1stdibs.Com Inc

NASDAQ:DIBS

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and thank you for standing by. Welcome to the 1stdibs Q4 2023 Earnings Conference Call. [Operator Instructions] 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.

[Kevin LaBuz, executive]

Good morning, and welcome to 1stdibs earnings call for the quarter and year ended December 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 fourth quarter financial results and first quarter outlook.

This call will be available via webcast on our Investor Relations website at investors.firstdibscom.

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 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 will present GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings 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. David?

[David Rosenblatt, executive]

Thanks, Kevin. Good morning, and thank you for joining us today. Throughout 2023, we laid the groundwork for future success. While there is no denying that high-end furniture demand has been under pressure for the past 2 years, we have used this period to reorganize our business. We have undertaken rigorous efforts to optimize our operations, reengineer our cost structure and focus our efforts on a narrower set of priorities, laying a strong foundation for future growth and profitability.

Encouragingly, we are starting to see tangible results. For example, in the fourth quarter, conversion rates increased for the first time since late 2021. In many respects, 2023 was a continuation of the efforts we started in the second half of 2022 to recalibrate our expenses, reprioritize our road map, reduce our cash burn and accelerate our path to profitability. While category demand remains subdued and GMV growth is far from where we would like it to be, we have made meaningful progress on all of these fronts.

First, by reorganizing our operations teams and finding other efficiencies, we expanded gross margins from the high 60s to the low 70s. Notably, this happened on lower revenue. Second, we took decisive action to align our expenses with demand and reorganize our business. For example, we reduced headcount, increased performance marketing efficiency thresholds and downsized our New York City real estate footprint. As a result of these and other actions, year-end head count was down over 20%, and fourth quarter operating expenses were down 19%.

The benefit of this lower cost structure are showing up in our P&L. Adjusted EBITDA margins in the second half of 2023 were negative 8.4% compared to negative 21.7% in the second half of 2022. In dollar terms, adjusted EBITDA improved to negative $3.5 million in the second half of 2023, from negative $9.9 million in the second half of 2022. This improvement occurred at a time when revenue declined approximately 9%.

A point worth stressing is that the majority of our operating expenses, about 2/3, are head count related. From our new cost base, we expect to be able to add meaningful GMV and revenue without proportionate increases in headcount. Said another way, the changes we made over the past 2 years increased our operating leverage potential. We expect this to be on full display when revenue growth resumes.

Third, we refined and refocused our product road map. Having fewer resources necessitated a narrower aperture and shifting resources away from areas where returns were further afield, like auctions and international expansion to areas where payoffs are expected to be more immediate, like checkout and seller experience. The underlying logic is that the highest return investments we can make are on platform-wide product changes. Today, we are focused on the handful of areas that we believe represent our highest ROI opportunities, which I will detail below.

We also revamped our A/B testing infrastructure and accelerated our testing velocity. 1stdibs has always been experimental and data oriented, but we are moving faster today. While it is still early, there have been some encouraging developments in this regard. We are releasing a high number of new features into the market, and we believe this is contributing to conversion improvements. In the fourth quarter, conversion rates increased year-over-year for the first time since the third quarter of 2021.

Fourth, based on the strength of our balance sheet, confidence in our prospects, the value of our strategic assets and the disconnect between market prices and our assessment of intrinsic value, we initiated a $20 million share repurchase program. Since inception in mid-August, we have opportunistically repurchased $3.5 million or approximately 820,000 shares.

While much has changed in our business throughout the past 2 years, our financial goals have not. Over time, our objective is to deliver sustainable revenue growth, expand margins, become profitable and ultimately, grow free cash flow per share.

Moving to the fourth quarter. We delivered GMV at the midpoint of guidance in revenue and adjusted EBITDA at the high end. Similar to the third quarter, traffic and average order value were headwinds to GMV, partially offset by conversion rate improvements, particularly from returning buyers. As I noted above, after seeing declines moderate for 5 consecutive quarters, conversion rates returned to growth for the first time since the third quarter of 2021.

Lastly, supply remained healthy, with listings up 12%.

