Wayfair Inc (W) 2015 Q1 法說會逐字稿

Good morning my name is Jonathan and I will be your conference operator today. At this time I would like to welcome everyone to the Wayfair Q1 2015 earnings conference call.

(Operator Instructions)

Ms. Kate Gulliver, Director of Investor Relations, you may begin your conference.

Good morning and thank you for joining us. Today we will review our first-quarter 2015 results. With me are Niraj Shah, Co-Founder, Chief Executive Officer and Co-Chairman; Steve Conine, Co-Founder, Chief Technology Officer 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 2015. These statements are only predictions based on assumptions that are believed to be reasonable at the time they are made, and are subject to significant risks and uncertainties. You should not rely on these forward-looking statements as representing 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. For a discussion of factors that could affect our future performance, results and business, please refer to our annual report, or Form 10-K, 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 and the slides accompanying this call which contain descriptions of our non-GAAP financial measures and reconciliations of non-GAAP measures to the nearest comparable GAAP measures.

This call is being recorded and a webcast 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. We're pleased to report strong Q1 2015 results.

Total net revenue for the quarter was $424.4 million, an increase of 52.3% over Q1 2014. Our direct retail business contributed $369.4 million of revenue, 87% of the total, for a growth rate of 63.4% over the same quarter last year.

As a reminder, our five home brands include Wayfair.com, Joss & Main, AllModern, Birch Lane, and DwellStudio. We are very excited about the acceleration in the growth rate this quarter for our direct retail business. While growth has consistently been strong across the entire business we are very pleased to see an acceleration in the growth rate in the direct retail business this quarter.

The decision we made to strategically increase our advertising spend at the start of 2014 helped attract new and higher-value customers, driving both revenue growth and advertising spend leverage this quarter. We believe the growth rate this quarter underscores the size of the market opportunity, the rapidly changing and favorable dynamics of how customers purchase home goods, and Wayfair's unique position in the market.

As we have said before, the market opportunity for Wayfair is very large. Euromonitor estimates that spending in our category in 2018 will be $264 billion in the United States and $308 billion in Europe. That's a combined $572 billion market opportunity in the geographies we serve.

Of course the online portion of the market is still just a fraction of the total. When we started Wayfair 13 years ago people didn't think that customers could get comfortable buying furniture and decor online. But over the past decade, as consumers have acclimated to purchasing a wide range of products online, and as the advantages to the online shopping experience have become apparent, that is to say, vast selection, inspiring merchandising, and attractive prices, all from the convenience of one's home, we have seen growing consumer comfort with purchasing furniture and decor online.

Within this favorable market context, our team continues to refine, expand and promote the Wayfair offering as we work to become the online destination for all things home. And our direct retail growth rate this quarter is reflective of all of that work.

As of April, Wayfair.com now enjoys 62% aided awareness. We believe this growth in brand recognition over such a short period is driven largely by the increased marketing efforts we have undertaken over the past year. As a result, we ended the quarter with 3.6 million active customers, an increase of 49.3% from Q1 2014 and up 11.8% from Q4.

While new customer growth has remained strong our growth rate in Q1 was also driven by improving repeat customer behavior, further underscoring the strength of our offering. Orders from repeat customers reached 53.9% in Q1, up over 300 basis points from Q1 2014.

A key driver of both our customer acquisition growth and repeat gains is the consumer experience on our site. A whole host of teams, including engineering, product, merchandising, design, storefront all work together to help our customer discover the product she wants in an easy and engaging manner.

This is not an easy task with over 7 million items for sale. So, to give you a little more color on how we think about the site and storefront and the improvements we've made and all the teams that work on these initiatives, I'd like to turn the call over to my Co-Founder Steve Conine.

Thanks, Niraj. And thank you all for joining us today. As Niraj described, the way the consumer engages and interacts with our sites is critical to getting both that initial purchase and helping to drive loyalty. We believe our site experience, custom-built for the unique needs of the furniture and decor market is the key differentiator for Wayfair.

There are hundreds of people at Wayfair, from engineers to designers to merchants to data analysts who work every day on refining the Wayfair shopping experience. For example, our Wayfair.com site and product team, comprised of over 200 merchandisers, designers, editors, engineers, products managers and business analysts, track our customer behavior throughout her shopping experience to understand where and how she engages with the site and our products. The teams use both technology-enabled and hand-curated design elements to help improve customer engagement.

With over 7 million different items we likely have what a customer is looking for. But her sense criteria can't easily be typed into a search bar. For example, bathroom vanity for small bathroom is highly subjective. Our site merchandisers aim to help you find that perfect end table, decorative pillow or tabletop accent in the most engaging, exciting and efficient way possible.

Recent examples of this work are our new category landing pages, the page a customer first clicks on when shopping a specific product group. Previously these pages were entirely computer-generated and only showed customers basic navigation options. From the more than 3 million customers we sell to today and the millions more who visit our site, we've learned that to find that perfect item for your home it takes a lot more than basic search and navigation.

Our new category landing pages help the customer truly discover the right product by combining proprietary imagery from our photo studios, helpful content and buying guides created by our editors, trend forecasting from our merchants, and enhanced navigation and discovery from our engineers. The result is a 25% to 35% reduction in exit rates on our revised landing pages in Q1 2015 compared to the same period a year ago.

