Ladies and gentlemen, thank you for standing by, and welcome to the Wayfair Q2 2020 Earnings Release and Conference Call. At this time, all participant lines are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference call over to Jane Gelfand, Head of Investor Relations of Special Projects. Please go ahead.

Good morning and thank you for joining us. Today, we will review our second quarter 2020 results. With me are Niraj Shah, Co-Founder, Chief Executive Officer, and Co-Chairman; Steve Conine, Co-Founder and Co-Chairman; and Michael Fleisher, Chief Financial Officer. We will all be available for Q&A following today's prepared remarks. I would like to remind you that we will make forward-looking statements during this call regarding future events and financial performance, including guidance for the third quarter of 2020. We cannot guarantee that any forward-looking statements will be accurate, although, we believe that we have been reasonable in our expectations and assumptions. Our 10-K for 2019, our 10-Q for this quarter, and our subsequent SEC filings identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made today. Except as required by law, we undertake no obligation to publicly update or revise these statements whether as a result of any new information, future events, or otherwise. Also, please note that during this call, we will discuss certain non-GAAP financial measures as we review the company's performance. These include measures such as adjusted EBITDA and free cash flow. These non-GAAP financial measures should not be considered replacements for, and should be read together with GAAP results. Please refer to the Investor Relations section of our Web site to obtain a copy of our earnings release, which contains descriptions of our non-GAAP financial measures and reconciliation of non-GAAP measures to the nearest comparable GAAP measures. This call is being recorded, and a webcast will be available for replay on our IR Web site. I would now like to turn the call over to Niraj.

Thanks, Jane, and good morning everyone. I'm glad to be speaking with all of you, and hope that you are safe and well. Q2 2020 was a very strong quarter for Wayfair, as COVID demand tailwinds benefited our sales momentum. More significant is that these circumstances highlighted the attractiveness of Wayfair's value proposition to our customers, a solid foundation we have built over multiple years, and the early fruits from the plants we put in motion last year to drive tighter execution and efficiency gains. Q2 demonstrated that Wayfair is now a meaningful, well-recognized, and trusted household brand. Millions of customers, new and loyal, are seeking us out when their attention is on their homes. They're turning to Wayfair as they explore how to use their homes in new ways, and seek comfort in them during highly uncertain times. Q2 demonstrated the wisdom of our strategic investments and the returns that they can generate. Our proprietary logistics network allowed us to effectively meet peak demand, not just for a few days or a three-week holiday stretch, but consistently over the course of a full quarter. The wide spectrum of product classes we've seated over the last several years positioned us to capture an outsized share of increased category demand, and our robust local operations and offerings in the U.K. and Germany forged the way for strong customer acquisition in Europe as demand there also shifted online. Finally, Q2 demonstrated the uniqueness of Wayfair's culture. Our more than 16,000 employees persevere, despite the challenges of the moment. Our team demonstrated enormous agility, productivity, and strength of execution, and stepped-up to serve our customers when they needed us most. Combined, all of these elements led to a turning point in our profitability. Even against the normalized demand picture, we fully expected to…

Thanks, Niraj, I want to take this time to share some insight on how this complex COVID period has further enhanced our already close alliance with our 12,000 plus suppliers. I will also provide an update on the inventory picture. At the onset of the pandemic in the U.S. and across Europe, suppliers were faced with a combination of challenges. They were overwhelmed by quickly changing rules and regulations on how and if they could operate, they were in the middle of managing inventory tightness caused by reduced China production, and they face the prospect of an inventory glut, as physical retailers begin to close and cancel orders. As we often say, our success depends on our supplier success, and we mobilize quickly to help each of them make sense of the complex circumstances. Our teams kicked off a series of intense rounds of communication, sharing real time guidance that enabled our suppliers to remain open and operational. As we quickly implemented a myriad of safety measures to keep our frontline workers and customers safe, we share these best practices with our supplier partners, as they're grappling with the same within their own warehouses and networks. Where these protocols were too much to take on for less scale players, we leaned in CastleGate and WDN solutions and successfully brought on more participating suppliers during the second quarter. This intense initial communication went on to set a standard for how closely aligned Wayfair has remained with supplier sense. In particular, we've elevated the frequency and quality of forecasting and supply coordination in a meaningful way. This includes going deeper to understand the health of everyone's supply chain and begin visibility in the production pipeline, so that we can better piece together what is needed to fulfill immediate demand. Such improvements help…

