Wayfair Inc.

Standing by, and welcome to the Wayfair Quarter 1, 2020 Earnings Release Conference Call. At this time, all participant lines are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star, then 1, on your telephone keypad. We do ask that you limit yourself to one question and one follow-up question. Please be advised, today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to Jane Gelson, Head of Investor Relations. Please go ahead.

Good morning, and thank you for joining us. Today, we will review our first quarter 2020 results. With me are Niraj Shah, co-founder, chief executive officer, and co-chairman, Steve Conine, co-founder and co-chairman, Michael Fleischer, chief financial officer, and Thomas Nestor, chief operating 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 2020. We cannot guarantee that any forward-looking statements will be accurate, although we believe that we have been reasonable in our expectations and assumptions. Our 10-K for 2019, our 10-Q for this quarter, and our subsequent SEC filings identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made today. Except as required by law, We undertake no obligation to publicly update or revise these statements, whether as a result of any new information, future events, or otherwise. Also, please note that during this call, we will discuss certain non-GAAP financial measures as we review the company's performance. These non-GAAP financial measures should not be considered replacements for and should be read together with GAAP results. Please refer to the investor relations section of our website to obtain a copy of our earnings release, which contains descriptions of our non-GAAP financial measures and reconciliation of non-GAAP measures to the nearest comparable GAAP measures. This call is being recorded, and a webcast will be available for replay on our IR website. I would now like to turn the call over to Niraj.

Thanks, Jane, and good morning, everyone. We hope you're all safe and healthy. So much has clearly changed since we spoke with you last. The world's response to the threat of COVID-19 has united us all in our humanity and yet has presented each of us with unique challenges to contend with. I'm particularly proud of how Wayfair and our 16,000 employees have mobilized to keep our customers, our communities, and each other as safe as possible. We are working relentlessly to continue to serve our customers across two continents as they navigate their new realities, while managing a global, complex supply chain and doing whatever is in our power to support government and community efforts to fight the virus. Though we are all eager for a return to normal, we do believe that this unprecedented situation has highlighted the many differentiated advantages we have built as the e-commerce leader in home over the last two decades. First, I want to briefly update you on the status of our operations. Thomas Netzer, our chief operating officer, who also joins us on this call today, will discuss the practical steps we have implemented within our logistics operations to keep them safe and efficient. Second, I will share with you what we saw transpire during the first quarter as it relates to revenue and customer behavior. I will also update you on the progress we are making against the plans we put in place late last year and which we spoke to you about last quarter. And finally, we will discuss our efforts to reinforce our strong liquidity position and talk through some exciting leadership and board developments. Our corporate offices in Boston, Berlin, and London transitioned to a work-from-home model in mid-March, and we continue to operate like this today. As governments align on what a gradual reopening looks like, we are preparing for how we transition back to an interactive and collaborative workspace. with enhanced safety and distancing standards. The good news is that most of us move seamlessly to a remote setup and our productivity remains strong. With technology at the core of our corporate DNA, our workforce has long embraced many of the virtual tools that became essential when working from home. In customer service, where we already ran a hybrid model, our physical call centers closed and we transitioned to 100% work from home model. Throughout this time, customer service levels have stayed high. Critically, our fulfillment centers, cross-docs, and last-mile delivery locations remain open and have continued to operate throughout. This is thanks to the tireless work of our frontline employees who have quickly adjusted to a number of new processes and procedures to ensure we continue to serve our customers while keeping our people healthy. We have also been leveraging our logistics infrastructure in a couple of key additional ways. Most importantly, We've been able to deliver much needed supplies to field hospitals, quarantine sites, and other community locations affected by the virus. And secondly, we're working even more closely with our suppliers to forward position additional inventory at our Castlegate locations so that it can quickly reach our customers. As we all rallied as an organization to adjust and keep internal initiatives on track, the revenue trajectory that Wayfair was on in the first quarter accelerated. From January through mid-March, our gross revenue growth year-over-year was tracking in the high teens with healthy and consistent trends for traffic and conversion. Both new and repeat customer activity was trending as expected, and as typically the case, repeat order growth was