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zulily, Inc. (NASDAQ:ZU)

Q4 2013 Results Earnings Conference Call

February 24, 2014 5:00 PM ET

Executives

Nancy Shipp - Investor Relations

Darrell Cavens - Chief Executive Officer

Marc Stolzman - Chief Financial Officer

Mark Vadon - Chairman

Analysts

Deb Schwartz - Goldman Sachs

Mark Miller - William Blair

Mark Mahaney - RBC Capital Markets

Mark May - Citi

Justin Post - Bank of America Merrill Lynch

Shawn Milne - Janney Capital Markets

Operator

Good afternoon, ladies and gentlemen. My name is Jeremy, and I will be your host operator on this call. Your lines will be placed on a listen-only mode. At the end of the presentation management will be available for questions. (Operator Instructions)

At this time, I would like to introduce Nancy Shipp, Investor Relations at zulily.

Nancy Shipp

Good afternoon. And thank you for joining us on our conference today to review our fourth quarter and full year 2013 financial results. With me today are Darrell Cavens, Chief Executive Officer; Marc Stolzman, Chief Financial Officer; and Mark Vadon, Chairman. Each will be available for Q&A following today's prepared remarks.

Before we began, I would like to remind you that we will make forward-looking statements during this call regarding the future events and financial performance, including our guidance for Q1 2014 and full fiscal year 2014.

These statements are only predictions based on assumptions that are believe to be reasonable at the time they are made and are subject to significant risks and uncertainties. You should not rely on these forward-looking statements as representing our views in the future and except as required by law we undertake no obligation to publicly update or revise these statements.

Our actual results may differ materially and adversely from any forward-looking statements discussed on this call. For a discussion of factors that could affect our future performance, results and business, please refer to our disclosure in today’s earnings release, our prospectus from our OPI, our annual report on Form 10-K, which we expect to file in the near future and other reports we have on filed from time to time with the SEC.

Also please note that during the course of this conference call, we may discuss certain non-GAAP financial measures as we review the company’s performance. Please refer to our Investor Relations section of our website to obtain a copy of earnings release, which contains description of our non-GAAP financial measures and reconciliations of non-GAAP measures to the nearest comparable GAAP measures.

This call is being recorded and a live webcast for our investors on our Investor Relations website and a replay of this call will be available there as well.

Now, I'd like to turn the call over to Darrell, our CEO.

Darrell Cavens

Thanks, Nancy. Good afternoon. And welcome to zulily’s fourth quarter and full year 2013 earnings conference call. I'll start with a brief overview of our results for the quarter and then since this is our first call as a public company, I thought it will be helpful to everyone if I spend a few minutes talking about our history and business model.

I will then finish with some highlights from 2013 and some thoughts on our focus for 2014 before I pass the call on to Marc Stolzman, CFO to cover our Q4 numbers in more detail and give an outlook for the coming year.

Q4 2013 was a strong quarter for us. We ended the quarter with $3.2 million active customers, up 21% from the third quarter and up 101% from Q4 2012. Net sales for the fourth quarter grew by 100% from a year ago and revenue for the full year grew by 110% from the full year 2012.

Adjusted EBITDA for Q4 was $17.8 million or 6.9% of revenue, up from $4.7 million in the prior year. We are excited about our Q4 results and I want to thank the entire zulily team for their hard work during the year to make this happen.

We launched zulily a little more than four years ago, in January 2010, with the goal of building an enduring brand that could revolutionize the way mom shopped. On the first morning we launched in 2010, we sent e-mails to our members offering them products from three vendors of children's apparel and accessories with limited quantities that were only available for three days. That first day we took an $1,800 worth of orders. That seem like a good start of the time and from there the business has proceeded to grow at a rapid pace.

We kept adding e-mail subscribers and increasing assortment of merchandise. We kept hiring more employees and building more infrastructure to answer the demand. But along the way, we always stay true to some basic tenants that were with us on that first day.

