Good day, and thank you for standing by. Welcome to the 1stdibs.com Second 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 June 30, 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 second quarter financial results and third 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 second quarter GMV and revenue at the midpoint of guidance and EBITDA margins above the high end. Excluding onetime restructuring costs, operating expenses were down 14%, reflecting our commitment to align expenses to demand. In addition, at the end of the quarter, we made the difficult decision to reduce head count by approximately 20%. Importantly, second quarter results do not include any material benefit from the June restructuring. These will be realized starting in the third quarter. Over the past year, we've taken multiple steps to reengineer our cost structure, including actively managing head count, reducing non-head-count-related operating expenses and divesting Design Manager. Over this period, we have reduced expenses by more than $25 million on an annualized basis. We are also committed to reaccelerating growth. While it is encouraging that year-over-year GMV declines moderated sequentially and that we expect further improvement in the third quarter, growth rates are below where we would like them to be. We are working hard to change this, but expect that significant improvements will take time to materialize. There is no question that we face headwinds, most importantly, a continued decline in demand in the luxury housing market. For example, luxury housing sales were down 24% year-over-year in the second quarter according to data from Redfin. Despite this softness, many other indicators of marketplace health remains strong. Organic traffic mix increased, supply growth remained brisk, seller churn remained low. We expanded into 2 new international markets, and we revamped our A/B testing framework, allowing for faster product velocity, all seeds for future success. In contrast to GMV growth, expense management is completely under our control, and we've taken decisive action here. At the end of the second quarter, we made the…

Thanks, David. Before discussing second quarter results and third quarter guidance, I'd like to touch on our recent cost savings initiatives. On June 28, we made the difficult decision to reduce our head count by approximately 20%. We also took a number of steps to reduce non-head count expenses. In total, these actions are expected to save approximately $12.5 million on an annualized basis. Approximately 2/3 of these savings are head count related, while the remaining 1/3 are non-head count related, including aggressively renegotiating vendor contracts and reducing certain marketing activities. We expect the majority of these head-count-related savings in technology development and sales and marketing, while non-head-count-related savings will be centered on general and administrative and sales and marketing. These are the latest in a series of measures we have taken to manage expenses and drive efficiency. Over the past year, we significantly reduced employee head count, our largest single expense. At the end of July, head count was 37% lower compared to the second quarter of 2022. This has been driven by head count reductions in June 2023 and in September 2022, coupled with limiting backfills for attrition, restricting hiring for 2 critical roles and drastically reducing the number of open positions. We pulled back on performance marketing and increased our efficiency thresholds to better align expenses with demand, yielding annualized savings of over $4.5 million. We streamlined our business and strengthened our balance sheet by selling Design Manager for $14.8 million in June 2022, recognizing a $9.7 million gain on sale and we discontinued supporting our NFT business. These actions substantially reduced our cash burn and accelerated our path to profitability. We have a number of other cost savings work streams open, most notably work to sublease our New York City office and will remain vigilantly around…

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

I want to ask 2 questions, 1 on jewelry and 1 on performance marketing spend. On jewelry, could you just remind us how big of a category that is for you as a whole? And within jewelry, it sounds like that's the segment that's sort of holding up best and for logical reasons related to luxury home sales, et cetera, kind of dampening the other segments? Are there particular parts within jewelry that you're seeing more consistent robust growth? And then switching over to performance marketing. David, what's the -- as you've kind of leaned into it, leaned in and out over the last 1.5 years, do you have any big learnings and that kind of set you up for when growth recovers, when luxury home sales start to recover in those categories will be recovered? How you would want to utilize performance marketing? I guess I'm just asking broadly about lessons learned about the performance marketing experiment.

Mark, so you're correct, the jewelry is our best-performing vertical. It's now roughly 23% of total GMV and obviously has increased its share over the last few years and did again this quarter. Within jewelry, we sell both contemporary and also a state or secondary market jewelry. I'd say probably the biggest driver of jewelry performance has been strength in high average order value orders. But it's been very resilient, actually, over the last 4 years and even in the beginning of COVID, when everything else was not growing, it grew. So it's a large category. And there are a lot of things we like about it. It's fragmented on the supply and the demand side. There's no natural incumbent marketplace shipping costs and sort of all the friction associated with shipping and returns is much lower, obviously, than it is with furniture and it works well with our brands. In terms of performance marketing, I mean, I would say generally, we've just gotten a lot tighter in terms of reducing our payback thresholds. What have we learned? I think -- I don't know. I'm not sure that there's any sort of single insight other than the fact than in sort of recognition of the environment, both in terms of the importance of getting to breakeven and also in terms of really understanding our LTVs of acquired customers, we're just getting a lot tighter. And I think when the market resumes its growth, we will be able to apply that discipline as we test new channels and start ramping spend up again.

