1stdibs.com, Inc. Q1 FY2022 Earnings Call

Good evening, and welcome to 1stDibs earnings call for the quarter ended March 31, 2020. I'm Kevin LaBuz, Head of Investor Relations and Corporate Development. Joining me today are CEO, David Rosenblatt; and CFO, Tom Etergino. David will provide an update on our business, including our strategy and growth opportunities, and Tom will review our first quarter financial results and second quarter outlook. This call will be available via webcast on our Investor Relations website at investors.1stdibs.com. Before we begin, please keep in mind that our remarks include forward-looking statements, including but not limited to statements regarding guidance and future financial performance, market demand, growth prospects and business plans. Our actual results may differ materially. Forward-looking statements involve risks and uncertainties, which are described in our SEC filings. Any forward-looking statements that we make on this call are based on our beliefs and assumptions as of today, and we disclaim any obligation to update them. Additionally, during the call, we'll present GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which you can find on our Investor Relations website along with a replay of this call. Lastly, please note that all growth comparisons are on a year-over-year basis unless otherwise noted. I'll now turn the call over to our CEO, David Rosenblatt.

Thanks, Kevin. Good evening, and thank you for joining us today. In the first quarter, we delivered results near the high end of guidance, while laying the foundation for future growth. Once again, our trade business posted strong results and continues to have great momentum. In contrast, consumer GMV declined modestly year-over-year due to lower new buyer conversion, a trend that's continued into the second quarter. In 2020 and 2021, pandemic-related lockdowns and other restrictions shifted consumer spending online. As the world reopens, the pendulum is swinging back in the other direction, with consumers spending more in categories like travel and restaurants. Traffic and top-of-funnel engagement metrics remain strong, but new buyer conversion headwinds resulting from rising macro uncertainty and economic reopening have reduced our GMV growth outlook for the second quarter relative to our previous expectations. While our near-term consumer demand outlook is lower, we remain optimistic about the future. From 1999 through 2019, U.S. e-commerce penetration rates consistently increased. During COVID, they inflected upward, and we're now seeing this trend unwind. We believe this is a temporary dynamic. When we think about the next decade, e-commerce will be a much larger market than it is today. Said another way, when the environment normalizes, we expect that e-commerce will resume its historical growth trend. We aim to capitalize on that growth. Encouragingly, top-of-funnel activity as measured by consumer traffic, registration volume and item favoriting is strong. However, consumers are not converting their interest into orders at historical levels, likely due to temporary external factors. Given our strong balance sheet and large opportunity, we have chosen to continue to thoughtfully invest for future growth. Despite current consumer headwinds, our high gross margin, asset-light business model and strong balance sheet provide us the flexibility to continue to execute on our strategic road map. Our plan for 2022 and beyond is to enhance our marketplace growth rate by focusing on 4 strategic areas: supply growth, auctions, international expansion and NFTs. Each represents a meaningful GMV opportunity. In the first quarter, we made progress on all 4. Our first priority is accelerating supply growth. There is no other marketplace with our breadth of unique luxury design. However, the number of our current listings is just scratching the surface of potential qualified items. For 2-sided marketplaces, supply begets demand. Given the heterogeneous and long-tail nature of our listings, more supply increases marketplace liquidity. Supply drives traffic, broadens buyers' options, makes search results more robust and increases the chances that we'll return a match for a given search. Our goal is to aggregate the world's most beautiful items regardless of where they're located. To accelerate supply growth, we launched a pricing test for new sellers in January. This allows sellers to choose the plan that best fits their business and includes a subscription-free tier with higher commission rates. This option reduces friction by lowering the upfront cost of trying the 1stDibs marketplace. Early results have been encouraging. We signed over 700 new sellers in the first quarter, ending March with over 5,400 seller accounts, up over 25% year-over-year. Our monthly seller acquisition was over 3 times higher than our monthly average in 2021. In general, these new sellers are drawn from our geographies, price points and verticals in a similar proportion to our existing sellers. Additionally, the new pricing options are helping to reduce churn, particularly for sellers with lower volumes. Sellers are responding well to having a choice of pricing options. Notably, about 85% of new seller accounts are choosing the subscription-free option. Even so, the higher volume of new sellers means that the number of sellers selecting plans with the subscription component is still about 50% of our 2021 monthly new seller run rate, highlighting the value of the services we offer on subscription tiers. Given the highly-considered nature of our purchases, it takes time for sellers to get up and running. The average seller takes about 90 days to make their first sale. Still, we're encouraged by the early progress we've seen. New seller accounts in the first quarter listed over 12,500 items and generated over $300,000 in GMV. Our second priority is commercializing auctions. We made progress on this front as well. Auctions provide a new way for buyers to discover and own the world's most beautiful things. This new purchase format leverages our existing supply and demand, adds a common luxury purchase format to our marketplace, increases