1stdibs.com, Inc. Q1 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to the 1stdibs.Com, Inc. First Quarter 2023 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kevin LaBuz, Head of Investor Relations and Corporate Development. Please go ahead.

Good morning, and welcome to 1stDibs earnings call for the quarter ended March 31, 2023. I'm Kevin LaBuz, Head of Investor Relations and Corporate Development. Joining me today are Chief Executive Officer, David Rosenblatt; and Chief Financial Officer, 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, business plans, strategic initiatives, evaluation of alternatives, business and economic trends, including e-commerce growth rates and our potential responses to them, international opportunities and competitive position. Our actual results may differ materially from those expressed or implied in these forward-looking statements as a result of risks and uncertainties, including those 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, except to the extent required by law. Additionally, during the call, we'll present GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release, which you can find on our Investor Relations website, along with the 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. David?

Thanks, Kevin. Good morning, and thank you for joining us today. We delivered first quarter GMV and revenue at the midpoint of guidance and EBITDA margins at the high end of guidance, while continuing to make progress against our long-term objectives. Headwinds in the luxury home goods market, exacerbated by comping against a record GMV quarter, resulted in a disappointing first quarter growth rate. We are working to reaccelerate growth, but we believe it will likely take some time before we see significant improvements. Despite these headwinds, supply growth and traffic growth continued, and we have made progress on our strategic initiatives. Over the past few quarters, we've taken actions to reduce our expenses and improve our efficiency. Our work here isn't finished. Because our growth outlook today is below what we anticipated at the start of the year, we are evaluating additional steps to align our expenses with current demand. We're managing through this challenging period to emerge with more growth vectors, an improved cost structure and a stronger competitive position. Digging into the quarter, continued conversion headwinds and lower AOV drove GMV declines. Although luxury home goods demand was subdued, marketplace supply remains robust, with record seller acquisition, double digit listings growth and near record low churn. Our annual seller survey indicates that 1stdibs is the top sales channel for our sellers after their showrooms. Additionally, we're seeing a larger GMV contribution from our influx of essential sellers in 2022, modestly boosting take rates. We're also pleased with continued traffic growth. Our organic traffic mix increased to nearly 75% of total, up several percentage points, due to continued SEO strength and pulling back on performance marketing. This is encouraging because more supply and more organic traffic are barometers of marketplace health. We are also pleased to see jewelry continue to perform well with double digit order growth, highlighting the benefits of operating across multiple verticals. Though not yet large enough to offset macro softness, our strategic initiatives continue gaining traction. In the first quarter, we saw a record number of auction orders and record GMV from our French and German marketplaces. Given our strong international supply position, scalable tech platform and encouraging international results to date, we plan to enter Italy and Spain later in 2023. Moving to operations. Our goal is to stabilize and then reaccelerate GMV growth. Improving conversion, particularly for new buyers, is our largest lever and top priority. To accomplish this, we are focused on four distinct tracks: pricing, personalization, narrowing the conversion gap between U.S. and European customers, and increasing app usage. Of these, we see the largest opportunity in pricing. Unlike an automobile or a smartphone, there is not always a clear market price for rare and unique items. Indeed, our user research suggests that the primary obstacles for new buyers to convert are their perception of price and a lack of pricing context. For example, is paying $3,700 for a vintage Van Cleef & Arpels Alhambra ring a good deal or not? Furthermore, in this market, buyer sensitivity to price is elevated. Our strategy is to leverage our decade-plus of proprietary transactional data to provide buyers and sellers more pricing transparency and advice. We are doing this in three ways. First, by giving buyers richer pricing insights. Second, by offering sellers more guidance on competitive pricing strategies. And lastly, by boosting the visibility of listings representing compelling value. For buyers, we launched new discovery experiences called Shops. Shops are dynamically generated pages that algorithmically aggregate our most performance supply. Historically, listings and collections have seen higher engagement and sell-through versus non-collection items. While it's early, we are seeing positive results. For example, in December, we introduced the design values shop, which highlights well-priced items. This collection generated over $3 million of GMV in March despite representing less than 2% of overall listings. Data points like this increase our confidence in our pricing hypothesis. Shops reward sellers who price their items competitively and regularly