1stdibs.Com Inc

NASDAQ:DIBS

Earnings Call Transcript 2023-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the 1stdibs.com Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Again, 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.

[Kevin LaBuz, Head-Investor Relations & Corporate Development]

Good morning, and welcome to 1stDibs earnings call for the quarter ended June 30, 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 second quarter financial results and third 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?

[David Rosenblatt, Chief Executive Officer]

Thanks, Kevin. Good morning, and thank you for joining us today. We delivered second quarter GMV and revenue at the midpoint of guidance and EBITDA margins above the high end. Excluding onetime restructuring costs, operating expenses were down 14%, reflecting our commitment to align expenses to demand. In addition, at the end of the quarter, we made the difficult decision to reduce headcount by approximately 20%.

Importantly, second quarter results do not include any material benefit from the June restructuring. These will be realized starting in the third quarter. Over the past year, we've taken multiple steps to reengineer our cost structure, including actively managing headcount, reducing non-headcount-related operating expenses and divesting Design Manager. Over this period, we have reduced expenses by more than $25 million on an annualized basis. We are also committed to reaccelerating growth. While it is encouraging that year-over-year GMV declines moderated sequentially and that we expect further improvement in the third quarter.

Growth rates are below where we would like them to be. We are working hard to change this, but expect that significant improvements will take time to materialize. There is no question that we face headwinds, most importantly, a continued decline in demand in the luxury housing market. For example, luxury housing sales were down 24% year-over-year in the second quarter according to data from Redfin. Despite this softness, many other indicators of marketplace, health remains strong; Organic traffic mix increased, supply growth remained brisk, Seller churn remained low. We expanded into two new international markets, and we revamped our A/B testing framework, allowing for faster product velocity, all seeds for future success.

In contrast to GMV growth, expense management is completely under our control, and we've taken decisive action here. At the end of the second quarter, we made the difficult decision to reduce headcount by approximately 20% and eliminate approximately $4.5 million in non-headcount expenses, which Tom will elaborate on shortly. At the end of July, employee headcount was down by 37% versus the second quarter of 2022. We don't believe that fewer resources results in a smaller opportunity. We reorganized the business to maximize our ability to scale in an efficient manner.

As part of the re-organization, we have focused our product and engineering teams on the areas with the highest ROI potential, personalized and frictionless buying, competitive inventory pricing and scalability. These priorities address the biggest constraints to growth. The June restructuring substantially reduces our cash burn and accelerates our path to profitability. Although growth rates are not where we would like them to be, signals like increasing organic traffic mix and steady double-digit listings growth give us confidence in the future. Inherently, asset-light online marketplaces are businesses with high potential for operating leverage. When we return to growth, we expect to generate strong incremental flow-through and margin expansion.

Turning to the quarter, we continue to see a discrepancy between the demand side and the supply side of the marketplace. Consistent with recent trends, conversion headwinds and lower AOV drove GMV declines. On a sequential basis, the improvement in year-over-year GMV growth was driven by more moderate AOV and conversion declines, partially offset by a modest slowdown in traffic growth. In contrast, supply remains robust. We've seen consistent double-digit growth of listings since the first quarter of 2021. One new dynamic this quarter was that consumer GMV, which accounts for approximately two thirds of our total outperformed the company average for the first time in two years. Meanwhile, trade slowed due to prolonged softness in the luxury housing market.

Overall, traffic grew modestly with organic growth partially offset by fewer paid sessions as we continue to pull back on our least efficient performance marketing channels. We're seeing persistent growth in our organic traffic mix, which reached nearly 80% of total, up several percentage points sequentially and year-over-year. This is being driven by the combination of continued SEO strength and lower performance marketing spend. Having millions of pages with expert created content has attracted many millions of links throughout our 20-plus years of operation. Through our unique content and back links, we've built strong domain authority, enabling a high mix of organic traffic.

Moving to operations, improving conversion, particularly for new buyers is our largest lever and top priority. To accomplish this, we're focused on personalized and frictionless buying and competitive inventory pricing. To aid these efforts, we revamped our A/B testing framework, allowing us to create and run tests more efficiently. We've already seen an uptick in test velocity and currently have a number of tests in market to improve the checkout experience, grow mobile app usage and increase engagement with our product detail pages.