urgency and creates opportunities for buyers to find exceptional deals. Auctions also provide a new on-ramp to our marketplace for more price-sensitive consumers. While it's still early, we're seeing healthy order growth offset by average order values below fixed-price marketplace AOVs, as expected. Encouragingly, and most importantly, new buyer conversion rates for auction items are 3 times higher versus the same metric for non-auction items. Additionally, sell-through rates on auction items are about 2 times higher than non-auction items. Increasing new buyer activation and sell-through rates were key objectives of introducing the auction format, and we're excited to see them playing out. Since launching in November 2021, we've enhanced the product experience through weekly updates. This quarter, we launched additional buyer urgency drivers through platform updates, e-mails and app notifications and new tools for sellers to manage their listings, update pricing and provide second chance offers. In the first quarter, our efforts focused on providing sellers with pricing guidance. Listings with low starting bids, competitive reserves and attractive 'buy-it-now' prices have higher bidding activity and correspond to buyer expectations of value for auctions. We've seen a sharp increase in the adoption of our pricing guidance. The number of auctions that meet all 3 of our pricing criteria has increased to over 20% at the end of March from below 1% at the start of January. Optimizing pricing allows us to get more aggressive marketing auctions and build awareness, setting the stage for higher bid participation and ultimately, higher future GMV growth. Our third priority is international expansion. We see a meaningful global opportunity and have a multi-year road map. Today, about 40% of our sellers, one-third of our traffic and one-fifth of our buyers are located outside the United States. Additionally, in the first quarter, international seller GMV growth outpaced U.S. seller GMV growth. In late April, we smoothly launched in Germany, and we plan to launch in France in May. These countries are our largest non-English speaking markets by order volume. Localizing our product strengthens the 1stDibs marketplace and allows buyers and sellers to transact in the language they're most comfortable with. With time, this should grow our buyer base and increase the unique supply on the marketplace. Supporting our launch in the first quarter, we completed the bulk of our upfront translation work, over 400 million words in total, to support localized production for Germany and France. Other international expansion progress included localizing sort order and search, translating marketing campaigns, hosting press events in Berlin and Paris, and building out European buyer and seller support. These launches are a cross-functional effort encompassing product, engineering, operations, logistics, marketing, supply and customer experience. I'd like to thank everyone involved. Our final priority is NFTs. In the first quarter, we made additional improvements to our NFT platform. In early March, we launched self-minting capabilities and creator profiles. Self-minting allows digital artists to create and sell their tokens in a self-serve fashion. Since those launches, the supply of NFTs on the 1stDibs marketplace has grown over 50%. The number of artists on the marketplace has nearly doubled, and our Twitter followers almost doubled. While expanding NFT supply is our near-term focus, we believe these first quarter accomplishments are precursors to future GMV growth. We are cognizant of the fact that the e-commerce operating environment has become challenging and unpredictable over the past few months. We remain confident that in the long term, e-commerce adoption will continue to grow and luxury design will continue shifting online. This confidence is reinforced by the healthy top-of-funnel activity we've seen year-to-date. Additionally, our past success with initiatives like SEO and expanding the marketplace beyond the vintage and antique furniture category gives us the confidence to invest in our road map. Today, about half of our GMV comes from our newer verticals like new and custom furniture, jewelry, art and fashion, and SEO traffic mix has increased substantially. Each of our initiatives is a tried-and-true marketplace growth tactic and has the primitives in place to be successful. For example, auctions are a common luxury purchase format. A significant percentage of our supply and our traffic come from outside the U.S. Growing supply increases marketplace liquidity. The hardest part of scaling an online marketplace is cracking the chicken and egg problem with supply and demand. We've done this with auctions, international and supply. We are making these investments because we expect attractive ROIs in terms of new buyers and GMV. Margins matter to us, profitability matters to us, generating free cash flow matters to us. As we think through our road map, we do so with these considerations in mind. Turning away from strategic initiatives, we also continue to improve our core platform. While new buyer conversion declined, top of funnel activity remains healthy, with traffic, registrations and item favorites growing double digits. We also redesigned our mobile web product pages and increased parcel pre-quote coverage. Today, 99% of our eligible parcel items have a pre-quote to buyers in the U.S., Europe and other international markets. However, continued shipping inflation represents a conversion headwind. Since our last earnings call, changing consumer behavior, rising macroeconomic uncertainty and consumer conversion headwinds have reduced our second quarter GMV growth outlook relative to our previous expectations. Undoubtedly, the macroeconomic environment has become more uncertain due to inflation, rising interest rates, geopolitical tensions, increased mobility, changing consumer spending patterns, stock market volatility and other issues. Our high gross margins, asset-light business model and strong unit economics provide us the flexibility to think long term and make disciplined investments in our growth.

