Earnings Call Transcript - DIBS Q1 2025

Operator, Operator

Thank you for standing by. And welcome to the 1stdibs First Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After today’s presentation, there will be an opportunity to ask questions. It is my pleasure to introduce your host, Kevin LaBuz, Head of Investor Relations and Corporate Development. Sir, you may begin.

Kevin LaBuz, Head of Investor Relations and Corporate Development

Good morning. And welcome to 1stdibs earnings call for the quarter ended March 31, 2025. 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 the 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, business and economic trends, including e-commerce growth rates, 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 filing. 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 will present both 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 will now turn the call over to our CEO, David Rosenblatt. David?

David Rosenblatt, CEO

Thanks, Kevin. Good morning and thank you for joining us today. The first quarter was marked by solid execution and steady market share gains. GMV and revenue exceeded the midpoint of guidance, and adjusted EBITDA margins exceeded the high end. Our product-led growth strategy is delivering a better buyer and seller experience, driving outperformance against our end markets. While recent developments have made the landscape more dynamic and less predictable, our focus remains the same, executing on initiatives that are under our control to drive GMV and revenue, improve margins and gain market share. The first quarter was another step in this direction. Evolving trade policies and their broader macroeconomic effects have created a tougher demand backdrop for luxury home discretionary spending, impacting results. We are relatively well-positioned for the new tariff regime. In 2024, 50% of our GMV was from transactions between U.S. sellers and U.S. buyers, and roughly 30% of GMV was from EU or U.K. sellers to U.S. buyers. In addition, U.S. buyer exposure to China, Canada, and Mexico is less than 1.5% of total GMV, and supply exposure to other Asian markets is virtually nil. Additionally, we have a highly fragmented and diversified supply base, with approximately 60% of our listings in the U.S. This means that there is often a local substitute on the marketplace for any imported product. Additionally, we don’t manufacture or hold inventory. Because most of our listings are secondary, they are shielded from potential increases in raw material costs. However, we expect secondary effects to impact our business. These include a negative wealth effect and dampened appetite for discretionary purchases, in addition to protracted softness in the housing market. This macro uncertainty creates a wide range of potential outcomes. Turning to first quarter results, we kicked off 2025 by building on the progress of 2024, with tighter focus and accelerated product velocity driving ongoing conversion improvements while maintaining expense discipline. In addition, we continue to gain market share, grow GMV, and expand our active buyer base. This is happening against the backdrop of prolonged weakness in the housing market, per the National Association of Realtors, and a protracted downturn in our end markets, per syndicated credit card data. Increasing conversion remains our operational priority and highest leverage activity. The first quarter was the sixth consecutive period of year-over-year conversion rate growth. Once again, conversion improved for both new and returning buyers. Relative to fourth quarter growth rates, conversion gains moderated and traffic softened, weighing on order growth, which was flat. This was partially offset by growth in on-platform AOV, resulting in 3% GMV growth. Platform improvements are fueling growth and market share gains. Our product development engine is humming, and we’re shipping enhancements faster than ever. For example, the number of AB tests we ran during the quarter grew triple digits year-over-year, hitting a new record. Our 2025 roadmap is focused on creating value for both sides of the marketplace via four themes. These are accelerating organic traffic growth, competitive pricing, funnel optimization, and elevating the level of service we provide. Building on the progress we made in 2024, we aim to maintain growth and expense discipline while capturing additional market share. We made progress on multiple fronts during the first quarter. Let’s start with organic traffic, where trends continue to move in the right direction. We returned to organic traffic growth in the first quarter, helped by improvements in SEO and direct traffic. These results reflect the impact of our work on site performance, removing low-value pages, boosting crawl efficiency, accelerating page load times, and refining SEO landing page content. In addition, we continue to optimize our email registration process, driving a higher