Moving on, we continue to make progress on our strategic initiatives. Once again, localized marketplaces in France and Germany posted strong traffic and order growth. Sessions from German and French IP addresses grew over 200%. Furthermore, SEO traffic grew over 175% and Orders from French and German IPs grew 25% year-over-year, accelerating five percentage points from the first quarter. We launched a number of new international product features over the past few months. First, to accelerate the growth of highly sought after Italian supply, we localized our seller tools for Italian speakers in late May. Second, at the end of the quarter, we launched a localized buyer-facing marketplace in Italian.

Lastly, we launched our Spanish site in late July. Relative to our French and German sites, launching the Italian and Spanish localized experiences was faster and cheaper as we applied learnings and leveraged upfront infrastructure work from 2022.

Auction orders grew 32%, accounting for over 6% of total orders, up from approximately 4% a year ago. Auctions continue to have a sell-through rate that is roughly twice as high as the marketplace overall. During the quarter, our product development effort focused on supply quality and pricing. For example, we had notable success with our May no-reserve auction, and we plan to increase the frequency of this type of auction moving forward.

Turning to supply, Seller and listing growth remained robust. We ended the quarter with over 8,800 seller accounts, up over 40% and seller churn near record lows. Additionally, listings grew 19% to nearly 1.7 million items. We have seen steady listings growth over the past few years. In addition to our conversion projects, plans to reaccelerate growth and cost savings initiatives, we have also undertaken a strategic review process over the past year.

As part of this process, we evaluated multiple alternatives including buy and sell-side M&A, capital return strategies and partnerships. After a comprehensive review, we have decided that our best path forward at this point is to supplement our existing plans to reaccelerate growth and drive efficiency with a share repurchase of up to $20 million. I'd like to take a moment to walk through our underlying beliefs and assumptions regarding this decision. First, we see a large secular growth opportunity ahead. While the last year has been challenging as the industry confronts a softer luxury real estate market, our expectation is that luxury e-commerce will resume growth, and consumer behavior will continue to shift towards digital.

As the leader in our category, we will benefit disproportionately from this resumption of growth. Second, scale is critical for online marketplaces. While the market is large, and we are the digital leader in our industry, e-commerce adoption of our categories and price points lags behind other categories. While there is more work to do, our product road map is focused squarely on gaining scale. Additionally, as opportunities arise, we will continue to evaluate both buy and sell-side M&A opportunities. Management and the Board are always open to inorganic means of maximizing shareholder value.

Third, we believe our current valuation is low relative to the strength of our brand, our long-term market opportunity and our intrinsic value. Over the past 20 years, we have developed a number of attributes that are valuable and difficult to replicate, including aggregating a fragmented offline supply base, building a trusted brand that provides buyers with the confidence required to transact online at high AOVs and cultivating a deep well of unique expert content, resulting in strong SEO domain authority and high organic traffic mix. These are durable competitive advantages. Fourth and last, we believe that we have ample cash on our balance sheet to achieve profitability with a cushion. Given the discrepancy between our current valuation and our assessment of our intrinsic value, we believe it is accretive to use a portion of our surplus cash to repurchase shares.

In closing, we are committed to maintaining expense discipline, accelerating growth, achieving profitability and enhancing shareholder value. In the second quarter, we took decisive action and made significant progress in cutting costs, substantially reducing cash burn and shortening the ramp to profitability. We have more work to do to reaccelerate growth. While softness in the luxury housing market is weighing on demand today, the prerequisites for a successful online marketplace, growing supply, high organic traffic and more localized buying experiences are all in place.

I'll now turn it over to Tom to review our second quarter financial results and third quarter outlook.

[Thomas Etergino, Chief Financial Officer]

Thanks, David. Before discussing second quarter results and third quarter guidance, I'd like to touch on our recent cost savings initiatives. On June 28, we made the difficult decision to reduce our head count by approximately 20%. We also took a number of steps to reduce non-headcount expenses. In total, these actions are expected to save approximately $12.5 million on an annualized basis.

Approximately two thirds of these savings are headcount related, while the remaining one third are non-headcount related, including aggressively renegotiating vendor contracts and reducing certain marketing activities. We expect the majority of these headcount-related savings in technology development and sales and marketing, while non-headcount-related savings will be centered on general and administrative and sales and marketing. These are the latest in a series of measures we have taken to manage expenses and drive efficiency.

Over the past year, we significantly reduced employee headcount, our largest single expense. At the end of July, headcount was 37% lower compared to the second quarter of 2022. This has been driven by headcount reductions in June 2023 and in September 2022, coupled with limiting backfills for attrition, restricting hiring for two critical roles and drastically reducing the number of open positions. We pulled back on performance marketing and increased our efficiency thresholds to better align expenses with demand, yielding annualized savings of over $4.5 million.

