Wayfair Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; unaudited. Comparisons are with the corresponding 2014 periods unless noted. Wayfair operates an e-commerce home-goods business across five brands, with more than seven million products from more than 7,000 suppliers.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net revenue | $594.0 million | $336.2 million | $1,510.1 million | $910.3 million |
| Gross profit | $141.4 million | $79.0 million | $365.0 million | $212.7 million |
| Gross margin | 23.8% | 23.5% | 24.2% | 23.4% |
| Operating loss | $(18.6) million | $(23.9) million | $(65.4) million | $(75.3) million |
| Net loss | $(15.5) million | $(24.1) million | $(61.9) million | $(75.5) million |
| Adjusted EBITDA, non-GAAP | $(1.4) million | $(18.3) million | $(18.8) million | $(55.3) million |
| Free cash flow, non-GAAP | $35.3 million | $(22.4) million | $(5.0) million | $(92.6) million |
Q3 revenue grew 76.7%; Direct Retail revenue rose 90.9% to $545.0 million, while Other revenue declined 3.3% to $49.0 million. For the nine-month period, revenue grew 65.9%, primarily on Direct Retail growth of 79.4% to $1,354.7 million. Q3 active customers increased 60.6% to 4.591 million; LTM revenue per active customer rose 8.5% to $371. Average order value was $235 in Q3, up 8.3%.
Operating expenses increased 55.5% in Q3 and 49.5% year to date, slower than revenue growth. Advertising expense rose in dollars but declined as a share of revenue, which management attributed to repeat-customer leverage and television spending growing more slowly than revenue. Equity-based compensation and related taxes were $8.0 million in Q3 and $23.2 million year to date.
Cash, liquidity and capital
- At September 30, cash and cash equivalents were $278.7 million; short-term investments were $46.7 million and long-term investments were $74.5 million. Combined cash and investments were approximately $399.8 million.
- Working capital was $119.4 million, down from $254.3 million at December 31, 2014. Current liabilities were $313.7 million and total liabilities were $346.6 million.
- Nine-month operating cash flow was positive $44.8 million, compared with use of $50.8 million in 2014. Investing activities used $109.2 million, including $36.7 million for property and equipment and $13.1 million for site and software development. Financing activities used $12.5 million, mainly for taxes on net share settlements of equity awards.
- The company reported no borrowings under its Bank of America credit agreement. The agreement included a $10 million revolving line and support for letters of credit, alongside a credit-card program; Wayfair was in compliance with its covenants.
Material changes and unusual items
- Net loss narrowed year over year in both the quarter and nine-month period. Adjusted EBITDA and free cash flow also improved substantially, although year-to-date free cash flow remained negative.
- Wayfair sold its Australian business in July 2015 to focus resources on North America and Europe. The sale generated a $3.0 million gain recorded in other income.
- Property and equipment, net, increased to $88.6 million from $60.6 million at year-end 2014. The filing reports $8.7 million of construction costs capitalized under finance lease obligations.
- Class B shares carry ten votes per share versus one vote for Class A shares. The co-founders’ voting control limits other shareholders’ influence.
Outlook, risks and contingencies
Management expects operating expenses to continue increasing as the company invests in advertising, personnel, technology, operations, customer service and infrastructure. It expects advertising to increase in dollars but decline as a percentage of revenue over time, and cost of goods sold to remain relatively stable as a percentage of revenue, subject to quarterly variation. Management expects near-term operating losses and negative cash flow as it invests for growth; it believes existing cash and IPO proceeds are sufficient for anticipated needs for the foreseeable future, while cautioning that liquidity assumptions could prove incorrect. The filing provides no numerical revenue or earnings guidance.
- Several states have assessed approximately $12.9 million in alleged sales or similar taxes, excluding later periods and certain interest and penalties. The company disputes the obligation, intends to defend its position, and has not recorded a liability because it does not consider a loss probable.
- A securities class action related to a stock-price decline following a research report remained pending; the plaintiff sought unspecified damages. The company said it intends to defend the case vigorously.
- Key disclosed risks include sustaining rapid growth, customer acquisition costs and retention, intense competition, supplier and delivery dependence, international expansion, technology interruptions and cybersecurity, privacy regulation, tax exposure, and continued losses. The company also cautions that home goods are discretionary and that growth rates may not persist.
- Management concluded disclosure controls and procedures were effective at the reasonable-assurance level as of September 30, 2015; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether rapid Direct Retail growth and customer gains translate into durable repeat purchasing and improving profitability.
- How operating cash flow and working capital evolve, particularly given negative year-to-date free cash flow and substantial investment needs.
- The status and potential exposure from the $12.9 million tax assessments and pending securities lawsuit.
- The effect of equity-based compensation, share withholding taxes and ongoing investment spending on cash, per-share results and dilution.
- Whether the company can manage operational growth, supplier and delivery performance, and international and technology risks while improving margins.