In the past nine months the site merchandising team has updated over 600 of these pages, and we expect to see continued improvement as we roll out this initiative across our family of brands. For example of the types of changes we've made to the category landing pages, please check out the slides accompanying this call on our Investor Relations website.

Of course, the right technology infrastructure is critical in enabling a high-quality customer experience. Our over 300 engineers are continually updating both our front-end and back-end infrastructure. Among the many initiatives they've focused on recently was a complete overhaul and updating of our JavaScript framework. We know that site speed impacts revenue, and as our user experience gets more dynamic we need to maintain and improve our speed.

Our new JavaScript framework is approximately 3 times as fast as our old framework for typical browser activities, with less than half the code. Because there is no existing commercially available solution for our specific needs, this work was done entirely in-house starting this past November. The new framework allows our designers to use more exciting content on the site while improving the user experience through faster speeds and better customer interaction with the storefront.

Our engineering talent and the technology that enables both the front-end customer experience and our back-end supplier management and fulfillment processes are key differentiators for us. And, therefore, we are continuously updating and refining our tech infrastructure in much the same way that we regularly evaluate and work to improve the way the customer experiences Wayfair. We believe the improvements made this quarter, both in the underlying site architecture and the resulting user experience, help how to contribute to the direct retail growth rates, and will continue to do so going forward.

I'd now like to turn the call back over to Niraj.

Thanks, Steve. Before handing of the call over to Michael I'd like to focus for a minute on our advertising spend. It was a year ago, in Q1 2014, that we began to aggressively ramp our advertising spend to both grow our brand awareness and improve customer lifetime value through the acquisition of customers who have a higher propensity to repeat.

We've made significant progress on those goals throughout 2014 and into 2015 as awareness, customer growth and repeat behavior have all continued to improve. We're particularly excited that this quarter we're seeing these improvements while showing meaningful ad spend leverage.

On this call last quarter I shared with you that advertising spend as a percentage of sales was expected to improve by 200 basis points year over year in Q1 2015 as a result of comping over the large step up in advertising Q1 2014. While we are excited to be able to deliver on that forecast with 220 basis points of advertising spend leverage achieved year over year, while improving in our key metrics of customer acquisition and repeat behavior. Throughout 2015 on a year-over-year basis we expect to see continued leverage on this line item as our somewhat fixed TV ad spend leverages and as we see ongoing repeat buying behavior from our previously acquired customers.

Overall we are very excited about the acceleration of the direct retail growth rate this quarter. We believe this growth is a clear result of the work that we've done to improve the customer experience, expand and improve our selection, refine our logistics infrastructure, and grow our brand. And we're excited about the impact these efforts have had on revenue growth and advertising leverage.

Now I'd like to turn the call over to Michael to walk through the quarterly financials in a bit more detail.

Thanks, Niraj. And good morning, everyone. I'm going to highlight some of the key financial information for this quarter with more detailed information available on our earnings release and in the slides accompanying this call, both of which can be found on our Investor Relations website. For the first-quarter 2015 our total net revenue was $424.4 million, a year-over-year growth rate of 52.3%. As Niraj described, this growth was driven by our direct retail business which generated net revenue of $369.4 million, a 63.4% growth rate over Q1 2014.

Our other business, which includes revenue from our small media business and our retail partners, grew 4.3% to $55 million. A little over a year ago we started the strategic de-emphasis of our retail partner program to focus more on the direct retail business where we own the customer relationship.

As Niraj and Steve highlighted, we are particularly excited with the direct retail growth rates this quarter. As a reminder, Q1 2015 is comping off a very strong Q1 2014, a quarter that had direct retail growth of 87.4%. The growth in 2015 was driven by success in all our sites but in particular continued strength and momentum in our largest business, Wayfair.com.

Our gross profit for the quarter, which is net of all product costs, delivery and fulfillment expenses, was $102.8 million or 24.2% of net revenue. This is compared to 23.4% in the same quarter last year and 24.1% in Q4. As a reminder, we do see some quarterly fluctuations in gross margin due to the wide variety of products we sell.

As with last quarter, I will present the operating expenses on a non-GAAP basis excluding the impact of equity-based compensation and related taxes which totaled $8.2 million in Q1 2015 and $4.5 million in Q1 2014. As a reminder, the equity-based compensation expense is recognized in all line items that have headcount. For a reconciliation of GAAP to non-GAAP reporting please refer to our earnings release and the slides accompanying this call on our Investor Relations website, which include a version of the P&L on a non-GAAP basis excluding the impact of equity-based comp and related taxes.

Customer service and merchant fees were 3.7% of sales compared to 3.9% in the same period last year. Advertising spend was $58 million or 13.7% of revenue in the quarter compared to $44.2 million or 15.9% of sales in Q1 2014. As Niraj spoke to a minute ago, and as I described on our last call, the majority of the leverage in 2015 is expected to be from the ad-spend line. Repeat buying behavior by previously acquired customers helped drive ad spend efficiency in Q1, as we need to spend far less on driving our existing customers to buy again.

Orders from repeat customers rose to 53.9% of total orders compared to 50.7% in Q1 2014. And, remember, this number is somewhat muted because the large number of new customers added in the quarter may not yet have had a chance to repeat. TV advertising provided additional leverage due to the somewhat fixed cost nature of our TV spend for Wayfair.com in the US. We expect this spend will continue to grow but at a rate far lower than revenue, helping to drive the leverage we see in ad spend.