registration rate without negatively impacting lower funnel metrics. Growing the number of registered users expands our email file, providing another direct organic touchpoint. Given that over 70% of our traffic is organic, improvements here should drive efficient buyer acquisition. We also maintained our momentum with competitive pricing, where our objective is ensuring that listing and shipping costs are priced in line with the market. On item pricing, in January, we fully launched our machine learning-based pricing model for art. In March, we started testing pricing recommendations for fashion, and this graduated into general availability in April, meaning that ML pricing models are currently live in all verticals. These models leverage our unique transactional database to provide pricing transparency in what is historically an opaque market. Our expectation is that this builds buyer trust and confidence. Additionally, we integrated pricing recommendations into the buyer experience, giving customers more context on pricing. In March, we increased the visibility of the 1stdibs estimate, prominently displaying pricing recommendations to shoppers on product display pages. Testing showed that this led to higher conversion. This move ensures that buyers can quickly and easily access critical information, driving a more informed purchase decision and a better user experience. With ML-based pricing models fully launched, we are now focused on experimenting with the most impactful ways to surface these recommendations to buyers in improving our accuracy to spur seller adoption. We also made progress with shipping. In March, we rolled out partial self-service to all sellers, giving them complete control to select the best shipping methods for their business with our seamless integration of calculated shipping rates, shipping labels, and automated tracking. This feature also enables buyers to obtain real-time best price shipping quotes, reduces operational complexity, and increases our parcel pre-quote coverage by 5 percentage points to nearly 100%. Building on the foundation laid over the past two years, we also made strides in reducing friction and streamlining the user experience. We want to make it easier for shoppers to find and buy the perfect item. From discovery through checkout, we saw improvements across the funnel during the first quarter. At the top of the funnel, we made product discovery more intuitive and efficient. These changes are helping users better navigate our categories and connect with relevant items faster, which in turn supports improved engagement and conversion. In the middle of the funnel, we amplify trust signals by more prominently displaying seller standing on product display pages, clearly distinguishing our top-tier sellers. The results suggested that reinforcing seller standing helps build buyer confidence and trust earlier in the purchase process. Indeed, Platinum Seller, our highest ranking, saw the most significant conversion uplift. At the bottom of the funnel, we simplified checkout design, resulting in a smoother user experience and higher checkout completion rates. These wins, and many others, contributed to our ongoing conversion improvements. Our conversion rate in the first quarter was over 10% higher versus the first quarter of 2023. Turning to supply, as we navigate through this period of uncertainty, we are becoming more important to sellers. Our 2025 Seller Sentiment Survey showed that 1stdibs is now the primary sales channel for our sellers, surpassing their own showrooms for the first time. This marks a meaningful shift from the past four years, when showrooms consistently ranked first. It also reflects the progress we’ve made in deepening seller engagement and delivering value. Consistent with recent quarters, we saw steady listings growth and ended the quarter with over 1.8 million listings, up 5%. Unique seller count remains volatile due to subscription pricing optimizations. We ended the quarter with approximately 5,900 unique sellers, down 23% year-over-year, but flat sequentially. Similar to the past few quarters, churn was elevated due to the retirement of our essential seller program and pricing changes in the fourth quarter of 2024. In total, the churn cohort accounted for less than 50 basis points of GMV over the trailing 12 months and approximately 50 basis points of total listings. Looking ahead, we expect churn to normalize in the second quarter of 2025 and to see unique seller growth on a sequential basis in the second half of the year. Additionally, we expect continued listings growth through 2025. First quarter results demonstrate our ability to execute, even amid rising uncertainty. We delivered inline or better performance, strengthened our market position, and made progress on our product roadmap. Thank you for your continued support. I will now turn it over to Tom to review our first quarter financial results and second quarter outlook.