Thanks, David. I'm delighted to have joined 1stDibs a few weeks ago, and I'm looking forward to helping drive growth for years to come. In addition to being a 1stDibs customer, I'm a long-time admirer of the brand, the business model and the company's unique position in luxury e-commerce. Turning to the first quarter. We delivered results at the high end of our guidance range, which I'll review along with providing an outlook for the second quarter. First quarter GMV was $117 million, up 3%. As a reminder, we lapped historically strong GMV growth of 64% from the first quarter of 2021. Similar to the last few quarters, trade GMV growth outpaced consumer GMV growth, with trade GMV hitting a quarterly record. Once again, we grew both the number of spending trade firms and the average spending per firm. Many of the firms we work with have full pipelines, and the trade business continues to have great momentum. While trade GMV growth remained robust, consumer GMV modestly declined due to traffic mix shifted from returning buyers to new buyers and softness in new buyer conversion. Additionally, as the world reopens, we believe there is pent-up demand for spending on experiences and travel. As a reminder, when we reference trade GMV or consumer GMV, we are speaking of the subsets of on-platform GMV attributable to each of these buyer groups. Fashion and new and custom furniture were our fastest-growing verticals, consistent with the fourth quarter. Vintage and antique furniture accounted for less than 50% of GMV, and the majority of our first-time orders continue to come from our new categories like art, jewelry and new and custom furniture. Continuing a trend from 2021, average order value was over $2,900, up 11% on broad-based strength across categories. This illustrates the trust we've built over the past 2 decades. There's no other digital marketplace operating at our scale, transacting at our price points across multiple verticals. Average order value growth was offset by order softness due to 2 traffic mix shifts: a shift towards mobile web and a shift towards new buyers, both of which have lower conversion rates. For context, returning buyer conversion is materially higher than new buyer conversion so a traffic mix shift towards new buyers puts downward pressure on overall conversion. Many of these new buyers are coming from organic channels like SEO. We have several projects and tests in flight to increase conversion engagement from new buyers, including overhauling remarketing for a post-IDFA world, redesigning our mobile web product pages, updating our mobile web checkout and increasing awareness of auctions, which have higher new buyer conversion versus non-auction orders. Importantly, conversion for returning buyers grew year-over-year and top-of-the-funnel activity remains healthy. We ended the quarter with approximately 71,300 active buyers, up 10% year-over-year but down 2% quarter-over-quarter. As a reminder, active buyers is a trailing 12-month metric and could be choppy near-term as we cycle through some strong comps from the pandemic-related e-commerce boost. On the supply side of the marketplace, we closed the quarter with over 5,400 seller accounts, up over 25%. As David mentioned, we've seen great response from our new seller pricing test, which launched in January. Net revenue of $26.6 million grew 4% driven by GMV growth. Transaction revenue, which is tied directly to GMV growth, was approximately 70% of revenue, with subscriptions making up the bulk of the remainder. Gross profit was $18.9 million, up 2%. Gross profit margins were 71.1%, down from 72.5% a year ago. As expected, gross margins normalized following elevated shipping losses in the fourth quarter. While we continue to see shipping price inflation, the measures we implemented starting in December have kept shipping costs in line with historic norms. We are reviewing shipping data on a regular basis and we'll continue adjusting our shipping rates to reflect market trends. Sales and marketing expenses were $11.8 million, up 2%. Consistent with the fourth quarter, we pulled back on some performance marketing due in part to continued IDFA headwinds. Sales and marketing as a percentage of revenue was 44%, down versus 45% a year ago. Technology development expenses were $5.8 million, up 46%, driven by headcount growth and expenses supporting the launch of our localized sites in France and Germany, including translation. As a percentage of revenue, technology development was 22%, up from 15%. General and administrative expenses were $6.4 million, up 45%. The increase was mainly driven by expenses related to public company costs, including director and officer insurance and increased headcount. As a percentage of revenue, general and administrative expenses were 24%, up from 17%. Lastly, the provision for transaction losses was $1.7 million, up 59%, driven primarily by an uptick in transactional losses related to shipping damages and items lost in transit. Looking forward, we are working to mitigate these issues by optimizing our carrier network, reevaluating carrier SLAs and partnering with sellers to improve packaging practices. The provision for transaction losses was 6% of revenue, up from 4%. Adjusted EBITDA loss was $4.7 million compared to a loss of $1.3 million last year. The adjusted EBITDA margin was a loss of 18% versus a loss of 5% last year. This year-over-year change was driven primarily by higher G&A expenses due to public company costs and higher investment in technology development spend due to headcount growth and product localization. Moving on to the balance sheet, we ended the quarter with a strong cash and cash equivalent position of $161 million. Now turning to our outlook, we forecast second quarter GMV of $104 million to $111 million, equating to a year-over-year change between a decline of 3% and growth of 3%; net revenue of $24.4 million to $25.5 million, equating to a year-over-year change between a decline of 1% and growth of 3%; adjusted EBITDA margin loss of minus 32% to minus 28%. As David mentioned, due to shifting consumer demand, rising macroeconomic uncertainty and consumer conversion headwinds, it's a tricky environment to forecast e-commerce demand. While we're not providing full-year guidance, we'd like to share some additional context on the assumptions on delaying our GMV outlook. We have widened our GMV guidance range to reflect increased uncertainty. Last quarter, our outlook was that year-over-year GMV growth would be the lowest in the first quarter. This is no longer the case due to the issues David and I discussed earlier. The midpoint of our second quarter guidance implies that GMV growth is flat year-over-year. We continue to expect GMV contribution from our strategic initiatives to increase in the second half of the year. Turning to adjusted EBITDA margins. Guidance reflects a sequential decline in revenue and continued disciplined investment in our 4 long-term growth drivers. When we resume growth, we expect to generate operating leverage. That said, 2022 EBITDA margins will be dictated by the pace of GMV growth. In the first quarter, we made foundational progress in our 4 strategic initiatives, which represent meaningful upside potential over the next few years. Over time, our objective remains scaling the 1stDibs marketplace, improving our buyer and seller experience and achieving profitability and free cash flow generation. Thank you for your time. I'll now turn the call over to the operator to take your questions.