Even with the leverage in ad spend we are still seeing strong gains in customer acquisition, adding 380,000 net new customers for 3.6 million total active customers. This compares favorably to the 318,000 net new customers gained in Q1 2014 and the 359,000 net new customers gained just last quarter. We believe this continued strength in new customer acquisition is a result of our increased highly efficient ad spend and the growing awareness and resonance of the Wayfair brand.

Our brand building effort began with the rebranding of the site in 2011 and accelerated last year with our increase in ad spend. This growth in new customers, combined with the more favorable repeat dynamics, contributed to our strong revenue growth this quarter.

On the remainder of our operating expenses we achieved higher than forecasted leverage which flows through to the EBITDA margin. These categories are largely headcount related and the leverage is somewhat due to slower than expected hiring.

To continue to meet the needs of our business and grow, we had planned to expand teams in merchandising, marketing, technology and operations throughout 2015, but with a hiring emphasis in Q1. We believe the wide range of talent on our team is truly what differentiates us from our competitors. And for any position we will only hire when we find someone with the right fit and the right skill set, individuals who are hard-working, intelligent, team oriented, and obsessive about data.

While we continue to find talented people, we hired a net total of 191 people in Q1. The rate of hiring has been slower than forecasted. We expect to hire more people throughout the year which will offset some of the leverage gained in Q1.

Our merchandising, marketing and sales spend on a non-GAAP basis was $19.4 million or 4.6% of net revenue compared to $11.3 million or 4.1% of net revenue last year. This category is largely headcount. An increase in spend reflects our continued focus on improving the customer experience through the product offering and front-end site, as well as our brand-building efforts. We regularly added headcount to these groups to meet the growing needs of our business and we'll continue to hire for these teams throughout the year.

Non-GAAP operations, technology and G&A expense was $28.6 million for the quarter or 6.7% of net revenue compared to $22.1 million or 7.9% of net revenue in Q1 2014. Our engineering and operations teams are the backbone of our organization, building the infrastructure necessary to provide our customers with a best-in-class experience from product discovery to product delivery. While we will see some leverage in these teams in 2015 the 120 basis points of leverage this quarter was partially a result of delayed hiring. We do anticipate ongoing hiring in the next quarter as we build out our site and logistics infrastructure for our expanding customer base.

Adjusted EBITDA for the quarter was negative $12.3 million or negative 2.9% of net revenue compared to negative $19.4 million or negative 7% of net revenue in Q1 2014. The year-over-year improvement in EBITDA margin was largely driven by leverage in our advertising spend. The remaining improvement was a result of the operating expense leverage I just noted.

Non-GAAP free cash flow for the quarter was negative $51.4 million based on net cash from operating activities of negative $35.2 million less capital expenditures of $16.2 million. While our low inventory model results in attractive working capital dynamics, due to the timing of supplier payments post the strong holiday season our first quarter typically has a large negative free cash flow. This year our high growth in Q4 means that we had a larger cash outflow for supplier payments in Q1.

Non-GAAP diluted net loss per share was negative $0.23 on 83.2 million weighted average common shares outstanding. As of March 31 we had $359.6 million of cash, cash equivalents and short- and long-term investments. This quarter we moved some cash to instruments with slightly longer maturities that under accounting rules are characterized as long-term but have maturities of only two or three years.

Our inventory level was $20 million or 1.4% of LTM sales. Our business model and our strong supplier relationships have allowed us to maintain very low inventory levels even as we have expanded selection, styles and proprietary offerings.

Overall we're very excited with our first-quarter results. I'd now like to offer guidance for Q2 2015. We forecast direct retail revenue of $380 million to $390 million. Our direct retail revenue guidance and growth rate reflects the acceleration we saw in the business in Q1.

We expect other revenue to be between $45 million and $50 million for total net revenue of $425 million to $440 million. We expect EBITDA margin of negative 3.5% to negative 3.75%.

Similar to Q1 2015, we expect year-over-year leverage on the ad-spend line as we continue to see the benefits of our strategy to acquire more high-value customers, though remember, the ad-spend line shows leverage on sequential quarters last year and, as such, the year-over-year ad-spend leverage will be less than in Q1.

As I described last call we give EBITDA guidance as a percent of revenue. This is how we manage the business within the quarter and make ongoing investment decisions. Therefore, if we over achieve on revenue the nominal dollar losses, albeit at the guided or even better percentages, could yield a higher nominal dollar loss.

For modeling purposes for Q2 2015 please assume equity-based comp expense of approximately $10 million, average weighted shares outstanding of 83.5 million, and depreciation and amortization of approximately $7.5 million. Now let me turn the call back over to Niraj before we take your questions.

Thanks, Michael. We're pleased with the first-quarter results, in particular the revenue strength and growth acceleration in our direct retail business. We believe the investments we made in 2014, and continue to make this year, are creating an increasingly differentiated customer experience, and are helping us create the leading site for the home. This in turn leads to higher growth, stronger customer loyalty, and allows us to deliver long-term value for our investors. We remain excited about the incredible market opportunity here and we look forward to sharing more good news in 2015 with you.

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

(Operator Instructions)

Neely Tamminga from Piper Jaffray.

Good morning and congratulations on some great results here. First question here for Steve or Niraj. The AllModern app launched in the quarter and we're just wondering, when you guys launch these apps on the new brands, do they tend to be pretty good lead generators of new customers?

