Good day, and thank you for standing by. Welcome to the 1stdibs.Com Second quarter 2022 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kevin LaBuz. Please go ahead.

Good morning, and welcome to 1stdibs earnings call for the quarter ended June 30, 2022. I'm Kevin LaBuz, Head of Investor Relations and Corporate Development. Joining me today are CEO, David Rosenblatt; and CFO, 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 under Investor Relations website at investors.1stdibs.com. Before we begin, please keep in mind that our prepared 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 alternative, business and economic trend dynamics, including e-commerce growth rates and our potential responses thereto, international opportunities and competitive condition. 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 non-GAAP to GAAP measures is included in today's earnings press 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?

Thanks, Kevin. Good morning, and thank you for joining us today. Amid a challenging operating environment for e-commerce and home goods, we delivered GMV and revenue within our guidance range and EBITDA margin above our guidance range, as we manage expenses in light of continued soft consumer conversion. We strengthened our balance sheet and streamlined our business with the sale of Design Manager for $14.8 million, generating a healthy $9.7 million return on our purchase price. Lastly, we're pleased with early signs of traction in our key strategic initiatives, auctions, international expansion and supply growth. During the quarter, some business trends remain resilient, as compared to our last earnings report, while others softened. First, I'll review what remain resilient. Traffic growth accelerated versus the first quarter due to SEO gains and upper funnel activity in general remain robust. Trade growth continued and returning buyer conversion increased as well. Supply growth remains healthy, helped by our pricing test, we're adding new sellers at three times last year's monthly run rate. Additionally, seller churn remains at historic lows. Finally, our strategic initiatives are making solid progress. While metrics are moving in the right direction, these efforts are in the early stages, and GMV contribution isn't yet large enough to offset softening new buyer conversion. Now on to what softened. Most importantly, consumer growth, which is historically 70% to 75% of GMV declined further due to conversion softness, particularly for new buyers. While we're bringing more traffic to the marketplace, it's not converting at historical rates. There are multiple factors at play here. In addition to economic uncertainty, consumers are spending less online in favor of out-of-home experiences such as travel and dining out. In addition, we are seeing a traffic mix shift towards mobile web, which is a lower converting device type.…

Thanks, David. We delivered GMV and revenue at the low end of our guidance range and EBITDA margins above the high end. GMV was $104.8 million, down 2%. In the first quarter, we saw strong top of funnel engagement but software conversion. These trends were exaggerated in the second quarter. While traffic growth accelerated, conversion softened, particularly for new buyers. This was partially offset by returning buyer conversion, which improved modestly year-over-year. Trade GMV growth has decelerated but remained positive while consumer GV declined. Trade remains a relative bright spot. The number of spending trade firms and average spend per firm both increased. We believe pipelines and project volumes remain healthy, but we expect to see a return to normal seasonality in the third quarter, which is historically slower for trade. As a reminder, when we reference trade GMV or consumer GMV, we are speaking about the subsets of on-platform GMV attributable to each of these buyer groups. Turning to vertical performance, new and custom furniture and jewelry GMV grew while all other verticals declined. Consistent with recent quarters, vintage and antique furniture accounted for less than 50% of GMV and the majority of our first-time orders continue to come from newer categories like art, jewelry and new and custom furniture. Average order value growth moderated in part due to a mix shift to auctions, lower AOV for auctions is a conscious part of our strategy and has many benefits, including higher sell-through, conversion and new buyer activation. We ended the quarter with approximately 69,300 active buyers, flat year-over-year and down 3% quarter-over-quarter. We expect this metric to be choppy near term as we manage through strong comps from the pandemic-commerce e-commerce boost and a period of softer conversion. On the supply side of the marketplace, we closed the quarter…

Great, thanks. Two if I may. First, given the current environment, it would seem that your balance sheet gives you a pretty sizable competitive advantage versus some of the privates in the space. What buyside M&A opportunities might make sense? I'm obviously not looking at specific targets, but rather like any categories that are complementary or any capabilities that might be attractive in the context of buy versus build? And then second one, on the strong trends in auction, could you just provide some color on which category is going to be better in that auction format?

Hey. Good morning. This is David. Yeah. So first, in terms of M&A, we do think this environment potentially does great opportunities, especially among smaller private companies that may have challenges in raising capital. I don't think the criteria is any different in this environment than it ever would be than any other. We have a very clear strategy and evaluate possible partners in the context of being able to help those strategies. So it could be great consolidation or it could be some of the things you mentioned vertical expansion, geographic expansion and so on. But overall, again, I don't think it's – you know, I don't think it's any fundamentally different than any other market environment. And in all cases, we would support for us certainly focused on our strategy. Second, in terms of auctions, as I mentioned in the script, we are very pleased with our growth in auctions. Order volume, for example, in Q2, was up 49% versus Q1. I think it's a little too early to call it among different verticals. That said, jewelry and art have been strong for us. But again, we think it's super early in this and the opportunity exists in all of our vertical

Great. Thanks, David.

Thank you. Our next question comes from the line of Nick Jones with JMP Securities. Your line is now open.

