Hello, and thank you for standing by. Welcome to Brilliant Earth's Third Quarter 2022 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce Allison Malkin with ICR.

Thank you. Good afternoon, everyone. Thank you for joining us for our third quarter 2022 earnings conference call. Joining me today are Beth Gerstein, our Chief Executive Officer; and Jeff Kuo, our Chief Financial Officer. For this afternoon's call, Beth will begin with highlights of our third quarter financial and operational performance and the drivers of future growth. Jeff will follow with more details on the quarter and share our outlook. Following this, the operator will begin the Q&A session with our presenters, Beth and Jeff, available to answer the questions you have for us today. Before we start, I would like to remind you that management will make certain remarks today that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These future forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings for a description of the risks that could cause our actual performance and the results to differ materially from those expressed or implied in these forward-looking statements. These forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Also, during this call, we will discuss both GAAP and non-GAAP financial measures. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's earnings release, which is available at the Investor Relations section of our website at investors.brilliantearth.com. A live broadcast of this call is also available at the Investor Relations section of our website. With that, I'll turn the call over to Beth.

Good afternoon, everyone, and thank you for joining us today. We are pleased to share our third quarter results with you, which reflect our fifth consecutive quarter of profitable growth as a public company. These results are the continuation of the multiyear strategy we've been executing to transform the jewelry industry. Transform an industry. I know that is a bold and ambitious aim, but I start there because it is core to everything we do. Our mission to cultivate a more transparent, sustainable, compassionate and inclusive jewelry industry is unwavering. This is our commitment is to building sustainable, long-term profitable growth for our company and our shareholders. We all know that 2022 has been a challenging environment for most companies, as you've heard from us every quarter, we believe that as a growth company, two of our fundamental and related differentiators are our commitment to building and protecting our brand and to driving healthy, profitable growth. And while the macro environment is clearly affecting consumers, I'm very proud of our team's ability to stay focused on delivering on that commitment and to delivering for our customers and for our company. I continue to be inspired by their agility and dedication. This quarter, we delivered revenue growth of 17% to $111.4 million. We delivered another quarter of record gross margin at 54.7%, a 430 basis point improvement over the prior year, and we delivered $10 million in adjusted EBITDA, representing an adjusted EBITDA margin of 9%. So what drove those results? First, it was the Brilliant Earth brand and its continuing resonance with millennial and Gen Z consumers, particularly those who share our mission-driven values and who seek our industry-leading craftsmanship and trend-forward unique designs. We know this because they tell us so. As a data-driven company, we are continuously engaging…

Thanks, Beth, and good afternoon, everyone. Thank you for joining us today to discuss our third quarter fiscal 2022 results. Today, we'll walk you through our detailed financial results and some of the important strategic efforts we've executed to deliver another strong quarter of profitable growth. Our third quarter results demonstrate the disciplined execution of our ongoing strategy to disrupt and transform the jewelry industry. Revenue grew to $111.4 million, which represents 17% year-over-year growth and up 29% on a three-year CAGR compared to Q3 2019. Gross margin expanded to 54.7%, a 430 basis point increase compared to Q3 2021 and once again, our highest quarterly gross margin percentage on record. And adjusted EBITDA was $10 million or 9% of revenue. As Beth said, these impressive results were delivered in a challenging and highly dynamic macroeconomic environment. While we have been experiencing a rapidly changing consumer landscape, the results we've delivered, again, illustrate and reinforce the power and distinction of our brand and our agile, highly efficient business model. Q3 revenue grew 17% year-over-year, driven by strength across our product lines. As we've said throughout the year, capitalizing on the demand for weddings has been a particular focus for us. We were successfully able to do so in Q3 as engagement rings and wedding bands as well as fine jewelry contributed to our growth. Consistent with our plans, we continue to see outsized performance within our fine jewelry assortment with growth that far outpaces the business as a whole. As expected, the outperformance of fine jewelry and wedding bands were drivers of a high single-digit percentage decline in our total company blended AOV for Q3. As a reminder, both fine jewelry and wedding bands have a lower average price point than our overall business. We have also seen outsized growth…

Thank you. [Operator Instructions] And our first question comes from the line of Matthew Boss with J.P. Morgan.

It's Amanda Douglas on for Matt. To start, Beth, could you speak to how you saw the cadence of demand trends progress throughout 3Q? And specifically on the softer 4Q to date trend, could you speak to where by category or price point you've seen changes relative to 3Q?

Absolutely. Hi, Amanda thanks for the question. So as we mentioned in the call, Q3 shaped up much as we expected, and what we started to notice in October is the retail environment became more challenging. As it relates to price point, specifically, we saw increased demand at the midrange of our offerings, and that was offset by some of the moderation that we saw in the $10,000 price point above the $10,000 price range. So keep in mind, this is just observed since October, and we do notice that there's some variability from October to October and a holiday season. So we're not ready to call it a trend just yet, but it is something that we're overall watching. And I think the one other thing I would just want to add is, as Jeff had mentioned in his remarks, we do recognize the majority of the holiday season is in front of us. We're very well prepared with the offerings that we have, and so we're able to capture the demand as we see it as we have in the past.