Or does it help with the sticky factor in keeping that customer to repeat purchase? And then are there more apps on deck for some of your brands? That's the first question and then I have a follow-up for Michael. Thank you.

Thanks, Neely, and nice to hear from you. The answer is actually what you said -- the sticky factor. I'll let Steve comment on a little more of how we think about it but it's totally for our core base.

When we first launch these, we do them for the loyal customers. And then as we start improving the app we'll definitely start using more for acquisition. You'll differently see us roll out apps across our additional brands this year, particularly internationally, which is exciting. And then we've just launched our Android app for Wayfair, as well, so we now have a native Android app, which we think is a nice improvement over the version we had out previously.

Great. Thank you very much on that. And then, Michael, a question for you.

Can we just step back a little bit. We've had a few quarters now underneath our belt, great results, revenues keep beating pretty meaningfully. Could you share with us a little bit more about your philosophy on guidance giving? The numbers that you put out there, is it about where you think you're going to be or is it about where you're actually currently trending? Could you talk us through a little bit more on that? Thanks.

Sure. Thanks, Neely. We're guiding today really based on our most reasonable view of the performance from the quarter to date, so what we've seen so far in the quarter, just as we did last quarter. And we're not trying to guide to some sort of outsized beat. But ultimately this is a consumer business and the customers have to show up. And while the past performance is obviously an indicator, sometimes we're going to over-achieve and sometimes we'll under-achieve.

This also gets magnified, I think, when you look at the direct retail business growing north of 50%, or you're at an inflection point in growth in your growth rate. It just makes it harder to predict the balance of the quarter.

Clearly last quarter we ended up with phenomenal performance towards the end of the quarter that resulted in the large beat from our prior guidance. But we have to be prudent and try to give you guys a reasonable view of the performance based on what we know through today. That's philosophically how we're thinking about it.

Great, thank you so much. And best of luck out there.

Matt Nemer from Wells Fargo.

The first question actually is on the gross margin. I realize there's some mix effect, which is somewhat out of your control. But I'm wondering if you could talk to how much of the improvement was driven by mix and how much might be attributable to core improvements in processes and distribution, et cetera. Thanks.

Sure. Thanks, Matt, it's Niraj. We've said for a long time that over time gross margin will go up, albeit at a moderate pace due to three things -- private label, transportation efficiencies, and greater scale getting us better economics with suppliers. And while those three are all true, I would say what I said last quarter, which is that gross margin is going to bounce up or down in a band, which is not 10 basis points but tens of basis points. And last quarter I said it was at the higher end of the band. This quarter I would tell you the same thing, it's still at the higher end of that band.

So, in other words, if it was in the higher 23%s, that wouldn't really, in my mind, be going down that much. So, we had two quarters where it's been in the higher band. And those three things that will drive it up over time are all in play. But the shift to private label, that plays out over time.

The transportation cost efficiencies we continue to get but there's a lot of things in there that caused that to play out not super fast. And same with scale. So, long story short, think of our normalized gross margin right now still in the high 23%s, with an incline expected over time, with this quarter just being at the high end of that plus or minus band.

Okay great. That's super helpful. And then just secondly, I know you're not providing details by brand but I'm wondering if you could just comment on the Joss & Main performance given the churn that we're seeing on some other flash platforms. Thanks.

Yes, sure. We think of Joss & Main as being our brand for home decor enthusiasts. The way that brand is structured, with the daily engagement, the ever-changing offering, makes it not a good fit for the bulk of the customers but makes it a great fit for a small set of the customers.

Now, with our aspiration to be the preeminent online home retailer, the way we think about it is we've got this big infrastructure that lets us handle sourcing millions of items, very efficient delivery into the home, just all kinds of things that are fairly expensive to do in a scale you can do well. So, once you have that, it makes sense for us, in addition to Wayfair, which can be a household brand name and a go-to site of really large scale, it makes sense to tackle these niche offerings like the lifestyle retail brands we have that give us a lot of private label in Birch Lane and DwellStudio, and the core enthusiast brand, Joss & Main.

That said, they all have different sizes of the TAM. These other brands outside of Wayfair are going to address smaller pieces of the TAM. We don't measure them necessarily as expecting them to grow at similar rates to one another, or to get to similar size.

But we have profit profile in mind for all of them and we focus on them gaining outsize share up until the point where they're reaching maturity of their TAM, and then gliding into a profit profile that's what we want. And all of which making sure that they ride on this infrastructure we've built so they don't create their own incremental fixed cost past that of the actual merchandising and marketing, which they need to bear as part of the profit profile we wanted to get to.

That's how we think about it. There's no question the very large long-term opportunity from a scale standpoint is driven by the Wayfair brand, and there's also no question that these other brands help us address the overall home market, which we want to be the company on the online side that's the dominant guy.

Got it. Great. Thanks so much.

Heath Terry from Goldman Sachs.

I was wondering if you could give us a little bit of sense as to what categories were particularly strong outperformers or, to the extent that there were any that were under-performers this quarter especially as it relates to your marketing spend and the ROI that you target for those given categories.

And then to the extent that you're seeing this higher leverage or higher degree of leverage on your marketing spend, as you increase back to the normal ROI that you target in these given categories, is it reasonable or are you guys anticipating in the guidance that you're giving that we'll see growth accelerate as you spend back down to that ROI? Or is there something else going on in that math that we should be paying attention to?

