Good day, and welcome to the 1stdibs.com Inc. Q3 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Instructions will be given at that time. As a reminder this call maybe recorded. I would like to turn the call over to Kevin LaBuz, Head of Investor Relations and Corporate Development. You may begin.

Good morning and welcome to 1stdibs earnings call for the quarter ended September 30th, 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 third quarter financial results and fourth 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 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 to them, 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. Despite a challenging environment for e-commerce and home goods in general, we delivered GMV revenue and adjusted EBITDA margins above the high end of our guidance. Strength in jewelry and high-value orders bolster GMV, while adjusted EBITDA margins benefited from cost cuts. Additionally, we continued making progress on our strategic initiatives, auctions, international expansion, and supply growth. We are focused on improving efficiency and aim to emerge from this challenging period with more growth drivers and a leaner cost structure. For the past two quarters, we have aligned expenses to lower demand by drastically curtailing hiring, increasing performance marketing efficiency targets, and reducing headcount by approximately 15%. As a result, adjusted EBITDA margins improved sequentially despite quarter-over-quarter declines in revenue. Third quarter operating trends were broadly consistent with those of the second quarter. Traffic growth was healthy, organic traffic mix improved four percentage points due to continued strength in SEO combined with higher efficiency targets on performance marketing. Supply acquisition remained brisk and seller churn stayed at historical lows. Once again, returning buyer conversion increased, but this was offset by softness in new buyer conversion. Our strategic initiatives are gaining traction. Auctions represented 6% of total orders in the quarter, up from 4% in the second quarter. Traffic growth to our localized French and German sites accelerated sharply, and we added new sellers at three times last year's rate. One new dynamic this quarter was a change in the composition of GMV growth. Through the end of the second quarter, we had seen average order value grow for the prior seven quarters. However, AOV declined in the third quarter. At the same time, order growth rates improved month-over-month throughout the quarter. Encouragingly, this trend has come into October. We…

Thanks David. -- strength in jewelry and high-value orders, we delivered GMV, revenue, and adjusted EBITDA margins above the high end of our guidance range. Despite lower revenue, adjusted EBITDA margins improved sequentially as a result of our cost reductions. GMV was $99.2 million, down 9%. Similar to the first half of the year, traffic growth remained strong, while conversion softened, particularly for new buyers. This was partially offset by modest increases in returning buyer conversion. Both trade and consumer GMV declined. Consistent with recent quarters, trade growth was relatively stronger. We are encouraged that trade orders were flat while AOV declined. Turning to vertical performance. All verticals declined with the exception of jewelry, which grew mid-teens. Jewelry, our second largest vertical behind vintage antique furniture has grown every quarter since mid-2018. Strength in jewelry was helped by a record number of high-value orders, highlighting the benefit of spanning multiple verticals. Consistent with recent quarters, vintage and antique furniture accounted for less than 50% of GMV. Nearly 60% of our first-time orders can categories, jewelry, new and custom furniture, art and fashion. Over the past seven quarters, average order value grew. In the third quarter, it declined 3%, driven by a mix shift to auctions as well as an overall higher percentage of orders under $1,000. Additionally, our median order value, which is insulated from quarter-over-quarter fluctuations in high-value orders, has declined on a monthly sequential basis since June. While average order value and median order value declined, order growth rates improved month-over-month throughout the quarter, a trend that continued into October. Despite economic uncertainty, order volume is resilient. Luxury on 1stdibs is available at a variety of price points and vertical. During the quarter, median order value was approximately $1,250 and over 40% of orders were under $1,000. We…

Thank you. Our first question comes from Mark Mahaney with Evercore ISI. Your line is open.

Okay. If I could ask a couple of questions, please. First, how broad do you think the appeal of auctions is to both buyers and sellers on the platform? So, if it's gone from 4% to 6% now of transactions, is there a natural level where you think it could go to? Are there certain categories or price points that wouldn't make sense that are off limits for auctions from either buy or a seller perspective? So, just how big you think auctions could be?