As we look towards 2024, our focus is on reinvigorating growth while maintaining our leaner cost structure. Our road map centers on 3 themes: personalized and frictionless buying, competitive inventory pricing and scalability and order retention, which I will briefly preview. All of these ultimately roll up to driving conversion and operating leverage.

The 1stdibs marketplace is home to over 1.7 million of the world's most beautiful items. Personalized and frictionless buying means making it easier for shoppers to find the perfect piece. This spans improving item discovery, to making it easier to complete a purchase by reducing checkout friction after finding that special item.

Optimizing our make offer flow is an example of a project in this work stream that we are focused on in the first half of the year. Purchases on 1stdibs are highly considered. Many involved back and forth communications or negotiations between buyer and seller. In fact, over 40% of orders originate as buyer-initiated negotiations. As such, optimizing the make-offer process has the potential to lift conversion and order volumes.

Competitive inventory pricing is our second theme. The objective here is ensuring that listings are transparently and competitively priced. To do this, we are giving sellers more insights and tools to list their items at the market clearing price. For example, we will soon be launching a test of our listings optimization score and seller recommendation page. This provides sellers with data-driven recommendations aimed at improving sell-through and conversion. For example, depending on item attributes and the performance of similar listings, we might recommend that the seller reduced the product price, move the item from marketplace to auction or add more images. Success here looks like sellers adopting our recommendations, ultimately driving more conversion.

Lastly, scalability and order retention is about streamlining processes to improve efficiency. Focused projects here include optimizing our operational teams and enhancing the performance of our tech platform. Success here is growing our GMV and revenue, well in excess of our costs.

During the fourth quarter, we started rolling out our 1stdibs parcel rates and labels. This suite of tools give sellers complete control to select the best shipping methods for their business with our seamless integration of calculated shipping rates, competitively priced shipping labels and automated tracking for parcel shipments, which account for approximately 70% of our shipping volume. In addition to giving sellers more control, once fully implemented, we expect these tools to reduce the load on our operations teams.

Lastly, turning to supply. We were pleased with double-digit listings growth despite the soft demand environment. In this quarter, we revised our approach to seller acquisition and monetization. A lesson from our central seller test was that subscription paying sellers had higher engagement. For example, the central sellers accounted for about half of our sellers, but only approximately 10% of listings.

As a result, we instituted a new pricing structure, whereby all newly acquired sellers will pay a monthly subscription fee, while allowing existing essential sellers who meet inventory posting minimums to continue with the subscription-free plant. We will continue to monitor this and adapt our pricing and acquisition accordingly.

We also updated our commission tiers for high-value orders. As a consequence of these changes, we would expect to see some volatility in seller count through mid-2024. However, during this period, we expect to see continued listings growth.

In closing, despite the challenges we have faced over the past 2 years, I am proud to say that we have remained resilient and have not shied away from difficult decisions. As conditions change, we responded. We have taken actions to reduce our cost structure, lower our cash burn, channel our focus on the highest ROI projects and opportunistically return capital to shareholders.

While we continue to navigate through market softness, I am encouraged by the progress we have made. The steps we have taken to reduce costs and sharpen our focus are beginning to yield results, as evidenced by our progress towards breakeven and improving conversion rates. As we move forward, we remain committed to adopting the market dynamics, maintaining cost discipline, reaccelerating growth and doing so in a capital-efficient manner. Thank you for your continued support. I will now turn it over to Tom to review our fourth quarter financial results and first quarter outlook.

[Thomas Etergino, executive]

Thanks, David. Over the past 2 years, we have taken significant action to streamline our business and reengineer our cost structure. In the fourth quarter, the benefits of this work were on full display, with head count and operating expenses down materially and adjusted EBITDA margins improving meaningfully. We have made significant strides towards improving our financial health and positioning ourselves for future success.

As we have mentioned before, given the operating margin leverage in our 2-sided marketplace business model, we expect revenue growth to be the primary driver of margin expansion from here. As such, we are focusing our existing resources on reaccelerating growth in a capital-efficient manner.

Turning to fourth quarter results. We delivered GMV at the midpoint of guidance and revenue and adjusted EBITDA margins at the high end. GMV was $86.4 million, down 17%, due to soft demand for luxury home goods and high-end discretionary items.

