat. The challenge in giving you an exact answer is that it is obviously somewhat tied to how many new customers we're bringing on board. So as the efforts of our online advertising and TV continue to drive new customers a couple hundred thousand this quarter, and obviously that increases the denominator, making it harder to drive repeat up, even though the existing customers are repeating more often. But I think if you look at what has transpired with repeat orders over the last year or so, I think we expect to see a continued March there, but it's going to have some quarter-to-quarter variability, largely tied to how successful we are being bringing in new customers.

Okay, great, thanks. And then just some perspective on growth of daily deals or flash sales, relative to the growth of items that are everyday assortment regular offering?

Sure. So I mentioned earlier, we don't really break out the sales of our different brands. Obviously Joss & Main really functions primarily as the flash sale take business model. We believe that target audience there are home to core enthusiasts and so we believe the strategy is actually more akin to using content and merchandising to drive revenue, but it uses that sort of ever-changing assortment concept. So that would be flash sales-oriented.

On the Wayfair brand, which as you guys know is our biggest brand by far, there we do have a program where we lost new features every day. Some are curated events, some are function-based collections around call it spring cleaning or whatever the topic might be. Obviously around seasonal topics as well, which is very pertinent right now.

That said, the Wayfair business really trades up the fact that we have a tremendous selection across all the home categories; and so you could almost think about what we do every day is we give the customer a reason to want to think about us and reason to check out what we're doing. But that keeps us top of mind, but that's not necessarily what you need to buy from us.

If we are top of mind, it may occur to you that you're thinking about getting that area rug replaced that just got stained and you may come shop for it with us, not necessarily because there's an event about rugs. More because we are top of line. I would just say that we are primarily focused on being more evergreen go-to destinations for home. That's really the strategy and where we see the revenue.

And the only thing I would add there, Mark, is oftentimes, even when we are putting out a daily sale, it drives business in the everyday catalog. We can see those folks come in through the daily sale email but then go find something somewhere else in everyday catalog and actually not purchase the daily sale. So it's really about staying top of mind and driving repeat for the everyday purchase.

Got it. Okay, thank you.

There are no further questions at this time. This concludes today's conference call. You may now disconnect.