Wayfair Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted. Wayfair operates an online home-goods marketplace, offering more than 10 million products from over 10,000 suppliers through U.S. and international businesses.
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Net revenue | $1,404.3 million | $960.8 million; up 46.2% |
| Gross profit / gross margin | $323.8 million / 23.1% | $236.9 million / 24.7% |
| Operating expenses | $426.9 million | $293.1 million; up 45.7% |
| Operating loss | $103.1 million | $56.2 million |
| Net loss / diluted loss per share | $107.8 million / $1.22 | $56.5 million / $0.66 |
| Adjusted EBITDA (non-GAAP) | $(50.0) million | $(20.9) million |
| Cash used in operating activities | $13.1 million | $46.1 million |
| Free cash flow (non-GAAP) | $(47.6) million | $(69.0) million |
| Cash and cash equivalents | $522.0 million | $559.0 million at Dec. 31, 2017 |
| Cash, short- and long-term investments | $593.0 million | At March 31, 2018 |
| Working capital | $(2.8) million | $77.1 million at Dec. 31, 2017 |
Direct Retail revenue grew 47.7% to $1,388.9 million; Other revenue declined 24.9% to $15.4 million. Active customers increased 33.2% to 11.8 million, LTM revenue per active customer rose 9.6% to $432, orders delivered increased 39.8% to 5.9 million, and average order value rose 5.8% to $236. U.S. revenue was $1,201.6 million and International revenue was $202.7 million. Adjusted EBITDA losses widened in both segments: U.S. $(7.9) million versus $3.7 million positive, and International $(42.0) million versus $(24.6) million.
Material changes and liquidity
- Revenue growth was driven primarily by a larger customer base and higher revenue per active customer. Cost of goods sold increased 49.2% and rose to 76.9% of revenue from 75.3%, which management attributed mainly to product mix; shipping and fulfillment costs also increased.
- Advertising increased 36.7% in dollars but declined to 11.5% of revenue from 12.3%. Selling, operations, technology, general and administrative expenses rose 51.2%; management cited investment in personnel, technology, rent and operations. Equity-based compensation and related taxes were $27.1 million, versus $15.0 million.
- Operating cash outflow improved year over year, but investing outflows were $23.4 million, including $21.4 million of property and equipment purchases and $13.2 million of site and software development costs, partly offset by investment maturities. Cash declined $36.9 million during the quarter.
- Long-term debt was $337.2 million carrying value. The company had issued $431.25 million principal of 0.375% convertible notes due 2022; the notes’ reported fair value was $409.5 million. Lease financing obligations were $82.6 million. The company had no borrowings under its $100 million revolving facility and reported compliance with its covenants at quarter-end.
- Current liabilities exceeded current assets by $2.8 million. Management said cash, investments, operating cash generation and revolver availability were expected to cover anticipated needs for the foreseeable future, while cautioning that liquidity assumptions could prove incorrect.
Outlook, commentary and risks
- No full-year revenue or earnings guidance is provided. Management expected Q2 2018 capital expenditures to be approximately 4.0% of net revenue as it continued building its logistics network. Capital expenditures were 2.5% of Q1 revenue.
- Management described continued investment in international expansion, proprietary logistics, technology and product categories. It expected advertising to increase in dollars but decline as a share of revenue over time; operating and technology expenses were expected to rise with the business.
- Wayfair adopted the new revenue recognition standard on January 1, 2018 using the modified retrospective method. It recorded a $4.7 million cumulative adjustment to accumulated deficit for gift-card and site-credit breakage; prior periods were not restated.
- The U.S. Supreme Court heard South Dakota v. Wayfair on April 17, 2018, with a decision expected in Q2 or Q3. The company disputed obligations to collect sales and similar taxes in certain jurisdictions and said current assessments were not material, but warned that adverse outcomes could create significant additional tax liabilities.
- The board authorized up to $200 million of Class A share repurchases in February 2018; no shares were repurchased during Q1. The authorization has no expiration and may be suspended or terminated.
- Other risks include customer acquisition and retention, competition, growth execution, international operations, shipping and fulfillment costs, currency movements and litigation. The filing reported no material change to previously disclosed risk factors.
- The company expects adoption of the new lease accounting standard for periods beginning after December 15, 2018, and anticipates a material impact, primarily on the balance sheet and disclosures.
Important facts for investors to verify
- Whether revenue growth can continue while gross margin and GAAP profitability remain under pressure, particularly as international operations expand.
- How the Supreme Court’s sales-tax decision affects collection obligations, compliance costs and potential liabilities.
- Whether liquidity and working capital remain adequate alongside ongoing losses, logistics investment, lease commitments and the $200 million repurchase authorization.
- The potential conversion, dilution and cash-settlement effects of the 2022 notes; the filing says settlement form is at the company’s election and capped calls may reduce, but do not eliminate, potential dilution.
- Whether reported non-GAAP Adjusted EBITDA and free cash flow trends are supported by GAAP results and cash requirements; both measures exclude items investors should consider alongside them.