Thank you, Steve, and good morning everyone. Let's first turn to the substance of just reported Q2 results. As you saw in our press release IR presentation, our Q2 total net revenue grew approximately 84% or $2 billion year-over-year. Net revenues in the U.S. grew 83% and international grew 91%. International net revenue growth on a constant currency basis was higher at 97% year-over-year. You might be wondering why our net revenue growth rate in the quarter fell somewhat below the 90% plus gross revenue growth rate we quoted in our intro quarter investor conversations. AS you know, we measure gross revenue on a win ordered basis, while net revenue is booked upon order delivery. So the wider than usual gap between gross and net revenue growth rate in the quarter is primarily explained by delivery timing. With longer lead times in certain classes of goods and shipping congestion still a reality, some revenue essentially shifted out of Q2 and into the third quarter. We expect some of these delivery delays to persist through the third quarter. Because Niraj earlier discussed many of the key KPIs we track, I'll jump directly to gross margin. As I move down to P&L, please note that I will be referencing the remaining financials on a non-GAAP basis, which includes depreciation and amortization, but excludes stock-based compensation. Gross margin came in at 3.7%. This is a standout result. You'll recall that when we laid out for you, back in May, when our margin expansion plans would have been in a 20% growth environment. Gross Margin assumption had a more moderate expansion baked in to get us to approximately 26%. There were multiple puts and takes that played out in reality in Q2, we absorbed nearly $15 million in incremental COVID-related expenses, but we also…

Thanks, Michael. 2020 has thus far been a remarkable and challenging period for all of us. Even I are proud and impressed without everyone at Wayfair has stepped up to support each other, our customers, our suppliers and our local communities. There's no telling quite what plays out over the coming months, but regardless, we're committed to being the go to solution for our customers as they seek comfort in their homes and a strategic partner to our suppliers as we navigate these unchartered waters together. Now, Steve, Michael, and I would be happy to take your questions.

Operator Instructions] Your first question comes from Peter Keith from Piper Sandler. Your line is open. Peter Keith, your line is open.

Sorry about that, everyone. Thanks for taking the question, and congrats on the results. The swing to profitability is quite impressive and dramatic. So, I guess on that note, I wanted to just ask you about the long-term EBITDA margin target of 8% to 10%. I think we've gone for years wondering when you might get there, and now asking are you rethinking that could be higher, and perhaps specifically around the gross margin, which probably not sustainable with what you saw in Q2, but was guided very solidly for Q3, and you'd mentioned increased supplier listings, leverage of CastleGate et cetera. So, how we think about at the longer term margin structure, given everything you've seen in the last couple of months?

Hi, Peter. Thanks for your question. This is Niraj. So, let me try to answer the question giving you some color on a couple of things. So, first just to recap a bit of history that I know you're aware, for years, as we've described, the gross margin runway and what we've been investing in, even while gross margin was steadily between 23% and 24% range that we were continuing to guide, we had described that bridge between that and the long-term gross margin, which was few 100 basis points higher in the model that we had four different levers that each alone could eclipse that whole gap, and so, the first one was suppliers gaining efficiency and [leaning in] [ph] on our platform, the second was gains associated with logistics, the third was all the merchandising improvements we were making and the gains associated with those, which is House Brands, Red Carpet Merchandising and the like, and the fourth was seller services, and sponsored products, one example of that are the CastleGate business or some merchandising services et cetera, and when we describe that and we talked about that, that large 1,000 basis point plus runway, we basically said that, well, it's going to take a long time to unlock all that, it will be over multiple years, but that we're making good headways. Now, we're at now at a point where some of these gains are starting to come through, and what's happened is it's then been accentuated by the surge in volume associated with COVID, providing efficiencies that to your point will lapse, but if you just look back over the last few quarters, you can see how gross margins sort of broke out of the 23% to 24% range, got to 25%, how Michael then guided…

And your next question will come from Maria Ripps from Canaccord. Your line is open.

Good morning and thank you for taking my questions. So, in the markets that are reopening, can you maybe give us a little bit more color on what you're seeing in terms of trends, relative to average quarter-to-date trends that you highlighted? And then secondly on international, can you update us on way your new international markets in terms of key customer KPIs and market inefficiency, and do you have eyes on any additional international markets at this point?