We wanted to offer unique products that were hard to discover elsewhere. We wanted to price them well, so customers felt that they were getting great value and we wanted to the entire experience to be simple and entertaining. We wanted to create an experience that we are proud of and that was so good our members would come back every single day to see what was new and exciting.

If you fast forward to today, our model is still very similar, just much larger. We still launch new products on our website every morning at 9 a.m. East Coast Time in limited quantities and available for a limited time.

But we now launch over 4,500 new products every morning from dozens of brands and we send out e-mails and push our applications to millions and millions of people. In four years we have become a destination for people to come to everyday to find items that are special and unique.

Kids apparel and accessories which is where we started is still a very important part of our business. But as we grew we found that our customers wanted more from us. So we built a significant women's apparel category and we have a thriving category -- we have thriving categories in home, kitchen, toys and a host of others.

We find our customers are not coming to us purchase products from a single category but they come to find new and interesting products and they end up purchasing across departments as they discover new things.

Our models worked well for customers but it's also worked very well for our suppliers. To us taking care of our vendors is as important as taking care of our customers. We have an incredible team of merchants that work with these vendors to ensure we launch unique offering everyday.

For small emerging vendors that have great products but limited distribution we are able to bring their products to vast and highly relevant audience. We are able to work with our vendors to celebrate their products with great photography and tell their unique stories to our audience. We work hard everyday to be our vendors most valued partner.

Our goal is to invest to help our vendors scale and pursue their dreams of creating meaningful businesses that our customers can be passionate about. To-date, we have worked with thousands of vendors and we add more everyday.

I believe our success is grounded in our daily obsession to do great things for both customers and vendors. We are focused on every detail every day, engaging our customers the great site and unique shopping experience that coupled with our incredible product selection and unbeatable value keeps our customers coming back.

Today, over 80% of our North American orders come from repeat customers. Similarly, the vast majority of our vendors repeat with us. We focus on telling their stories to customers in a compelling way and we create fantastic volume for them and we do with efficiently and quickly. It's a win-win partnership.

As I look back on 2013, there are many significant highlights. We obviously had great financial success but there's so much more to our business. In 2013, we more than doubled our revenue from 2012 and we did so by posting our first full year of positive net -- positive net income.

We achieved this growth while hitting some important milestones, including we rapidly expanded our passionate customer base by over 100%. We scaled that one of the largest and best teams in retail, merchandising and now have over 300 merchants.

That team successfully expanded our offering in the women's apparel and home categories. During this year, this focus on great merchandising category expansion has led to non-kid categories making up the majority of our business.

We added a large amount of capacity to our fulfillment centers in Ohio and Nevada by enhancing our custom technology solutions and innovating on the unique processes that make our business so special. We also aggressively added to our technology team. This enabled us to invest in projects across the business and grow at a tremendous rate.

We invested in the areas of personalization allowing for us to expand their daily assortment while keeping the website and offering relevant for our customers. We invested in improving our site experience as well, creative execution in our mobile experience.

We ended the year with 45% of our North American Q4 orders generated through our mobile device, up substantially from 31% in Q4 2012. And across the business, we added world-class talent to all our functional groups. As I look forward to 2014, there is a tremendous amount of work to be done to keep up the growth of our business.

Our number one priority is to maintain our obsession on providing an amazing customer experience everyday. Our success comes from having great products priced well with the shopping experience that our customers love. We need to always remember that this is why our customers keep coming back. And we need to continually invest to scale and keep improving on that core value proposition.

In 2014, on the merchandising front, we will continue our product expansion by finding new and entertaining products that our customers love. Children's apparel will always be a high priority for us, but we’ll keep investing to push aggressively beyond the kid’s categories. Women's apparel was a phenomenal growth business for us in 2013 and we’ll continue innovating grow this product category in 2014.

In the coming year, I see an incredible opportunity to expand our offering in the home category. To date, we built a sizable home category. This happened because our customers have let us there, and without a tremendous amount of focus from our team.

In operations, we’ll bring online a new fulfillment center in Nevada during 2014. This facility would be roughly double the size of our existing Nevada facility, increasing capacities over 700,000 square feet, which for perspective is over 16 acres under a single roof.

