Zulily Should See Profit Gains

Similar to last quarter, Zulily needed to deliver upside to consensus projections in the first quarter for shares to move higher. While underlying performance was materially better than our first-quarter forecast, the increase in deferred revenues with a seasonal shift created poor optics for margins in the period. Arguably, management should have anticipated that the Easter shift would shift timing of orders, although zulily should see corresponding profit gains in the second quarter. Nonetheless, a near-term pullback in shares could be expected, especially considering that zulily shares have performed much better this year than many technology and e-commerce companies.

Focusing on the key business drivers in the first quarter, more than 90% order growth and increasing average order size remain impressive. Category expansion is encouraging with more than 60% of orders now outside kids’ categories. Zulily also continues to demonstrate that it is a beneficiary of mobile, which now represent 45% of orders. We recommend an opportunistic approach for long-term investors, as we believe zulily remains well positioned to win in an Amazon-dominated market.

Shares may be pressured near-term due to the poor optics of the seasonal shift; we recommend long-term investors be opportunistic at lower valuation levels Reported: Zulily reported first-quarter adjusted EBITDA of $2.6 million, which were $3 million below our estimate of $5.6 million because of order shipments that shifted from the first to the second quarter. Total reported revenues increased 87% year-to-year, to $238 million, modestly ahead of our $235 million estimate (consensus $234 million). Total orders increased 91% and average order value rose 4%, implying 99% underlying revenue growth (to $252 million in revenues, or $17 million above our projection). Looked at another way, the active customer count of 3.7 million, 94% growth, came in 120,000 better than our estimate, but reported revenue per customer of $65 declined 3% because of delayed recognition of shipments.

The increase in revenue per active customer was 3% on an underlying basis. While it is difficult to precisely estimate the drop-though to gross margin and adjusted EBITDA on an underlying basis (without the deferred revenue increase), we estimate that zulily would have handily exceeded our projections on both of these measures without the seasonal shift. Outlook: Zulily expects 2014 revenue to be in the range of $1.15 billion to $1.20 billion (65% to 73% growth), up $50 million versus prior guidance. The first-half revenue outlook, based on the midpoint of second quarter guidance, is more than $25 million above our incoming projection. Adjusted EBITDA outlook for 2014 is unchanged at $45 million to $55 million, although we are raising our forecast by $1 million this year to