Great. That's helpful. And then to follow-up for Jeff. Could you speak to what's driven the magnitude of your gross margin expansion in the third quarter? And how should we think about potential pricing optimization opportunity in 4Q despite maybe a more promotional holiday? And then just multiyear, are there any changes to your mid-50s gross margin target?

Sure. So let's start off with what drove the gross margin improvement in the third quarter, is driven by similar factors that we've seen in the past. Underlying it is the strong brand resonance in the premium proprietary products that we have, which allow us to have that premium gross margin. We support that operationally with our pricing optimization engine and procurement efficiencies. And then we've also seen some benefit from our enhanced extended warranty program, which has seen good customer demand. So those are areas that we've seen that are able to drive our gross margin. In terms of Q4, as I mentioned in the remarks and as you pointed out, we do anticipate in our guidance that maybe a more promotional environment set [ph] our strategy of continuing to focus on sustainable, profitable growth has not changed, and we've continued to manage these levers in Q4 as we do in each quarter. And then with respect to the longer-term model, our longer-term model that we've previously discussed has our gross margins in the mid-50s percent. And we expect to continue to manage the levers that we just talked about to optimize both top line and gross margin. So the continuation of the strategies and approach that we've seen in the past, and we expect to continue those going forward.

That's helpful color. Thank you.

Thank you.

And our next question comes from the line of Oliver Chen with Cowen.

Thanks so much. Hi Beth and Jeff. Regarding the guidance and the call out on macro headwinds, which macro headwinds are you most concerned about are most relevant to what you're seeing? Also, Jeff, on the marketing efficiency and customer acquisition cost, what's ahead with that dynamic in terms of how efficient it is and the kinds of [indiscernible] you're making lately as it's a pretty agile changing dynamic? And then finally, just as we think about the guidance that you provided, your revenue step down but your EBITDA in the previously established range, what's the main delta in terms of being able to maintain the EBITDA? Thanks so much.

Hi Oliver thanks for the question. So in terms of the macro, we are seeing strong interest, nice traffic in our showrooms online. I think we're just seeing a lengthening of the overall decision cycle there. One of the overall differentiators that we have is we don't believe that all revenue growth is equal, and we don't believe in chasing unprofitable growth. So as we're seeing a more promotional environment, we're not going to be leaning into discounting the same way that others need to in order to sell through their inventory. So we're really thinking about how we can maintain our profitability targets, and I think that speaks to the agility of our business model and continuing to build a premium and luxury brand. So that's how we're thinking about just how we're managing our performance in a challenging environment, where marketing is one of the levers that we have. We continue to look for strong ROI as we think about delivering in the marketing with our marketing strategy; we're also building a longer-term brand. And so we're taking a, I think, a pretty managed approach there in terms of making sure that we are healthy and profitable while considering that we are still a young and growing brand in a $300 billion fragmented industry, where we will continue to gain share.

And then with regard to your questions about marketing and EBITDA; say that the way that we think about management of our OpEx, including marketing is to focus on running the business to sustainable profitable growth. Our marketing – the way that we look at our marketing then is dynamic, very data-driven and ROI-focused and that is an approach that we've always taken and continue to follow in this environment. That ties into the second part of your question regarding the profitability, and we're pleased that we're able to, in this environment maintain our profitability guidance in the same range that we've discussed earlier on in the year. And I think that speaks to how across the business and across our OpEx, we've been disciplined in our focus of how we deploy funds, think thoughtful of ROI and managing the business to profitability and how the business model is also dynamic and flexible and allows us to manage based on differences in demand that may occur. And so I think that all comes together in how we are continuing to guide to a similar EBITDA range that we have previously.

Thank you, Beth. Best regards. Happy holidays.

Thanks Oliver.

Thanks Oliver.

Thank you. And our next question comes from the line of Michael Binetti with Credit Suisse.

Hey guys. Thanks for answering our questions here. So Jeff, you laid out the revenue path here, potential guide down 5, up 3 in the fourth quarter, some very different scenarios there. But relative to the 17% growth in the last quarter, can you speak a little bit about the KPIs that you do release to us and which ones you're anticipating to slow? I think you mentioned traffic a little bit before, but should we think about AOV is compressing a bit? Should we think about orders slowing? I know you don't report active customers, but you're seeing change in dynamics with the new customers trafficking the site. And then, I guess, is there a potential that early – you had a moment earlier this year when consumer process lengthened as well. You seem to pull leverage to adjust pretty well and steady the ship pretty quickly. Is there a chance that a some of the negativity in the scenarios for fourth quarter stands into early next year?