add items to the marketplace. These behaviors drive seller success, and we'll continue to encourage them. They also make it easier for buyers to discover great products. In addition to design values, we launched most saved items in February and new arrivals in April with more planned in the coming months. We also introduced several pricing related features for sellers. For example, we added pricing guidance to item upload in early March. This leverages historical sales data to provide pricing recommendations when sellers create a new listing. Throughout 2023, we'll increase coverage and proactively share insights with sellers. Additionally, pricing guidance has been incorporated into auction listings. While it's still early, we are also exploring a number of different AI applications that could help to increase conversion and drive savings. These areas include pricing guidance, search and browse personalization, SEO content creation, and reducing manual workloads. We are also making progress on our strategic initiatives. Localized marketplaces in France and Germany posted strong traffic growth, translating into record GMV. Sessions from German and French IP addresses grew over 300%. Furthermore, SEO traffic continued growing over 220% in both markets. Orders from German and French IPs grew 20% year-over-year, while orders on our localized marketplace grew over 10% sequentially. To foster the growth of our international business, our product team continues working on features to drive supply and demand. In the second quarter, we will roll out localized seller tools in Italian. A pilot of the program is already underway. Our objective is to accelerate the growth of highly sought after Italian supply. Additionally, based on the encouraging results of our French and German sites, we plan to launch localized marketplaces in Italian and Spanish by the end of the third quarter. Relative to our initial launches, these markets will be faster and cheaper as we apply our learnings and leverage upfront infrastructure work from 2022. For example, it took about seven months to launch French and German sites. We expect that it will take about three months for Italian and Spanish, despite having a smaller team. We're also anticipating meaningfully lower translation costs compared to France and Germany due to more efficient machine translation models and renegotiated rates. Auctions continues to deliver on our priorities of buyer activation, order growth and higher sell-through. Orders hit a record in the quarter, growing approximately 10% sequentially and accounting for over 6% of the total. During the quarter, our product development efforts focused on demand generation and refining item-level pricing recommendations. We expect these to help drive page views and bids. On the supply side, our strategy is evolving to focus on a narrower set of the most performance supply, like specific categories of art and jewelry. Additionally, in January, we also ran our first no reserve auction, which had the highest sell-through of any of our monthly curations. Turning to supply. Seller and listings growth remained robust. We ended the quarter with over 8,100 seller accounts, up nearly 50%, while seller churn remains near record lows. Additionally, listings grew 20% to over 1.6 million items. While demand remains soft, we believe our supply growth signals growing relevance to our end markets. Indeed, our recent seller survey indicated that 1stdibs is the top sales channel for our sellers after their showrooms. Furthermore, for legacy sellers, defined here as those joining the marketplace before 2022, 1stdibs is typically the primary sales channel. Our goal is to aggregate the world's most beautiful items, regardless of where they are located, while maintaining our high curatorial standards. Because we're a marketplace of one-of-a-kind items, breadth and selection matter. Growing supply improves marketplace liquidity, drives traffic, and deepens search results, creating new opportunities to transact. In 2022, we introduced our essential seller plan, the subscription-free tier with higher commissions, spurring a strong year of seller acquisition and helping to reduce churn. In 2023, we are focused on making this influx of new sellers successful, in part by growing listing volumes and launching new data-driven seller tools like pricing recommendations. To this end, in early March, we launched the next evolution of this program, introducing minimum inventory posting requirements for new essential sellers. We know that sellers who post more, sell more. And our goal with inventory minimums is to encourage engagement and drive sales. Before I conclude, I'd like to take a minute to welcome Ryan Beauchamp, our new Chief Product Officer. Ryan joined 1stdibs in March following a decade at Google, where he most recently led the product management organization for Google Ads core experiences. Prior to that, Ryan oversaw business development and strategy for Google Shopping, and before that, launched Groupon Goods. He brings a strong understanding of online business models and monetization strategies. We entered 2023 facing headwinds from subdued demand for luxury home goods. But continued gains in traffic, seller acquisition and supply growth, as well as performance in out-of-home categories like jewelry, give us confidence that we remain as important as ever to our buyers and sellers. Our goal remains to be leaner and have more growth drivers when demand recovers. I will now turn it over to Tom to review our first quarter financial results and second quarter outlook.