Mark, it's David. Yes, I think it's pretty broad. I mean, as measured by a couple of -- or in a couple of ways. I mean, one, the simplest is when you look at the market landscape, there are comps out there, companies that are kind of at least from a high level, reasonably similar to ours in terms of both supply and demand. They're in the kind of, I don't know, $600 million to $800 million range, we believe. We think we have better products. We think we have a better consumer experience. I think in terms of sellers, it absolutely solves a commercial need that is more important in this economy than ever before, right? It provides an efficient way to liquidate inventory and generate cash. And in our case, put that product in the hands of qualified buyers. And then on the demand side, we -- I just start with the fact that we have very low sell-through, right? We have over $14 billion worth of product listed on the marketplace. You know what our GMV will be this year. So, the balance between those two things, all of our research says the primary reason why our sell-through rates are what they are is that the price is perceived to be too high. In many cases, people don't really understand that they have the ability to negotiate. What we see that reflected in is the difference in conversion rates between returning buyers who are familiar with how the platform works and new buyers. And what we're seeing is that auction so far has addressed those strategic opportunities. So on a sell-through basis, sell-through is 2x what it is in the marketplace. On the demand side, conversion rates are significantly higher for new buyers than they are for the marketplace. The 50% of people who have registered to bid are people who are new to file. So, it's doing its job. At the same time, it's a different way of living and working for our sellers. Pricing needs to evolve to a more auction-friendly ranges. And secondly, we ourselves are learning what sells, right? And so far, jewelry and art have outperformed other categories. And so again, we're still early in this. We're still in the process of both learning ourselves and teaching our sellers and how to work with auctions and then lastly, had to grow awareness among buyers. But again, I sort of go back to those fundamentals, especially that sell-through number and the comps. And to me, that says it's a big opportunity in front of us.

And then if I could do one follow-up, please. On international, I know you -- this was the first full quarter for France and Germany. I may have missed it, but did you disclose how material, if at all that those areas were in terms of GMV, GLV or revenue? Or what's implied in the guidance for Q4? Or just talk about the ramp, like how long you think it will take for those segments -- for those international markets to be material to the business overall? Thanks.

So this is the first full quarter for the localized version of France and our French and German experiences. The initial focus after ensuring that the product is stable, which is to develop our SEO capability. We're pleased -- we were pleased to see that organic traffic grew 200% year-over-year. So, we feel like we're off to a good start there. The next steps will be to build the infrastructure, to build kind of e-mail files to market to and then also put paid behind it. Right now, it's not a material part of our GMV. Tom, do you want to talk about how that's sort of how you think about the curve over the next several years?

Yes, I think that the curve on international is a little bit longer. So, going into 2023, we're not going to give guidance on that right now. But -- it will start to ramp up. I don't think that we'll be breaking it out probably into the first half at least of next year as it becomes larger, will we consider that. But the -- we're thinking that this is -- it takes time to grow the traffic. We're seeing great traffic growth in the first full quarter of us having it. But the monetization is -- will come at a slower rate.

Okay. Thank you, David. Thank you, Tom.

Our next question comes from Trevor Young with Barclays. Your line is open.

Great. Thanks. Two, if I may. First, just given the current business mix and contemplating the ongoing cost savings, I think you mentioned because of the reduction of $4.5 million Q-on-Q improvement, also potentially subleasing the New York office space. I guess at a high level, is there a certain level of GMV or revs that we should be thinking about, at which point you've reached that EBITDA breakeven. Not looking for a specific quarter, 2023 guide or anything like that, BUT just trying to assess like how much lift do we need to have from, call it, the 4Q guide to get to some sort of breakeven point?