Thanks, Maria. On reopening trends, what we've noticed is the economies that did -- that have reopened or reopened earlier, that growth does dissipate there a little faster, but it still stays at very elevated levels, relative to where we were before, and so, I mean I think you could think at this point, quite a few markets that were in, or reopened to some decent degree, and you can, you know, Michael said that revenue quarter-to-date was at that 70% range. So, you can keep in mind like it's -- that is with stores open although obviously, you have people perhaps not wanting to go to stores. So, you say that's a COVID-related tailwind, but then frankly, we picked up a year's worth of new customers in just one quarter, and so, those customers, we're seeing great repeat behavior from them and ongoing engagement. So I think, frankly, even as reopenings continue, we're going to see that the secular shift to e-commerce has been accelerated meaningfully, and then that that continues, and that rolls forward. In terms of your second question around international, or the international business, we're seeing -- so the international business just range -- three countries are in that, Canada, and then two countries in Europe, the U.K., and then Germany. They're all continuing to develop very, very well. Now, international will continue to be an investment area for quite some time, but as it gets bigger, it will get the same efficiencies that we have in the United States, and it's moving, each country is moving along that trajectory at the rate we would expect. So it's actually coming along quite nicely. In terms of other geographies or countries to enter, we have no immediate plans on that, but I think the way to think about that over time is that in Europe we've built, we've invested in building an infrastructure that would support us throughout Europe. So, in other words today, even though we only deliver into the U.K. and Germany, we actually have suppliers all across Europe, Poland and Spain and Italy and the Netherlands and Denmark, and so, our transportation logistics network allows all those goods to flow all throughout the continent and so and the U.K. as well, and so, there's obviously opportunities to deliver it to other countries and pick up that benefit similar to when we actually optimize the Canadian business and saw it grow very nicely, very quickly because of all the U.S. investments and so we'll get to that, but right now the focus is on the same four countries.

Got it. Thanks so much for the color.

And your next question comes from Heath Terry from Goldman Sachs. Your line is open.

Great, thanks. Niraj, when you look at sort of where you are from a capacity utilization standpoint and the level of investment that you're making into your infrastructure. Obviously, this was a year where you felt like you had built some excess capacity into the system before we got into the environment that we're in, given the short timeline between here and what's likely to be a lot of demand that you're going to see during the holiday season. How well prepared do you think you and your third-party suppliers will be to deal with that demand? And when you look at sort of the longer term trajectory of what you're going to need from a fulfillment perspective, from a CapEx investment perspective, how long should we anticipate sort of this level or potentially even higher levels of CapEx investment into the business obviously, with the understanding that it's all going to sort of very productive, very good return on that investment?

Thanks, Heath. Yes, so to your question, the network we had built and the 16 million square feet, it really was, it had a tremendous amount of capacity that we were not yet utilizing because the focus during that first phase was to make sure that we had the footprint, the geographic footprint we needed, and with the racking projects and some of the automation projects that we've been doing, we basically are creating more capacity without taking on more square footage, and so we have quite a lot of capacity left in the network, and a lot of the projects that are continuing, that are underway, and we've not slowed the plans due to COVID, but frankly, we haven't really accelerated, we're on the same plan, and it's going quite well, and so I think the CapEx guys, Michael could maybe chime in, I think it's been a $100 million a quarter plus or minus, and that plan basically allows us to continue to develop the network, and also keep in mind when we plan the network, you plan a couple of years ahead, because basically these buildings don't necessarily exist until last and you're having them built to your specific needs, et cetera. And so we're continuing to develop the network. But I think we're in a very good position to serve the demand despite the elevated level because of the investments of the past few years. And then one thing I would highlight when you mentioned our suppliers as well, they obviously over the years have been working on optimizing their business for e-commerce more. So, that basically means making sure that their network is more integrated with our network. Their network has more capability. And frankly, more specifically it's really around inventory availability, and so, as…

Great, and then that level of comfort extends to your last mile delivery partners, they're going to have the capacity this holiday season to be able to accommodate the surge that you're going to need them to?

Exactly, so I think the way to think about that is when the COVID related search first took off, no one was prepared for it. So obviously everyone starts scrambling, then as the weeks and months go by, you see the delivery capacity keep increasing, you see the delivery speed get better, you see, et cetera, et cetera. And so what you can expect is as we continue to move through time is that actually, we should see all of those things improved versus worried that the kind of forward coming demand would be a problem.

Great. Thanks, Niraj.

Your next question comes from Jonathan Matuszewski from Jefferies. Your line is open.

Hi, guys, thanks for taking my questions next quarter. First one was just on your conversations with vendors during the quarter, and kind of what those conversations revealed regarding potentially higher propensity to use CastleGate going forward and kind of whether you expect accelerated adoption rates versus history as the players kind of realized this new dynamic and kind of rising consumer expectations? That's my first question.

Let me say a little bit and then Michael could maybe chime in, if you want to. What I would say is what we're saying is that what we're seeing suppliers are clearly, so let me start from super high level. Suppliers were already excited about e-commerce. The series of events that have transpired this year have only made them much more interested and excited about e-commerce. What we see from our suppliers, they view Wayfair as their natural primary platform for home. And so a lot of what's transpired over the quarter, so the surge of new customers and then what we've then seen is that these are actually very high quality new customers, the repeat behavior on him is very high. We then shared a lot of that information with our suppliers and then that turns into a demand forecasts. And so then they see that the demand is building in a steady predictable long-term way. Then our suppliers are integrating some of our long-term plans. In fact that we have thousands of people who are working on initiatives for the future, a lot of those will stimulate demand sources; this all ties together specifically on CastleGate. We continue to see an increase in adoption, we've added more suppliers into the program, we are adding more capabilities into the program. So I think what you're going to see from suppliers is that we're effectively going to have a more integrated logistics network and that will be the combination of three things. We'll see more of the more suppliers using CastleGate. We'll see suppliers increasingly improving the quality of their logistics operation and having it more integrated with ours, and then you'll see that the demand forecasts at the item level will create integrated solutions at the item level, whether that be Asian consolidation or direct containers into CastleGate port locations or using their logistics network and parts of the country where they actually have capabilities versus where they don't et cetera, et cetera. In that combinations, more and more suppliers are kind of working with us on this bespoke type opportunity, which it basically creates more and more benefit, and it does result in them using more and more of our CastleGate and logistics services. Michael, was anything you wanted to add on this?