Okay. Thanks, Heath. Let me try to answer your question. First, you said are there some categories outperforming others, and then how do you think about that relative to ad spend. The first thing I would just say is we don't think of ad spend -- very little of our ad spend is tied to categories.

The vast majority of our ad spend is really either around building up the Wayfair brand proposition -- if you think about what we do with television or what we do with some of the other online advertising we do that is broad based. That's a smaller piece relative to the second piece. Then the vast majority is about online customer, new customer acquisition. And online new customer acquisition, again, is generally around the notion that Wayfair is the ultimate home store, not with category-led offerings.

So, while there's some category- or product-led stuff, like some search terms on Google or some of the PLA type advertising on Google, which is product-led, that's really not a terribly large portion of the total. The way I would think about it is, quantitatively we certainly measure any advertising we do for it to hit the ROI goals we have. So, in that sense, it's generally fairly equal. We don't try to invest in one category versus another from an advertising perspective.

And then what we do from a merchandising standpoint, when we get a customer we're obviously trying to put them in front of categories we think that are interesting to them. And in the case of an emerging category -- for example, we're doing a lot with seasonal decor and decorative accents right now -- we certainly will feature them fairly broadly to see if we can get engagement with the base. The good news is we are. And in that sense maybe it's a little bit more of a speculative bid but it's unrelated to the advertising. That's more of a merchandising decision of what you're leading with, say, on the homepage or in that seasonal promotion or what have you.

Now, to talk a little bit about ad spend leverage unrelated to categories, the reason we're getting leverage right now is actually, it really has nothing to do with spending less or pulling spending down to a tighter ROI target. It's actually a totally different reason we're getting leverage.

We're getting leverage simply because -- the way to think about it is, the ad spend today, or has been through all of 2014, is comprised of television, which we've said is a $30 million-odd spend, which seems like a lot in absolute dollars but relative to total ad budget on the direct business which is, call it, in the order of magnitude of $200 [sic -- $200 million], it's a relatively modest piece. And think of it as somewhat fixed.

And then you've got a piece of the ad budget which is for repeat business which runs at a pretty low single-digit percentage of revenue cost relative to the revenue there. So, the vast majority of the dollars are for new customer acquisition. And what happens is, you spend that money for new customer acquisitions, you get those people. They don't even buy necessarily in that period but they buy in future periods, and then they repeat in future later periods.

So, what happens is, as you're growing the revenue line, it's being driven by the fact that more and more people are repeating, and people that you've gotten engaged with the brand in prior quarters become customers. The math is you can actually keep spending a larger amount in absolute dollars and still be driving down the ad cost as a percentage of revenue significantly just by the nature of how TV is fixed and the nature of how inexpensive the repeat businesses is. And you can see that the repeat business is growing at a very good clip. That's the shape of it. Michael, do you have any thoughts on that?

The only other thing I'd add, Heath, is that when we gave guidance last quarter I think we were very clear about 200 basis points of leverage on the ad spend line. And I tried to make clear in my comments earlier that people shouldn't expect that level of leverage year over year because everyone needs to remember that from Q1 to Q2 last year we showed over 100 basis points of leverage in the ad spend line sequentially.

We will continue to have both sequential and year-over-year leverage on the ad spend line, but it won't be as dramatic a number as it was in Q1.

Great. Just to follow up, maybe to simplify it a little bit, besides seasonal, which you mentioned, any other categories that did outperform or any that under-performed absent the piece relative to advertising just relative to over growth in the business?

The way I would tell you to think about it is, I think for broad-based customers we're becoming increasingly their go-to in furniture and decor. And we obviously have a range. We have furniture which is larger ticket. We've got a lot of decor, which you think of middle ticket, so think of rugs and lighting. And if you're renovating you can think of things like plumbing fixtures and things like that.

And then we have lower ticket things -- decorative accents, seasonal decor, housewares, and other categories. It could even be entry price point bath mats and pillows, accent pillows and the like. And we're seeing pretty good strength across the board, and we're also seeing good strength in customers who engage with one of these bucket starting to buy across the different buckets. We think that's a pretty big opportunity for us.

But it's not really any one way trend. And you can see that in the sense that our average order value, which is a little over $200. $200 is an odd number, because nothing we really sell is $200. Like most things you think of are either less than or more than $200. It just shows you that mix. And the fact that it's not really moving is indicative of the fact that we have strength across the board.

Great. Thanks, guys.

Michael Graham from Canaccord.

Good morning, guys, and congrats. Just two questions. One is, you talked a lot about the data that you gather on the shopping experience. I'm just wondering, as you look forward, where there are still significant conversion opportunities to convert potential customers into customers, and to convert customers into purchasers.

Just on the repeat customer you were just talking about, it's been on a steady march upward. How high do you think it can go? And the last two third quarters I think it was down sequentially. I'm just wondering, is that a seasonal patterns that should repeat itself? And what's going on there? Thanks.

Thanks, Mike. This is Niraj. I'll chime in and then let Michael chime in too. On the conversion side, in terms of converting, I couldn't quite hear whether you're thinking about converting folks to be active customers or whether it was just broad conversion on the site. But in either case there's a huge amount of opportunity.

Because if you look at what we're doing with merchandising, which I touched on some of with Heath's question a minute ago, there's just -- as our merchandising gets stronger, as we become stronger and stronger in these various categories, as the personalization technology which Steve's talked about in the past becomes more and more robust, which we're seeing very nice gains from all, all of these things basically contribute to customer engagement with us going up, which can be measured by any number of things like frequency of visit, time on site, all these things, and, in turn, them coming back and buying more and more often.