Tom Etergino, CFO

Thanks, David. Our first quarter results all met or exceeded guidance. This performance was fueled by ongoing conversion improvements, higher average order value, and disciplined expense management. GMV was $94.7 million, up 3%, outperforming our end markets, which continued to contract. Lapping a leap year was an approximately 1 percentage point headwind to GMV growth. On a sequential basis, GMV growth rates decelerated due to softening traffic and moderating conversion improvements, partially offset by higher average order value growth. On-platform average order value of nearly $2,600 and median order value of approximately $1,250 were both up 4%. AOV growth strengthened sequentially, driven by a makeshift away from orders under $1,000. In total, these accounted for approximately 44% of total orders in the first quarter, down from 46% a year ago. Going deeper, orders under $1,000 decreased 5% year-over-year, while orders over $1,000 grew 4%. There’s no other digital marketplace at our scale which has the buyer and seller trust to transact at our price points across multiple verticals. We’re able to deliver qualified buyers at prices ranging from under $100 to over $1 million. Returning to funnel trends, traffic softened slightly, with improvements to organic traffic being offset by slower paid traffic growth. We ended the quarter with over 70% of traffic from organic sources. Conversion gains moderated versus the fourth quarter, but remained healthy. Conversion rates have now increased year-over-year for six straight quarters. Additionally, both new and returning conversion increased. Returning to GMV, consumer GMV grew mid-single digits while trade GMV was flat. GMV increased for all verticals except for new and custom furniture. Jewelry and fashion posted the strongest performance, both growing double digits. We ended the quarter with approximately 64,800 active buyers, up 7% year-over-year and 1% sequentially. This was the fourth consecutive quarter of sequential growth on an absolute basis. On the supply side of the marketplace, we experienced steady listings growth, ending the quarter with over 1.8 million listings, up 5%. We ended the quarter with approximately 5,900 unique sellers, down 23% but flat sequentially. As anticipated, seller churn was elevated due to subscription pricing optimizations. However, this added a de minimis impact on GMV and listings. We expect churn to normalize in the second quarter and to see listings growth throughout the year. Turning to the P&L, net revenue is $22.5 million, up 2%. Transaction revenue, which is tied directly to GMV, was approximately 75% of total revenue with subscriptions making up most of the remainder. Take rates were down approximately 30 basis points year-over-year due primarily to a shift to higher value orders. Gross profit was $16.3 million, up 2%. Gross profit margins were 72% flat year-over-year. Sales and marketing expenses were $9.1 million, down 1% driven by lower headcount related expenses due to a reduction in force in January, partially offset by increases in performance marketing. Sales and marketing as a percentage of revenue was 40%, down from 42% a year ago. Technology development expenses were $5.6 million, up 18% driven by higher headcount related costs due to our annual merit increases awarded in March and some selective hiring. As a percentage of revenue, technology development was 25%, up from 21%. General and administrative expenses were $7 million, down 1% due to lower headcount related costs, lower tax expense and lower professional services spending, partially offset by higher stock-based compensation due to our annual merit increases awarded in March. As a percentage of revenue, general and administrative expenses were 31%, down from 32% a year ago. Lastly, provision for transaction losses were approximately $900,000, 4% of revenue, up from 2%. In the first quarter, we left a one-time benefit in a year ago period. Looking forward, we expect provision for transaction losses to remain approximately 4% of revenue. Total operating expenses were $22.6 million, up 6% year-over-year. Adjusted EBITDA loss was $1.7 million compared to a loss of $1.8 million last year. Adjusted EBITDA margin was a loss of 8%, flat year-over-year. We remain committed to driving operational leverage by scaling efficiently, with roughly 60% of our cost base tied to headcount. Our asset-light model enables us to grow revenue without proportional increases in hiring. In 2025, we expect to keep headcount approximately flat. Moving on to the balance sheet, we entered the quarter with a strong cash, cash equivalents, and short-term investments position of $101 million, down $2.9 million sequentially, which includes repurchasing approximately $1.8 million worth of shares. Since launching our first share buyback in August of 2023, we’ve repurchased approximately 6.9 million shares for a total of $33.4 million. Turning to the outlook, our guidance reflects 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 7% to up 1%; net revenue of $21.2 million to $22.5 million, down 5% to up 1%; and adjusted EBITDA margin loss of 14% to 10%. Our GMV guidance reflects steady traffic trends, a softening of conversion in April versus March, which we expect to persist throughout the quarter, and moderating AOV growth. We believe these dynamics reflect increased consumer caution around highly discretionary purchases in the current environment. Our adjusted EBITDA margin guidance reflects gross margins towards the lower end of our 71% to 73% range, a full quarter of higher headcount-related costs due to our annual merit increases in March, and provision for transaction losses of approximately 4% of revenue in line with historical levels. In summary, first quarter results reflected balanced execution. We captured market share, stayed disciplined on expenses, and advanced our roadmap. As we move through 2025, we remain committed to managing costs carefully and delivering on the key initiatives that position us for long-term success. While we remain mindful of the broader macroeconomic environment, we’re confident in our strategy and our ability to deliver value through operational focus on the initiatives under our control. We appreciate your continued support and look forward to updating you on our progress in the coming quarters. Thank you. I will now turn the call over to the Operator to take your questions.

Operator, Operator

Thank you. Our first question comes from the line of Ralph Schackart from William Blair. Please go ahead.

Ralph Schackart, Analyst

Good morning. Thanks for taking the question. Just on the organic traffic, I think you quoted around 70% or so. David talked about conversion gains up, I think, six straight quarters, but moderating lately. Maybe just talk about your ability to keep driving a conversion and how should we think about that 70% organic traffic rate? It’s really strong, obviously, but just your sort of thoughts about that going forward.