As you’ll hear from Mark in our CapEx guidance for 2014, we plan to invest in significant automation in our fulfillment facilities to continue to add capacity and technology that will help us keep delivering more value to our customers. We will continue to aggressively invest in technology to scale the business.

I expect us to more than double our technology team in 2014. This investment allows us to keep innovating and delivering and inspiring experience to our customers and our suppliers. Across the business, we’ll also keep hiring aggressively.

Since launching zulily, we've been in a continual sprint to keep up with the demand from our customers. Our intent in 2014 is to really invest to capture the opportunity we see in front of us. Our success to date has come from having an amazing team that believes we can change the way people shop.

I’d like to thank the entire zulily team and our vendor partners for their hard work in 2013 and for their passion for this business and our customers. And with that I'll turn the call the call over to Marc to review the numbers in more detail.

Marc Stolzman

Thanks, Darrell. It’s great to be here today on our first earnings call following our IPO in mid-November. As Darrell mentioned, we're excited to report great results in the fourth quarter with revenue growth of exceeded 100% and a significant increase in profitability versus the same quarter last year.

Now let me turn to the details of our financial performance in the fourth quarter. Net sales totaled $257.0 million, representing an increase of 100.1% versus the fourth quarter of 2012. Gross profit was $68.4 million compared to $34.6 million in the fourth quarter of 2012.

Gross profit as a percent of net sales was 26.6% compared to 26.9% last year. Marketing for the fourth quarter 2013 totaled $17.0 million compared to $11.1 million for the fourth quarter of 2012. As a percentage of net sales, marketing was 6.6% compared to 8.6% for the fourth quarter of 2012.

Our active customers, which we define as customers who have made at least one purchase in the previous 12 months rose to 3.2 million at the end of Q4 2013, compared to 1.6 million at the end of Q4 2012, an increase of 101%. Selling, general, and administrative expenses for the fourth quarter 2013 was $38.5 million compared to $20.3 million for the fourth quarter of 2012.

Selling, general and administrative expenses include stock-based compensation expense of $2.9 million for the fourth quarter in 2013 and $0.5 million in the fourth quarter of 2012. Excluding the impact of stock-based compensation expense, SG&A decreased to 13.9% of net sales, compared to 15.5% for the fourth quarter of 2012.

Operating income for the fourth quarter 2013 totaled $12.9 million compared to $3.2 million in the fourth quarter last year, an increase of $9.7 million. Taxes for the fourth quarter 2013 totaled $0.4 million while we remain in a cumulative net loss position. Our profit in the fourth quarter of 2013 triggered AMT that is anticipated to be deducted against future taxes as long as we are able to continue to increase our profits and reach cumulative net income.

Net income totaled $12.8 million for the fourth quarter of 2013. Fourth quarter diluted net income per share was $0.05, compared to a net loss per share of $0.71 in the fourth quarter of 2012. The non-GAAP diluted earnings per share for the fourth quarter of 2013 was $0.10, compared to $0.03 for the fourth quarter of 2012.

The non-GAAP diluted earnings per share calculation normalizes the treatment of the convertible preferred shares to an as converted basis in order to show the quarter in a more consistent way with the way the preferred shares will affect our going forward earnings per share post the IPO.

Non-GAAP adjusted EBITDA for the fourth quarter of 2013 was $17.8 million compared to $4.7 million for the fourth quarter last year, an increase of $13.1 million. Cash flow generated by operations totaled $43.9 million in the fourth quarter and $73.1 million over the trailing 12-months. We continue to generate cash from operations significantly in excess of our operating income, which is consistent with the fundamental design of our business model.

We typically purchase inventory after our customers have ordered, which yields negative working capital and superior cash flow generation when combined with topline sales growth. We ended the fourth quarter with cash, cash equivalents and short-term investments of $308.1 million, compared to $105 million in the prior year, representing an increase of $203.1 million.

