Good day, and thank you for standing by. Welcome to the 1stdibs.Com, Inc. First Quarter 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. Please go ahead.

Good morning, and welcome to 1stDibs earnings call for the quarter ended March 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 first quarter financial results and second quarter outlook. This call will be available via webcast on our Investor Relations website at investors.1stdibs.com. Before we begin, please keep in mind that our remarks include forward-looking statements, including, but not limited to, statements regarding guidance and future financial performance, market demand, growth prospects, business plans, strategic initiatives, evaluation of alternatives, business and economic trends, including e-commerce growth rates and our potential responses to them, international opportunities and competitive position. Our actual results may differ materially from those expressed or implied in these forward-looking statements as a result of risks and uncertainties, including those described in our SEC filings. Any forward-looking statements that we make on this call are based on our beliefs and assumptions as of today, and we disclaim any obligation to update them, except to the extent required by law. Additionally, during the call, we'll present GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release, which you can find on our Investor Relations website, along with the replay of this call. Lastly, please note that all growth comparisons are on a year-over-year basis, unless otherwise noted. I'll now turn the call over to our CEO, David Rosenblatt. David?

Thanks, Kevin. Good morning, and thank you for joining us today. We delivered first quarter GMV and revenue at the midpoint of guidance and EBITDA margins at the high end of guidance, while continuing to make progress against our long-term objectives. Headwinds in the luxury home goods market, exacerbated by comping against a record GMV quarter, resulted in a disappointing first quarter growth rate. We are working to reaccelerate growth, but we believe it will likely take some time before we see significant improvements. Despite these headwinds, supply growth and traffic growth continued, and we have made progress on our strategic initiatives. Over the past few quarters, we've taken actions to reduce our expenses and improve our efficiency. Our work here isn't finished. Because our growth outlook today is below what we anticipated at the start of the year, we are evaluating additional steps to align our expenses with current demand. We're managing through this challenging period to emerge with more growth vectors, an improved cost structure and a stronger competitive position. Digging into the quarter, continued conversion headwinds and lower AOV drove GMV declines. Although luxury home goods demand was subdued, marketplace supply remains robust, with record seller acquisition, double digit listings growth and near record low churn. Our annual seller survey indicates that 1stdibs is the top sales channel for our sellers after their showrooms. Additionally, we're seeing a larger GMV contribution from our influx of essential sellers in 2022, modestly boosting take rates. We're also pleased with continued traffic growth. Our organic traffic mix increased to nearly 75% of total, up several percentage points, due to continued SEO strength and pulling back on performance marketing. This is encouraging because more supply and more organic traffic are barometers of marketplace health. We are also pleased to see jewelry…

Thanks, David. We delivered first quarter GMV and revenue at the midpoint of guidance and adjusted EBITDA margins at the high end of guidance. GMV was $97.1 million, down 17%, due to the soft demand for luxury home goods. As a reminder, we're lapping record high GMV from a year ago. Conversion remained a headwind, particularly for new buyers, more than offsetting continued traffic growth. In addition, the mix shift to orders under $1,000 that we saw in the fourth quarter continued. These orders accounted for 46% of total orders in the first quarter, up from 42% a year ago. This trend is partially explained by auctions, which has a lower AOV, but it holds true even when excluding auctions. We believe this reflects a more cautious consumer amid macroeconomic uncertainty and some trading down. Consumer and trade GMV declined at similar rates, a departure from the past 7 quarters where trade outperformed. As the luxury housing market has remained volatile, we've observed that trade projects are taking longer to complete and that end buyers are becoming more price sensitive. We've also seen instances of clients opting to spread out spending by planning for multiple smaller installations as opposed to one larger project. Once again, jewelry showed the best relative performance. Jewelry orders grew 12% year-over-year. In contrast, demand for at-home categories like art, vintage and antique furniture and new and custom furniture, which account for the bulk of our GMV, remain soft. We ended the quarter with approximately 66,400 active buyers, down 7%. We expect this metric will remain choppy near term as we manage through a period of soft luxury home good demand. On the supply side of the marketplace, we closed the core with over 8,100 seller accounts, up nearly 50%. Additionally, there are now over 1.6…

[Operator Instructions] Our first question comes from Mark Mahaney with Evercore ISI.

Two questions. If I just look at the numbers that you're guiding to for the June quarter, maybe at the optimistic end of the range, it implies that the year-over-year trends are the same or maybe even a little bit better. Is there anything that you've seen quarter-to-date that suggests that sort of stabilization or an improvement in end market demand?