No, I think the only thing I'd add is, you know, I think we mentioned that we've nearly doubled the wholesale dollars running through CastleGate, this past quarter, and just echoing what Niraj was saying, and all of our conversations with suppliers, and as Steve mentioned, we're all spending a lot of time talking to our supplier partners. It's very clear that they're used this opportunity, this moment to lean in with Wayfair, and I think they're reassessing the sort of entire retail landscape and they see the movement from offline to online in a more powerful way than they ever did before. I think this is a little bit of a shock to the system for many of them, and so, I think tipping off those folks sort of more and more to our business model is clearly an outcome. We're going to continue to see over four quarters coming out of this COVID period.

Great, that's super helpful. And then just a quick follow-up, you mentioned Way Day, it sounds like it's still in the works for 2020. Can you share any thoughts in terms of timing for the event and how you may be thinking about it differently this year versus last?

Yes, sure. Way Day is obviously a very, very big event for us. This will be the third year having it, and obviously its traditional spring timing we moved because of the -- obviously the events of this year. So, the current plan is to have it late this quarter, and so, similar to how Michael explained that, last quarter where the order intake was over 90% and it actually continued to be over 90% through the end of the quarter, but you see the net revenue came in at 84%. That was some revenue moving into this quarter. Well, the timing of the Way Day later this quarter, you're going to -- I think Way Day is going to be quite successful, but the actual revenue, because it's on delivery day, a lot of that'll show up really next quarter, but we think it's a good timing of being able to have it sort of separated enough from holiday, but actually have the opportunity to have Way Day. So, that's our current plan for Way Day, and we're excited about it.

It makes sense. Best of luck, guys.

Thank you.

Your next question comes from Justin Post from Bank of America. Your line is open.

Great, thank you. A couple of questions, just first on the July update, did the absence of prime day have any impact, and are you seeing any changes in the competitive intensity from offline retailers moving online, or maybe Amazon in the home goods category? And then second, bigger picture, maybe for Niraj; you've had a big increase in category penetration, maybe if you have any thoughts on where that is now and where it was pre-COVID, and when you get into next year and you kind of lap this big surge, do you think that penetration can keep growing next year? How are you thinking about that? Thank you.

Thanks, Justin. Let me try to answer some of those, and then let Michael add any color that he wants to add. In terms of prime day, I mean, prime day does drive a kind of an e-commerce sale though, but you know what I would say about this year, you know, the comps have -- there is weird shapes of the curve relative to last year, so like mid-April, there was the stimulus. Usually in April we have Way Day, and we didn't. We're going to have Way Day later this year. Prime day, I would say it's pretty modest in comparison to those other puts and takes, but even our events that we have are different timings than last year. So, if you look at -- you zoom into like days and weeks, you do see some lumpiness, but fundamentally, I would say, not that much impact from prime day. Competition, so I think Amazon, Walmart reduced some of their online advertising for a little while, and then came back in. In truth, if you look at the impact of that, it's actually quite small, because it's primarily in one of the Google advertising products, but PLAs, where we are actually the outsized player in our categories, and so, while folks move in and out, it affects you a little bit, there is actually quite a few other players of the same magnitude as them, and that's Home Depot and Lowe's and a series of others, and so -- Target, and so, it's actually not as big an impact as you think. And so, the way to think about it to your point, we added $2 billion in revenue this quarter, year-over-year, and we did it well driving the sustainable profitability, which is a continued thing that we're…

Thank you.

No, I think you covered it really well, Niraj. I think this notion that if you think about how many new customers we just picked up, and the positive experience they have with Wayfair, and as we know our business is predicated on repeat, and so, when you start to think about not just the back-half of this year, but next year in that long-term perspective that we tend to have, we're thinking about those customers, how to super satisfy them and make sure they keep repeating, and that's sort of a bolus of new penetration that should continue to serve as well not only in the back-half of this year, but into next year as well.

Thank you.

Thanks, everybody. I think that wraps up the call. So, we appreciate your time, and hope you're all healthy and safe.

Thank you. This will conclude today's conference call. You may now disconnect.