Our first question comes from the line of Ralph Schackart with William Blair.

David, you've mentioned several macro challenges that are widely recognized in the market today. I'm interested to know that while your upper funnel traffic is holding steady, which is positive, you're seeing an influx of new buyers on the platform. However, improving conversion rates seems to be a work in progress. How quickly do you think the platform can adapt to enhance conversion with these new buyers despite the existing macro challenges?

Thank you for the question, Ralph. You're correct that the top of the funnel is as healthy as ever, particularly in terms of traffic growth and dealer contacts, which refers to the number of buyers contacting sellers about products. Essentially, people are visiting the store, but they aren't completing their purchases. We have several projects and initiatives aimed at addressing this issue. Some are immediate and tactical, while others are more long-term. For example, we are focusing on optimizing the mobile experience since a significant portion of our traffic growth comes from mobile users, who typically have lower conversion rates compared to desktop and app users. We're also enhancing our shipping options by increasing pre-quote coverage for parcel items, which generally have lower shipping costs. In the longer term, all our core strategic initiatives are designed to improve conversion. A good case is international expansion, where non-U.S. visitors check out at half the rate of U.S. buyers. We recently launched in France and Germany, and by adding more items to the site, we can minimize the number of pages with limited products, which is common given our long-tail marketplace. Auctions are also aimed at improving this situation. The data we’re gathering from these efforts is promising. However, regarding how these initiatives will perform against macroeconomic factors, it's better to ask those more senior to me when those conditions will change.

