Q2 2019 Earnings Call
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Good morning, they have the name of the conference call.
Wayfair earnings call.
Yeah, just filling up your first and last name please.
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Kevin will form K E. The high end.
L.A.
Oh, a and E.
Yeah, I mean I have the spelling of your company name. Please.
Era A.I.E.R.A.
Thank you and May I have your telephone numbers, starting with the area co. Please.
Evan seven four to 650 382.
Oh, joining now continues to March higher year over year.
I'll now speak to our Cape size on a consolidated global basis.
We were pleased to see another strong quarter for new customer acquisition with our LTM active customer base, reaching $17.8 million in Q2.
An increase of 39% year over year.
LTM net revenue per active customer was $447 and LTM orders per active customer.
Were 1.86 in Q2.
Both Cape size were up modestly on a sequential basis.
LTM net revenue per active customer was driven higher by the us.
Well orders per active customer experienced small increases quarter over quarter in both the us and international.
I will share the remaining financials on a non-GAAP basis, excluding the impact of equity based compensation and related taxes, which totaled $57 million in Q2 2019.
For a reconciliation of GAAP to non-GAAP reporting.
Please refer to our earnings release on our IR site.
Our gross profit for the quarter, which is net of all product costs delivery and fulfillment expenses was $561 million or 23.9% of net revenue.
Gross margins were 60 basis points higher year over year and in line with our near term expectation for gross margins in the 23% 24% rate range.
Which remains unchanged.
In Q2 advertising spend was $259 million or 11.1% of net revenue approximately 35 basis points higher than Q2 last year and better than our guidance of a 75 basis point increase.
As you recall, our AD spend decisions are governed by our approximately one year contribution margin payback thresholds.
And we continue to see attractive opportunities to invest advertising dollars within this framework.
We believe the success of that approach is evident in both LTM active customers and percentage of orders driven by repeat customers, reaching all time highs this quarter.
Our proprietary AD spend technology allows us to invest behind the highest returning customer cohorts.
Which tend to make repeat purchases year after year.
As our marketing teams continue to execute on this approach we expect advertising as a percent of net revenue to increase roughly 50 to 75 basis points year over year in Q3.
A component of this.
As a drag as Europe becomes a larger part of our business mix and as we continue to ramp our brand building investments there.
Our non-GAAP selling operations technology, and Gionee expenses are driven primarily by compensation costs and in Q2 totaled $330 million.
In the second quarter.
We added approximately 1200 net new employees for a total of 14548 employees as of June 32019.
Approximately 850 were in variable cost areas of our business.
Namely in customer service and in our logistics operation.
As we continue to in source work previously done by third party logistics providers.
Approximately 350 of the net new hires Werent opex areas, such as engineering marketing merchandising product operations, including logistics leadership and technology.
As a reminder, Q3 2019 will show a pickup to this pace of hiring as we welcome the tremendous new talent, we attracted through our on campus recruiting efforts.
Our employer brand is very strong on campus and we were able to fill positions in almost every part of our business with recruits from the top universities and graduate schools.
In Q4, we plan to step down again.
Closer to the hiring levels, we saw in Q2.
Now turning to profitability adjusted EBITDA for Q2 was negative $70 million or negative 3% of net revenue.
Adjusted EBITDA for the US business in Q2 was negative $342000 rounding to roughly breakeven as a percent of net revenue.
Adjusted EBITDA for the international business was negative $70 million.
non-GAAP free cash flow for the quarter was negative $91 million based on negative $3 million in net cash from operating activities and $89 million in capital expenditures.
Capex was 3.8% of net revenue in Q2, and we expect Q3 capex to total approximately 4% to 5% of net revenue.
As our business scales, we continue to look for the most cost effective and flexible solution for our data infrastructure.
And so we are in the process of partnering with a large cloud provider to support our ambitious long term growth plans and best serve our customers.
In Q3, our Opex line will reflect $10 million to $15 million of incremental expenses related to this initiative.
