Wayfair Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; filed November 2, 2017. Wayfair operates an e-commerce business focused on home products, with U.S. and International reporting segments. The interim financial statements are unaudited.
Financial and operating results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net revenue | $1,198.2M | $861.5M | $3,281.9M | $2,395.8M |
| Gross profit / margin | $280.3M / 23.4% | $201.7M / 23.4% | $786.7M / 24.0% | $569.2M / 23.8% |
| Operating loss | $(74.0)M | $(61.6)M | $(167.7)M | $(152.5)M |
| Net loss | $(76.4)M | $(60.9)M | $(171.8)M | $(150.4)M |
| Net loss per share, diluted | $(0.88) | $(0.72) | $(1.98) | $(1.77) |
| Adjusted EBITDA (non-GAAP) | $(22.7)M | $(30.8)M | $(45.8)M | $(76.7)M |
| Operating cash flow | $24.8M | $15.6M | $(3.2)M | $(10.7)M |
| Free cash flow (non-GAAP) | $(18.5)M | $(14.0)M | $(114.7)M | $(114.0)M |
Q3 revenue rose 39.1% year over year; Direct Retail revenue increased 41.9%. Active customers grew 39.2% to 10.25 million, orders delivered rose 38.1%, average order value increased 2.5% to $250, and trailing-12-month revenue per active customer was nearly flat at $408. U.S. revenue grew 33.4% to $1,050.6M and International revenue grew 100.1% to $147.6M.
Cash and cash equivalents were $553.7M at September 30, 2017, with short- and long-term investments of $86.5M; management reported total cash and investments of $640.2M. Working capital was $126.3M, versus a deficit of $80.1M at December 31, 2016. Total liabilities were $1,135.1M. The balance sheet reported $327.95M of long-term debt, reflecting the accounting carrying amount of the convertible notes; their aggregate principal was $431.25M. The company also had an unused $100M secured revolving facility and an $82.7M lease financing obligation.
Material changes and management commentary
- Revenue growth was driven primarily by the larger Direct Retail customer base. Other revenue declined as the company continued shifting emphasis from third-party retail-partner sales toward Direct Retail.
- Gross margin was 23.4% in Q3, unchanged year over year; nine-month gross margin improved modestly. Operating expenses increased 34.6% in Q3, but declined as a share of revenue to 29.6% from 30.5%.
- U.S. segment Adjusted EBITDA improved to $4.5M in Q3 from a loss of $7.9M. International Adjusted EBITDA loss widened to $27.2M from $23.0M.
- Q3 included $9.6M of charges related to a warehouse vacated in July: $8.8M for estimated excess future lease commitments, net of expected sublease income, and $0.8M of accelerated depreciation. The company excluded these charges from Adjusted EBITDA.
- In September, Wayfair issued $431.25M principal amount of 0.375% convertible senior notes due 2022, generating approximately $420.4M net proceeds. It spent $44.2M on capped-call transactions intended to reduce potential dilution or offset conversion cash payments, subject to a cap. Notes are unsecured; holders may require repurchase after specified fundamental-change events.
- Management said available cash, investments, expected operating cash generation, and the revolving facility should meet anticipated needs for the foreseeable future, while cautioning that assumptions could prove incorrect. Capital expenditures were 3.6% of Q3 revenue; full-year 2017 capex was expected to be approximately 3.0% of revenue, primarily supporting logistics-network expansion.
Risks, contingencies, and other disclosures
- The company disclosed substantial ongoing losses and negative free cash flow. Its stated risks include customer acquisition and growth, competition, international expansion, customer spending, foreign exchange, and legal or regulatory developments.
- Operating leases extend through 2029. The filing reports $231.0M of additional future minimum lease commitments entered into after year-end 2016, alongside previously disclosed commitments; future payments include estimated exposure for leases and facilities.
- Wayfair disputed state and local sales-tax collection assessments and claims, considered potential losses immaterial at the time, but warned significant additional tax liabilities were possible. A Quebec consumer class-action settlement was awaiting court approval and was not expected to materially affect results or financial condition.
- The company was in compliance with its revolving-credit covenants at September 30. The filing highlights risks that debt service, refinancing availability, or covenant restrictions could constrain liquidity. The $100M facility was undrawn during the reported nine-month period.
- Management expected the new lease-accounting standard, when adopted, to materially affect the balance sheet and related disclosures. It did not expect the forthcoming revenue-recognition standard to have a significant impact, subject to ongoing assessment.
Important facts for investors to verify
- Whether strong customer and revenue growth can translate into improved GAAP profitability and sustained positive operating cash flow.
- How fulfillment, advertising, technology, and logistics investment affect margins and free cash flow as the business scales.
- The carrying value, conversion terms, potential dilution, and cash settlement implications of the 2022 notes and capped calls.
- Actual exposure from lease commitments, the vacated-warehouse charge, and any sublease proceeds or sales-tax claims.
- Whether 2017 capital expenditure expectations and management’s liquidity outlook were met; the filing does not provide earnings or revenue guidance.