During the quarter, traffic was the primary driver of order softness, consistent with the third quarter trends. Both paid and nonpaid traffic were down year-over-year. Traffic declines were partially offset by conversion improvements. As David mentioned, conversion rates returned to positive growth for the first time since the third quarter of 2021. This was driven by growth in returning buyer conversion and moderating declines in new buyer conversion.

Since mid-2023, we have ramped our A/B testing velocity and launched more product enhancements into production. We believe this is helping conversion.

Average order values were another headwind to GMV growth. Average order value of approximately $2,530 was down 7%. In contrast, our median order value of approximately $1,150 was flat. The latter metric is less sensitive to fluctuations in high-value orders.

Taking deeper, orders under $1,000 accounted for 47% of total orders in the quarter, flat year-over-year. However, we did see orders over $100,000 count for approximately 3% of GMV towards the low end of its historical range of 3% to 5%. We also saw fewer orders in the $20,000 to $100,000 range. While the fourth quarter is our seasonally weak quarter for AOV due to gifting, we believe these trends signify lingering consumer hesitancy around discretionary categories and big ticket purchases.

Consumer and trade GMV both grew at similar rates. We continue to hear feedback from the trade that is consistent with previous quarters. That is, while clients are pulling back slightly due to economic uncertainty and rising costs, designers are still actively working on projects and building out the pipeline.

Turning to verticals. Vintage and antique and New and custom furniture were the top performers. This was a change in trend to recent quarters, where at-home categories underperformed. We ended the quarter with approximately 60,700 active buyers, down 10%. We expect this metric to remain choppy near term as we manage through a period of soft demand.

On the supply side of the marketplace, we closed the quarter with over 9,200 seller accounts, up 25%. Additionally, there are now over 1.7 million listings in the marketplace, up 12%.

Looking forward, we will report a unique seller number. In the fourth quarter, we had approximately 7,800 unique sellers, up from approximately 5,600 a year ago. This differs from seller accounts, which counts a unique seller multiple times if that seller has sales in multiple verticals. For example, if a seller sells in 2 verticals, they will count as 2 seller accounts, but only 1 unique seller. Historically, the difference between seller accounts and unique sellers is approximately 1,500 per quarter. This change has no impact on listing count.

Turning to the P&L. Net revenue was $20.9 million, down 9%, but up 1% sequentially. 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 due to the combination of several factors, including growing GMV contribution from essential sellers, which carry a higher commission rate, a higher proportion of orders below our $25,000 commission break and a revised commission brake structure that went into effect during the quarter.

Going a bit deeper monetization. During the quarter, we refreshed our commission tiers and paused the essential seller program, which carried no monthly subscription. Currently, all new sellers will be required to pay a monthly subscription fee. We expect these 2 changes should have a modest positive impact on take rates looking forward.

Gross profit was $15 million, down 8%. Gross profit margins were 71%, up approximately 1 percentage point, primarily driven by lower operations headcount-related expenses as a result of our restructuring initiatives and lower shipping expenses.

Sales and marketing expenses were $8.6 million, down 19%, driven by lower performance marketing spend and lower headcount-related expenses, as a result of our restructuring initiatives. Sales and marketing as a percentage of revenue was 41%, down from 46% a year ago.

Technology development expenses were $4.4 million, down 22%, driven by lower headcount-related expenses as a result of our restructuring initiatives. As a percentage of revenue, technology development was 21%, down from 25%.

General and administrative expenses were $6.3 million, down 10%, driven primarily by savings from reducing our New York City real estate footprint. As a percentage of revenue, general and administrative expenses were 30%, flat year-over-year.

Lastly, provision for transaction losses were $800,000, 4% of revenue, down from 7%, primarily driven by a decrease in damage claims as a result of lower GMV, as well as new policies implemented in partnership with our carriers.

In summary, total operating expenses were $20.1 million, down 19%, reflecting the benefits of restructuring. Adjusted EBITDA loss was $1.7 million compared to a loss of $4.5 million last year. Adjusted EBITDA margin was a loss of 8% versus a loss of 19% last year, due to savings from restructuring, partially offset by lower revenue. These results reflect the actions we have taken since mid-2022 to reengineer our cost base. The point worth stressing is that these adjusted EBITDA margin improvements happened in the context of declining revenue.