We expect to be able to meaningfully reduce our capex spend in this area over the coming quarters.
As of June 32019, we had approximately 714 million of cash cash equivalents and short and long term investments.
With that I'd like to turn to guidance for Q3 2019.
I want to start with our normal update to give transparency on our quarter to date performance.
On a year over year basis, our direct retail gross revenue growth is running in the mid thirtys, thus far into the quarter.
While this is somewhat lower growth than when we exited Q2. It is not uncommon for us to have variability in our month to month growth rate within a quarter.
Our guidance setting discipline is to consider our quarter to date performance as well as our expectation for the full quarter and then prudently guide as you've heard me say almost every quarter in our mass market consumer business. The customers to show up every day and there is still a lot of the quarter to go.
Given our typical approach we are setting our guidance for overall revenue growth just below our current quarter to date performance.
We forecast direct retail net revenue of 2.22 billion to $2.27 billion.
Representing approximately $525 million to $575 million of direct retail dollar growth year over year.
Or a growth rate of approximately 30% to 34%.
For the US business, we forecast direct retail net revenue growth in the range of 30% to 32% year over year.
And expect international direct retail net revenues to be up 40% to 45% year over year.
On a constant currency basis, we're forecasting international growth between 42, and 47% year over year.
We forecast other net revenue to be in the range of $5 million to $10 million for total net revenue of $2.23 billion to $2.28 billion for the third quarter.
We're not adjusting our current level of investments based on our revenue guide as such the U.S. business will swing to a loss this coming quarter. We continue to believe we are on the path to sustained adjusted EBITDA profitability for the us business.
But repeat that it will not be a straight line.
At our current near breakeven levels of adjusted EBITDA in the us.
Even small changes can easily swing us to a gain or loss in any one quarter.
For consolidated adjusted EBITDA, we forecast margins of negative six to negative 6.5% for Q3 2019.
Reflecting our ongoing investments in international continued spend on advertising, where we are delivering our returns threshold.
The timing of campus recruits joining wayfair in the us and the further build out of our global logistics network.
In the US we expect adjusted EBITDA margins of negative 2.75 to negative, 3% and expect an international EBITDA loss in the range of $80 million to $90 million in Q3 in North America and increasingly in Europe , our investments are paying off in the form of greater scale and higher levels of repeat overtime.
Which tells US our strategy of not timing our investments to any particular quarter is working as intended over the long term.
We expect to stick to this philosophy, and we will not alter our ROI positive long term investments to make any particular quarter more profitable.
For modeling purposes for Q3 2019, please assume equity based compensation and related tax expense of approximately $66 million to $68 million.
Average weighted shares outstanding of 92.5 million.
And depreciation and amortization of approximately $53 million to $55 million.
I'd now like to turn the call back to Niraj before we take your questions.
Thanks, Michael.
Steve and I are very excited about the growth of our business. This year the competitive advantages we continue to build on and the immense opportunities still ahead of us both in the us and internationally and in mass and in luxury.
Our growth is representative of the remarkable platform and experience we have worked hard to achieve as well as the strong secular tailwinds from which we benefit.
We're extremely proud of the team of over 14000 people and evolve the initiatives. They are working on to make the customer experience as delightful as possible when shopping for the home online.
I want to thank our employees for their hard work passion and engagement as we collectively strive to capture an outsize share of the secular shift of home good dollars moving from offline to online.
I'll now ask the operator to open up the lines. So we may answer some of your questions.
Thank you.
At this time if anybody has a question. Please press star one on your telephone keypad.
And that would be star one on your telephone keypad. Your first question comes from Peter Keith Piper Jaffray. Your line is open.
Hi, Thanks, Good morning, everyone and congrats on the solid Q2 with improving Capesize.
Just at risk of asking a bit of a short term question. Michael the shares have turned down since you provided some of the quarter to date metrics.
It's obviously, a lower trend them, what investors are used to seeing and coming off the heels of.
