WAYFAIR INC. The following discussion of our financial condition and results of operations should be read in conjunction with the Consolidated and Condensed Financial Statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our audited Consolidated Financial Statements and related notes thereto included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those included in Part I, Item 1, Special Note Regarding Forward Looking Statements, and in Part II, Item 1A, Risk Factors, of this Quarterly Report on Form 10-Q and in Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , our actual results may differ materially from those anticipated in these forward-looking statements. The following discussion includes financial information prepared in accordance with generally accepted accounting principles inthe United States of America ("GAAP"), as well as certain non-GAAP financial measures such as Adjusted EBITDA, Free Cash Flow, and Net Revenue Constant Currency Growth. Generally, a non-GAAP financial measure is a numerical measure of financial performance, financial position or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. Management believes the use of these non-GAAP measures on a consolidated and reportable segment basis assists investors in understanding the ongoing operating performance of our business by presenting comparable financial results between periods. For more information on these non-GAAP financial measures, including reconciliations to the most directly comparable GAAP financial measures, see "Non-GAAP Financial Measures" below. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to "Wayfair," "the company," "we," "us," "our," and similar terms includeWayfair Inc. and its subsidiaries, unless the context indicates otherwise. Overview We are one of the world's largest online destinations for the home. Through our e-commerce business model, we offer visually inspired browsing, compelling merchandising, easy product discovery and attractive prices for over eighteen million products from over 12,000 suppliers. Because of the large market opportunity we see in front of us, we are currently investing across our business, including investments to expand our international business, to build our proprietary logistics network and to continue developing various product categories. 23
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Our operating and reportable segments are theU.S. and International. The following table presents net revenue attributable to our reportable segments for the periods presented: Three months ended March 31, 2020 2019 (in thousands) U.S. net revenue$ 1,974,983 $ 1,657,698 International net revenue 355,080 287,131 Total net revenue$ 2,330,063 $ 1,944,829 For more information on our segments, see Note 11, Segment and Geographic Information, included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q. COVID-19 Outbreak We are closely monitoring the impact of the COVID-19 outbreak on our business, results of operations and financial results. The full extent of the positive or negative impact of the COVID-19 outbreak on our business will depend on certain developments including the length of time that the outbreak continues, the impact on consumer activity and behaviors and the effect on our customers, employees, suppliers, partners, and stockholders, all of which are uncertain and cannot be predicted. See Part II, Item 1A, Risk Factors for additional details. In the first quarter of 2020, we took a number of precautionary measures designed to protect the health, safety and financial security of our employees, including suspending all non-essential travel, transitioning a large portion of our employees to working-from-home, providing emergency paid time off and targeted hourly pay increases, developing no contact delivery methods and implementing social distancing and enhanced cleaning measures in our facilities. In an effort to slow the COVID-19 outbreak, authorities across the world have implemented various measures, including travel bans, stay-at-home orders and shutdowns of certain businesses. We anticipate that these actions and the global health crisis caused by the COVID-19 outbreak will negatively impact global economic activity. While the COVID-19 outbreak has not had a material adverse impact on our operations to date and we believe the long-term opportunity that we see for shopping for the home online remains unchanged, it is difficult to predict all of the positive or negative impacts the COVID-19 outbreak will have on our business. In the short term we have generally seen increased sales and order activity and lower advertising costs in the market since the COVID-19 outbreak. In order to keep up with the increased orders, we are in the process of hiring additional frontline workers. However, much is unknown and accordingly the situation remains dynamic and subject to rapid and possibly material change. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, local or foreign authorities, or that we determine are in the best interests of our customers, employees, suppliers, partners, stockholders and communities. 24
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Key Financial and Operating Metrics
We measure our business using financial and operating metrics, as well as
non-GAAP financial measures. Our Free Cash Flow non-GAAP financial measure is
measured on a consolidated basis, while our Adjusted EBITDA non-GAAP financial
measure is measured on a consolidated and reportable segment basis. See Note 11,
Segment and Geographic Information, included in Part I, Item 1, Unaudited
Consolidated and Condensed Financial Statements, of this Quarterly Report on
Form 10-Q for additional information regarding our reportable segments. All
other key financial and operating metrics are derived and reported from our
consolidated Direct Retail net revenue, which includes sales generated primarily
through our family of sites. These metrics do not include net revenue derived
from the websites operated by our retail partners and our media solutions
business. We do not have access to certain customer level information on net
revenue derived through our retail partners and therefore cannot measure or
disclose it.