Great. Thanks for taking the questions. As I - with your kind of weaker conversion and just kind of challenged macro conditions, I mean are there other options on the platform to kind of get a little or nimble when they be lower AOV items that could convert better? And then a second question on kind of shifting preference to mobile or mobile browser, I think is what you said. I mean what initiatives do you have in place to kind of drive conversion up there? Is that forcing people maybe more into the app as opposed to the mobile browser. Any color there would be great. Thanks.

Yeah. So a couple of things. First, let me start with conversion. In general, the way I would characterize our kind of top of funnel activity is that, you know, the top of the model of traffic and engagement metrics, including things like favoriting and registrations and so on have been very healthy, as healthy as they've ever been in the business. When we look at conversion, the softness in conversion is concentrated or specific to new buyer conversion. The conversion rate from returning buyers is actually higher or was higher in Q2 than it had been in the Q2 prior. So - and as you correctly point out, that softness in turn is driven largely by a mixed set in favor of mobile web and lower converting channels. Our strategy is there, again, are not that different from what they've been in the past, which is a combination of, on one hand, incremental, kind of always on improvements to the core user experience, things like figuring out how to optimize, how we present shipping prices and changing around the format on mobile web, landing pages and so on. Yes, we want to continue to drive people into the app as well. The app has conversion rates which are substantially higher than mobile app. With respect to your second question in terms of AOV, we have seen relative strength actually in lower AOV orders, which for us below $1,000. I think that's across the board. Auctions has an AOV that's kind of in that zip code, and then we're seeing at the same time strength in the non-auction marketplace at those price points as well. Where we've seen softness is at the higher AOV level, again, not surprisingly. So we are continuing to see that primarily through our strategy to expand supply via experimentation with different pricing formats – seller pricing format.

Thank you. Our next question comes from the line of Justin Post with Bank of America. Your line is now open.

Great. Thank you. First couple of questions on sellers. You're seeing a lot of accounts added, but obviously, GMV is slowing. Any pushback there? And how is non-transaction revenue trending?

Let me take the first question, and then I'll pick it over to Tom for the second question. In terms of supply, so yes, because you correctly point out, we're adding sellers at roughly 3 times the rate that we added them historically. Churn. I will also note is that kind of all-time historical lows. However, given the length of the sales cycle on 1stdibs, there is a pretty substantial lag time between when we add sellers when they add supply, right, because that's - there's a cumulative effect as they add more supply over time. And then when those translate into GMV. So we're in a phase now where we're adding a lot of colors. But obviously, most of that supply has not yet converted into orders, but that's in line with the experience of all sellers on 1stdibs, and we'll have a much better sense of how the inventory performs over the next 6 to 9 months. I would also say that the auctions really potentially does change the velocity of sales. It's the one product we have that creates urgency, its also a value oriented product, which I think is - works well with the macros that we're currently in. And so we expect to see those two strategies act somewhat synergistically.

This is Tom. So I'll take the next question. Our non-transaction revenue, it's been relatively flat year-over-year. It's primarily subscription-based revenue, excluding our Design Manager, which clearly, we sold in quarter. So year-over-year trends, excluding design manager have been flat, relatively flat.

Got it. Thank you. And then two follow-ups. It looks like some interesting progress on auction. Just wondering the scale of that to start moving the needle. Like is that a year away? How are you thinking about that? And then secondly, how do you correlate sales that you see with the housing market? Do you think there's a correlation there? And is that one metric to watch on potential future sales? Thank you.

Yeah. So first, in terms of auctions and when they move the needle, I mean to some degree, they have. So in Q2, for example, auctions were roughly 5% of our total order volume. That increased in July in percentage terms. So there's less of a GMV impact because the AOV on auctions is lower that that of the rest of the marketplace. But as on as we continue our current momentum, I think it will obviously continue to grow and impact over time. In terms of the correlation of our sales with the housing market in general, we're much more levered to the luxury housing market, and we have seen continued strength in trade, trade had a good quarter in Q2. Trade growth rates, GMV growth rates softened a little bit versus the prior quarter, but were still very healthy. And what we hear back from our designer clients is that sort of in Q3 - Q3last year, we were comping a quarter where there wasn't typical seasonality. This year, there is some seasonality, again, we hear from our customers in Q3. That said, they also report to us that their own pipelines are full and remain healthy. So I am not a macro economist and we're still early in the adoption cycle of digital by the design community. So its sort of hard to know whether secular trends, how they relate to economic cyclicality, but everything we hear from our customers, at least over the near-term horizon is positive.

Okay. Thank you very much.

Our next question comes from the line of Mark Mahaney with Evercore ISI. Your line is now open.

Okay, thanks. I want to ask twp topics. One on international. The localized versions out in Germany and France. Just remind us the country roadmap so other markets that you're looking to roll out? And then your thoughts on how long it will take those two markets to ramp up to where you want them to be and now that they're launched now that they're localized. Is that something that takes a year or two? Or is that half a year, just your thoughts on how quickly that takes to ramp up to be material to you because there's clearly a lot of kind of pent-up opportunity there given your - the data point you've disclosed about the percentage of sellers and buyers that are already overseas?

