Wayfair Inc. — Q1 2015 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2015, compared with the three months ended March 31, 2014. Wayfair operates an online home-goods business across five brands, offering more than seven million products from over 7,000 suppliers. Most products are shipped directly from suppliers to customers.
Financial and operating performance
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Net revenue | $424.4 million | $278.7 million | Up 52.3% |
| Direct Retail revenue | $369.4 million | $226.0 million | Up 63.4% |
| Other revenue | $55.0 million | $52.7 million | Up 4.3% |
| Gross profit / margin | $102.8 million / 24.2% | $65.2 million / 23.4% | Margin up 0.8 percentage points |
| Operating loss | $27.2 million | $28.2 million | Operating margin improved to -6.4% from -10.1% |
| Net loss | $27.1 million | $28.0 million | 2014 common-stockholder loss was $35.2 million, including $7.2 million preferred-unit accretion; Q1 2015 had none |
| Net loss per share, basic and diluted | $0.33 | $0.85 | Loss per share narrowed; weighted-average shares increased to 83.2 million from 41.1 million |
| Adjusted EBITDA | $(12.3) million | $(19.4) million | Non-GAAP measure; improved by $7.1 million |
| Operating cash flow | $(35.2) million | $(24.4) million | Cash use increased |
| Free cash flow | $(51.4) million | $(38.5) million | Cash use increased; non-GAAP measure |
Direct Retail growth reflected a 49.3% increase in active customers to 3.597 million and a 7.1% increase in trailing-twelve-month revenue per active customer to $346. Orders delivered rose 57.9% to 1.797 million, while average order value increased 3.5% to $206.
Cost of goods sold was 75.8% of revenue, versus 76.6% a year earlier. Operating expenses increased 39.3% to $130.1 million, but declined to 30.7% of revenue from 33.5%. Advertising rose 31.2% in dollars but fell to 13.7% of revenue from 15.9%; management attributed the leverage partly to repeat customers and television advertising growing more slowly than revenue.
Liquidity, cash flow and debt
- At March 31, 2015, cash and cash equivalents were $206.1 million, short-term investments $74.2 million and long-term investments $79.3 million. Combined cash and investments were approximately $359.6 million.
- Working capital was $149.0 million, compared with $254.3 million at December 31, 2014; the current ratio was approximately 1.68.
- Cash and cash equivalents declined $149.8 million during the quarter. Investing cash outflow was $110.1 million, including $104.2 million of investment purchases, $12.1 million of property and equipment purchases, and $4.1 million of site and software development costs.
- The company reported no borrowings under its Bank of America credit agreement. The facility provides up to $25 million, including a $10 million revolving/letter-of-credit component and $15 million supporting its credit-card program; it was scheduled to mature July 31, 2015.
- Management said existing cash, cash equivalents, IPO proceeds and operating cash generation should cover anticipated needs for the foreseeable future, while cautioning that liquidity assumptions could prove incorrect.
Outlook, risks and contingencies
- No specific numerical revenue, earnings or cash-flow guidance was provided. Management expected continued investment and substantial increases in operating expenses as it expands advertising, staffing, technology and operations. It anticipated near-term losses and negative cash flow, without assurance that investments will produce expected returns.
- Management identified risks including whether rapid growth can continue, customer-acquisition costs and retention, intense competition, supplier and delivery performance, international expansion, technology interruptions, data security, and the ability to manage growth and public-company compliance.
- Several states had asserted sales-tax collection claims totaling approximately $12.7 million, excluding later periods and subsequent interest and penalties. Wayfair disputed the claims, intended to defend its position, considered a loss not probable and recorded no liability; the outcome is uncertain.
- Office leases extend through 2024; first-quarter operating-lease rent expense was $4.1 million. The filing also reported approximately $3.3 million in letters of credit securing leases.
- Wayfair disclosed a full valuation allowance against net deferred tax assets and $0.2 million of gross unrecognized tax benefits. It reported no pending litigation it believed would be material.
- The company had $7.6 million of equity-based compensation expense in operating cash-flow adjustments; its Adjusted EBITDA reconciliation included $8.2 million for equity compensation and related taxes. Q1 financing cash use included $4.3 million of taxes paid on net share settlements of equity awards.
- Class B shares carried ten votes each versus one vote for Class A. The co-founders and affiliates held a majority of voting power, limiting other shareholders’ influence.
Important facts for investors to verify
- Whether Direct Retail customer and revenue-per-customer growth can continue while acquisition and operating costs rise.
- How operating cash use, free cash flow, capital investment and equity-award tax withholding affect liquidity over coming quarters.
- The status and potential financial exposure of the $12.7 million sales-tax assessments, including additional periods, interest and penalties.
- The renewal or replacement of the credit facility scheduled to mature July 31, 2015, and compliance with its covenants.
- Whether the reported improvement in margins and Adjusted EBITDA translates into sustained progress toward profitability; Adjusted EBITDA and free cash flow are non-GAAP measures and should be considered alongside GAAP results.