Moving to the balance sheet. We ended the quarter with a strong cash, cash equivalents and short-term investment position of $139.3 million. Additionally, interest income increased to approximately $1.7 million, up from approximately $860,000 a year ago.

During the fourth quarter, we repurchased $2.1 million of shares under our $20 million board-authorized repurchase program. Since inception in August 2023, we have repurchased $3.5 million of shares.

Turning to the outlook. Our guidance reflects quarter-to-date results and our forecast for the remainder of the period. We forecast first quarter GMV of $83 million to $90 million, down 14% to 7%. Net revenue of $20.6 million to $21.9 million, down 7% to 1% and adjusted EBITDA margin loss of minus 13% to minus 8%.

Our GMV guidance reflects continued macro headwinds, including shifting consumer behavior, ongoing economic and geopolitical uncertainty and softness in the luxury housing market.

Year-over-year declines in traffic and [ AOV ] partially offset by conversion improvements, with [ AOV ] being the primary headwind and quarter-to-date order volumes that are down low single digits year-over-year.

Our revenue guidance reflects modest take rate expansion due to a number of factors, including updated commission tiers, a higher mix of orders under our commission break and instituting a minimum monthly subscription fee for new sellers.

Lastly, adjusted EBITDA margin guidance reflects gross margins in the range of 71% to 73%. That on a sequential basis, we expect operating expenses to increase modestly, due to increased paid media spend and increased head count costs due to filling roles that were planned for in 2023, our annual merit cycle and increased health care premiums.

However, from a margin perspective, we expect these increases to be offset by sequential revenue growth. And lastly, while we are not providing annual guidance, it is worth noting that our annual merit cycle goes into effect on March 1. So the full impact of higher salaries will be felt in the second quarter.

We exited 2023 with a leaner cost structure and a more nimble organization. Our P&L is showing the benefits of the actions we have taken over the past 2 years, with head count and operating expenses down roughly 20% and adjusted EBITDA margins up over 11 percentage points. With our reengineered cost structure and streamlined operations, we are well positioned to realize significant operating leverage when revenue growth resumes.

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

[Operator]

[Operator Instructions] Our first question comes from Ralph Schackart with William Blair.

[Ralph Schackart, analyst]

I guess just on the new pricing structure, where I think you talked about all new sellers being on a monthly subscription fee, maybe just kind of give us some more perspective on what you're hearing from the new sellers coming on and maybe some of the sellers that are opting out of this. Have you seen them return under the new program, would be the first question. I have a follow-up.

[David Rosenblatt, executive]

Yes, it's David here. I think the context on this is in early '22, we started testing a subscription plan, under which sellers had the option of a $0 higher commission rate plan. And what we found is that the 0 subscription fee sellers ended up posting a lot less than those who pay a subscription. So on that thesis, we discontinued that plan in the fourth quarter. All new sellers, as you pointed out, are signing up under a minimum of a $99 a month plan.

However, existing sellers already on the central seller plan, the 0 sub fee plan do have the option at renewal of continuing with that, subject to hitting posting minimums. And I think the sort of main learning that we got out of all that is the hang of sub fee increases engagement. And so I think it will end up being a win-win. We'll get more engagement and sub fees will be healthier.

[Ralph Schackart, analyst]

Great. And then just a follow-up here. You talked about A/B testing increasing and accelerating testing velocity overall. And I think you sort of highlighted a number of new features. Can you maybe sort of, I don't know, highlight the top 1 or 2 new features you're seeing success with? And then just a bolt-on, just confirm, I think I heard gross margins for Q1 in the 71% to 73% range. Just wanted to confirm those 2 items.

[David Rosenblatt, executive]

Sure. So on the first question, yes, we are pleased with this new A/B testing methodology. We put the number of tests you put in the market in the fourth quarter was up something like 300% year-over-year. So it allows us to get a lot more stuff in the market.

Only those features that pass the incrementality tests graduate into general availability. And we do think that those -- that, that coupled with a pullback on the least efficient tiers of paid spend, are the 2 primary drivers of our conversion growth, which -- it's the first time we've seen that in over 2 years.

