Good morning, ladies and gentlemen. Welcome to 1stdibs.com Inc. Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. Please note, that today's conference is being recorded. I would now hand the conference over to your speaker host today, Melanie Goins, General Counsel at 1stdibs.com. Melanie, you may begin.

Good morning, and welcome to 1stDibs earnings call for the quarter ended September 30, 2023. I'm Melanie Goins, General Counsel. Joining me today our Chief Executive Officer, David Rosenblatt; and Chief Financial Officer, Tom Etergino. David will provide an update of 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 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?

We delivered third quarter GMV and revenue at the midpoint of guidance and adjusted EBITDA margins above the high end. Over the past six quarters, we took decisive action to re-engineer our expense base, including actively managing headcount, increasing our performance marketing efficiency thresholds, divesting design manager, and most recently reducing our real estate footprint in New York City. These measures substantially lowered our cash burn, accelerating our path to profitability. The benefits of our leaner cost structure were on display this quarter. Operating expenses were down 20% gross margins increase from the high sixties to the low seventies adjusted EBITDA, a loss of $1.8 million improved by $3.7 million. Lastly, adjusted EBITDA margins of negative 9%. Our best yet as a public company improved by 15 percentage points despite lower revenue. Re-engineering, our cost structure was an important step towards being able to achieve our financial goals over time our objective is to deliver sustainable revenue growth, expand margins, become profitable, and ultimately grow free cash flow per share. With our cost structure now aligned to the soft demand environment, we expect future margin expansion to be driven primarily by improving top-line performance. We are committed to reaccelerating growth and doing so in a capital efficient manner. Following our restructuring, we are focused on a narrower set of priorities that we believe represent our highest ROI opportunities. This has meant shifting some resources from auction and international projects where returns are farther off to areas like checkout and seller experience where the expected payback is more immediate. Our product roadmap is squarely focused on capital efficient growth. We made progress on key product initiatives during the third quarter, and we saw the benefit of that in terms of a fifth consecutive quarter of improved conversion rates. While those gains…

Thanks, David. Since mid-2022, we've taken decisive action to re-engineering our cost structure, reduce our cash burn, and accelerate our path to profitability, this continued in the third quarter. In late August, we subleased our New York City headquarters starting on October 1st. We expect this to reduce net rent expense by approximately $750,000 per quarter, starting in the fourth quarter of 2023. In the first quarter of 2024, we plan to exit the space entirely and move to a smaller floor plan in New York as we maintain our hybrid work approach. As a result of our cost savings actions, we've expanded gross margins from the high 60% range to the low 70s and reduced total operating expenses from 20% from $25.3 million a year ago to $20.4 million in the third quarter. With the successful sublease, we have completed the major restructuring actions we identified earlier this year. While these have been executed, we will remain vigilant around expense management, for example, renegotiating contracts as they expire tightly managing our performance marketing efficiencies and remaining disciplined on headcount. Given the operating margin leverage in our two-sided marketplace business model, we expect revenue growth to be the primary driver of margin expansion from here. As such, our focus is on shepherding our existing resources to re-accelerate growth. When luxury home good demand rebounds, we expect to be able to layer on meaningful incremental GMV and revenue without proportionally increasing operating expenses. Turning to the third quarter results, we delivered GMV and revenue at the midpoint of guidance and adjusted EBITDA margins above the high-end, GMV was $89 million down 10% due to soft demand for luxury home goods and discretionary items. On a sequential basis, GMV growth rates improved 4 percentage points. During the quarter, we saw a change…

[Operator Instructions]. And our first question coming from the line of Trevor Young with Barclay. Your line is open.

Great. Thanks. First one for David. You mentioned in the release the increasing testing velocity, and I think you made comments to that effect also in your prepared remarks. Can you give us a couple examples of that, both where you're finding some early wins as well as maybe some things that haven't worked as you expected and that's allowed you to kind of refocus efforts and resources elsewhere? That's the first question, and then the second one for I guess either of you, you both mentioned that the cost base is now readjusted lower and margin expansion from here is going to be more top-line driven. Meanwhile, you're pulling back on marketing a bit. Just as we look out to ‘24, like what signals are you on the lookout for that would indicate we're through the choppy macro and demand is starting to come back? Is it an improvement in organic traffic? Is it growth in luxury home transactions? And then should we assume that you layer back in some of that marketing spend against that demand once it seems like it's coming back?