Yeah. So just to recap, I mean, July was our first full month where we had a kind of a sequential comp for international. And what we saw was traffic from German, French IT domains, meaning it's not necessarily only the new sites that we launched. But overall from those countries, we're up between the two of them, well over 50%. So we're pleased with our progress there, particularly since our first priority is to grow traffic. In terms of both the roadmap for other countries and then also kind of the overall impact, I mean, in terms of the roadmap for other countries, first priority is to make sure that we develop the playbook via scaling France and Germany. So that's both growing traffic organically and inorganically and then obviously, converting that into orders. So we're still in the early stages there. And as soon as we feel like we have a good handle on that, then the cost, we'll then apply that to new markets. But I think it's a little premature to assign a month or a quarter to either of your questions.

Okay. And then on - one follow-up on auctions. I know people already asked about this a little bit. Are there any pockets of resistance to the rollout of auctions? Do you find that there are certain seller bases, certain categories or certain buyer cohorts that would prefer not to have options, it would seem like a pretty good win for the marketplace for sellers and buyers? I know it's a small part of your business now, but you have kind of a hybrid, as you may did weigh in the capacity you'll buy now and auction format. So just talk about the resistance to if there are any other obstacles to getting options more broadly rolled out?

Yeah. So on the demand side, I wouldn't call it resistance, but I mean auctions don't really work as well with trade - with the interior designer business model. They operate on schedules and almost definitionally, of course, auctions don't really correspond to customer buyer schedules. So that's the customer segment for which it isn't a perfect bit. On the consumer side, obviously, and some level it appeals to everyone, particularly people who are focused on value. So we do see, occasionally, for example, designers who appreciate value or because they appreciate value buy, but usually, they're buying for their own account rather than for their client accounts. I think on the demand side, the biggest obstacle is really awareness. I mean, we've been in business for almost 20 years in one form or another without options. And now all of a sudden we've had them for 8 months. So kind of growing awareness among both our existing buyers that we have this format and understanding how it works, as well as, marketing to people who love auctions, interactive auctions buyers, but because we haven't had auctions haven't been for zip customers is, I think, the second challenge. On the supply side, again, I would say - I wouldn't really call anything in obstacle, I mean sellers have adopted auctions. And actually, we saw a very substantial acceleration in supply growth in Q2 versus Q1 from our sellers. And I think the biggest challenge is really the learning curve of helping our sellers understand how to price for auctions versus the marketplace. Part of the reason why auctions are so compelling, is that in the - whereas in the marketplace, pricing - sellers price typically at a slight premium to where they anticipate the market clearing price end up or given you know, because we support negotiations. In auctions, it works the other way, right? You want to generate a competitive dynamic by starting with a lower price. So that's somewhat counterintuitive you know, pricing strategy for our sellers and very different than the way they price on 1stdibs for a long time now. So a lot of our effort is focused on teaching them kind of how to price to maximize the value and the impact of auctions.

Thank you, David.

Thank you. Our next question comes from Ralph Schackart with William Blair. Your line is now open.

Good morning. Thanks for taking the questions. If I could, last quarter, you talked about improvements in shipping loss provisions. Just curious how that trended this quarter. And then maybe just you know, kind of turning to expenses, excuse me, it sounds like you're making some improvements both on the short term and maybe a little bit longer-term in duration. But if the macro deteriorate further, maybe kind of just speak to your philosophy and how you're thinking about margins? And could you potentially be more aggressive on some of the cost savings? Thank you.

Sure. This is Tom. I'll take both those questions. So shipping, shipping charges to mind everyone are primarily borne by the buyer. When our shipping quotes are different from our actual expenses, we do take a loss. The shipping expenses in the second quarter were minimal less than k $100,000, as we do continue to increase our pre-quotes to reflect the changes in shipping prices. So you're correct in stating in Q4, we took a larger charge. We of course corrected in Q1, and we continue to ensure that our pricing is appropriate. And that the charge in the quarter as was minimal as a result. As far as on the expense side, yeah, we're committed to calibrating our expenses to the current demand environment, and we're evaluating all of our options. During Q2, as you mentioned, we did begin to make some concrete actions to align our expenses to demand. We drastically reduced our number of open roles, limiting our hiring to only critical hires. We increased our efficiency thresholds for our performance marketing spend. Additionally, we're renegotiating aggressively on all new contracts as they come to come up. And we began – are actively marketing our New York office space as well as a result. Obviously, that will take time to realize any savings there. And we're going to continue to work in the third quarter. We're moving quickly to adjust our plans, and we would expect you to see substantially more financial progress, which will flow through primarily in Q4. I will say, I'm not satisfied with the EBITDA margins that we reflected in the third quarter guidance, and we're focused on identifying and realizing more incremental savings. However, we do want to be careful not to trade off future growth drivers. So we continue to resource our key strategic initiatives, the ones that David has been talking about on this call, auctions and international and the supply expansion. And we expect to drive long term growth there and keeping our competitive position. So we are going to continue to fund those strategic initiatives.

Okay. Thank you.

Thank you. I'm currently showing no further questions at this time. This does conclude today's conference call. Thank you for participating. You may now disconnect.