The next question comes from Ralph Schackart with William Blair.

David, on the call today, and I think in the release you talked about laying the groundwork for reaccelerating growth. Obviously, the macro is out of your control. But maybe if you could sort of highlight or spotlight the top factors that you're really focused on that are within your control to position you for the reaccelerating growth when indeed the macro returns to a more favorable situation?

Yes, I mean, look, the #1 thing that we've been focused on and we continue to stay focused on is conversion. If you look at the quarter, traffic was fairly resilient, especially on organic traffic, which continued to grow at a healthy rate. Average order values declined. But at the same time, in the long run, I think the single biggest driver and where we get the most leverage in terms of performance, both top and bottom line, is from conversion and specifically new buyer conversion. So everything we're doing from strategic initiatives like auctions in international and figuring out new ways to grow supply, all the way to the most micro kind of A/B test-driven product feature enhancements is geared towards conversion. What is encouraging to us is that we saw year-over-year declines in conversion moderate in the second quarter, which was the fourth quarter in a row that we saw that. And we do think that, that is attributable to many of the experiments that we've been running over that period of time. And we're continuing to get tighter and tighter on that. And the head count reduction that we did, I don't think materially impacts our ability to continue with that kind of test-and-learn approach. In fact, if anything, it's made us to be more disciplined in terms of prioritizing the projects that are likely to have the biggest impact.

The next question comes from Nick Jones with JMP Securities.

This is Luke on for Nick today. So average order value has improved sequentially for 2 consecutive quarters. Is this a trend we can expect to continue on the back half of this year? And then maybe more broadly speaking, how should we think about AOV levels heading into next year?

So AOV was down 6% sequentially -- sorry, year-over-year in Q2, which, as you know, did improve sequentially. But again, I just want to be clear. It did decline on a year-over-year basis. We think that, that is a reflection of the macros because we've seen that at every price tier. It's been compounded or depending on how you think about it or sort of added to by the growth in auctions. Auctions has a lower AOV than the rest of the marketplace and is now 6% or was 6% in Q2 of our total order volume, up from 4% a year ago. But that said, we -- while, of course, we always welcome high AOV orders, it's not -- and a lower AOV is not -- we don't view necessarily as a negative primarily because conversion rate in AOVs are inversely correlated. And the lower the AOV, the bigger the TAM as well. And so there are offsetting benefits to a lower AOV. And at the end of the day, the way our marketplace works, we've added the seller level. Sellers have the ability to list whatever they like. And our goal is to help sellers list those items at prices that are as fair as possible and help buyers interpret that pricing to more easily discover compelling value. So there's nothing in that, that says we're optimizing for a high AOV. What we're optimizing for is conversion and order volume growth. And then we sort of trust that because of the strength of our brand and the market that we're in and the types of sellers and buyers we have, that will result as it has in a substantial volume of high AOV orders. But we're not in the business of trying to drive up AOV.

The next question comes from Trevor Young with Barclays.

Just in light of the most recent round of cost savings and pulling forward the path to profitability, I appreciate you're not giving '24 guide yet, but maybe help frame a scenario in which '24 is a year in which you turned EBITDA positive. Is it a macro recovery? What needs to go right to have '24 to be profitable?

Tom, why don't you take that?

Yes. Great. Thanks for the question. You're right, we don't really give guidance past one quarter. But what I can say is that over the past year, like you've mentioned, we've taken a number of steps to reengineer our cost structure, including actively managing our head count. We've reduced our non-head-count-related operating expenses. In fact, we divested ourselves in Q2 of last year of Design Manager. And reducing -- we reduced our expenses by more than $25 million on an annualized basis over the last 12 months. And what that has effectively done is lowered our GMV breakeven by approximately $200 million. So the actions that we've taken have substantially reduced our cash burn and have accelerated our path to profitability. We're not going to give like an exact number or time frame. But the actions we have taken have significantly reduced the amount of GMV we need to get to that breakeven.

[Operator Instructions] The next question comes from Steven McDermott with Bank of America.

This is Steven McDermott on for Curtis Nagle. To clarify, I believe you said that annualized savings are around $12.5 million from June. So do you mind just breaking that down line by line? And does the 3Q guidance kind of fully reflect that annualized cost cut?

Sure. So this is Tom. The -- yes, the OpEx trends, we had cost savings. Most of the cost savings are in tech dev. The 12.5% that we're going to see over time are in tech dev and in sales and marketing. But a significant amount as well in G&A from non-head-count-related expenses with a smaller amount being in cost of revenue. The actual numbers that we'll see, I would just say that the lion's share of those cost savings are, again -- really in tech dev are going to be the largest and then over time, sales and marketing and G&A. I don't think we give a breakdown, but...

I show no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.