We use the following metrics to assess the near and longer-term performance of
our overall business:
Three months ended March 31,
2020 2019
(in thousands, except LTM Net Revenue per
Active Customer and Average Order Value)
Direct Retail Financial and Operating Metrics:
Direct Retail Net Revenue (1) $ 2,322,582 $ 1,931,181
Active Customers 21,108 16,408
LTM Net Revenue per Active Customer $ 449 $ 442
Orders Delivered 9,876 8,163
Average Order Value $ 235 $ 237
Non-GAAP Financial Measures:
Adjusted EBITDA $ (127,277 ) $ (102,218 )
Free Cash Flow $ (354,623 ) $ (166,817 )
(1) Direct Retail net revenue is calculated by taking consolidated net revenue
and excluding U.S. net revenue derived from the websites operated by our retail
partners and our media solutions business, which accounted for $7.5 million and
$13.6 million of net revenue for the three months ended March 31, 2020 and 2019,
respectively.
Non-GAAP Financial Measures
Adjusted EBITDA
To provide investors with additional information regarding our financial
results, we have disclosed here and elsewhere in this Quarterly Report on
Form 10-Q Adjusted EBITDA, a non-GAAP financial measure that we calculate as
loss before depreciation and amortization, equity-based compensation and related
taxes, interest (expense), net, other (expense) income, net, provision for
income taxes, net, non-recurring items, and other items not indicative of our
ongoing operating performance. We have provided a reconciliation below of
Adjusted EBITDA to net loss, the most directly comparable GAAP financial
measure.
We have included Adjusted EBITDA in this Quarterly Report on Form 10-Q because
it is a key measure used by our management and the Board to evaluate our
operating performance, generate future operating plans and make strategic
decisions regarding the allocation of capital. In particular, the exclusion of
certain expenses in calculating Adjusted EBITDA facilitates operating
performance comparisons on a period-to-period basis as these costs may vary
independent of business performance. Accordingly, we believe that Adjusted
EBITDA provides useful information to investors and others in understanding and
evaluating our operating results in the same manner as our management and the
Board.
Adjusted EBITDA has limitations as an analytical tool, and you should not
consider it in isolation or as a substitute for analysis of our results as
reported under GAAP. Some of these limitations are:
? Although depreciation and amortization are non-cash charges, the assets
being depreciated and amortized may have to be replaced in the future, and
Adjusted EBITDA does not reflect cash capital expenditure requirements for
such replacements or for new capital expenditure requirements;
? Adjusted EBITDA does not reflect equity-based compensation and related taxes;
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? Adjusted EBITDA does not reflect changes in our working capital;
? Adjusted EBITDA does not reflect income tax payments that may represent a
reduction in cash available to us;
? Adjusted EBITDA does not reflect interest expenses associated with our
borrowings;
? Adjusted EBITDA does not include other items not indicative of our ongoing
operating performance, and
? Other companies, including companies in our industry, may calculateAdjusted EBITDA differently, which reduces its usefulness as a comparative
measure.
Because of these limitations, you should consider Adjusted EBITDA alongside
other financial performance measures, including various cash flow metrics, net
loss and our other GAAP results.