The year-over-year increase was driven by $147.5 million of net proceeds received from our IPO in November 2013, combined with the $53.5 million of positive free cash flow for the year. Our inventory balance at the end of the fourth quarter equaled $13.0 million compared to $7.6 million at the end of the fourth quarter last year, an increase of 71% on year-on-year net sales growth through the fourth quarter 2013 of 100%. We maintain a low level of inventory as a result of our innovative business model, which further contributes to favorable working capital dynamics.

Now turning to our guidance, for the first quarter of 2014, we expect net sales to be between $225 million and $235 million. Net loss is expected to be between $5 million and $1 million and non-GAAP adjusted EBITDA is expected to be between $1 million and $5 million.

For the full year, we expect fiscal year 2014 net sales to be between $1.1 billion and $1.15 billion. Net income before tax is expected to be between $15 million and $25 million. Non-GAAP adjusted EBITDA is expected to be between $45 million and $55 million. Additionally, capital expenditures are expected to be between $45 million and $55 million for fiscal 2014 and will be primarily for our fulfillment centers to support our growth as we scale.

Now, let me turn the call back over to Darrell to wrap up before we take your questions.

Darrell Cavens

Thanks Mark. Clearly, this has been a great year for the company. We look at the opportunity for zulily from a very long-term perspective. So while, we want to take a moment to reflect on the fourth quarter and for that matter the entire year, our focus remains on the road ahead. Delivering a magical experience to our customers and staying true to our core is key to our success in the coming years.

I’m going to turn the call over to the operator and we will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Deb Schwartz from Goldman Sachs. Your line is open.

Deb Schwartz - Goldman Sachs

Great. Thanks and congrats on the quarter. Two questions. First, can you give us a sense of your mix of national versus local events, I guess both on a sales and volume basis as of Q4? And how that’s changing, as you gain scale customers and similarly as you move into other categories like women’s apparel and home?

Darrell Cavens

Sure. Thanks, Deb. So as we look at our vendor mix, it remains very consistent as we look at kind of out there discovering new up-and-coming brands everyday is really the heart of our business. We certainly try to supplement that with big brands over time that our customers can get excited about, but the heart and soul of the business very much remains the core of our business.

Deb Schwartz - Goldman Sachs

Okay. Thanks. I was just going to ask one follow-up.

Darrell Cavens

Sure.

Deb Schwartz - Goldman Sachs

Curios also on shipping incentives, it seems like throughout the quarter you’ve been experimental a little bit with shipping incentives, just curios how you are thinking about free shipping as we had into this year?

Darrell Cavens

I think we remain focused on kind of value for the customer in anyway we can provide it. And I think as we look at incentives for shipping, it's not kind of our core focus. I think our focus is very much on value and product pricing everyday and we continue to test and try a lot of different programs. But I don’t think there is anything material as we look forward in kind of changing the way we think about shipping.

Deb Schwartz - Goldman Sachs

Great. Thank you.

Operator

Your next question comes from the line of Mark Miller from William Blair. Your line is open.

Mark Miller - William Blair

Hi, good afternoon, incredible results. Question about competition, so your competitors are able to see the boutique sellers on the site everyday, to what extent do you think they're approaching them to selling their sites and their flash sales events and do you think where this could dilute the uniqueness of the offering?

Darrell Cavens

So, I guess we look at our offering, first and foremost is kind of where our focus is. And I think as you look at the customer base that we have, we think it's pretty unique and that our customers are coming to us first everyday to discover that. But certainly no doubt that anybody can look at our site and see what we are selling.

But what we hear from our vendors is that we are a phenomenal partner for them, in many cases, are significant part of their business and they keep coming back to us and I think the customers are coming to us and you can see that in the numbers. And so I think this is not an easy thing to replicate and our focus is there and I think. Yeah, that’s.

Marc Stolzman

Yeah, I think just -- I think just adding to that I think we have by far the largest audience in this demographic. And then if you look at any of the traffic data out there, just the level of engagement we get from our audiences is significant compared to anybody else. And so I think if you're a small vendor out there, trying to get distribution, trying to reach an audience, where your first call. So I think that will continue to be the case. If we have the audience, we’re going to get the product. If we have the product, we’re going to get the audience The whole system is kind of a reinforcing marketplace.

