Good morning and thank you for standing by. Welcome to 1stDibs’ Q4 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.

Good morning, and welcome to 1stDibs earnings call for the quarter and year ended December 31, 2023. I'm Kevin LaBuz, Head of Investor Relations and Corporate Development. 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 fourth quarter financial results and first 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, 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. Throughout 2023, we laid the groundwork for future success. While there is no denying that high-end furniture demand has been under pressure for the past two years, we have used this period to reorganize our business. We have undertaken rigorous efforts to optimize our operations, re-engineer our cost structure, and focus our efforts on a narrower set of priorities, laying a strong foundation for future growth and profitability. Encouragingly, we are starting to see tangible results. For example, in the fourth quarter, conversion rates increased for the first time since late 2021. In many respects, 2023 was a continuation of the efforts we started in the second half of 2022 to recalibrate our expenses, reprioritize our roadmap, reduce our cash burn, and accelerate our path to profitability. While category demand remains subdued and GMV growth is far from where we would like it to be, we have made meaningful progress on all of these fronts. First, by reorganizing our operations teams and finding other efficiencies, we expanded gross margins from the high 60s to the low 70s. Notably, this happened on lower revenue. Second, we took decisive action to align our expenses with demand and reorganize our business. For example, we reduced headcount, increased performance marketing efficiency thresholds, and downsized our New York City real estate footprint. As a result of these and other actions, yearend headcount was down over 20%, and fourth quarter operating expenses were down 19%. The benefit of this lower cost structure is showing up in our P&L. Adjusted EBITDA margins in the second half of 2023 were negative 8.4%, compared to negative 21.7% in the second half of 2022. In dollar terms, adjusted EBITDA improved to negative $3.5 million in the second half of…

Thanks, David. Over the past two years, we have taken significant action to streamline our business and reengineer our cost structure. In the fourth quarter, the benefits of this work were on full display, with headcount and operating expenses down materially and adjusted EBITDA margins improving meaningfully. We have made significant strides towards improving our financial health and positioning ourselves for future success. As we have mentioned before, 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, we are focusing our existing resources on reaccelerating growth in a capital efficient manner. Turning to fourth quarter results, we delivered GMV at the midpoint of guidance and revenue in adjusted EBITDA margins at the high end. GMV was $86.4 million, down 17% due to soft demand for luxury home goods and high end discretionary items. During the quarter, traffic was the primary driver of orders softness consistent with the third quarter trends. Both paid and non-paid traffic were down year-over-year. Traffic declines were partially offset by conversion improvements. As David mentioned, conversion rates returned to positive growth for the first time since the third quarter of 2021. This was driven by growth in returning buyer conversion and moderating declines in new buyer conversion. Since mid-2023, we have ramped our AB testing velocity and launched more product enhancements into production. We believe this is helping conversion. Average order values were another headwind to GMV growth. Average order value of approximately $2, 530 was down 7%. In contrast, our median order value of approximately $1, 150 was flat. The latter metric is less sensitive to fluctuations in high value orders. Taking deeper, orders under $1, 000 accounted for 47% of total orders in the quarter, flat…

[Operator Instructions] Our first question comes from Ralph Schackart with William Blair.

Good morning. Thanks for taking the question. I guess just on the new pricing structure, where I think you talked about all new sellers being on a monthly subscription fee, maybe just kind of give us some more perspective what you're hearing from the new sellers coming on and maybe some of the sellers that are opting out of this. Have you seen them return under the new program, be the first question then I have a follow up.

Yes, it's David here. I think the context on this is in early ‘22, we started testing a subscription plan under which sellers had the option of a $0 higher commission rate plan. And what we found is that the zero subscription fee sellers ended up posting a lot less than those that paid a subscription. So on that basis, we discontinued that plan in the fourth quarter. All new sellers, as you pointed out, are signing up under a minimum of a $99 a month plan. However, existing sellers already on the central seller plan, the zero sub fee plan, do have the option at renewal of continuing with that subject to hitting posting minimums. And I think the sort of main learning that we got out of all that is that paying a sub fee increases engagement. And so I think it'll end up being a win-win. We'll get more engagement and sub fees will be healthier.

Great, and then just a follow-up here. You talked about AB testing increasing and accelerating testing velocity overall. And I think you sort of highlighted a number of new features. Maybe sort of, I don't know, highlight the top one or two new features you're seeing success with. And then just to bolt-on, just confirming, I think I heard gross margins for Q1 in 71% to 73% range, just want to confirm those two items. Thank you.