The following table reflects the reconciliation of net loss to Adjusted EBITDA
for each of the periods indicated:
Three months ended March 31,
2020 2019
(in thousands)
Reconciliation of Adjusted EBITDA
Net loss $ (285,865 ) $ (200,389 )
Depreciation and amortization 66,843 39,583
Equity-based compensation and related taxes 63,992
51,833
Interest expense, net 22,218
9,238
Other expense (income), net 246 (3,078 ) Provision for income taxes, net 1,333 595 Other (1) 3,956 - Adjusted EBITDA$ (127,277 ) $ (102,218 ) (1) The Company recorded$4.0 million in the three months endedMarch 31, 2020 in selling, operations, technology, general and administrative expenses in the Consolidated and Condensed Statements of Operations related to severance costs associated withFebruary 2020 workforce reductions. Free Cash Flow To provide investors with additional information regarding our financial results, we have also disclosed here and elsewhere in this Quarterly Report on Form 10-Q Free Cash Flow, a non-GAAP financial measure that we calculate as net cash provided by or used in operating activities less net cash used to purchase property and equipment and site and software development costs (collectively "Capital Expenditures"). We have provided a reconciliation below of Free Cash Flow to net cash provided by or used in operating activities, the most directly comparable GAAP financial measure. We have included Free Cash Flow in this Quarterly Report on Form 10-Q because it is an important indicator of our business performance as it measures the amount of cash we generate. Accordingly, we believe that Free Cash Flow provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management. Free Cash Flow has limitations as an analytical tool because it omits certain components of the cash flow statement and does not represent the residual cash flow available for discretionary expenditures. Further, other companies, including companies in our industry, may calculate Free Cash Flow differently. Accordingly, you should not consider Free Cash Flow in isolation or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, you should consider Free Cash Flow alongside other financial performance measures, including net cash provided by or used in operating activities, Capital Expenditures, and our other GAAP results. 26
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The following table presents a reconciliation of net cash used in operating activities to Free Cash Flow for each of the periods indicated:
Three months ended March 31,
2020 2019
(in thousands)
Net cash used in operating activities
(59,964 ) (60,626 )
Site and software development costs (38,369 ) (24,843 )
Free Cash Flow $ (354,623 ) $ (166,817 )
Net Revenue Constant Currency Growth
To provide investors with additional information regarding our financial
results, we have disclosed in this Quarterly Report on Form 10-Q Net Revenue
Constant Currency Growth, a non-GAAP financial measure that we calculate by
translating the current period local currency net revenue by the currency
exchange rates used to translate our financial statements in the comparable
prior-year period.
Net Revenue Constant Currency Growth is included in this Quarterly Report on
Form 10-Q because it is an important indicator of our operating results.
Accordingly, we believe that Net Revenue Constant Currency Growth provides
useful information to investors and others in understanding and evaluating
trends in our operating results in the same manner as our management.
Net Revenue Constant Currency Growth has limitations as an analytical tool, and
you should not consider it in isolation or as a substitute for analysis of our
results as reported under GAAP. For example, Net Revenue Constant Currency
Growth rates, by their nature, exclude the impact of foreign exchange, which may
have a material impact on net revenue.
Key Operating Metrics (Direct Retail)
Active Customers
As of the last date of each reported period, we determine our number of active
customers by counting the total number of individual customers who have
purchased at least once directly from our sites during the preceding
twelve-month period. The change in active customers in a reported period
captures both the inflow of new customers as well as the outflow of existing
customers who have not made a purchase in the last twelve months. We view the
number of active customers as a key indicator of our growth.
LTM Net Revenue Per Active Customer
We define LTM net revenue per active customer as our total net revenue derived
from Direct Retail sales in the last twelve months divided by our total number
of active customers for the same preceding twelve-month period. We view LTM net
revenue per active customer as a key indicator of our customers' purchasing
patterns, including their initial and repeat purchase behavior.
Orders Delivered
We define orders delivered as the total Direct Retail orders delivered in any
period, inclusive of orders that may eventually be returned. As we ship a large
volume of packages through multiple carriers, actual delivery dates may not
always be available, and as such we estimate delivery dates based on historical
data. We recognize net revenue when an order is delivered and therefore orders
delivered, together with average order value, is an indicator of the net revenue
we expect to recognize in a given period. We view orders delivered as a key
indicator of our growth.
Average Order Value
We define average order value as total Direct Retail net revenue in a given
period divided by the orders delivered in that period. We view average order
value as a key indicator of the mix of products on our sites, the mix of offers
and promotions and the purchasing behavior of our customers.