We streamlined our business and strengthened our balance sheet by selling Design Manager for $14.8 million in June 2022, recognizing a $9.7 million gain on sale, and we discontinued supporting our NFT business. These actions substantially reduced our cash burn and accelerate our path to profitability. We have a number of other cost savings work streams open, most notably work to sublease our New York City office and will remain vigilantly around expense management. Moving forward, we're focused on scalability so we can layer on meaningful incremental GMV and revenue without proportionately increasing our operating expenses. Indeed, part of our reorganization is an increased focus on leveraging automation and AI to allow us to scale efficiently.

Turning to second quarter results. We delivered GMV and revenue at the midpoint of guidance and adjusted EBITDA margins above the high end. GMV was $89.8 million, down 14% due to soft demand for luxury home goods. On a sequential basis, growth rates improved three percentage points. Conversion remained a headwind, particularly for new buyers, more than offsetting continued traffic growth. In addition, the mix shift to orders under $1,000 continues to weigh on GMV. These orders accounted for 45% of total orders in the quarter, up from 42% a year ago. Consumer outperformed trade with consumer GMV outpacing the company's average for the first time in two years.

Turning to trade, a slowdown in the luxury housing market continues to weigh on demand. We're hearing from designers that active projects are taking longer to complete and that some clients are pulling back due to economic uncertainty and rising costs for materials and labor. Jewelry remains our top performing vertical. Jewelry mix increased three percentage points to 23%. There appears to be a bifurcation demand between in-home verticals like vintage and antiqueue furniture and art, which are seeing below company average growth and out-of-home verticals like jewelry, which are outperforming spanning multiple verticals is a strategic advantage of ours. We entered the quarter with approximately 65,000 active buyers down 6%. We expect this metric to remain choppy near term as we manage through a period of soft luxury home good demand.

On the supply side of the marketplace, we closed the quarter with over 8,800 seller accounts, up over 40%. And Additionally, there are now nearly 1.7 million listings on the marketplace, up 19%. Although demand has been volatile over the past few years, we've seen steady double-digit listings growth Increasing supply improves marketplace liquidity, drives traffic and deepens research results, creating new opportunities for buyers and sellers to transact.

Turning to the P&L. Net revenue was $20.9 million, down 15%. Adjusting for the sale of design manager on a pro forma basis, net revenue was down approximately 12%, given the June 2022 divestiture. This is the last period when Design Manager will impact the year-over-year comparison on a quarterly basis. Transaction revenue, which is tied directly to GMV was roughly 70% of revenue with subscriptions making up most of the remainder. Take rates improved modestly sequentially, due in part to growing GMV contribution from our essential sellers, which carry a higher commission rate.

Gross profit was $14.6 million, down 12%. Gross profit margins were 70%, up from 68% a year ago due to lower shipping expenses and lower operational headcount-related expenses. Sales and marketing expenses were $9.8 million, down 13%, driven primarily by lower performance marketing spend. Consistent with recent quarters, we pulled back on performance marketing and increased our efficiency thresholds to better align expenses with demand. Excluding restructuring expenses of $800,000, sales and marketing expenses were down 20%. Sales and marketing as a percentage of revenue was 47%, up from 46% a year ago. Excluding restructuring expenses, sales and marketing was 43% of revenue.

Technology development expenses were $6.9 million, up 5%. Excluding restructuring expenses of approximately $1 million, technology development expenses were down 11%, driven by lower headcount-related costs. As a percentage of revenue, technology development was 33%, up from 27%. Excluding restructuring expenses, technology development was 28% of revenue.

General and administrative expenses were $7.5 million, flat year-over-year with nominal decreases in professional services and liability insurance costs, offsetting small increases in headcount-related expenses. General and administrative restructuring expenses were immaterial. As a percentage of revenue, general and administrative expenses were 36%, up from 31%. Lastly, provision for transaction losses were $900,000, 4% of revenue, down from 6%, driven by a decrease in damage claims.

In summary, total operating expenses were $25 million, down 7%. However, this figure includes approximately $1.9 million in restructuring expenses, of which the majority was severance. Excluding these onetime charges, operating expenses in the second quarter were $23.2 million compared to $26.9 million a year ago, representing a 14% year-over-year decline. It's important to note that these figures do not include any material benefit from our June restructuring, which are expected to yield annualized cost savings of approximately $12.5 million.