Sure, maybe I can begin that, and Jeff, feel free to add on. So I think the one KPI, as I called out earlier on was on AOV at the high price point at that $10,000 plus. Keep in mind, it's highly considered. It's a younger target demographic. And so we are seeing more moderation there. I think one of the benefits of our offering is we have a wide variety of different price points. So regardless of the budget that you're coming to us with, we have a really compelling offering for you. As it relates to kind of the overall considerations lengthening, I think that one thing to keep in mind is oftentimes in October, we do see people that are demonstrating interest but tend to be waiting a little bit closer to the holiday season. I think last year, in October, there were a lot of consumers that were afraid that the inventory was going to disappear. And so I think you saw earlier purchasing. So I think part of this is just how can we quickly convert people, especially as the holiday season is approaching. And as we're coming close to that special December 25th date. So that's why we're, I think, being a little bit more cautious, but definitely recognize that we have a lot of opportunity that lies ahead, and we have a compelling offering. We have our showrooms. We have our digital experience. So we're really firing on all cylinders in terms of being able to close that customer, but we are seeing them, I think, be more hesitant than we had in the past.

Got it. And then if I could follow that, as you look to next year, maybe we're just self-fulfilling prophecy on making a recession happen, but if we do go into a tougher macro, you guys have longer-term growth targets in the high-20s and low-30s. You've got these showrooms that you sound very happy with consistently call to call. What do you think about as far as leverage you want to pull to try to keep your business on track towards your longer-term growth algorithms if we do stay in a big consumer macro?

The way that we're thinking about managing the company and the pillars that we're going to operate with is, one, we're not going to compromise the brand. We're really thinking about this to build long-term value. Two, we're going to continue to invest in the business to ensure that we can take advantage of any acceleration that we see. And then three, we're going to simultaneously deliver profitability with a rigorous ROI focused management of cost structure. So that's how we're thinking about managing really in any environment. I mean, keep in mind we're originally a bootstrap company. We've been doing this for many years. We've seen many cycles. We think there's a lot of potential in terms of the brand that we've built, being very resonant with that younger consumer. We think the omnichannel strategy is absolutely the right one for our industry and for our business. And overall, I think the fact that we're able to maintain profitability in a challenging environment speaks to how nimble we are as a company and the disciplines that we overall have.

Sound good. Best of luck and [indiscernible]. Thanks.

Thank you. And our next question comes from the line of Noah Zatzkin with KeyBanc Capital Markets.

Hi. Thanks for taking my question. Just first, are there any differences in behavior you'd call out between customers shopping for fine jewelry and engagement? And then second, just in terms of showrooms, you added about, I think, 10-year-to-dates, that brings you to 25. Any update on the number you'd expect to end the year with and just progress there generally? Thank you.

Sure. So I wouldn't say there's a meaningful difference in terms of fine jewelry and engagement. We've seen kind of similar trends that have been impacting them. Fine Jewelry continues to outpace the overall company, but we've seen more moderation just as customers have taken a little bit more of a wait-and-see approach. As it relates to our showrooms, I think that we may end the year with another one or two with several more planned for 2023. Some of that timing is based on permitting and other kind of variable time frames that we work within. But it's about what we envisioned when we talked about almost doubling the number of leases with the majority opening this year.

Thank you.

Thank you. [Operator Instructions] Our next question comes [Technical Difficulty] with William Blair.

Just kind of curious, this idea of lengthening the purchase decision would imply that the sales ultimately do kind of flow through. And you sort of speak to having to operate this business now through several cycles. I mean are there periods that are similar to this in your history where you've kind of seen that lengthening? And can you just give us a sense of duration as to sort of when those sales you would expect those sales to happen? I guess that would be my first question.

Yes. I think we've seen a variety of different cycles. And I think that we are in a unique point in time right now that we're adapting to. I think, overall, we do expect to be able to convert this customer as we have in the past. And I think we have that compelling offering. So still really have a good conviction there of our ability generally to be able to meet the demand where we see it. Keep in mind also jewelry has long-term value that consumers are interested in meaningful purchases. And I think we have a really compelling offering overall to be able to cater to that. So the category itself has shown to be resistant, especially as you think about bridal and people continuing to be engaged. I think you just are going to see puts and takes from quarter-to-quarter, and ultimately, I think that the long-term growth prospects remain the same.

Okay. And then I'm just kind of curious when we can anticipate more leverage on the marketing line now that you kind of – with the larger store fleet? Thanks.

Yes. So I can speak to that. How we're thinking about, and this is also just how we think about our OpEx in general is that we are continuing to make disciplined ROI-focused investments, including in marketing to drive that sustainable profitable growth. We've spoken about our long-term growth algorithm for marketing and how we are working towards that target in the mid-to-high teens as a percentage of revenue as we continue to grow our brand awareness and roll out our showrooms, which are beneficial, as you point out in terms of driving uplift in the metros. So we continue to work towards that target and we'll continue also to, as we look at the upcoming periods to manage to profitability as we've been guiding to for the year and the quarter.

Okay. Thanks.

Thank you. [Technical Difficulty] with that, I'll hand the call back over to CEO, Beth Gerstein, for any closing remarks.

Thank you, everyone, for listening. We are very proud of our team's efforts, given how challenging the environment has been, and we are very excited for what we have planned this holiday season. We look forward to giving you an update in our next earnings call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.