Strong advertising growth for the first half the year.
Wondering if you guys could provide some perception what's caused this recent DSL and.
If you might expect any type of re acceleration of business as the months move forward.
Cannot can chime in with any additional thoughts he has as well.
Yes, so what I would say first of all.
Last year, we had four quarters at all grew over 40% and in three of them. We had a month that was in the mid Thirtys for example.
For example, we launched a great new App redesign this quarter that were really excited about but when you do that you reset some of the customer consideration cycle for a portion of your customers well. If you worry about that you obsess about the things you don't actually move the business forward, but when you do it aggressively you're actually doing great things for customers equate really good outcomes.
Here, we also have some volatility thats imposed on us and frankly incentive tariffs.
Our business model is more resilient than that of a traditional retailer by being a platform. We have suppliers will win suppliers will lose suppliers, who will choose to run lower margin and take share suppliers, who will choose not to do that but that creates volatility. So.
So when we look at it.
Yes, I do when exactly will that kick in I don't exactly know if you look at our history and the way we grew over the years, we've had periods that slowed a little period that picked up a little and usually on the outcomes of these big things. We did like one big thing. We're doing right now is our logistics network and that frankly is just it's going great and there's huge dividends that are going to come out of that they come out over a period of years and were now deep enough into it we were actually.
We are highly highly confident of those gains were actually seeing some of them flow through will as we get more and more volume through that network. We know we know what that will yield.
Europe is another big expense thats, providing great gains in.
FX frankly is a headwind, but we don't worry about that we're investing aggressively that's part of the negative free cash flows were investing aggressively in putting in place an infrastructure logistics, our European business unless keep winning so I know that doesn't speak specifically to that Q question, you have about volatility as measured in weeks, but that's the way I think about it Michael do you have anyone no. The only thing I'd add Peter is I know you mentioned sort of AD spend I just want to remind remind you remind everyone. We spend our ad dollars.
Based on a one year payback on a contribution margin basis, if we're not getting that one year payback on a contribution margin basis from the performance of those dollars. We know it quite quickly and we would ratchet. It back. So there is a clear ROI investment on every dollar we spend we're seeing it payback, we're continuing to see that performance in the cohort our cohorts of customers.
You saw that Nicole our chart, we put out at the end of the last year and those cohorts have continued to perform.
And that gives us a lot of confidence that the ROI metric in the investment we're making in the AD dollars is really working.
Is there any thought to slowing supplier programs to allow for some optimization or maybe a term making up some of the interface user friendly and some of the data analysis for user friendly.
We internally have recognized for years, if you look at the website and the App that's the platform the technology platform.
And we give to our end customers and if you look at the way in which we reduce friction and made it more and more intuitive and easy to use even while adding tremendous amount of feature and functionality. You look and then you say man Thats Thats really been quite amazing you made it more powerful more complicated in some ways and yet easier at the same time and then if you looked at the technology tool set that we've we've used historically with our suppliers. When we started the call the extra net and recently, which limit address we re branded partner home you'd say when that that really seems like a clunky set of over 100 tools and if you compare the two that wouldn't really be a good comparison and our business. We're a platform connecting these suppliers with these customers you'd want totally different set of tools, but equally powerful equally friction free equally elegant and you'd want to make each one more and more powerful while still making more and more easy and so thats something that we recognized a while ago. We're about six to nine months into scaling up the team that's going after in the plans are quake.
We didn't quite great. It's not investment, we specifically called out but it's in the guidance. We've given you for head count. So the costs are captured in there and we think it's actually one of our biggest opportunities because we don't think the answer is to have less and less tools unless unless program. The tools that the key is to make them easier for suppliers to adopt them regardless of the sophistication of the supplier from a technology standpoint, and increasingly regardless of the size. The team. The supplier has on the program by making it easy for them to opt in in a way that can be lighter and lighter from a workload standpoint easier and easier for them to recognize the ROI. What we're seeing is a huge enthusiasm on their part to participate.