We'll start realizing these benefits in the third quarter. Adjusted EBITDA loss was $4.6 million compared to a loss of $6.1 million last year. Adjusted EBITDA margin was a loss of 22% versus a loss of 25% last year due to savings from expense management, partially offset by lower revenue. Moving on to the balance sheet, we ended the quarter with a strong cash, cash equivalents and short-term investments position of $145.9 million. Additionally, interest income increased to approximately $1.6 million, up from approximately $180,000 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 third quarter GMV of $85 million to $92 million, down 14% to 7%. Net revenue of $20.1 million to $21.3 million, down 12% to 6%. And adjusted EBITDA margin loss of 17% to 12%, including benefits from our recent restructuring.

Our GMV guidance reflects a number of converging factors, including shifting consumer behavior, ongoing economic uncertainty, softness in the luxury housing market, continued conversion headwinds and lower average order values. Turning to adjusted EBITDA margins. Guidance reflects savings from our second quarter headcount reduction and ongoing expense management.

In summary, over the past year, we have taken numerous measures to reengineer our cost structure, delivering on our commitment to align expenses with demand. This will substantially reduce our cash burn and accelerate our path to profitability. When revenue growth resumes, we expect to benefit from our leaner cost structure.

Thank you for your time. I will now turn the call over to the operator to take your questions.

[Operator]

[Operator Instructions] The first question comes from Mark Mahaney with Evercore. Your line is open.

[Mark Mahaney, Evercore ISI]

Okay, thanks. I want to ask two questions, one on jewelry and one on performance marketing spend. On jewelry, could you just remind us how big of a category that is for you as a whole? And within jewelry, it sounds like that's the segment that's sort of holding up best and for logical reasons related to luxury home sales, et cetera, kind of dampening the other segments? Are there particular parts within jewelry that you're seeing more consistent robust growth?

And then switching over to performance marketing. David, what's the -- as you've kind of leaned into it, leaned in and out over the last 1.5 years. Do you have any big learnings and that kind of set you up for when growth recovers when luxury home sales start to recover in those categories recover? How you would want to utilize performance marketing? I guess I'm just asking broadly about lessons learned about the performance marketing experiment.

[David Rosenblatt, Chief Executive Officer]

So you're correct, the jewelry is our best-performing vertical. It's now roughly 23% of total GMV and obviously has increased its share over the last few years and did again this quarter. Within jewelry, we sell both contemporary and also a state or secondary market jewelry. I'd say probably the biggest driver of jewelry performance has been strength in high average order value orders.

But it's been very resilient, actually, over the last four years and even in the beginning of COVID, when everything else was not growing, it grew. So it's a large category. And there are a lot of things we like about it. It's fragmented on the supply and the demand side. There's no natural incumbent marketplace shipping costs and sort of all the friction associated with shipping and returns is much lower, obviously, than it is with furniture and it works well with our brands.

In terms of performance marketing, I mean, I would say generally, we've just gotten a lot tighter in terms of reducing our payback thresholds. What have we learned, I think, I don't know. I'm not sure that there's any sort of single insight other than the fact that in sort of recognition of the environment, both in terms of the importance of getting to breakeven and also in terms of really understanding our LTVs of acquired customers, we're just getting a lot tighter. And I think when the market resumes its growth, we will be able to find that discipline as we test new channels and start ramping spend up again.

[Operator]

The next question comes from Ralph Schackart with William Blair. Your line is open.

[Ralph Schackart, William Blair]

Good morning. Thanks for taking the question. David, on the call today, and I think in the release you talked about laying the groundwork for reaccelerating growth. Obviously, the macro is out of your control. But maybe if you could sort of highlight or spotlight the top factors that you're really focused on that are within your control to position you for the accelerating growth when indeed the macro returns to a more favorable situation?

[David Rosenblatt, Chief Executive Officer]

Yes, I mean, look, the number one thing that we've been focused on and we continue to stay focused on is conversion. If you look at the quarter, traffic was fairly resilient, especially on organic traffic, which continued to grow at a healthy rate. Average order values declined. But at the same time, in the long run, I think the single biggest driver and where we get the most leverage in terms of performance, both top and bottom-line, is from conversion and specifically new buyer conversion.