And the one thing I'll say on repeat customers before I turn it over to Michael, remember that repeat customer metric, too, it gets suppressed by the rate of growth of new customers. So, as we gain a lot of new customers, they, in turn are just making their first order, so that's going to hold down the number of repeat orders we could have. And despite that we have some nice growth there. But, Michael?

The other thing I'd point you to is our investor presentation on the investor website. You'll really see on page 20 there the seasonal pattern to it. There has typically been a step up in Q1 and Q2 and then it flattens out for the balance of Q3 and Q4 and then steps back up again. There's nothing that has changed in the business that would lead us to believe that pattern is going to change in any meaningful way.

Shawn Milne from Janney Capital Markets.

Thanks and good morning. Michael, let me just start. It just seems like in the numbers that you did what you said you were going to do in the first quarter. By that I mean it seems like you exited the quarter with a lot of strength and momentum in the business and reinvested back into the business. Is that a fair characterization exiting the quarter?

And just a follow-up to the question about what was stronger in the quarter. It seems like Presidents' Day, overall, online was very good in this category. Maybe if you could talk, Niraj, about any other seasonal activities you have going on in the second quarter. And then I have one follow-up. Thanks.

Thanks, Shawn. I think that is right. And I think as we continue to try and let everyone know, we're trying very hard to watch the performance of our business within every quarter, and then spend ad spend dollars as we can within the quarter in order to get to our maximum investment ability on the ad spend line.

Obviously the people side of that is a bit lumpier. Hiring is lumpier and not as fluid a lever for the business, which is why you saw a little bit of outsized leverage in some of the P&L lines that are more people oriented.

And to answer -- this is Niraj -- the question around Presidents' Day, it seems like it was solid, is there anything in Q2 -- two things I'd say. One is, Presidents' Day -- certain holidays, certainly retail holidays, they can be strong. To be honest, in the context of that quarter they can end up being some of the bigger days but the truth is they don't really swing quarters in general.

That said, there's a bunch in Q2. For example, our outdoor category is very strong in the second quarter every year. This year we're really pleased with how it's doing. But there's something every quarter. There's something every quarter so it doesn't really -- again I think you've got to be consistently strong across the board on what you're doing for holidays and the seasonal categories and all of these things. But no one thing can swing the story.

That's particularly true when we're growing at the rate we're growing at because, the thing is, the rate we're going at requires you to be growing across the board. And if you're not, a promotion or a product highlight or a strong category merchandising story, it wouldn't make up for it.

And just the follow-up -- you've hit on some of these at points but really the order frequency, I think there were some that misunderstood that it was a one-and-done in furniture, and that continues to improve year over year. Maybe a little bit more color on some of the things that you're trying to do to drive order frequency. I know you talked a little bit about personalization and Steve gave some interesting numbers around new category or new landing pages. I'd like to hear a little bit more about that. Thanks a lot.

Sure. Let me talk quickly about categories and then let Steve talk about some of what we're doing on the merchandising side of it. The one thing I'd just say on categories, just to clarify a little bit, I think we're known for furniture because of two things. One is where we get started in our business, when we got started 13 years ago. And, second, we've become the preeminent dominant guy in furniture, so in that sense it's easy to highlight it as something we're known for.

But the truth is, we talk about furniture and decor, and that goes very broadly. If you think about things like bedding sets and towels and soft goods, or things like housewares and seasonal decor, decorative accents, and even the smaller decor items like lamps or rugs, there's a lot of things that are bought with much higher frequency. You've got brick-and-mortar retailers that just hang around those categories and can even get a store base model to work in those categories. And that's with the challenges of limited selection and so on and so forth.

So, if you think about where we play, we cover all of that. We cover all the way up through furniture. And we cover these categories that are particularly important when you're renovating or remodeling things, like plumbing fixtures and lighting fixtures and flooring. So, we have a much broader breadth than I think would be covered by the word furniture. I think that's part of why the opportunity is so large. Steve can touch on some of the things we're doing on [lokfist] too.

I mentioned on the call we obviously have focused a lot on some tools to improve performance of our site. A lot of that's driven because we're trying to deliver a much more dynamic and exciting experience for our customers.

This past quarter we made some dramatic, I think, improvements on our tools that let our merchandising team curate merchandise really exciting deals and seasonally relevant products for customers, and really try to pay a lot of attention to how do you put things in front of people that are exciting and that can drive them to come back and purchase frequently throughout the year.

And I think it's a combination of using smart merchandising with smart programming and being able to analyze trends and look at the data and figure out programmatically how you want to present things to customers. But then also coupling that with smart human interaction. We really, I think, added some great talent on our team and their ability to merchandise and curate products and create things that are exciting and on point and seasonally right.

Great. Thank you.

Seth Basham from Wedbush Securities.

My first question is around some of the metrics that you talked about regarding the 25% reduction exit rate for the new landing pages. Maybe if you could take that a step further, Steve, and tell us what kind of improvement you've seen in conversion.

In general, conversion has been increasing. We always have the debate internally in terms of performance and speed and how much that can directly impact performance. And I think our point of view would be that speed is always better and it certainly creates an experience that customers are going to shop on and going to enjoy more.