Great. Maybe just a follow-up. I think you talked about it in the prepared remarks, I apologize. But just remind me if you talked about it already, what happened with shipping costs, I guess, with respect to last quarter? And how has that trended sort of quarter-to-date?

Thank you for your question. There are two shipping issues to discuss. Last quarter, we addressed some pre-quote losses quickly, which is why our margins are now at 71%, reverting to historical levels. This quarter, however, we are seeing a slight increase in the loss provision as a percentage of GMV, which has trended upward over the past few quarters, reaching the higher end of historical revenue percentages. This increase is mainly due to items being lost or damaged during shipping. Currently, logistics services are facing challenges as many carriers are operating at or above capacity. To mitigate losses, we are optimizing our carrier network, reevaluating and strengthening all carrier SLAs, and collaborating with sellers to improve their packaging practices. We anticipate that these measures will bring losses back to the lower end of historic revenue percentages, but it will take some time to see the effects.

And our next question comes from the line of Justin Post with Bank of America Merrill Lynch.

Can you provide some assistance in understanding the revenue mix between transaction and non-transaction? Additionally, how will the changes in the fee structure and the decrease in subscription users impact the overall take rates? I also have a few follow-up questions.

So yes, this is Tom. The rough breakout of transactional is about 70-30. Can you repeat the second part of that question?

On the call, you mentioned more sellers are kind of joining the platform subscription-free, I think you said 85%. So just wondering, as more people adopt kind of that format of pricing, what does that mean for overall take rates as you think out the next couple of years?

Yes, I can answer that, Justin. We are quite pleased with the new seller pricing plan. In fact, we've tripled the growth rate of the number of sellers we've added in the first quarter compared to Q1 last year. The program is designed to maintain a neutral take rate, which is our perspective on it.

Great. And then I guess the last one is on auctions. Obviously, you've got some new data here. You mentioned it's kind of higher conversion. Is it at all material to GMV or something that could be helpful as you get out to Q4? And how do you think about that now that you have a quarter into it about converting, I think you said last quarter, $14 billion of inventory. But is it something that could make a difference by Q4 or next year?

Yes. So we're quite happy with the progress so far. Our focus, given that it just launched basically mid-Q4, has been on the operational or behavioral drivers that ultimately convert into GMV. So specifically, our focus in the first quarter was on helping educate sellers to price in a way that is most effective for the auction format, and we went from 1% of items meeting our pricing criteria to roughly 20%. The impact of that operationally was we basically doubled orders in Q1 versus Q4, albeit at a lower AOV than in Q4, but that's okay because, again, what we're optimizing for is effective pricing for this format. In terms of making headway on the kind of the opportunity that this product is pointed at, which as you point out, was primarily conversion, specifically new buyer conversion, we did see, as I mentioned in the script, that conversion rates for new buyers for auction items were about 3 times that of conversion from non-auction items. If you look at that conversely on a supply basis, sell-through for items in auction was about 2 times sell-through for items in the marketplace. So we are making progress against our strategic objectives, specifically in terms of being able to better monetize the large amount of unsold inventory in the marketplace. We continue to make progress each quarter. I don't want to put a kind of specific quarter on when it turns into any specific GMV number, but again, we're very happy with the inputs there, and we're confident that it will translate into GMV growth.

Last question, on the 2Q guidance, if you take the midpoint, it's down $9 million or $10 million for GMV quarter-over-quarter. Going back to '19, it was flattish. Clearly, last year, it was down as well on weird pandemic stuff. But any reason why quarter-over-quarter, it's down. Is that normal seasonality? Or is it some of the macro factors have really intensified here in April?