But frankly this did that.
The complexity involved today, it's one of the source of friction that weve been eroding and I think over the next.
Yes, 612, 18 months, we're hoping to transform that platform from what we have today to one that you know.
Well today, we're still viewed as better than a lot of other platforms in terms of supply to as we think there's a huge opportunity we are going to compare it to what we offer consumers from a from elegance standpoint.
Peter It's Mike the only thing I'd add there is you spend a lot of time it.
At markets and so you recognize that there's a there's a very long continuum of supplier sophistication level around how they think about and run and manage their own businesses and so therefore their ability to take advantage of our business. You're just talking about is all the investments, we're making to make that easier and easier but to some extent. This goes back to the very founding of the company right from the very beginning we've been educating and working side by side with suppliers as our partners to sort of teach them how to take advantage of what we are building and so at any moment in time right, whether it's sponsored skews or just sort of how to have inventory on hand at castlegate or whatever it might be we theres a constant dialogue with all of our suppliers to sort of bring them along both with the tools they need to sort of manage it everyday but also to help them think about what their business has become in order to take advantage of our opportunity.
Okay. Thanks, a lot guys. It's great feedback good luck with the backup.
Thanks, Thanks Peter.
In the interest of time May we ask everyone, who would like to ask a question to limit themselves to one question and one follow up so that everyone gets a chance to ask.
Your next question comes from Maria reps from Canaccord. Your line is open.
Good morning, and thanks for taking my questions.
I appreciate the color on international business. So maybe you can spend a few minutes talking about potential international expansion outside of the existing markets. So what kind of operational milestones would you like to see within your existing international geographies for you to get more comfort around expense spending to maybe some of the Jason market and that is it a near term priority for the company.
Thanks for your question.
So here's the way we think about it.
In North America today, we're very focused on the us in Canada, and we think there's still a lot of room. There. Despite the fact that we built a brand with top of mind awareness and where we are well known.
In Europe , we started in the UK and we've organically overtime become the leader in the UK and the brand awareness is now reaching household brand status, it's not quite there, but it's quite close and then earlier this year, we start folks on the German business a couple of years ago, but earlier. This year. We started the brand building in Germany, we referenced a television advertising that we launched and.
Barbara shown on the asset our spokesperson well what what we want to see happen next which is happening as we want to see the German business. Following the same footsteps and were able to tighten index. These countries in that case as to when we start the marketing and different milestones along the way to make sure that we're seeing the same customer satisfaction. The same repeat performance and all the types of metrics that we know will drive the long term outcome.
And what we don't want to do is expand further in Europe in a way that we have many different markets that are all still early stage, where it distracts us where we want to do is make sure. We do in a very methodical way, but we will plan to expand further in Europe over time, but the focus right now is on Germany, Germany is going quite well and so if it continues going quite well, which is what we would expect there'll be a point in the not too distant future, we'll we'll figure out what the next.
Sort of the adjacent or obvious European market to tackle would be but we're not in a rush and we don't have a fixed timeframe forum. It's rather based on this kind of continued kind of focus and continued success with the UK and Germany, we address that half of the GDP in Europe . So even though it's only two countries. It's a meaningful portion of the market and then the thing I would point out is that the cost when we talk about the investment in Europe or the investment in logistics.
They are really big part of it is because we're planning for the long term outcome on the logistics side of things like Asia consolidation, what we're doing and ocean freight in dredged than what we're doing in the warehouse what we're dealing with the home delivery. It all adds up is quite expensive well Europe is similar because we built a pan European network. So today, we source from.
Over a dozen countries throughout Europe , and we have a transportation network that pools those items brings them into the markets, where we then do the home delivery, which today are just the UK and Germany, but the infrastructure, we have built to handle taxation to handle transportation to handle customer service to English language translation that we will make it actually not as difficult for us to enter additional markets. Its not theres zero complexity, but there's far less than there would be otherwise we have category management teams that are based on of our office in Berlin, but that focus specifically on markets in Italy, or Spain, or Poland that our native language speakers and natives of those countries and so we are actually in we think an advantage position for our long term European plan would cost we've already incurred but in terms of where we're going to focus on building the business right now it's just the UK Germany.