Thanks, David. We delivered first quarter GMV and revenue at the midpoint of guidance and adjusted EBITDA margins at the high end of guidance. GMV was $97.1 million, down 17%, due to the soft demand for luxury home goods. As a reminder, we're lapping record high GMV from a year ago. Conversion remained a headwind, particularly for new buyers, more than offsetting continued traffic growth. In addition, the mix shift to orders under $1,000 that we saw in the fourth quarter continued. These orders accounted for 46% of total orders in the first quarter, up from 42% a year ago. This trend is partially explained by auctions, which have a lower AOV, but it holds true even when excluding auctions. We believe this reflects a more cautious consumer amid macroeconomic uncertainty and some trading down. Consumer and trade GMV declined at similar rates, a departure from the past seven quarters where trade outperformed. As the luxury housing market has remained volatile, we've observed that trade projects are taking longer to complete and that end buyers are becoming more price sensitive. We've also seen instances of clients opting to spread out spending by planning for multiple smaller installations as opposed to one larger project. Once again, jewelry showed the best relative performance. Jewelry orders grew 12% year-over-year. In contrast, demand for at-home categories like art, vintage and antique furniture and new and custom furniture, which account for the bulk of our GMV, remain soft. We ended the quarter with approximately 66,400 active buyers, down 7%. We expect this metric will remain choppy near term as we manage through a period of soft luxury home goods demand. On the supply side of the marketplace, we closed the core with over 8,100 seller accounts, up nearly 50%. Additionally, there are now over 1.6 million listings on the marketplace, up 20%. While continued supply growth sets us up for long-term success, the near-term demand outlook for durables and luxury home goods is challenging. Accordingly, we remain focused on driving efficiency and improving productivity. While operating expenses were down 2% and headcount was down 16%, our work here isn't finished. Because demand isn't evolving the way we expected at the beginning of the year, we're evaluating further cost reductions. Turning to the P&L. Net revenue was $22.2 million, down 17%. On a pro forma basis, net revenue was down approximately 14% when adjusted for the sale of Design Manager in June 2022. Transaction revenue, which is tied directly to GMV, was approximately 70% of revenue with subscriptions making up most of the remainder. Take rates improved modestly due in part to growing GMV contribution from our essential sellers, which carry a higher commission rate. Gross profit was $14.9 million, down 21%. Gross profit margins were 67%, down from 71% a year ago. Gross margins were negatively impacted by approximately $0.5 million in amortization expense due to the acceleration of internal use software amortization related to our NFT platform, which we discontinued supporting in the quarter. Excluding this one-time charge, gross margins would have been approximately 69%. Sales and marketing expenses were $9.8 million, down 17%, driven primarily by lower performance marketing spend. Consistent with the recent quarters, we pulled back on performance marketing and increased our efficiency thresholds to better align expenses with demand. Sales and marketing as a percentage of revenue was 44%, flat versus a year ago. Technology development expenses were $5.8 million, up 1%, due to increased stock-based compensation, partially offset by lower translation costs and lower salaries and benefits. As a percentage of revenue, technology development was 26%, up from 22%. General and administrative expenses were $8.1 million, up 26%, primarily driven by increases in legal and professional service fees related to our strategic alternative expenses and stock-based compensation. Excluding the approximately $900,000 in strategic alternative expenses, general and administrative expenses were up approximately 12% year-over-year. As a percentage of revenue, general and administrative expenses were 37%, up from 24%. Lastly, provision for transaction losses were $1.4 million, 6% of revenue, flat year-over-year. Adjusted EBITDA loss was $5.3 million compared to a loss of $4.7 million last year. Adjusted EBITDA margin was a loss of 24% versus a loss of 18% last year. This year-over-year change was driven primarily by negative operating leverage from lower revenue. Moving on to the balance sheet. We ended the quarter with a strong cash, cash equivalents and short-term investments position of $150.5 million. Additionally, interest income increased to approximately $1.5 million, up from roughly $50,000 a year ago. Turning to the outlook. Our guidance reflects our quarter-to-date results and our forecast for the remainder of the period. We forecast second quarter GMV of $85 million to $92 million, down 19% to 12%. Net revenue of $20.1 million to $21.3 million, down 18% to 13%. And adjusted EBITDA margin loss of 34% to 28%, primarily driven by lower revenue resulting in negative operating leverage. Our GMV guidance reflects a number of converging factors, including shifting consumer behavior, ongoing economic uncertainty, continued conversion headwinds and lower average order values. Turning to adjusted EBITDA margins. Guidance reflects the fact that lower revenue is driving the substantial majority of the sequential decrease in EBITDA margins and a full quarter of annual merit increases. To close, we are in a period with limited visibility. While comps ease moving throughout the year, the macroeconomic environment remains difficult to handicap. Given recent softer than anticipated demand, we will continue realigning our expenses. When demand rebounds, our goal is to have more growth drivers, an improved cost structure and a stronger competitive position. Thank you for your time. I'll now turn the call over to the operator to take your questions.