Mark Miller - William Blair

It’s clearly working. If I can ask another question about free cash flow, what are the priorities for reinvestment here, I mean it’s a good problem to have, but you’re going to build up considerable cash. So what are your current thoughts on international expansion, additional technology fulfillment, investments maybe beyond what's being talked about here today? Thanks.

Darrell Cavens

Sure. As you look at our kind of investments going forward, it remains kind of very focused in the core. As I mentioned on the script, a big focus in the technology area to make sure that we can keep improving that customer experience and driving that daily kind of engagement everyday. At the same time, you saw that we just leased a new location in Nevada to build out our fulfillment capacity. We will continue to make significant investments in the fulfillment center to make sure that we are -- that we are able to service the customer demand, that’s coming. And then along that lines we’ll also continue our investment in mobile to make sure that that kind of daily engagement and that daily habit from the customers can be just improved over and over again.

So I think you our focus remains on the core. I think as you look at international, I look at that as kind of great long-term opportunity for us. Obviously as the U.S. business continues to scale at the rate it is, our primary focus remains there, but I remain excited about the possibility for the international over the long term.

Mark Miller - William Blair

Thanks. If I could just sneak one more, you’ve been running some TV spots. And just, I mean, you’ve had nice leverage on marketing, I mean, it’s early days, it seems like the focus was on growth rather than trying to maximize margins here. But what kind of response are you getting, does this news round of TV ads and what kind of marketing expenditures do you see in the annual EBITDA margins that you are looking at? Thank you.

Darrell Cavens

Yeah, if you look at our marketing spend, it’s very distributed across the different channels. And so what TV is there, it is alongside many other channels and programs we’re going after. We are very disciplined in our marketing spending. You can see that in the numbers that we really tried to make sure that we’ve got direct payback on every dollar that we invest. And so what I’d say is I think we will continue to see great returns on those dollars invested there. And I think as we continue to see more opportunities to deploy dollars and get that return, I think you'll see us overall remain aggressive with that marketing investment. On the second part of your question, I am going to let Marc Stolzman take that.

Marc Stolzman

Yeah. So coming off of this current year where we had just over 8% marketing, I expect the level to be similar as we look at the upcoming year. We see as Darrell said great opportunity to continue to invest behind marketing. It may have the objective as to not overly leverage and gain too much scale in their terms as to focus the funds on investing in the growth. So I think you will see a similar cadence from us.

Mark Miller - William Blair

That’s great. Thanks.

Operator

Your next question comes from the line of Mark Mahaney from RBC. Your line is open.

Mark Mahaney - RBC Capital Markets

Great, thanks. Three questions please. Did you say what percentage of your transactions or revenue came from mobile devices? Secondly, Marc, could you talk -- just as you talked about margins -- I am sorry marketing spend in ’14, how we should think about gross margins in ‘14 versus ’13? And then Darrell you made a comment about consumers kind of leading zulily to away from or beyond the initial core segments towards home products. Could you provide any examples, more recent examples of products where you have found that to be the case where you see consumer demand build up and show you kind of a path towards the segment that you weren’t in before? Thanks a lot.

Darrell Cavens

Sure. I will take the first and third question. I will let Marc jump in on the second one there. As a percent of revenue in mobile, for Q4 it was 45%. So I think we continue to see great growth in mobile engagement over time. I think as you look at kind of customers pulling us into new opportunities, I think the best example I can put you at is kitchen. And we had a set of buyers that had a passion for that space and experience in that space and discovered some product put it up there and our customers got very, very passionate about us. And I think that's the great thing about this business is that with our three day events, we can put things up there and test and try a lot. And I think we just continue to see that that kind of daily engagement of the customers coming to us and the passion from them is that as we put up great products, we price it well, we tell a story about the vendor that they are willing to look at the diversity of products and diversity of offering. And so I just continue to see a lot more opportunity, provide a unique experience everyday.