That's very helpful. Thank you.
Hi, good morning.
Morning, I want to go back to if we could have and apologize for that kind of shorter term nature of the question, but just the guidance Michael and the.
The sales slowdown modest sales slowdown weve seen here, thus far in Q2, but.
Having followed wafer for a while now your company your ability to track your consumers know your consumers is better than anyone I've ever seen. So the question I have is as you look at what seems to be a deceleration sales from what from Q1 to Q2 is there any more color you can give us on the metrics the KPN as you're looking at that could help us understand the real Genesis of this and then so that we can begin to understand better frame better whether this is indeed.
Transitory short term in nature versus some type of.
Longer term slowdown.
Yep.
I think you by the way the place you see that it was great pretty clearly in the Q2 results right on every KPN metric in Q2, we basically hit a new high.
And so the way the cohorts are performing the way that customers are performing their purchases all of that remains quite strong I think niraj pointed to a couple of pieces that.
Our.
Could well be factors in this sort of first month of the quarter, introducing new iOS app. It's the kind of thing you do that Theres no way to test that you do it because it's the right thing to do for customers over the long term, but as we pointed out last quarter.
Our App is now has a more subs and improve our customers running through it every day right. So if you change their purchase.
As we as we take.
Supplier tariff price increases and put them into customer prices right, that's going to change the purchase timeline and process for our customer.
And so I think theres a couple of those kind of sort of short term factors out there that I think could clearly be impacting this first month of the quarter as niraj pointed out.
But I think the other piece of it nears talked about earlier is this level of volatility at this scale. This growth rate this level of volatility and the number of investments we're making this level of volatility should be expected right. We are going to have months or quarters that are slightly slower growth than months or quarters that are slightly higher growth.
And I think trying to call that.
Two a couple of hundred basis points is going to be really hard.
The only thing I'd add to that is.
Did in the last quarter that inject volatility thats meant to just be an illustrative example, and so those things can create some volatility than you have external volatility, which which for example could be macro could be terrorists could be things like that and you know these numbers.
So when we guide we are guiding here. It's August onest. So we have literally one month of data of three months of the quarter and so we just use whatever we have we tell you what's happened so far and we just use that to projected going forward. So we don't actually sale well when we think exactly will happen in the next two months because that the challenge with that is the timing on these things and never that precise and so.
Certain things we're seeing today last 30 days 60 days 90 days 100 point, it's very hard to tell and so what we do is we just tell you. The current to date because that's a fact base. We have and then we just sort of build up guidance around that but the reality is as you've seen with the business business has had some inherent volatility that we inject connect because of that sort of ambitious nature, we have which is why we're getting great outcomes, but we sort of don't let the very short term volatility which is.
Which is higher than you would have if you only grew 1.2468% year something lower like that.
We don't let that affect how we make good long term decision.
Got it thank you.
A follow up.
On a separate subject so near as you spent a lot of time talking about your proprietary distribution infrastructure, which is obviously a key component of that.
However, the wafer model as we as we look at the ongoing Buildout.
How should we think about the duration, how far particularly look in the domestic market how far.
Are we into the to the Buildout and maybe for Michael as we did with this build out and we look at the expense growth. Obviously is a lot of investments happening at wayfair, but what portion of that investment spend relates pertains directly to the build out of this distribution infrastructure.
And so today the utilization of the network is not anywhere near the full capacity we've been building out this footprint, but the footprint. We largely have built out. So what happens is you get the gains as utilization rises in the building.
Three shifts and you can basically really take advantage of the speed opportunity and get more throughput through the buildings. We recently for example move to three shifts to a seven day, a week model with multiple shifts and what that basically doesn't that increases your cost base. It actually makes the per unit cost drop at a certain utilization level, but thats never the day you shipped into it. So we actually just Thats. An example, something we just did recently, it's actually really it's.