Yes. Thanks for the question. So, you're right. So, over the past two quarters, we have taken significant cost out of the business, right? In August, we made some decisions to pull back on NFTs. In September, we've made the difficult decision to reduce our head count by about 10%. We've drastically reduced the number of open positions we have that we're hiring for. We've lowered performance marketing spend by increasing our efficiency targets. And we've started rationalizing our non-headcount costs. So, as you've seen, our P&L is starting to reflect our progress, right? At the end of October, our headcount was down 15% versus the second quarter peak. Operating expenses declined approximately 6% quarter-over-quarter and that's despite lower revenue, adjusted EBITDA margins improved sequentially. And lastly, we expect our September headcount reductions to reduce quarterly operating expenses by about $1.5 million a quarter or $6 million annually. So, we're also redeploying our resources to the highest potential projects. For example, we moved engineering resources from NFTs to auctions and projects that increased conversion and engagement. And kind of going forward, we are focused on identifying and realizing additional efficiencies and diligently managing our expenses. I just want to remind everyone, reaccelerating GMV growth is a precondition to us achieving that breakeven mark. As we've discussed on prior calls, we have an asset-light business model with high operating leverage. That operating leverage cuts both ways though. So, in terms of declining GMV and revenue, there is pressure on EBITDA. When GMV growth returns, though, we will be well positioned to realize the operating leverage in the model with a high percentage of additional revenue hitting the bottom-line. I will not -- we are not giving specific guidance on dates for breakeven. But we are doing everything we can to realize additional efficiencies and keeping our costs in line with our GMV and revenue.

That's really helpful color, Tom. So, it sounds like kind of embedded in that though is at some point, you need to see some GMV recovery to reach that pack to breakeven. Second question, just on the seltzer boarding for more sellers -- how do you balance that lower touch versus your historically higher touch betting process, which buyers maybe view as a bit more of an endorsement that these are credible sellers. Perhaps they're less likely to have inauthentic goods and so forth. How do you balance those two factors?

So, we haven't changed our any criteria at all. And the -- what we did change in the seller test is the range of pricing mechanisms that we're offering sellers. Previously, we had a one-size-fits-all that included a very high or relatively high subscription fee. That was kind of hard to stomach for lots of sellers who didn't have any experience or familiarity with 1stdibs to bear that fixed cost. And so in response to that, we offer now a range sort of a sliding scale of higher subscription and low-commission to higher commissions and low to no sub fees. That's what's resulted in the tripling of our -- kind of, the rate at which we're adding suppliers. What we've seen is that those suppliers are healthy and they have high-quality product. But the next step is to evolve the pricing test to create incentives for them to post more and more actively since that correlates with success on the marketplace.

Great. Thanks David. Appreciate it.

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

Good morning. Thanks for taking the question. On marketing efficiency increases, I think you talked about getting better performance. Maybe if you could provide some color on some of the steps that you're taking there and maybe some of the more opportunities you might have here to gain more efficiencies.

Sure. This is Tom. So, what we've done is we analyze every channel that we have paid spending within marketing. And what we're doing -- we do this on a regular basis. We're taking out the least efficient spend in favor of obviously continuing to spend in the most favorable places and spending up to a maximum allowable that we set. And so what we're doing is we are bringing those allowables. We're managing the allowable that we're spending against and we're managing the channels in which we're spending them in.

Great. Just in terms of softness in new buyers, which is obviously a large lever to getting you back to accelerating GMV. I know the macro is tough. But maybe if you could sort of isolate the top one or two priorities to sort of reverse this trend to the extent you can in a tough macro environment? Thank you.