So, in terms of the testing velocity, I mean, and I think the significance of that is that it allows us to put many more features in the market. Not all of them succeed, as you alluded to. Where we have been focused over the last quarter, couple of quarters has been the lower funnel. So, the part of the funnel related to checkout specifically, we have a complex multi-step funnel relative to most other e-commerce companies. So, we think there are significant opportunities at each stage of the funnel. The focus on checkout, I think initially we prioritize because it has the fastest returns. But overall, it's something we've been focused on for over a year. And I think we've been hardened that our year-over-year decline in conversion has moderated each of the last five quarters and last quarter was low single digits. So, approaching flat year over year and it's something we've seen carry over into the fourth quarter. In terms of kind of what we would look for in terms of a market rebound, I think, when you look at our performance overall over the last two years, we've indexed very tightly with the luxury real estate market. That market improved last quarter, we improved with it in terms of the moderating year-over-year GMV decline. As you can see from our guidance, we expect to see that soften in this quarter along with kind of the activity that we've seen quarter to date. Alongside that, of course, we're focused on things that over time we believe will allow us to grow faster than the market specifically conversion. And again, like I said before we’ve seen positive results of that. It's been offset so far by traffic. But overall, the more we can convert the visitors who come to first dibs, the better the experience for them, the better the experience for sellers, and the more, the better the platform we have to be able to re-accelerate paid. But I think, again, the sort of short answer to your question is, we're been pretty tethered to the market change. And while I think we can grow faster than the market, ultimately, I think we're going to need to see that market come back for us to be able to resume our targeted long-run GMV growth rates.

Our next question coming from the line of Ralph Schackart with William Blair. Your line is open.

Hi, good morning. Thanks for taking my question. On the Q4 guide, you talked about the macro as well as pulling back an SEN spend. Just curious, sort of the weighting factors there because obviously typically in Q4 you see a little bit of a bump. But just kind of curious, what was the more kind of pronounced driver of sort of the Q4 guide? Then I have a follow-up.

So, I mean, I think, specifically, as we look at our numbers, independent for a second of the macros. Typically, we see a month over month over month increase in GMV from September to October. We did not see that this October. Going deeper, the pattern that we saw was similar to what many other consumer e-commerce companies have reported, which is a slowdown in the second half of September, which carried through into October. And we saw actually a very kind of specific and pronounced decline right after the October 7th attacks in the Middle East. Since then, the GMV trends have stabilized. But at the same time, they're not sort of capturing or not reflecting our typical fourth quarter seasonality. So, on that basis, we moderated our fourth quarter GMV forecast. And I think, look what's driving it? I mean, again, I don't -- we're in the same market as everyone else. And I would point to similar dynamics like weak demand for consumer discretionary in general, geopolitical instability, as I mentioned. And on top of that, we're very levered to the luxury real estate market. That market was down 25% in the second quarter. It was down 10% ish plus in the third quarter, our year-over-year GMV performance reflected that change. We don't know what that is yet in the fourth quarter, but we're feeling softness in that market as well.

Right. And then, on the call you mentioned shifting resources from auctions of international, which have the longer payback periods to some of the seller and checkout initiatives. Just curious, any metrics behind that or any other color you could share in terms of some of the improvements that you're seeing on that front? Thank you.

You mean in terms of conversion improvements?

That's correct.

Yes. So again, as I mentioned, our year-over-year decline in conversion has moderated each of the last five quarters, meaning, our second derivative, which is something we look at pretty closely, has improved to the extent that last quarter and quarter to date this quarter, we're approaching zero, so very low single digits. So again, we're very hardened by that because that's a kind of intentional, the result of an intentional strategy that's helped by the pullback and paid. But the pullback and paid doesn't explain all of it. We think that, we -- all of these improvements that we make are pretty rigorously tested, and the only ones that we graduate to making available to all users are ones that have a kind of measurable lift. Not all of them do. Some of them don't. Those fail, we don't put them into production. So, I think it's really a combination of those two things. What would it take, I think, your one of the questions I didn't answer was what would it take for us to increase paid again. Again, it is paid for us is all about very disciplined, the very -- the math of a very disciplined customer acquisition program. So, we have a break even. We spend up to that breakeven, as conversion continues to increase, we'll be able to spend more. But at the same time right now, we think it is prudent to pull back on that which we have pretty substantially and reallocate resources into features that benefit the whole user base. And that improve the experience, not just for buyers, but for sellers. The most important of which is conversion, conversion in turn is driven by reducing purchase friction and also another focus of ours which is inducing our sellers to price items as competitively as possible.

[Operator Instructions]. Our next question coming from the line of Nick Jones with JMP Securities.

Hey, this is Luke on for Nick. So, you mentioned that the active buyer growth may be choppy near term. Could you just add any additional color on what needs to happen to re-accelerate the active buyer base heading into next year, particularly if stock demand persists? Thanks.

This is Tom. So, on active buyer growth -- So, from the macro perspective, on active buyers, what we're seeing is that it's definitely pulled back. We are seeing the implications of the macros, the lower luxury housing market, the decline in the housing market, the decline in consumer discretionary spend, is impacting the total buyer growth. So that's where we're seeing the declines. It is mostly driven by those macros. As David said, what we're starting to see on conversion is that it's been improving over the last five quarters from the second derivative, as well the active buyers, it's obviously been lowered because of our lower paid spend that we've been actively managing our paid spend down to reflect what we're seeing in the macros and what we're seeing in lifetime value relative to what we can spend against. So, that has been an ongoing focus of ours is to bring paid spend down to reflect what we're seeing in the broader market.

Thank you. And at this time, I see we have no further questions in the queue. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.