The model on its fantastic and speeds up delivery increases what your throughput through the building can be so over the next.
It's hard to put it to exact timeframe on it but so so you think broadly over the next couple of years. What happens is you are really driving volume through existing buildings more than adding buildings for footprint coverage. You generally are adding buildings more for volume needs and your mastering to maximize your older buildings in throughput, which is making your cost per unit drop and we're also reducing transportation costs as you do it so to answer your question in terms of the build out.
Well, we will be building a lot more buildings answer is yes, when the profitability of buildings, we build in the future be much higher it will be yes, because we won't be building until we actually need the space and so the timeline of Unutilized space shrinks dramatically from where it is today.
Hey, let me let me just add a couple of thoughts there on the sort of cost of that that set of investments I think you can think about the logistics network.
Buildout is having an impact from a cost perspective on both on all three lines right gross margin Opex and Capex and just to try to like Dimensionalize.
On the gross margin side near just use. The example of moving to a seven day model operating model. The place. We see that right is that you are then going to sort of operate for a short period of time those boxes are going to operate less efficiently right and so the place you see that is in the <unk> is in the Cogs line right because that's the piece that we're running through as a cost of goods sold in terms of the delivered cost.
On the Opex line today, we bear the Unutilized rent of warehouses that we've built that are not fully utilized today that number is in the sort of range of $15 million to $20 million per quarter.
And then on the Capex side right you can see this quarter, we spent $54 million in pp any capex.
A big portion of that spend.
Is the Capex going into this warehouse network right and when you think about.
At the free cash flow of our business has changed right last year.
First half to this year first half.
Theres two big investments that we've made there right. One is the continued losses and investment in the international business and the growth of that business and then the second is the capital costs right. The capex cost that we put in particularly in the logistics network.
And I think as Nick mentioned, we continue to build that network in advance of the committed volumes right that you have to stay ahead of it are on top of it.
But that's how I would dimensionalize the sort of the investment places where the dollars are going to build out the logistics number.
Yes, Thanks Brent.
Your next question comes from Oliver Wintermantel from Evercore. Your line is open.
Yes, Thanks, guys I had a question regarding so order from repeat customers grows continues to grow faster than the orders from the new customers.
Which probably helps helps the margins and the US revenues also grows faster than what you guided to but the EBITDA is basically in line or slightly below could you give us some some details white white of EBITDA is not reflecting a lot higher.
Revenue growth.
Almost every one of our line items and so if if our marketing team finds the right advertising opportunities and can spend within our payback threshold. This ROI those hard ROI thresholds, we're going to us that those dollars and get those new customers, because we know that they're continuing to perform as a new cohort better than the last previous years cohort.
Yes same thing when you think about.
When we're going to open a new facility or higher and in person. If we're going to make those determinations time to what we think is the right long term answer to build our business and serve our customer as opposed to.
Are we going to sort of make more in this quarter or or not.
And so in any quarter just that I just described it as we described our Q3 guidance what Weve got planned to spend this quarter based on what we think those we can do in the AD markets and get our lives.
Except we know what we're going to do it will move as we sort of see what performance looks like but if revenue is a little higher a little lower we're not going to sort of change the investments, we're making for the long term.
And just.
No. The nurse couple couple of comments I just chime in on one is if you look at the way we've sort of inform that CAC calculation. If you look at repeat it running at 7%, you'll see that the customer acquisition cost still hovering in that same range $50 million and you can see how the paybacks are staying very tight because actually the repeat economics are getting stronger.