And with that, I will let Marc take your second question.

Marc Stolzman

Yeah. So on gross margin, and actually very consistent with what we discussed during the IPO, we anticipate gross margins will stay relatively flat year-on-year as we look to invest in value. I think that for 2014 the more unique component of that is the front half of the year will face more of a headwind in our operations as we have really invested in scaling the organization, hiring and staffing the fulfillments to make sure that we’re meeting our scale.

As we move across the year I expect that headwind to become more neutral and then become tailwind as we exit the year. A lot of that has to do with building into the facility changeover in Reno and some of the capital and technology that’s been deployed that will help gain efficiencies in that side of the business. So I think overall the year will look relatively flat first half and particularly Q1 will have some headwinds and then I think you will see it stabilize and begin to get improvement in the fourth quarter.

Mark Mahaney - RBC Capital Markets

Thanks, Marc. Thanks, Darrell.

Operator

Your next question comes from the line of Mark May from Citi. Your line is open.

Mark May - Citi

Thanks for taking my questions. One has to do with, just as you’re diversifying into other categories. Wondering how that influences some of the metrics that we will guide on. An example being with home, where the products may be larger, may weigh more. Does it in anyway impact your shipping costs and ultimately your gross margins for that product?

What about the CapEx implications there, do you to tend to do more drop ship in that category versus some of the apparel and toys and accessories category? Such we’ll love to get a sense of how some of these newer emerging growth categories impact those aspects of your business. And then we’d love to get an update, if there is one in terms of progress you've made in shortening from order to delivery times, I guess in particular the vendor to zulily ship times?

Mark Vadon

Sure, this is Mark Vadon. I’ll just take the first one and then pass the shipping one on. On the metrics as we go in new categories and that’s just for perspective, that's something that's been going on since very early. I think, our customers, I think it’s interesting, they don’t really define us. I think a lot of people who are new to the story, kind of defined us as we are some kind of kids brand or mom's brand. There is a big element of that. But I think our customers don't see as in that way, they see us as a place to find great things.

And as we've put of different things over time, they just go really horizontal and buy a lot of things. And so that's not anything new, it’s been -- you can even see that in the S1, as they were updated over time. You see that gradual progression into just a much wider variety of products. We don’t really see it having much or any impact on gross margin. So far we haven't seen that at all. I think the most interesting aspect of it, it obviously gives us a much larger addressable market. And part of that comes from the marketing side, as there is more and more products.

There's more opportunities to market. There’s more customers to go after. There's more opportunities to go after the same customer. Of course, you can hit them on various different kind of purchase occasions that are relevant to them. So we see as grade there. Our marketing teams just loves it because they kind of opens up the field of what they can do.

The other area in the metrics, you may see a little bit is just in revenue per user. We’re growing the active file so rapidly that I think in the short term that maybe a headwind on revenue per user because we’ll go after customers that maybe aren't as active as our purchase as frequently as those in our core.

So it maybe headwind on that. But I think what we’ve seen over time is we bring in users and as we learn the more, we personalize experience more, they buy more from us. And I think, you'll see that same trend, that kind of the user at cohort level. So, I think, it’s really it's all good things for the business. Then shipping?

Darrell Cavens

Sure, on the shipping front, I'd say, we continue to focus on that and make sure that we’re delivering both that value but there were also improving our order to shift time. I think if you look at 2013 fiscal year, we ended at 11.5 days, down from 12.8 in 2012. So making good progress there.

And I think, you can see us continue to focus there. Again I come back to it not being the primary reason customers are choosing us but we know that as we drive that down that it's a way to drive kind of more engagement with the customer. But I don't think it's going to -- I’d say there’s no big change in our approach to bring inventory in or change our model any way, shape or form.

We continue to think that as long as we can drive great new products every day that the consumers are willing to trade it off value for time a little bit. But you'll see us continue to drive that down and I think we’ve got more opportunity there as we look forward.

Operator

And your next question comes from the line of Justin Post from of Bank of America Merrill Lynch. Your line is open.