Our first question comes from Mark Mahaney with Evercore ISI.

Two questions. If I just look at the numbers that you're guiding to for the June quarter, maybe at the optimistic end of the range, it implies that the year-over-year trends are the same or maybe even a little bit better. Is there anything that you've seen quarter-to-date that suggests that sort of stabilization or an improvement in end market demand?

Mark, it's David. I mean, listen, I think overall, we're continuing to see both quarter-to-date and also in the first quarter, essentially a continuation of the same kind of underlying drivers that we have seen before, positive and negative. So on the positive side, traffic's strong. Supply, our supply position is great. Retention is as good as it's ever been. Subscription fees actually for the first quarter were flat sequentially for the first time in three quarters. And our strategic initiatives continue to make progress, both auctions and international. And on the downside, we saw a further deceleration of AOV. That hasn't changed. And then similarly, the conversion rate, while improving in the sense that it's not declining as fast and that rate of deceleration has improved, it is still meaningfully negative and the biggest drag on performance. So overall, I'd say not a fundamental change in any direction.

Can you explain to what extent these demand trends are representative of the market? Is there any particular reason to believe that you are underperforming or outperforming?

No, not at all. Based on the data we've seen, that's our assessment as well, considering both our comparisons and just common sense. A significant part of our business, not all of it, is influenced by luxury real estate, which is currently facing challenges. The portion of our business that isn't tied to luxury real estate, such as jewelry, is actually performing quite well, with orders rising by double digits in the first quarter. However, that only represents a small fraction of our business today. The majority is still impacted by macroeconomic factors, and those factors are affecting us in a way that aligns with the overall market.

Our next question comes from Trevor Young with Barclays.

First one, just results on the quarter. The prior few quarters, you'd come in at or above the high end of GMV guidance, but this quarter coming in right down the fairway, even given the guide was given more or less two-thirds of the way through the quarter. Can you just talk a little bit about the cadence throughout the quarter month-on-month? And did things kind of deteriorate in March around some of the banking turmoil, and has that persisted into April? And then second one for Tom, just on the gross margin. I appreciate the commentary around that amortization charge. Just to clarify, that's a one-time charge. And then is that 69% or 70% range a reasonable bogey going forward?

Yes, this is David. We didn't see any significant changes in overall performance for the quarter despite some month-to-month variability. There was nothing material within the quarter. Regarding the impact of the banking situation, it wasn't positive, but it's difficult to quantify the exact effect. I think it's best not to attribute any changes in performance directly to that. Tom?

On the gross margin side, you're correct. The discontinuation of the NFT platform and the recognition of approximately $0.5 million in accelerated internal use software did have a 2% impact on gross margins for the quarter. Going forward, you can expect that we'll return to more normalized historic trends in gross margins. This is a one-time item.

Great. And just one quick follow-up. On the strategic alternative costs realized in the quarter, should we interpret that to mean that the strategic review with Allen Co is largely completed at this point?

I really can't provide any commentary on that. It is ongoing. However, I can say that we are dedicated to exploring every potential option regarding both buy-side and sell-side M&A, as well as optimizing our balance sheet to enhance shareholder value. Beyond that, there isn't much more I can share.

We have a question from Nick Jones with JMP Securities.

Two, if I can. The first one on AOV. I think I might have this right. It did kind of accelerate the declines year-over-year, but sequentially, it actually increased. Does that indicate maybe these are the right levels for AOV from here as we think about the rest of the year and Q2?

AOV in the first quarter declined by 8% compared to the previous year, which is a greater decline than the 6% drop in Q4. We're observing a decrease in AOV across all price tiers, indicating that this is mainly due to broader market trends. Additionally, the increasing proportion of auctions, which constituted about 6% of orders in Q1 and grew by over 10% sequentially, also plays a role. Auctions tend to have a lower AOV compared to the rest of the marketplace. However, I believe this is mainly a market-wide issue.

Great. And then I guess, as you continue to add supply and listings but demand remains strained, is there any evidence that you're potentially diluting some of the stronger performing sellers as you essentially add more supply to the platform, given what demand there is more options?