And so the AD cost has done a very disciplined way, but on the EBITDA line you have a couple of other things that drive that in the near term. One is I mentioned like for example, some of the things we're investing in on the logistics side like the seven days a week those things have some costs, but they will yield good benefits again not in the current quarter and then Michael did reference a movement, we're increasingly running infrastructure in the cloud and so if you look at from a cash flow standpoint, that's actually going to be a very good trade for us, but the reality is it's moving money out of what would be in depreciation into opex and so we're not going to worry about the optics of that but the reality is that that's going to you know if you're looking at adjusted EBITDA, It's going away on that but the reality is what we're focused on is how the company will becoming credibly.
Got it thanks.
Just quickly.
Prime day, this year and into July was longer than it has ever been.
Is that have you seen any difference there from your customers trade away from you guys is that why the quarter today revenues could be a little bit weaker as well or do you think that has nothing to do with it.
All retailers out there is that there is some published data showing Walmart target number of others did on Prime day, you could see that Prime day is actually a boon for everyone. We saw something very similar on way day, we're waiting became a and now we'd like this because way days, obviously named after wafer will lead marker of it but the number of other major retailers ran home home shopping events on that that that day and a half period. So I think some of these things become major retail holidays in the way that singles day has in China, and I actually think that they are on net the sort of good for everyone. In a way that is cyber cyber Monday or black Friday.
Got it thanks very much good luck.
Thanks, Alex.
And our final question for today will come from John Blackledge from Cowen Your line is open.
Great. Thanks, So two questions on logistics, just curious what percent of revenue or units are running through.
Castlegate at this point and as you invest and build it out.
How does it drive customer value prop.
Competitive moat and it also is being built in a way that you can increase the speed of shipping.
The next day at some point similar to Amazon's recent move to Prime one day and then on the gross margins expanded nicely this quarter just.
Wondering about the impact of the advertising business. This quarter and then how we should think about it kind of ramping in the back half of the year. Thanks.
Good. Thanks, Thanks, John Let me, let me answer a couple of parts to that and then I'm going to defer to Mike on one part.
On the logistics network and the speed, who the nice thing if you think about the places that we have operations in the way in which we're running it seven days a week with multiple shifts we actually that network automatically becomes a one day and even it seemed a network as more and more goods are positioned into more and more facilities and a lot of what we're doing with Asia consolidation and the like basically enables them and the real benefit is that frankly at scale, it's actually less expensive than a two day net worth because you're basically positioning goods ahead of time very close to the customer so youre basically using a leg of transportation at the same but you get it closer to that the last mile leg is shorter and smaller and so it reduces your net total cost and so that's something that we're but thats been part of the vision for a very long time, we believe speeds critically important every category of goods.
On the gross margin question and the advertisers I just want to on the advertising because we're very bullish on it but I just do want to highlight it's still quite early and it's still quite small so I wouldn't I wouldn't focus on the advertising business as really being a major driver at all for the financials. Today. However, we do think that offers great opportunity in the future for upside and we've been very cautious not to put a timeframe on that because it will play out over time and it's not something that we think is a light switch.
On the Kathleen penetration I don't recall the last public numbers, we gave I'm going to let Michael Allen.
We the last numbers, we gave was that 26% of U.S. small parcel that was back in Q4 was running through county, and then in Q1, we talked about 14% of large parcel running through Castlegate. We continue to make progress there. It's not a number we're going to update every quarter.
But yes, I do think this from your own conversations I know with suppliers. You know this is a better they are adopting but continue to adopt and as we get.
Is really enhanced and then the other thing that I always point out on this sort of notion of the penetration is our whole business is growing so fast that growing penetration in those means that were dramatically growing the inventory on hand, right and so that that piece is really important to recognize that over the last few years, we've got from not having as program, having 26% of small parcel running through it. If you think about the amount of growth of inventory that suppliers are now putting into our buildings.
It's a it's actually it really stunning off balance sheet asset for us. If you will right. Because you have all of that inventory basically with your ability to get to your market it and get it to your customers very quickly without having to deploy that capital.
And Thats really sort of an amazing underpinning of our business model.
Thank you.
Yes, thanks, everyone. We appreciate your time.
Thanks, everyone for joining US today. This concludes today's conference call you may now disconnect.