Mark, it's David. I mean, listen, I think overall, we're continuing to see both quarter-to-date and also in the first quarter, essentially a continuation of the same kind of underlying drivers that we have seen before, positive and negative. So on the positive side, traffic's strong. Supply, our supply position is great. Retention is as good as it's ever been. Sub fees actually for the first quarter -- in the first quarter were flat sequentially for the first time in 3 quarters. And our strategic initiatives continue to make progress, both auctions and international. And on the downside, we saw a further deceleration of AOV. That hasn't changed. And then similarly, the conversion rate, while improving the -- while sort of improving in the sense that it's not declining as fast and that rate of deceleration has improved, it is still meaningfully negative and the biggest drag on performance. So overall, I'd say not a fundamental change in any direction.

And then the second question is, can you tell to what extent is this -- what you're looking at, these demand trends, these are probably very representative of what's happening in the market. Is there any particular reason to think that your -- versus the category, that you're underperforming or outperforming?

No, not at all. I mean, that is actually how -- based on the data that we've seen, that's our assessment as well, both in terms of our comps and also just commonsensically. So much of our business, not all of it, but so much of it is driven by luxury real estate, and that's obviously under pressure. The meaningful component of our business that's not really driven by luxury real estate, jewelry is performing pretty well. I mean, orders were up in the first quarter by double digits. But again, that's only the minority of our business today. The majority is still driven by the macros. And those macros are producing an impact for us that we think is consistent with the market as a whole.

Our next question comes from Trevor Young with Barclays.

First one, just results on the quarter. The prior few quarters, you'd come in at or above the high end of GMV guide, but this quarter coming in right down the fairway, even given the guide was given more or less 2/3 of the way through the quarter. Can you just talk a little bit about the cadence throughout the quarter month-on-month? And did things kind of deteriorate in March around some of the banking turmoil, and has that persisted into April? And then second one for Tom, just on the gross margin. I appreciate the commentary around that amortization charge. Just to clarify, that's a one-time charge. And then is that 69% or 70% range a reasonable bogey going forward?

Yes. This is David. I mean, we didn't see -- relative to the overall performance for the quarter, I mean, there's always variability month-to-month. We didn't see anything that was, I'd say, material within the quarter. In terms of the impact of the banking situation, I mean, look, it's not -- it wasn't positive. It's very hard to quantify the exact impact. And I guess I would just leave it at that. I don't know that we can kind of fairly attribute any change in performance to that specifically. Tom?

On the gross margin side, yes, so you're correct. The discontinue of the NFT platform and the -- where we recognized about $0.5 million in accelerated internal use software did have a 2% impact on gross margins for the quarter. And yes, I think you can expect that we'll be brought back to more normalized historic trends in gross margins going forward. It is a one-time item.

Great. And just one quick follow-up. On the strategic alternative costs realized in the quarter, should we interpret that to mean that the strategic review with Allen Co is largely completed at this point?

We really can't. I can't offer any commentary on that. I mean, it's active and underway. But -- and beyond saying that we're committed to evaluating every possible alternative both in terms of buy-side M&A, sell-side M&A and working on our balance sheet to improve the shareholder value of the company, there isn't much I can say.

We have a question from Nick Jones with JMP Securities.

Two, if I can. The first one on AOV. I think I might have this right. It did kind of accelerate the declines year-over-year, but sequentially, it actually increased. Does that indicate maybe these are the right levels for AOV from here as we think about the rest of the year and 2Q?

Yes. I mean, so AOV in the first quarter was down 8% year-over-year, which was an acceleration versus Q4 of -- Q4 was down 6%. What we're seeing is a decline in AOV across all price tiers, which does suggest that it's primarily a macro phenomenon. In addition to that, the growing share of auctions, auctions is about 6% of orders in Q1 and grew on an order basis sequentially roughly a little bit more than 10%. That does contribute to it. Auctions are a value -- is a value format and has a lower AOV than the rest of the marketplace. But I think primarily, as I said, it is a market phenomenon.

Great. And then I guess, as you continue to add supply and listings but demand remains strained, is there any evidence that you're potentially diluting some of the stronger performing sellers as you essentially add more supply to the platform, given what demand there is more options?

No, we haven't seen that. Actually, retention is as high as it's ever been in the history of the company, and that's ultimately the most important metric for the satisfaction of sellers. We -- so no, we haven't seen that. I think at the end of the day, what drives conversion more than anything else is the perception of value, fair value. And that's why it's important for us to continue to make progress not just on our new auction platform, but also, we've got a whole range of efforts around helping sellers price competitively relative to market clearing prices on one hand and also arming sellers with better historical transactional data with which to negotiate. And what we see is that when that results in market-based pricing, the conversion rate is very strong. So for example, we added a collection, which we call design values, which specifically highlights well-priced listings based on historical transactions for comparable items. That collection generated over $3 million in GMV in March despite the fact that the items represented only 2% of our total supply. So that's where a lot of our energy is increasingly is around the communication of value as it relates to pricing.