No, we haven't seen that. Retention is at an all-time high for the company, which is the most crucial metric for seller satisfaction. What influences conversion the most is the perception of fair value. Therefore, it's essential for us to progress not only on our new auction platform but also in assisting sellers to price competitively against market clearing prices and providing them with better historical transaction data for negotiation. When we achieve market-based pricing, conversion rates are robust. For instance, we introduced a collection called design values that showcases well-priced listings based on historical transactions of similar items. This collection generated over $3 million in gross merchandise value in March, even though the items accounted for only 2% of our total supply. Our focus is increasingly on communicating value as it pertains to pricing.

We have a question from Ralph Schackart from William Blair.

You talked about pricing being the biggest lever, particularly with a tough macro, and providing more transparency and then providing more to the buyers on that side as well as sellers better pricing tools. And then maybe you'd mentioned boosting value listings. Maybe sort of talk about is this a newer initiative, continuation of something you'd been working on? And then just any more color you could share, that would be great. And then I have a follow-up.

Yes. Pricing is essential. Based on extensive consumer research we've conducted, the perception that an item is too expensive and the difficulty in evaluating the list price, particularly for unique items, are the main barriers to conversion, especially for new buyers who are less familiar with our negotiation options. For about a year and a half, we've focused on pricing. Our initial approach was to introduce auctions, which will continue to be significant moving forward. What's evolving now is our use of historical transactional data that we uniquely possess in this market. This data will assist buyers in negotiating better prices by showing them historical pricing for similar items, while also helping sellers to set more effective prices. These initiatives are new; we started to commercialize them around two quarters ago. As I mentioned in the design values collection example, we can scale this approach, resulting in a significant and rapid impact on gross merchandise value. This applies across all markets, but it's particularly important in the current weak macroeconomic environment.

Great. And then just, you had mentioned trade projects taking a little bit longer to complete and some clients spreading that out. Is that something new in the quarter, or is this something that's continued or acceleration of that trend? Anything you could add there on trade would be great.

Yes. I mean, certainly in a GMV sense, it's new. So over the last two years, as you know, trade has outperformed consumer. That changed in the first quarter where both trade and consumer had similar growth rates, and we expect that consumer will grow faster than trade over the coming quarters. And I think that's, again, for a very straightforward reason. Trade is a proxy on the state of the luxury real estate residential market, and that state is not great right now. So that's reflected in trade purchasing.

Our next question comes from Curtis Nagle with Bank of America.

Could you provide a quick update on the contributions from auctions and international? I understand you mentioned that orders were around 6%. How do these two new categories impact GMV currently, and what should we anticipate by the end of the year? It seems like it's in the low single digits combined, but any insight on that would be appreciated.

Yes, so we don't break out the percentage of GMV that's attributable to both of those initiatives. What I can say is we're happy with where both of them are not satisfied, but happy. So on auctions, like I said, the primary driver on auctions is conversion, specifically new buyer conversion. And there, we're seeing a positive impact. And as I mentioned, order growth sequentially was up over 11%. GMV from auctions was down sequentially because that order growth was offset by AOV declines. Again, those AOV declines, given the fact that auctions is, by definition, a value product, is something that we anticipated that weakness in AOV. Of course, over time, we're investing this to grow GMV, and we expect that order volume will offset those AOV declines. International, similarly, we're pretty happy with where the progress to date. So as you may remember, we launched our first two non-English language markets in France and Germany in the summer last year. In Q1, we had organic traffic growth of over 200% year-over-year, and like I mentioned, double digit order growth. Based on the successful experience there, we're going to launch our next two largest international markets, which are Italy and Spain. We anticipate doing that before the end of the third quarter. And we're hopeful that we'll see similar results there as well. We have yet to put paid behind these markets in a major way, but again, we're very happy with the organic progress that we've seen to date.

Okay. Great. And then just a quick modeling question. Just how to think about GMV dollars for Q2 and the rest of the year. And presumably, the guidance for EBITDA does not include any additional cuts. Is that correct?

This is Tom. So on the GMV side, we gave the guidance for Q1. We don't really guide to full year. On the expense side of things, the EBITDA does not anticipate any major cost actions in Q2. Again, we did talk about adjusting our expense structure to reflect our current demand, and we are looking at all items on the expense side to adjust for that across the board. But right now, our guidance does not anticipate large changes to our expense structure in Q2.

And I'm showing no further questions. This concludes today's conference call. Thank you for participating. You may now disconnect.