outpacing new order growth. Starting in mid-March, we saw a pickup in both traffic and conversion with increasingly strong repeat behavior coupled with an acceleration in new customer orders. This period coincided with customers beginning to shelter in place at home, which led to new needs for essential products like cookware and kitchen appliances, home office products, and children's furniture and play items, and also brought to light ongoing renovation and decoration projects that customers are now taking on. The competitive landscape also shifted as many physical retail stores closed temporarily, leading customers to move increasingly towards shopping online across all categories, This pickup in demand has continued to gain momentum, and in the U.S., the rollout of stimulus monies in mid-April served as an added accelerant of new and repeat customers coming to Wayfair. As a result, we have seen gross sales momentum build across almost all classes of goods, across mobile and desktop platforms, and across all regions in the U.S., Canada, the U.K., and Germany. As Michael will detail later in the call, this very strong momentum has continued thus far into Q2. We can all debate how long current dynamics will persist. To be clear, we are not orienting internally around these revenue run rates, but this does create a unique opportunity to serve our returning and new customers and to accelerate the shift online in our category. We believe There are clearly definable long-term advantages accruing to Wayfair in this period. It is likely that e-commerce adoption is going to step change across a wide swath of categories. In our case, millions of new customers shopped at Wayfair over the last several weeks. In the process, they discovered the unparalleled benefits of our years of strategic investments to serve our core customer. Elements like our best product selections, Rich Merchandising and Visualization Capabilities, Robust Customer Reviews, Reliable, Visible, and Fast Delivery afforded by Castlegate and the Wayfair Delivery Network, and of course, our high-quality customer service. We're seeing proof of these customers' positive experiences in strong NPS scores and repeat purchasing behavior from new customers that is consistent with or better than previous customer cohorts. and we expect further brand benefits as word of mouth recommendations drive other friends and family to Wayfair. Time will tell how economic conditions affect future purchasing behavior and the size of the overall home market. But there is little doubt that the quality of experience we can offer to new and returning customers during this challenging time will serve us well in the future. I will remind you that Wayfair's revenue grew through the financial crisis in 2007, 8 and nine, even as the total addressable market declined some 30% and more than 10,000 brick and mortar stores went out of business. E-commerce adoption accelerated over this time as consumers sought the best possible selection and deals and e-commerce platforms like ours benefited quickly from lower wholesale costs, lower shipping costs and lower advertising costs against a recessionary backdrop. While our business is a much larger size and scale today, we also have huge advantages that we did not enjoy back then, such as a well-recognized household brand, a large loyal customer base, deep and strategic supplier relationships, a broader home offering with sales spread across various categories, a proprietary flexible and resilient logistics network, and a world-class technology backbone. Even as the operating environment grows more dynamic around us, Our internal focus remains the same. Back in February, we spoke to you about having now reached a stage where investing against priority long-term initiatives such as Europe, building our logistics operations, and building teams to fully penetrate the market could be coupled with adjusted EBITDA profitability and free cash flow positive status. We embarked on this plan starting in late 2019, and we are excited by our quick progress. You will have seen the early benefits of the various underlying workstreams begin to benefit the Q1 P&L, and we now expect positive consolidated adjusted EBITDA margin in Q2. To be clear, this is not driven by the incremental revenue we are seeing, but by the aggressive implementation of the plans we set late last year to deliver profitability at our then current growth rate of about 20%. All incremental revenue will be additive, and we would expect it to create significant additional profitability this quarter. While this is exciting, we are most enthusiastic about our internal plans and the statements we made back in February. We are large enough and strong enough to both be adjusted EBITDA profitable and to invest with a long-term horizon. Our plan focuses on driving gross margin expansion Increasing marketing efficiencies and gaining leverage on operating expenses while still aggressively investing into the future. Let me quickly remind you of the primary drivers behind each by walking down the P&L. And in doing so, also provide some incremental color as to the variable or fixed nature of each of these line items. Starting with cost of goods sold, which are largely variable expenses. Several key levers here are beginning to add to gross margins. First, we are experiencing improving scale benefits across many of our emerging categories and across geographies. In February, we talked about how variable contribution margins in vanities had expanded by more than 500 basis points over