We have a question from Ralph Schackart from William Blair.

You talked about pricing being the biggest lever, particularly with a tough macro, and providing more transparency and then providing more to the buyers on that side as well as sellers better pricing tools. And then maybe you'd mentioned boosting value listings. Maybe sort of talk about is this a newer initiative, continuation of something you'd been working on? And then just any more color you could share, that would be great. And then I have a follow-up.

Yes. So pricing is something -- just to sort of start with first principles. Based on consumer research, extensive consumer research that we've done, and not surprisingly, price, both the belief that an item is too expensive, and also importantly, an inability to evaluate the list price, given that these are one-of-a-kind items is the biggest obstacle to conversion, especially among new buyers who aren't as familiar with the ability that we offer to negotiate. So pricing has been a focus for, I don't know, 1.5 years or so. I think kind of our first initial offering to address that was auctions, and auctions I think remains an important part of the story going forward. What's changing now is that we're beginning to leverage the historical transactional data that uniquely we have in this market to help to both help buyers negotiate better pricing by showing them historical item pricing or transactional pricing for comparable items on one hand and using that same data to help sellers price more effectively. These are both things that we had never done before, and they're new as of -- we began this -- we began to commercialize it probably about 2 quarters ago. And again, as I mentioned in the example of the design values collection, where we're able to scale that, it has a meaningful and quick impact on GMV. I think that's true in all markets, but of course, as you point out, it's especially true in a weak macro environment like the one we're in.

Great. And then just, you had mentioned trade projects taking a little bit longer to complete and some clients spreading that out. Is that something new in the quarter, or is this something that's continued or acceleration of that trend? Anything you could add there on trade would be great.

Yes. I mean, certainly in a GMV sense, it's new. So over the last 2 years, as you know, trade has outperformed consumer. That changed in the first quarter where both trade and consumer had similar growth rates, and we expect that consumer will grow faster than trade over the coming quarters. And I think that's, again, for a very straightforward reason. Trade is a proxy on the state of the luxury real estate residential market, and that state is not great right now. So that's reflected in trade purchasing.

Our next question comes from Curtis Nagle with Bank of America.

Just I guess a quick update on -- give me attributable to auctions and international? I know you had mentioned that orders, I think you said about 6%. But in terms of how those 2 new categories translate to GMV, where is that now? Where should we expect that to be by the end of the year? Feels like it's around low-single digits combined, but any color on that would be very helpful.

Yes, so we don't break out the percentage of GMV that's attributable to both of those initiatives. What I can say is we're happy with where both of them are not satisfied, but happy. So on auctions, like I said, the primary driver on auctions is conversion, specifically new buyer conversion. And there, we're seeing a positive impact. And as I mentioned, order growth sequentially was up over 11%. GMV from auctions was down sequentially because that order growth was offset by AOV declines. Again, those AOV declines, given the fact that auctions is, by definition, a value product, is something that we anticipated that weakness in AOV. Of course, over time, we're investing this to grow GMV, and we expect that order volume will offset those AOV declines. International, similarly, we're pretty happy with where the progress to date. So as you may remember, we launched our first 2 non-English language markets in France and Germany in the summer last year. In Q1, we had organic traffic growth of over 200% year-over-year, and like I mentioned, double digit order growth. Based on the successful experience there, we're going to launch our next 2 largest international markets, which are Italy and Spain. We anticipate doing that before the end of the third quarter. And we're hopeful that we'll see similar results there as well. We have yet to put paid behind these markets in a major way, but again, we're very happy with the organic progress that we've seen to date.

Okay. Great. And then just a quick modeling question. Just how to think about GMV dollars for 2Q and the rest of the year. And presumably, the guidance for EBITDA does not include any additional cuts. Is that correct?

This is Tom. So on the GMV side, we gave the guidance for Q1. We don't really guide to full year. On the expense side of things, the EBITDA does not anticipate any major cost actions in Q2. Again, we did talk about adjusting our expense structure to reflect our current demand, and we are looking at all items on the expense side to adjust for that across the board. But right now, our guidance does not anticipate large changes to our expense structure in Q2.

And I'm showing no further questions. This concludes today's conference call. Thank you for participating. You may now disconnect.