Justin Post - Bank of America Merrill Lynch

Thank you. [Guys, I was very interested] your prepared remarks, you highlighted a new type of shopping that zulily is enabling. And I know you’ve already covered a lot of the positive features that zulily offers its customers. But maybe you could talk a little bit about the competitive landscape and why zulily has kind of continued to be very successful while other companies may have struggled to scale. And then, I’ll have a couple of other questions. Thanks.

Mark Vadon

Sure, I think at the end of the day, it very much comes down to our obsession about the daily offering everyday. I think if you spend time on the site each day, what you'll see is incredible photography, incredible brands and great, great pricing and it’s the combination of those things and it's the kind of daily execution that makes it work so well.

It’s interesting because it’s one other question like so often get ask and I think people are looking for an answer that is, what here is this, we’ve invented the Thinga-ma-jigger and the closet and that solves our problems. But at the end of the day, I think our success really comes from the hundred little things we do today well and the hundred little things tomorrow and the hundreds little things the next day.

And it’s a sum of those parts together that add up to just a better experience, better product, better pricing. And that's why the customers are coming back. And I think it's easy to look at the competitive set and say “oh they’re in the same model”. But our daily execution is just so strong and the team obsesses about those details. That’s really been, I think what’s driven the success today.

Justin Post - Bank of America Merrill Lynch

Okay. And then when you look at the brand pipeline and the number of new vendors you can bring on in ’14, obviously your guidance speaks a lot about that. But maybe you could comment on that. And then lastly, I know industry practices haven’t really just disclosed trend on customers, but as you add the additional categories, is that affecting a customer trend? Thanks.

Darrell Cavens

Sure. So as you look at the brand partners, I think you can look back at the history of the business and candidly look at the site everyday and see what's going on that there still continues to be tremendous amount of vendors that we haven't worked with where we’ve got a team of merchants that are out traveling to trade shows and working the phones, talking to new vendors everyday and working with our existing vendors to find and discover new product.

And so, I don't see any slowdown in our focus there and I think we've go a lot more brands and a lot more product opportunity to go. On the customer churn side, I would just say, I mean, our customers remain incredibly engaged with us. And you can see it in the active customer growth that the customers are coming back and buying from us again and again and again.

Marc Stolzman

Yeah, I wonder, this is Smart Fit on again. On the vendor question, a huge part of this when you’ve got the thousand and thousands of vendors we have, there’s enough new product they’re coming up with where you can feel the entire business and everything can feel brand new to every customer, every single day. So we definitely are going out and looking for more and going wider and wider, but a big part of the focus is, how do you work with the existing vendor base to help them understand their business and grow their business.

There is an article the other day on this in the Seattle Times, where I think they interviewed a little tinny company called Jelly The Pug, it’s a tinny clothing brand and I haven’t realized the extent to which they are growing, but they recorded and they were saying when they started with us three years ago, they had five employees and they have I think now 250 or 300 employees.

So that’s ton of that is coming from working with us, getting volume, getting information from us and then investing it back in the business and growing and growing. And I think that’s one of the hugely exciting things for us as entrepreneur as building this is like we are providing also an opportunity for a lot of great small businesses, a platform for them to scale and build out some businesses.

Justin Post - Bank of America Merrill Lynch

Thanks, Marc. And maybe last one, just as your outlook for taxes over the next couple of years, any thoughts on how we should think about modeling that? Thanks.

Marc Stolzman

Yes. So with regards to tax, I think, we would anticipate an effective tax rate approximately 35%, I think, as we look to grow our international business, there certainly are some other pieces there that will influence it.

We are exiting this year with an NOL on our U.S. of about $9 million. So if, based on the guidance that we are talking about here, it’s our belief that we will get through that NOL and then be in a tax position and that’s actually why in our guidance that really stayed focus on the pre-tax figure just because of the timing and how that will float into tax paying and is up coming will cause a little bit of noise.

Justin Post - Bank of America Merrill Lynch

Thanks. I appreciate it.

Operator

(Operator Instructions) Your next question comes from the line of Shawn Milne from Janney Capital Markets. Your line is open.

