Wayfair Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Wayfair operates an e-commerce home-goods business across five brands, offering more than seven million products from over 7,000 suppliers. Its supplier-direct fulfillment model allows it to carry limited inventory. Financial statements are unaudited.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net revenue | $491.8 million | $295.4 million | $916.1 million | $574.1 million |
| Gross profit | $120.8 million | $68.5 million | $223.6 million | $133.7 million |
| Gross margin | 24.6% | 23.2% | 24.4% | 23.3% |
| Operating loss | $(19.5) million | $(23.3) million | $(46.7) million | $(51.4) million |
| Net loss | $(19.3) million | $(23.4) million | $(46.5) million | $(51.4) million |
| Adjusted EBITDA (non-GAAP) | $(5.0) million | $(17.6) million | $(17.3) million | $(37.0) million |
| Free cash flow (non-GAAP) | $11.0 million | $(31.7) million | $(40.4) million | $(70.3) million |
Q2 diluted loss per share was $0.23, compared with $0.69 a year earlier; first-half diluted loss per share was $0.56, compared with $1.55. The comparison is affected by the substantially larger weighted-average share count after the 2014 IPO and conversion of preferred securities.
- Revenue mix: Q2 Direct Retail revenue rose 80.8% to $440.3 million; Other revenue declined 0.9% to $51.5 million. For the first half, Direct Retail increased 72.4% to $809.7 million and Other increased 1.7% to $106.4 million.
- Customer measures: Q2 active customers grew 53.5% to 4.044 million; trailing-twelve-month revenue per active customer rose 7.5% to $357. Orders delivered increased 80.7% to 1.959 million, while average order value was unchanged at $225. First-half orders delivered rose 69.0%; average order value rose 2.4% to $216.
- Costs and margins: Cost of goods sold was 75.4% of revenue in Q2 versus 76.8% a year earlier. Operating expenses rose 52.9% to $140.3 million, but declined to 28.5% of revenue from 31.0%. Advertising expense grew 44.8% in dollars but fell to 12.5% of revenue from 14.4%.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $236.6 million, short-term investments $51.4 million and long-term investments $78.7 million: approximately $366.7 million in combined cash and investments. Working capital was $129.2 million, down from $254.3 million at December 31, 2014.
- First-half operating cash use was $6.7 million, versus $39.8 million in 2014. Investing cash use was $104.6 million, including $108.3 million of investment purchases, $25.2 million of property and equipment purchases and $8.4 million of site and software development costs. Cash declined $119.3 million to $236.6 million during the half.
- Q2 operating cash flow was positive $28.5 million and free cash flow was positive $11.0 million; first-half free cash flow remained negative. Management noted operating cash flow can be volatile and sensitive to working capital.
- No borrowings were outstanding under the credit agreement. The renewed facility provides a $10 million revolving line and support for letters of credit, within changing total commitments of $35 million to $45 million through July 2016. The company reported covenant compliance at June 30.
Changes, outlook and material matters
- Revenue growth and improved losses reflected a larger customer base, higher revenue per active customer, improved gross margin and lower advertising expense as a share of revenue. Management attributed advertising leverage partly to repeat customers and television spending growing more slowly than revenue. Losses nevertheless continued.
- Management expects operating expenses to increase as it invests in advertising, personnel, technology, operations and capacity. It expects near-term losses and negative cash flow while pursuing longer-term returns; there is no assurance those investments will pay off. Management believed available liquidity would cover anticipated needs for the foreseeable future, but cautioned that its assumptions could prove incorrect. No specific financial guidance was provided.
- In July 2015, after quarter-end, Wayfair sold its Australian business to focus resources on North America and Europe. Proceeds exceeded the business’s carrying value; the filing does not provide a clear sale price or gain amount.
- Several states assessed approximately $12.7 million of alleged uncollected sales taxes, excluding later periods, interest and penalties. Wayfair disputes the obligation, intends to defend its position, and recorded no liability because it did not consider a loss probable. An adverse outcome could increase exposure.
- Equity-based compensation and related taxes increased materially; first-half equity-based compensation was $14.2 million. Net share settlement taxes used $7.8 million of financing cash flow. The company also disclosed $52.3 million of unrecognized compensation expense for RSUs expected to vest.
- Risks include sustaining rapid growth and reaching profitability; customer-acquisition costs and marketing effectiveness; competition and supplier or delivery execution; technology outages, cybersecurity and privacy; international operations and currency exposure; and potential further sales-tax assessments. The co-founders’ Class B shares carry ten votes per share, concentrating voting control. Management concluded disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether customer growth, repeat purchasing and revenue per customer remain strong while customer acquisition and advertising costs are controlled.
- Whether gross-margin improvement persists and operating losses, Adjusted EBITDA and free cash flow continue to improve; assess non-GAAP measures alongside GAAP results.
- How working-capital movements, capital spending, equity-award tax settlements and investment purchases affect cash and liquidity.
- Developments in the $12.7 million sales-tax assessments, including potential additional periods, interest and penalties.
- The Australian business sale terms and subsequent financial impact, which are not quantified in this filing.
- The impact of dual-class voting control and substantial outstanding equity awards on public shareholders.