Yes. I mean, listen, overall, as we look at the funnel, as we've said in past quarters, and it remains the case, most parts of the funnel are very healthy. So, traffic growth is very strong, as strong as it's ever been. Conversion has held up both for trade buyers and for returning buyers. Engagement is very healthy as measured by things like registrations and favoring and so on. We have a kind of single biggest driver of our GMV weakness, which has been new buyer conversion, right? New buyer conversion is a function of a couple of things. Certainly, the macros don't help. But we've also seen a significant shift in traffic in favor of our lowest converting channel, mobile web. And so we're doing a lot in that regard. We've got lots of operational projects that are intended to improve that. Things like, for example, adding new payment methods. We added Klarna, adding the number of items on search results pages when people get to 1stdibs from Google, from SEO. And of course, our primary strategic initiatives, auctions, international supply growth are all pointed at conversion. I would say, to add to that, there was another kind of interesting dynamic that we saw for the first time in a couple of quarters, this past one, which was -- which had to do with the relationship between AOV and order volume. So, what we had seen for the seven quarters leading up to the third quarter was increases in the year-over-year growth rate of AOV. That changed beginning in July. For each month, since July through October, we've seen declines in AOV, pretty significant declines. We think that's attributable to a couple of factors. One, again, clearly is the kind of macroeconomic. And for example, the kind of product range that we've seen the highest growth in orders has been the sub-$1,000 price range. And then second is the increasing share of total orders that is auctions. Auctions by design has a lower price point. Conversely -- and probably not unrelated, beginning at the same time, we've seen sequential improvements each month in year-over-year order growth. To the extent that in October, order growth was actually positive on a year-over-year basis. So, again, those two things are likely related, but it's encouraging to us because that order -- the sort of resilience of the order number suggests that, again, this platform retains its relevance might even possibly be growing share in the face of a weak overall e-comm market and ultimately expands our TAM. So, while in the near-term, it has a negative effect on GMV, in the long run by expanding our market, it could be very helpful. The last thing I would say on that is -- that is not coming at the expense of our strength in the super high AOV luxury pricing segment. In September, as an example, we had our all-time record high month in terms of the number of orders over $100,000.

Great. Thank you.

Our next question comes from Curtis Nagle with Bank of America. Your line is open.

Good morning. Thanks for taking the question. So, I just wanted to focus on the strength in jewelry. That was definitely out in the quarter. How much was that related to, I guess, a strong post-COVID wedding season? And should we expect some deceleration going into 4Q on basic seasonality, if that's the case?

So, jewelry, thanks for the question. Jewelry, just as a reminder for those who may not be aware, Jewelry is our second largest vertical and did have a strong quarter. In fact, jewelry has grown GMV on a year-over-year basis every quarter since the third quarter of 2018. And I think it's just sort of in terms of the fundamentals, it's well suited to what we do. It's our biggest market. It's highly fragmented on the supply side. Shipping costs are low, returns are fairly straightforward, and it benefits from the consumer trust, which we think is one of our strongest competitive advantages. So, it benefited from a number of factors. One of them was the high -- the growth in high AOV orders that I mentioned in relation to the previous question. We did sell a bunch of high-price engagement rings, which, I guess, likely is seasonal. But beyond that, I think, again, the sort of long-term trend has been positive there. So, I don't know if I'm really in a position to kind of attribute that strength to any very specific kind of temporal factor, I think instead, it's likely more a function of just the sort of macro industry factors that I mentioned before.

Okay, fair enough. And then just a follow-up on the 4Q guide. Just I guess how much of that -- or I guess is that fully incorporating the most recent announcements in terms of headcount cuts. It sounds like it probably is, but not sure there. And which lines would we see the greatest impact within OpEx?

Yes. Hi. So, in the fourth quarter, what we're going to see is the savings were -- sorry, in the fourth quarter, we're going to see muted seasonality savings that we're going to see. We're going to see $1.5 million attributable to the reduction in force that we had at the end of September. So, none of that was actually included in the Q3 results. But some of that will -- that savings will be offset by some seasonal expenses that we have in kind of long lead-time marketing projects, such as like our holiday catalog. And as well, we're expecting to see some seasonally higher logistics costs. And so some of that savings will be offset in Q4 based on those types of factors.

Okay. Thank you.

Our next question comes from Nick Jones with JMP Securities. Your line is open.

Great. Thanks for taking our questions. I have two I guess. First, as we try to think about conversion stability, it sounds like traffic is growing nicely, kind of overall conversion is down. I guess that's attributable to newer buyers. I mean, what does that indicate on kind of the timing it takes to take these new buyers and convert them into repeat and when that kind of shows up in conversion stability or, I guess, when GMV kind of starts tracking with traffic growth? And then I have a follow-up.