Tom, do you want to talk about the gross margin?

[Thomas Etergino, executive]

Yes. So you're correct. The guidance for Q1 is 71% to 73%. Again, Q4 was 71%. And yes, we're expecting somewhere between -- in that range that we gave.

[David Rosenblatt, executive]

Yes. And by the way, just I realize I didn't answer one part of your question. The primary area of focus in Q3, Q4 was in checkout, but we have a multistep checkout product or order path. And so that's just one of several kind of target-rich areas for conversion growth.

[Operator]

Our next question comes from Mark Mahaney with Evercore ISI.

[Unknown Analyst]

This is Luke on for Mark. Looking into 2024, what are some of the signals that would show that demand is starting to come back? And then will you turn back to focusing on things like auctions and international growth when the macro improves?

[David Rosenblatt, executive]

Sure. So look, I mean, we're very encouraged, actually, by what we're seeing in terms of demand. I think most encouraging is that on a dollar basis, at the midpoint of our Q1 GMV guidance, Q1 would be the third quarter in a row of flat sequential GMV. So obviously, if that if you extrapolate that out, that has a meaningful impact on changing the historical trajectory of our GMV growth.

Quarter-to-date, also in the first quarter, another encouraging data point, order volumes are down low single digits, and that's compared to, of course, the double-digit decrease in order volume for both the full year '23 and the last quarter Q4. So I think, again, on that basis, I don't know if I'm going to sit here and call a bottom. I mean, it does feel like things are moving in the right direction.

[Unknown Analyst]

Got it.

[David Rosenblatt, executive]

Auction International. So as part of our reorg and cost reduction effort midyear last year, we pulled dedicated resources on Auction International, in favor of allocating them on the basis of platform-wide ROI. So things like checkout, which I mentioned, that affect all users rather than only those in auction or kind of international order pads.

That said, both are doing well. I mean we remain committed to both. Both are strategically important auctions. For example, in the first -- or sorry, in the fourth quarter on an order volume basis, which is the metric we optimize to grew 7%, which was about, what, 17 percentage points faster than the overall order growth in the marketplace.

International grew in the 4 localized markets that we prioritize, grew both order volume and -- or sorry, traffic and GMV by double digits. So while we don't have dedicated resources on those 2 initiatives, they are priorities. They do benefit from all the other stuff that we do, and we are seeing positive traction.

[Operator]

[Operator Instructions] Our next question comes from Nick Jones with Citizens JMP.

[Unknown Analyst]

This is Tim on for Nick. Just 2 quick ones, if we could here. Just wondering if you could talk a little bit in terms of like a high level of what you're seeing, kind of in terms of -- I know you mentioned demand has been improving a little bit. Can you just talk about kind of on a regional basis, hearing from a lot of companies out there that things over in Europe are not quite as strong as here in the U.S. I was just wondering if you could kind of break that kind of out for us in terms of just high level, just kind of regional stuff. And then just one follow-up, if I could.

[David Rosenblatt, executive]

Yes. I mean we haven't seen a significant difference between the regions, but it's also the case that we're so focused on conversion that -- and we have a low enough base that it may be that the improvements we're making to the products were sort of washing out regional [ differences ], I really don't know. But I mean, I think the kind of summary there is we don't see any clear discernible difference, either on the buyer or the seller side among the regions.

[Unknown Analyst]

I appreciate that. And then just double clicking on conversion real quick. Great news to see that conversion is improving here, turning back to positive. Can you talk a little bit about traffic mix in terms of how you guys have been trending for direct traffic versus like indirect and paid traffic?

[David Rosenblatt, executive]

Yes. So we think about it mostly in terms of paid versus organic. Organic traffic is declining and has been under pressure. We feel like we're indexing pretty well to all the home kind of traffic data points that we have. So we don't feel like it's a market share issue. We feel like it's more of a macro issue.

In terms of organic versus paid, we're actually quite happy with some of the advancements we've made in terms of both our methodology and kind of spend targeting and so on. And we've been able to increase spend versus -- while still maintaining kind of remaining faithful to our ROI cost per new thresholds.

[Operator]

Thank you. This concludes the conference call. Thank you for your participation. You may now disconnect.