It's tricky to correlate that perfectly with conversions. There's just so many factors that play into how consumer is going to make an ultimate purchase decision. I think what we're doing across the board with site performance, smart curation, programmatic personalization to really try to put things in front of you that are exciting are also factors that are helping to drive improved metrics with our customers.

And I'll just chime in a little bit. One of the things I think Steve is getting at, internally, when we operate, while conversion is certainly something we track, we actually look at some other metrics. And the truth is, our goal is really to be the customer's go-to in home, whether they are intending to make a purchase or not. So we, frankly, would rather have the customer come back every week with just any thoughts they have, even if they're not going to buy on as frequent a percentage basis as they would have if they only came when they actually need to buy something.

So, a lot of things we work on are just to be their go-to, so that, as a result, we'll capture more and more of their purchases. But that conversion percentage number gets impacted negatively if you're successful at that and then positively by things like the exit rate improvements and other things. I think what Steve's getting at is our core metrics are really all about we want to be the place where they're' engaged in and we want to reduce all friction. The exit rate was an example of a friction removal.

Got you. That's helpful. And that's actually a good segue into my second question. I know you don't report customer churn metrics but qualitatively can you speak to the trend we're seeing sequentially in year over year?

We don't give you guys quite enough data to really dig into churn. Just use the gross metrics. I think churn, if you look over the last eight quarters has remained in a relatively consistent band. It bounces up and down a little bit each quarter. But whether it's quarterly churn or last 12 months or however you want to look at it, that band's been relatively tight for the last eight quarters. So, nothing new or unusual going on there even as we add larger and larger groups of new customers.

Understood. As you strive to acquire higher LTD customers who come back more frequently, purchase more frequently, would you expect churn to go down over time?

I don't know that I would expect the churn level to go down. I think what we're doing is, we have an amazing team of people in the marketing group who are super efficient in how they spend that money to bring folks in who are those most likely high lifetime value customers. And then what we want to do is, when we find the folks within that group, as the funnel narrows, who are those folks, that's the place where we direct our effort and our energy. But I would expect there's always going to be some reasonable set of churn out of the folks who aren't the right long-term customers.

This is Niraj. Just to chime in a little bit on that, the other thing I would just say is, if you just look in absolute numbers, we ended the quarter with roughly 3.6 million active customers. And just the order of magnitude, while that's grown a lot, that's still, we think, very small relative to even in the United States alone, the audience for whom we are the best place for them for home.

If you look at that, we think there is basically, depending on how you want to count, between 45 million and 60 million households that we would, I think, be the best home option for them. And we think it's closer to that 60 million. I get that we won't get them all, but 3.6 million is still very much the early days.

So, a lot of our answers are predicated on what we're seeing. And the reason there's no diminishing return -- in fact there's a lot of improving return -- is there's just so much ground to cover ahead of us before you get to the days where you're going to see some of these things change, which would reflect the business more hitting maturity type levels, which we're nowhere close to.

Got it. Thank you very much and good luck.

John Blackledge from Cowen and Company.

Thanks. Two questions, the first one for Niraj. With the brand awareness rising and the strong customer growth improving, repeat customer count, can you talk about how you think Wayfair is positioned competitively now maybe versus a year or two ago as the Company does drive towards these big share gains in this huge market?

And then, second, would be just talk about the overall health of the supplier relationships, maybe update us on the number of suppliers, opportunity for growth and potential growth and selection or SKUs.

Great John. To answer those questions, the first question, how are we positioned competitively, what I would say to that is, on one hand, home is a very crowded field and I think it will remain that way. On the other hand, I think our offering is actually fairly differentiated and becomes increasingly so over time.

If you actually take that, which is due to a combination of what we're doing merchandising, marketing, operations, how we are using technology, through the whole offering, we're making it more differentiated. And the brand is getting stronger and stronger. I think those things, that multiplies out to, I think, us, frankly, becoming stronger on a competitive basis. That said, we still think there's a lot more we could do. I do think we're becoming stronger.

The easiest way, I think, to look at that, frankly, is that the category is probably growing, depending on whose numbers you believe, 15% a year online year over year, or 12% is maybe the low number you might see somewhere, 18% is the high number. I think most of the numbers I see are 15% to 18% for home. So, if you think about that, and then you look at the growth of our direct retail business at a meaningful multiple to that, that share taking, I think, particularly as you see it driven by repeat and those types of things accelerating in the face of marketing decelerating, I think that tells you that we're becoming stronger competitively because the customer is voting with their dollars. Short of buying that business, which you can see we're not, the only conclusion I think you can draw is they're preferring to shop and spend with us.

On your second question -- the health of supply relationships -- I think in the industry we're known for actually having incredibly strong supply relationships. I think if you were to query a couple hundred of the suppliers out there, and if you could do it in a way that they would give you their unvarnished feedback, what you would get is that I think we're one of the folks they actually would state by name as significantly preferring because, frankly, we try to create a situation that's very successful for them and very successful for us. And as a result we're both doing very well. I think you would hear that from them. That creates a lot of opportunity to grow.

From a selection standpoint, we're not really trying to bulk up in SKUs in terms of an absolute amount, we're actually trying to fill in what we think are gaps or opportunity areas in our catalog. That's still a fair number of SKUs we're adding every month but I think it's actually more nuanced than it's ever been and, as a result, it's more successful than it's ever been.