Sure, so on the first question, yes, we are pleased with this new AB testing methodology. We put the number of tests you put into market in the fourth quarter was something like 300% year-over-year. So it allows us to get a lot more stuff into market. Only those features that pass the incrementality tests graduate into general availability. And we do think that those, that coupled with a pullback on the least efficient tiers of paid spend are the two primary drivers of our conversion growth, which is the first time we've seen that in over two years. Tom, do you want to talk about gross margin?

Yes, so you're correct. The guidance for Q1 is 71% to 73%. Again, Q4 was 71%, and yes, we're expecting somewhere in that range that we gave.

Yes, and by the way, just I realized I didn't answer one part of your question. The primary area of focus in Q3, Q4 was in checkout, but we have a multi-step checkout prior order path, and so that's just one of several kind of target-rich areas for conversion growth.

Our next question comes from Mark Mahaney with Evercore ISI.

Hey, this is Luke on for Mark. Looking into 2024, what are some of the signals that would show that demand is starting to come back? And then will you turn back to focusing on things like auctions and international growth when the macro improves? Thanks.

Sure, so look, I mean, we're very encouraged, actually, by what we're seeing in terms of demand. I think most encouraging is that on a dollar basis, at the midpoint of our Q1 GMV guidance, Q1 would be the third quarter in a row of flat, sequential GMV. So obviously, if you extrapolate that out, that has a meaningful impact on changing the historical trajectory of our GMV growth. Quarter-to-date, also in the first quarter, another encouraging data point, order volumes are down low single digits, and that's compared to, of course, the double digit decrease in order volume for both the full year of ‘23 and the last quarter of Q4. So I think, again, on that basis, I don't know if I'm going to sit here and call the bottom, but I mean, it does feel like things are moving in the right direction.

Got it, thank you.

Auction and international, So as part of our RE-ORG and cost reduction effort mid-year or last year, we pulled dedicated resources on auction and international in favor of allocating them on the basis of platform-wide ROI. So things like checkout, which I mentioned that affect all users rather than only those in auction or kind of international order paths. That said, both are doing well. I mean, we remain committed to both. Both are strategically important. Auctions, for example, in the first, or sorry, in the fourth quarter on an order volume basis, which is the metric we optimize to grew 7%, which is about, what 17 percentage points faster than the overall order growth in the marketplace. International grew in the four localized markets that we prioritize grew both order volume in traffic and GMV by double digits. So while we don't have dedicated resources on those two initiatives, they are priorities. They do benefit from all the other stuff that we do. And we are seeing positive traction.

Our next question comes from Nick Jones with Citizens JMP.

Hey, good morning, guys. This is Tim on for Nick. Just two quick ones, if we could here. Just wondering if you could talk a little bit in terms of, like, a high level of what you're seeing, kind of, in terms of, I know you mentioned demand has been improving a little bit. You just talk about, kind of, on a regional basis, hearing from a lot of companies out there that things over in Europe are not quite as strong as here in the U.S., I'm just wondering if you could, kind of, break that, kind of, out for us in terms of just high level, just, kind of, regional stuff, and then just want to follow up, if we could.

Yes. I mean, we haven't seen significant difference between the regions, but it's also the case that we're so focused on conversion that, and we have a low enough base, that it may be that the improvements we're making to the product, we're sort of washing out regional [inaudible]. I really don't know, but, I mean, I think the kind of summary there is we don't see any clear, discernible difference, either on the buyer or the seller side among the regions.

I appreciate that. And then just double-clicking on conversion real quick, great news to see that conversion is improving here, turning back to positive, can you talk a little bit about the traffic mix in terms of how you guys have been trending for direct traffic versus, like, indirect and paid traffic? Thanks.

Yes. So, we think about it mostly in terms of paid versus organic. Organic traffic is declining, and it's been under pressure. We feel like we're indexing pretty well to all the home kind of traffic data points that we have, so we don't feel like it's a market share issue. We feel like it's more of a kind of macro issue. In terms of organic versus paid, we're actually quite happy with some of the advancements we've made in terms of both our methodology and kind of spend targeting and so on, and we've been able to increase spend versus while still maintaining kind of remaining faithful to our ROI cost per new thresholds.

Thank you. This concludes the conference call. Thank you for your participation. You may now disconnect.