David Rosenblatt, CEO

Thanks, Ralph. To start with traffic, organic traffic declined for over a year, so we were pleased to see it return to growth in Q1. This improvement is driven by our product and engineering teams, and we expect to maintain this growth for the remainder of the year. Looking at conversion more broadly, Q1 was relatively stable for the business overall. However, we did experience a notable drop in conversion year-over-year between March and April. While traffic remained stable and average order value softened slightly but stayed positive, the main issue was conversion. Specifically, this drop in conversion was concentrated in the consumer furniture sector. Trade performed well during the month, and other sectors, primarily fashion and jewelry, also saw growth. Therefore, the conversion decline is largely isolated to consumer furniture. We believe we are still focused on the right priorities, and this change in conversion is influenced by shifts in the broader economic environment. We will continue to concentrate on the long-term value drivers in the business, where we have made significant progress as noted, for the rest of the year.

Ralph Schackart, Analyst

And just one more for me. I think you talked about churn normalizing in Q2. Is that just from lapping some of the seller programs or any more context you could add there? Thank you.

David Rosenblatt, CEO

Yes. Exactly. So listings is what we really optimized the business for, and that grew 5% in the first quarter, and that’s on course to continue to grow. In terms of churn, we are now past our change in the subscription pricing plan and we’ve seen that return to normalized levels. And we’re also on pace to continue to add new sellers on historical normalized levels as well.

Operator, Operator

Thank you. Our next question comes from the line of Mark Mahaney from Evercore ISI. Please go ahead.

Mark Mahaney, Analyst

Hey. I just wanted to ask about active buyers. You’ve had a couple of quarters now where you’ve had solid growth in active buyers. Talk about if there are new sources of these buyers and how to think about continued growth for active buyers through the rest of the year and going forward? Thank you.

David Rosenblatt, CEO

Thanks, Mark. So in terms of sources of active buyers, no, I mean, we are improving organic, as I said, but there hasn’t been a massive change in the composition of our traffic. Pay did soften, paid traffic softened in Q1, but again, beyond that, no real change. And I’m sorry, I missed the second question.

Mark Mahaney, Analyst

How do we view the growth in active buyers? I noticed that over the past two years, the net additions of active buyers were mostly flat or even declining, but this seems to have improved in the last three quarters. We've seen consistent positive trends in active buyer net additions for the last three quarters. Is this trend likely to continue in the future?

David Rosenblatt, CEO

So, active buyer, the change in active buyers is a direct result of changes in conversion, which of course is our number one focus. So, it’s our ability to continue to grow active buyers will be a function of what happens to conversion. Conversion, again, we saw pretty significant change in April versus March, completely macro-driven. I mean, you can trace it to changes in the macroeconomic environment. And so, I think, we’re going to continue to do the same things that we’ve done to get us to this point, but also remain vigilant and see how the macro environment changes.

Operator, Operator

Thank you. Our last question comes from the line of Nick Jones from Citizens. Please go ahead.

Luke Meindl, Analyst

Hi. This is Luke for Nick. Thanks for taking our questions. I guess, first, you pointed to market share gains in the quarter. I was wondering if you could just provide a bit more color there and how you sort of size that up? Thanks.

David Rosenblatt, CEO

We measure market share by comparing our GMV change to syndicated credit card data for both the online furniture and luxury furniture markets. In both cases, we experienced market share growth. This trend has been consistent for the past five quarters since we made the change in the first quarter of 2024. We believe this is a result of our strategies, and we plan to maintain our approach to product development.

Luke Meindl, Analyst

Great. And then maybe just to follow-up, for the ML pricing models, can you just provide a bit more color there on what you’re seeing so far in the progress there? Thank you.

David Rosenblatt, CEO

Sure. As of the first quarter, we have rolled out our machine learning pricing models across all categories for general availability. We have completed our first round of testing. In terms of seller adoption, we are measuring that for items priced below $9,000, where adoption has been very high, exceeding 90%. However, for items priced above $9,000, the adoption rate has been relatively low. We believe this is due to the fact that higher price points have fewer data points available, both in the market and based on our own experience. This makes it more challenging to build models for predicting pricing on items with less sales volume. We are continuously working to improve this, as models tend to get better over time. Additionally, we are applying machine learning to calculate shipping prices for items and routes in advance, which we have not been able to do before. This should lead to a significant increase in our pre-quote coverage, meaning a higher percentage of items will have a pre-quote, which is linked to improved conversion rates. This represents the next frontier for our machine learning efforts. Lastly, we are also focused on developing a machine learning-based customer service agent.

Luke Meindl, Analyst

Appreciate it. Thank you.

Operator, Operator

Thank you. This concludes our question-and-answer session. Thank you for joining today. You may now disconnect.