In terms of number of suppliers, the last number we stated was over 7,000. We haven't issued another official number so I'll just say over 7,000. I don't think that number, whether it be slightly different than that -- 8,000, 7,500 or whatever it is -- actually matters. It could be 7,000, it could be 6,000. The key is that you're able to really have that biggest catalog, that's broadest, that covers all the styles, all the bases, all the price points. That's where I think we win and that's what we're continuing to flush out.

Thanks so much.

Justin Post from Merrill Lynch.

I have two questions. First, Michael, nice quarter versus guidance. Do you factor in some deceleration when you guide? And what drove the outperformance in March given it was a late guide? I was just wondering if you put deceleration in your plan?

And then, secondly, you're getting obviously scale, you're growing faster than the category. Are you seeing better positioning for your brands within search engines and other marketing channels as you scale? Is there a benefit from that? Thank you.

Yes. On the question on the guide, we saw real strength at the back end of last quarter. And as I stated in my comments and tried to state earlier, we're trying to give a clear a guidance as we possibly can. When we go and build that we're obviously taking into account the performance of the quarter to date. And then we're looking at each piece of our business and how it's performing and how it's performed this past week versus the earlier weeks in the quarter, and then what we anticipate it's going to look like over the balance of the quarter.

But at the end of the day it's a consumer business. Those customers have to show up every day and make those purchases. So, there's a balancing act on our part to both look at the current run rates of the revenue and then also set a set of expectations that we feel confident enough to be out telling everybody about. But it's certainly not our goal to be creating outsized beats. It's our goal to be putting out some numbers out there that we think are the right ones.

What was the second question again?

One follow-up to that. Was there anything that was new in the quarter that drove outperformance that could carry on to future quarters? Just wondering, pick out what drove the outperformance. And the second one was, in search marketing channels is your scale starting to help you? Thanks.

Yes, great. This is Niraj. Let me just chime in on the end of the first one. Michael addressed that a little bit. And then I'll talk about search.

On the outperformance, I think the outperformance, frankly, I know this is probably an unsatisfying answer for you, but I think it's really just driven by the fact that we are, in truth, getting more and more customers, and they in turn are coming back more and more often. While you like to nail it down to one marketing campaign or one particular product offering, it's really not that cut and dried. And, frankly, at the revenue level we're at there is really nothing we could potentially come up with, short of giving away product, that would do that. It's the aggregate effect of all the things Steve was talking about, all the things that we're doing broadly in the Company.

If you think about it, we ended the quarter with a little over 2,500 people. And I think in roundabout numbers it's something like 1,600, 1,700 of them are in that fixed cost portion. So, not in the customer service and the warehouse, labor and all the stuff that's variable to the orders.

So, if you think about that, we basically have, out of the 1,600, 1,700, maybe 100 at most are what you call overhead. So, really, almost all of them are merchants and marketers and technologists and operations guys who are basically making the offering better every day. And it's the aggregate effect of that that's really driving the experience as you first shop, as you first buy, as you repeat buy. And that's what I think really is the answer to you.

The second part, just to answer it quickly, search marketing is one of our channels. It's again just a portion of our total spend. It's really not any dominant piece. And I think there what happens is, Google, who's the major player there, their algorithms are becoming more and more acute at watching customer behavior to figure out what ads to show and not show, effectively, through the quality score.

So, in other words, you'd have to pay more to show a poorer quality ad, to be more and more relative to the consumer, which is what they want because they want you to come back to them. So, frankly, I think we benefit -- to that earlier question that someone asked about the Wayfair brand, is it strengthening and how are you doing competitively. As we do a better job for our customers, you will see it in the year-over-year growth in our direct retail business and the repeat rate changes. But, frankly, Google will see it in terms of customer engagement with our site, and they'll in turn want to show us higher in free search, the quality score we have will improve which will make search engine marketing better and better ROI, and so on and so forth.

Thank you.

Mark Miller from William Blair.

Can you, Michael, maybe walk us through the flow of cash going through the year. First half, an outflow, I think. Second quarter also had a use on the working capital. But how does that look for the year, working capital, if you can help us track the flow relative to last year? And then what is your updated CapEx view for 2015?

Thanks, Mark. No substantive changes to how the cash flows in the year. A particular note this quarter, just so everyone sees it the right way, if you combine Q4 and Q1 cash flows, you'll find that those net each other off. And the reason is pretty straightforward -- we have a large number of sales in the back end of Q4 related to holiday. We collect that cash from our customers but don't play our suppliers until into January, so then that cash flows out Q1.

The cash flow rates are more normalized around how they look versus EBITDA for the rest of the quarters, for Q2 and Q3. So, I don't think any changes year over year in terms of the pattern to that.

And then CapEx, I think our CapEx will remain similar to what it's been in the last year, nothing substantively different from that. I would note that we have some flow-through in our CapEx both last year and this year, we'll have from the office buildout of the space in Boston. That's not real cash cost to us but because of the accounting some of it flows through CapEx. We'll note that as it shows up in Q2 and Q3.

That's helpful, thanks. And then just pulling that together, it looks like free cash flow use would be similar place to 2014 or just a little bit larger? Thanks.

Yes. Because we're only guiding for the current quarter I'm not going to extend out the cash flow notion. But I don't think there's anything that's changed between the relationship between EBITDA and free cash flow in 2015 as it looked in 2014.

Okay, thanks. Nice performance.

Thanks, everyone, for joining the call. We appreciate all the interest and all the questions and we look forward to talking to you again next quarter.

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