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Factors Affecting our Performance We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed in Part II, Item 1A, Risk Factors, of this Quarterly Report on Form 10-Q and Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Components of Our Results of OperationsNet Revenue Net revenue consists primarily of sales of product from our sites and through the websites of our online retail partners and includes related shipping fees. We deduct cash discounts, allowances and estimated returns from gross revenue to determine net revenue. We recognize product revenue upon delivery to our customers. Net revenue is primarily driven by growth of new and active customers and the frequency with which customers purchase. The products offered on our sites are fulfilled with product we ship to our customers directly from our suppliers and, increasingly, from our CastleGate warehouses. We also generate net revenue through third-party advertisers that pay us based on the number of advertisement related clicks, actions, or impressions for advertisements placed on our sites. Net revenue earned under these arrangements is included in net revenue and net revenue through our third-party advertisers is recognized in the period in which the click, action or impression occurs. This net revenue has not been material to date. Cost of Goods Sold Cost of goods sold consists of: Product costs: Product costs include the purchase price of products sold, expenses capitalized into Wayfair inventory, which include direct and indirect labor costs, rent, and depreciation expenses, and inbound shipping and handling costs for Wayfair inventory. These costs are partially offset by product rebates earned from suppliers upon shipment of goods and certain fees incurred for other media and merchandising services Wayfair provides to its suppliers to promote products for sale on our sites. Shipping and Fulfillment costs: Shipping costs include outbound shipping costs. Fulfillment costs include costs incurred to operate and staff our fulfillment centers and provide other inbound supply chain services, such as ocean freight and drayage. Costs to operate and staff our CastleGate and WDN networks include rent and depreciation expenses associated with various facilities, costs to receive, inspect, pick, package and prepare customer orders for delivery, and direct and indirect labor costs including payroll, payroll-related benefits, and equity-based compensation. These costs are partially offset by fees incurred for warehousing, fulfillment and other inbound supply chain services Wayfair provides to its suppliers. Cost of goods sold is sensitive to many factors, including quarter-to-quarter variability in product mix, pricing strategies, changes in wholesale, shipping and fulfillment costs, and fees earned for supplier services rendered. Customer Service and Merchant Fees Customer service and merchant fees consist of labor-related costs, including payroll, payroll-related benefits, and equity-based compensation, of our employees involved in customer service activities and merchant processing fees associated with customer payments made by credit cards and debit cards. Increases in our customer service and merchant fees are driven by the growth in our net revenue and are expected to remain relatively consistent as a percentage of net revenue. We expect customer service and merchant fees expenses to remain relatively stable as a percentage of net revenue. Advertising Advertising consists of direct response performance marketing costs, such as display advertising, paid search advertising, social media advertising, search engine optimization, comparison shopping engine advertising, television advertising, direct mail, catalog and print advertising. We should benefit from deriving a larger base of our net revenue from repeat customers, as we believe the cost of marketing to a repeat customer is less than the cost to acquire a new customer. We expect our absolute marketing dollar spend to continue to grow as our business scales, though advertising costs as a percentage of net revenue will continue to be impacted by factors such as the mix of new and repeat customers, as well as brand, channel, and geographic mix. 28
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Selling, operations, technology, general and administrative Selling, operations, technology, general and administrative expenses primarily include labor-related costs, including equity-based compensation, of our operations group, which includes our supply chain and logistics team, our technology team, which builds and supports our sites, category managers, buyers, site merchandisers, merchants, marketers and the team who executes our advertising strategy, and our corporate general and administrative team, which includes human resources, finance and accounting personnel. Also included are administrative and professional service fees including audit and legal fees, insurance and other corporate expenses, including depreciation and rent. We expect selling, operations, technology, general and administrative expenses will continue to increase as we grow our net revenue and operations. Interest (expense), net Interest (expense), net consists primarily of interest expense in connection with our convertible notes and other borrowings. Interest expense is offset by interest earned on cash, cash equivalents and short- and long-term investments held by us. Results of Consolidated Operations Comparison of the three months endedMarch 31, 2020 and 2019
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