Shawn Milne - Janney Capital Markets

Thank you and thanks for taking my question. I wanted to go back to the marketing efficiency, I mean, pretty remarkable, I mean, your business was up about $130 million in revenue on, just under $6 million and I mean, incremental marketing stand? Can you help us around what some of the -- what channels were most productive and I don’t know if you can maybe give out some mobile app downloads update and what you saw from that channel and I have one follow-up?

Darrell Cavens

Sure. I think if you look at our channels, we don’t disclose the kind of difference between each one and what we are seeing across channels, but what I can say is, we saw great efficiency across all our channels. We continued to see kind of strong diversity across the channels there.

Similarly on mobile, our customers are coming to us across multiple channels, they are coming to us from desktop, from mobile phone, from iPad and we are seeing great engagement happening on the mobile side. I don’t have any more stats other than saying we are at 45% of sales in Q4 coming from mobile but…

Marc Stolzman

I think a big piece of this is when you think about our marketing model, right. We are spending -- the money we spend in Q4 of 2013 we do that we acquire a number of email addresses and then we go on to market to those people every single day for years and years and years and years. And so I think what you’ll find is that there is growth in the business.

If you go back to the S1 and look at the cohort analysis we did there. You will see when we bring in email addresses, we monetize them a better as time goes on and so the business has good growth even before we spend marketing dollar to acquire new member. So I think as you look at it as, if you look at marketing as a percentage of revenue it naturally just keeps falling just because the old cohorts keep spending more money.

Shawn Milne - Janney Capital Markets

And are we going to get that cohort update in the 10-K or is that the last time we are going see it?

Marc Stolzman

Our 10-K is going to update that in anyway, I would just say, we didn’t -- we -- you look at the growth in Q4 and underneath it the cohorts behaving incredibly well. It’s -- we saw that same trend to continue. But we will not formally update that anyway going forward. We felt like, we felt we are putting that out there, so people could understand the power of what we are doing, but competitively I think that’s the last time what we said there.

Shawn Milne - Janney Capital Markets

That sounds good and…

Darrell Cavens

Okay. But as I was saying the some mobile is 45% of transactions on mobile in Q4, I realized that was same revenue, but it’s 45% of transaction, yeah, in Q4.

Shawn Milne - Janney Capital Markets

Right. And this is a follow-up to that. Can you give us a sense for average order trend year-over-year?

Darrell Cavens

The numbers overall have been very consistent over time. We haven’t seen any materially changes -- material changes in average order value. I think average order value we got here is in Q4 was $56.23, so just very, very, very consistent to where it has been.

Marc Stolzman

Yeah. And I would add one piece to that which is the revenue per active customer in addition to that AOV was $81 in the fourth quarter compared, similar, so the same figure in the previous Q4. So our AOV is doing great, the trend on revenue per active is also a million strong.

Shawn Milne - Janney Capital Markets

That’s helpful. Thanks. And last question you do as, already a few questions about shifting times and delivery, you talked about having more automation in the new facility in Nevada? I just wonder is that an area where you can shrink a couple days out of that duration or is it really more structural and now you are working with smaller vendors that’s getting keep up your typical order to shift time in that sort of about 10-day range?

Darrell Cavens

So as you look at that investment we are making in both facilities in Ohio and in Nevada, the vast part of that investment is focused on capacity, making sure that we can handle the volume well and keep that order to shift time improving.

I think as you look at kind of shift time, again we continue to think there is an opportunity to bring that down, but I think it will be the investment in automation is primarily capacity and I think our focus on improving that order shift time primarily comes from working with our vendors to get product in bound to us faster.

Once we get it into our facility, we are able to move it through very, very rapidly through that network and so we are putting a lot of time and effort into improving our interactions and looking for ways that we can help our vendors work with us to bring that time down.

Shawn Milne - Janney Capital Markets

Great. Thank you very much.

Operator

And thank you for joining us today, ladies and gentlemen. This concludes today’s conference call. You may now disconnect.

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