two years. There are many more such examples, and we are managing each of these to incremental profitability. We are also seeing unit economics improve in the UK and Germany. Second, greater efficiencies are accruing from our logistics operations as we drive higher throughput, improve delivery speeds and incidence rates, and lower costs in the process. Thomas will detail many of these initiatives later in the call, so I will not go into more depth now. Third, we have invested heavily in our house brands in a few ways, including red carpet merchandising and a growing base of unique products. Our house brands now represent more than 75% of our sales. These merchandising investments are allowing us to unlock incremental margin opportunity. And finally, our supplier-facing services, starting with Castlegate and sponsored product listings, are growing. Now, moving on to marketing. As we mentioned on the Q4 earnings call, we have raised the bar on expected efficiency across all marketing channels. This was enabled by more sophisticated attribution technology, which facilitated a set of refined targets as well as a top-down commitment to drive leverage as appropriate for each geography and brand. Our work to aggressively move towards these tighter efficiency targets drove ad spend leverage year-over-year in Q1 and even at normalized revenue growth rates should yield additional leverage in Q2. Simultaneously, we are also seeing lower advertising costs in the market due to COVID. This will allow us to drive more revenue at our refined efficiency targets and may result in even more leverage during this exceptional period. As a reminder, roughly three quarters of our marketing mix is deployed every day across digital channels with another 15% dedicated to television and 10% to direct mail. We also benefit from having the ability to reach the majority of our customers through email and app notifications with repeat customers representing 70% of our orders. Finally, On OPEX, you'll recall that compensation represents the majority of these costs. In mid-February, we chose to eliminate approximately 550 roles as we drove out complexity and redundancy from the organization. And we expect total OPEX headcount to be flat to down for the year. Importantly, we were able to do this without curtailing our ambitious investments for the future. We still have thousands of people working on initiatives that due to their early stage nature show very little gains today compared to their large long-term potential. We continue to closely assess progress against these key work streams via our semi-annual strategic review cycle. And we are also closely managing other components of OPEC such as unutilized rent and Google Cloud costs. Though we were initially prudently conservative in talking to you about our path to profitability, We have been aggressively maneuvering the whole business towards sustainable positive adjusted EBITDA. Importantly, this is not based on today's growth rate, but the plan was and is predicated on top line growth rates in line with the pre-COVID-19 period. Later, Michael will discuss with you what this could look like for Q2. We hope this color helps you better understand why our recent $535 million capital raise was a welcome event but not a necessity. The global economy is navigating through largely uncharted territory. In this environment, our leadership team all share the belief that having more cash to bolster our balance sheet should maximize our ability to operate from a position of strength through this period. We're fortunate to have the support of leading growth equity players like Great Hill and Charles Bank in the latest convert and know we will benefit from both of their perspectives at the board level. In fact, Mike Heumann of Great Hill has already been a valuable source of advice and counsel over his almost 10 years on our board. Another exciting organizational update is that Jim Miller, who had served in the interim CTO capacity since last summer, has officially joined Wayfair as our permanent chief technology officer. After an extensive global search for a pedigree technology leader, with experience in fast-growing companies operating at tremendous scale, we came back to what we knew all along. The best candidate was already in-house. We are very excited to have Jim join us full-time and thank him for his years of service as a board member before this. Steve and I look forward to having Jim join a future earnings call to speak with all of you. Lastly, I want to highlight that while making sure that our employees are safe and healthy, and that our customers are well taken care of, we're also working to support our local communities. They've been hit hard and we feel fortunate to be in a position to help. Among the long list of things we have done thus far is helping set up field hospitals and emergency housing in locations including Boston, New Orleans and the UK. We donated $250,000 to charities selected by our employees that are helping those impacted by the COVID-19 crisis. And the recent Save Big Give Back event in late April raised approximately $3 million for the Feeding America COVID-19 Response Fund and the UN's COVID-19 Solidarity Response Fund. We're proud of our team of 16,000 people and everything we've been able to do to help. We're all hopeful that this global pandemic is resolved and behind us soon. I will now turn it over to our Chief Operating Officer, Thomas Netzer, who's the first of the leaders we will be inviting to join us on these calls over the coming quarters.