So everything we're doing from strategic initiatives like auctions in international and figuring out new ways to grow supply, all the way to the most micro kind of A/B test-driven product feature enhancements, is geared towards conversion. What is encouraging to us is that we saw year-over-year declines in conversion moderate in the second quarter, which was the fourth quarter in a row that we saw that.

And we do think that, that is attributable to many of the experiments that we've been running over that period of time. And we're continuing to get tighter and tighter on that. And the headcount reduction that we did, I don't think materially impacts our ability to continue with that kind of test-and-learn approach. In fact, if anything, it's made us to be more disciplined in terms of prioritizing the projects that are likely to have the biggest impact.

[Operator]

[Operator instructions] The next question comes from Nick Jones with JMP Securities. Your line is open.

[Unidentified Analyst]

This is Luke on for Nick today. So average order value has improved sequentially for two consecutive quarters. Is this a trend we can expect to continue on the back half of this year? And then maybe more broadly speaking, how should we think about AOV levels heading into next year?

[David Rosenblatt, Chief Executive Officer]

So AOV was down 6% sequentially. Sorry, year-over-year in Q2, which, as you know, did improve sequentially. But again, I just want to be clear. It did decline on a year-over-year basis. We think that, that is a reflection of the macros because we've seen that at every price tier. It's been compounded or depending on how you think about it or sort of added to by the growth in auctions has a lower AOV than the rest of the marketplace and is now 6% or was 6% in Q2 of our total order volume, up from 4% a year ago. But that said, we -- while, of course, we always welcome high AOV orders. It's not, and a lower AOV is not. We don't view necessarily as a negative primarily because conversion rate in AOVs are inversely correlated and the lower the AOV, the bigger the TAM as well. And so there are offsetting benefits to a lower AOV. And at the end of the day, the way our marketplace works, we had at the seller level.

Sellers have the ability to list whatever they like. And our goal is to help sellers list those items at prices that are as fair as possible and help buyers interpret that pricing to more easily discover compelling value. So there's nothing in that. That says we're optimizing for a high AOV. What we're optimizing for is conversion and order volume growth. And then we sort of trust that because of the strength of our brand and the market that we're in and the types of sellers and buyers we have, that will result as it has in a substantial volume of high AOV orders, but we're not in the business of trying to drive up AOV.

[Operator]

[Operator instructions] The next question comes from Trevor Young with Barclays. Your line is open.

[Trevor Young, Barclays]

Great, thanks. Just in light of the most recent round of cost savings and pulling forward the path to profitability. I appreciate you're not giving '24 guide yet, but maybe help frame a scenario in which '24 is a year in which you turned EBITDA positive. Is it a macro recovery? What needs to go right to have '24 to be profitable?

[David Rosenblatt, Chief Executive Officer]

Tom, why don't you take that?

[Thomas Etergino, Chief Financial Officer]

Yes. Great. Thanks for the question. You're right. We don't really give guidance past one quarter. But what I can say is that over the past year, like you mentioned, we've taken a number of steps to reengineer our cost structure, including actively managing our headcount. We've reduced our non-headcount-related operating expenses. In fact, we divested ourselves in Q2 of last year of Design Manager. And reducing -- we reduced our expenses by more than $25 million on an annualized basis over the last 12 months.

And what that has effectively done is lowered our GMV breakeven by approximately $200 million. So the actions that we've taken have substantially reduced our cash burn and have accelerated our path to profitability. We're not going to give like an exact number or time frame. But the actions we have taken have significantly reduced the amount of GMV we need to get to that breakeven.

[Operator]

[Operator Instructions] The next question comes from Steven McDermott with Bank of America. Your line is open.

[Steven McDermott, Bank of America]

Hi, this is Steven McDermott on for Curtis Nagle. To clarify, I believe you said that annualized savings are around $12.5 million from June. So do you mind just breaking that down line-by-line? And does the 3Q guidance kind of fully reflect the annualized cost cut?

[Thomas Etergino, Chief Financial Officer]

Sure. So this is Tom. The OpEx trends, we had cost savings, most of the cost savings are in tech dev, the 12.5% that we're going to see over time are in tech dev and in sales and marketing but a significant amount as well in G&A from non-headcount-related expenses with a smaller amount being in cost of revenue. The actual numbers that we'll see, I would just say that the lion's share of those cost savings are, again, really in tech dev, are going to be the largest and then over time, sales and marketing and G&A. I don't think we give a breakdown, but...

[Operator]

I show no further questions at this time. This concludes today's conference call. Thank you for participating, you may now disconnect.