Yes. I mean, we have seen some encouraging trends in conversion recently. The rate of decline of our new buyer conversion has stabilized and actually improved recently. But look, we're throwing the kitchen sink at it. Everything we do is focused on growing conversion one way or another. I think it's probably premature to call timing on that. But I mean, you make a good point, which is if we can -- the goal is to continue growing traffic at the same rate and stabilize conversion. And if we do that, that will result in healthy order trends, which, again, as I mentioned before, is what we've seen over the last couple of months and which culminated in positive order growth in October. But we're in a volatile environment and there are a lot of moving parts to this business and to the economy and things that impact our performance. So, I think it's a little early for us to call with any degree of confidence when that inflection point is.

Got it. And then a follow-up. You've done a good job kind of adding a lot of supply to the marketplace. That enhances SEO. How do you balance kind of driving SEO within maybe the Google ecosystem in broader search? And then how adding increased supply to the platform impact search and discovery within the 1stdibs platform? And does that kind of impact kind of users able to find what they're looking for, like if they come on for something they find out Google and then they need to get somewhere else or some they realize they want something else. Is that impacting the kind of on-site search and discovery?

Yes. So, it's a good question. The -- certainly, the more items we have on the marketplace, the higher the burden there is on us to improve ways to find relevant inventory for a given user. That said, we are a marketplace of long tail one-of-a-kind items. And so the bigger problem than having too few items -- sorry, too many items is that we have very often too few for a given search query. So, for example, one of the phenomena that I described earlier that's contributing to our decline in new buyer conversion rates is the increasing proportion of traffic that we're getting from Google via SEO. The -- a large percentage of those users land on search results pages on 1stdibs that have either a small number or no product listings. When that happens, the bounce rate is very high and the conversion rate is very low. So, a big part of the motivation in adding supply and as well as other product changes that we're making, including adding recommendations and so on, on those pages is to increase the number of items on those pages and in that way, decrease the conversion rate. So, it's somewhat counterintuitive, but I think the headline is in a marketplace of kind of long tail, hard-to-find items, increasing supply actually, we believe, can help conversion.

Makes sense. Thank you.

Our next question comes from Aaron Kessler with Raymond James. Your line is open.

Great. Thanks guys. Maybe just on the strategic review, anything you can share from that were some of the cost reduction initiatives part of that? And then second, last quarter, you kind of noted a number of headwinds to the business. I think you had economic uncertainty, consumers spending less or more -- sorry, an out-of-home experiences, lower overall furniture spend as well as kind of traffic mix shift to mobile. Did most of these factors continue to weigh in Q3? Or did some do you see some easing of some of these factors as well? Thank you.

Sure. So, first, in terms of the strategic review process. As we announced last quarter, we did retain Allen & Company as our advisors, and we are working with them to explore the full range of ways to enhance shareholder value. The motivation for this is our belief that the current valuation does not reflect either the strength of the brand or the long-term potential of the business and we are committed to growing shareholder value. And as part of that, we want to look at every possible alternative. Those alternatives, of course, will -- could include everything from a kind of sell-side transaction to buy-side transactions to kind of a redeployment of cash. Everything is on the table. It's also possible because a lot of this isn't under our control that we may decide that the best course of action is not to do any transaction or make a change. And of course, until we have something to announce, we can't announce anything. So, that's kind of the summary on the strategic review process. In terms of changes to the underlying drivers, I think probably the biggest one is on the negative side, as I mentioned, AOV with the exception of jewelry is -- started to decline beginning in July in each of our verticals. On the positive side, order growth, as I mentioned before, the kind of year-over-year change in order growth has started to increase beginning in July, got better every month culminating in the best month it's had in a while in October. That, of course, was more than offset by declines in AOV. But still that long-term trend is positive. It adds to our buyer roles. It gives us a kind of crack at the LTV from those buyers and indicates the kind of the relevance overall of the platform. And I'd say the other thing is the other data point that I mentioned, which is new buyer conversion rates. The rate of decline of new buyer conversion rates did bottom out. Again, I would be foolish in this environment to make a prediction as to what will happen in the future, but that is what we saw. And then, of course, lastly, new buyer -- I mean, sorry, returning buyer conversion rates and trade buyer conversion rates remain constant and we're actually marginally positive in the quarter.

Great. Thank you.

There are no further questions. Thank you for your participation in today's program. This does conclude the program. You may now disconnect. Everyone, have a great day.