There are numerous growth areas in the business worth noting. For instance, trade had an impressive quarter, with all inputs for that sector remaining strong. As mentioned earlier, the volume of customer inquiries is also robust. Additionally, returning buyer conversion has increased compared to last year. The main factor contributing to the GMV decline in the second quarter stems from conversion rates, particularly for new buyers. We are experiencing significant growth from SEO traffic, which unfortunately has the lowest conversion rates among all our traffic sources. Moreover, the conversion rates from this channel have decreased, and we understand the reasons behind this. Some of it is linked to macroeconomic conditions, while some issues are specific to the channel, and we are actively working to resolve these challenges.

And our next question comes from the line of Ross Sandler with Barclays.

I wanted to follow up on the trade comment. It's interesting that it's holding up well. Is there a noticeable difference in the end customer, such as a shift towards more premium buyers? Or do designers have a larger backlog they're currently working through that indicates the consumer side of your business reflects people feeling the economic pinch in real-time? I'm curious if the trade side is somewhat insulated from recession impacts, and if you're adding more trade buyers, can you potentially grow from that? That's my first question. Regarding freight increases, you did well improving the pre-quote margin in the first quarter, so good job there. Are higher shipping costs generally deterring customers from making purchases? I'd like your thoughts on that compared to less bulky items that wouldn't incur significant shipping costs. Lastly, is it correct to think that one-third of your traffic from international sources serves as a good benchmark for your overall performance? I understand international GMV is around 7%. Should we interpret it that way? Additionally, do you have any early insights about Germany? I know it’s only been a couple of weeks, but any further insights would be helpful.

We are seeing strong performance in trade, including actual spending and sales pipeline feedback from our designers. This reflects a solid luxury real estate market, which remains robust. Our buyers often depend on designers, so as long as that market stays healthy and new sales volumes continue, we expect our business to remain strong. Additionally, we've been in this business for about four years, and as interior designers increasingly use our platform, it becomes more ingrained in their routine, improving their familiarity with our services. Designers tend to move between firms and carry their purchasing habits with them, which creates a beneficial network effect, although it's challenging to quantify. Regarding shipping, the market is dynamic, and while we can't measure it precisely, it's clear that rising shipping costs negatively impact conversion rates, especially for the 20% to 25% of our orders that involve freight. For international business, we established that conversion rates for non-U.S. buyers are about half of those for U.S. buyers, and while we aim to close that gap, it’s a gradual process. We just launched in Germany two weeks ago and have submitted our German site map to Google for SEO indexing. We also launched in France today, which means we haven't yet started that process there. Once we establish some SEO traction, we will introduce paid marketing efforts as part of our growth strategy. Moreover, once we offer local language support, we can also localize our seller tools to match, which should help expand our supply base. Overall, this gives us a promising long-term outlook for international growth, though it won’t happen instantly. About Germany specifically, it’s too soon to evaluate performance, but we are pleased that our launches have gone smoothly both technically and from a marketing standpoint. However, since our site map was only recently submitted to Google, it’s premature to draw any conclusions about its performance.

And our next question comes from the line of Spencer Tan with Evercore ISI.

I had one just around the mix between cross-vertical and single vertical buyers, maybe over the last couple of quarters, how that's trended? I know that that was kind of a really big positive for you guys at the time of the IPO. And then actually, maybe just to follow up on that. In your newer verticals, so new and custom furniture, art, jewelry, et cetera, what kind of verticals do you have the most confidence around growing through the back half of this year, understanding that it's a pretty difficult macro environment? But just any color behind vertical mix, and then as well as the single two multiple vertical buyer trends would be great.

Yes. Regarding share of wallet, which refers to cross-vertical purchasing, those trends have remained fairly steady over the past quarter. Currently, our new and custom furniture sector, along with our fashion categories, are experiencing the fastest growth. It's particularly encouraging that the fashion category has significantly increased its supply growth and posting activity. We anticipate this trend to continue. The strength in trade, which primarily involves buyers of new and custom furniture, is contributing positively. Overall, as long as the core fundamentals remain unchanged, we do not expect to see a significant shift in the relative growth rates compared to what we observed in the first quarter, where new and custom furniture and fashion were the fastest-growing segments.

Thank you. And this does conclude today's question-and-answer session. Ladies and gentlemen, this also does conclude today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.