1stdibs.Com, Inc.
Q1 2022 Earnings Call Transcript

Published: 11 May 2022

[Kevin LaBuz:]

Good evening, and welcome to 1stDibs earnings call for the quarter ended March 31, 2020. 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 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 and business plans. Our actual results may differ materially. Forward-looking statements involve risks and uncertainties, which are 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. 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 Rosenblatt:]

Thanks, Kevin. Good evening, and thank you for joining us today. In the first quarter, we delivered results near the high end of guidance, while laying the foundation for future growth. Once again, our trade business posted strong results and continues to have great momentum. In contrast, consumer GMV declined modestly year-over-year due to lower new buyer conversion, a trend that's continued into the second quarter. In 2020 and 2021, pandemic-related lockdowns and other restrictions shifted consumer spending online. As the world reopens, the pendulum is swinging back in the other direction, with consumers spending more in categories like travel and restaurants. Traffic and top-of-funnel engagement metrics remain strong, but new buyer conversion headwinds resulting from rising macro uncertainty and economic reopening have reduced our GMV growth outlook for the second quarter relative to our previous expectations. While our near-term consumer demand outlook is lower, we remain optimistic about the future. From 1999 through 2019, U.S. e-commerce penetration rates consistently increased. During COVID, they inflected upward, and we're now seeing this trend unwind. We believe this is a temporary dynamic. When we think about the next decade, e-commerce will be a much larger market than it is today. Said another way, when the environment normalizes, we expect that e-commerce will resume its historical growth trend. We aim to capitalize on that growth. Encouragingly, top-of-funnel activity as measured by consumer traffic, registration volume and item favoriting is strong. However, consumers are not converting their interest into orders at historical levels, likely due to temporary external factors. Given our strong balance sheet and large opportunity, we have chosen to continue to thoughtfully invest for future growth. Despite current consumer headwinds, our high gross margin, asset-light business model and strong balance sheet provide us the flexibility to continue to execute on our strategic road map. Our plan for 2022 and beyond is to enhance our marketplace growth rate by focusing on 4 strategic areas

[Tom Etergino:]

Thanks, David. I'm delighted to have joined 1stDibs a few weeks ago, and I'm looking forward to helping drive growth for years to come. In addition to being a 1stDibs customer, I'm a long-time admirer of the brand, the business model and the company's unique position in luxury e-commerce. Turning to the first quarter. We delivered results at the high end of our guidance range, which I'll review along with providing an outlook for the second quarter. First quarter GMV was $117 million, up 3%. As a reminder, we lapped historically strong GMV growth of 64% from the first quarter of 2021. Similar to the last few quarters, trade GMV growth outpaced consumer GMV growth, with trade GMV hitting a quarterly record. Once again, we grew both the number of spending trade firms and the average spending per firm. Many of the firms we work with have full pipelines, and the trade business continues to have great momentum. While trade GMV growth remained robust, consumer GMV modestly declined due to traffic mix shipped from returning buyers to new buyers and softness in new buyer conversion. Additionally, as the world reopens, we believe there is pent-up demand for spending on experiences and travel. As a reminder, when we reference trade GMV or consumer GMV, we are speaking of the subsets of on-platform GMV attributable to each of these buyer groups. Fashion and new and custom furniture were our fastest-growing verticals, consistent with the fourth quarter. Vintage and antique furniture accounted for less than 50% of GMV, and the majority of our first-time orders continue to come from our new categories like art, jewelry and new and custom furniture. Continuing a trend from 2021, average order value was over $2,900, up 11% on broad-based strength across categories. This illustrates the trust we built over the past 2 decades. There's no other digital marketplace operating at our scale, transacting at our price points across multiple verticals. Average order value growth was offset by order softness due to 2 traffic mix shifts

[Operator:]

Our first question comes from the line of Ralph Schackart with William Blair.

[Ralph Schackart:]

David, you called out a lot of macro headwinds that are fairly well known in the marketplace today. But just curious, it sounds like your upper funnel traffic still remain the same, which is great. You're having more sort of new buyers come to the platform. However, conversion is going to be a work in progress. Just curious, how quickly do you think the platform can mobilize to drive stronger conversion with the new buyers despite sort of the -- or I guess, given the macro headwinds?

[David Rosenblatt:]

Sure. Ralph, thank you for the question. So you're absolutely right. Top of the funnel remains as healthy as it's ever been, in terms of traffic growth, what we call dealer contacts, meaning the number of buyers who reach out to sellers with product inquiries and so on. In other words, people are walking into the store. They're just not checking out. So we have a bunch of projects and initiatives pointed at that. Some are more tactical and near term. Others are longer term. The near-term ones include things like, for example, we're putting a lot of energy into optimizing the mobile flow, because a lot of the traffic growth has been driven by mobile. And mobile web, as you know, has lower checkout or lower conversion rates typically than desktop and app. So we're putting some energy into that. Shipping as well. We're increasing our pre-quote coverage for parcel items, which carry lower shipping prices in general. And then in terms of the longer-term bucket, all of our core strategic initiatives are focused, in one way or another, on improving conversion, right? So international is a good example. Non-U.S. visitors check out at a -- or convert rather at half the rate of U.S. buyers. We just launched France yesterday or today, rather. We launched Germany 2 weeks ago. By increasing the number of items on the site, we reduce the number of pages that buyers land on with very few products on them, which is a fairly widespread given that we're a long tail marketplace. And so -- and auctions are pointed at exactly the same thing. So all the data that we're seeing in terms of these projects are encouraging. But again, to the extent to which they win against the macros, people above my pay grade are probably the better people to ask in terms of when those macros change.

[Ralph Schackart:]

Great. Maybe just a follow-up. I think you talked about it in the prepared remarks, I apologize. But just remind me if you talked about it already, what happened with shipping costs, I guess, with respect to last quarter? And how has that trended sort of quarter-to-date?

[Tom Etergino:]

Sure. Thanks for the question. There's 2 different shipping issues that -- last quarter, the shipping issues that we were talking about there were on pre-quote losses that we had. We effectively and quickly addressed those in Q1, and that's why you're seeing that our margins were at 71%. So they reverted back to historical levels. In this quarter, what we're seeing is an increase -- a little bit of an increase in the loss provision as a percentage of GMV. And we've seen a little bit of a trend on that over the past few quarters. increasing to a high -- to the higher end of what we've seen as a percentage of revenue in the past. And it's primarily driven by items that are being lost or damaged in shipping. And based on kind of the state of logistics services today, we're seeing some degradation in the service levels as many of the carriers are operating at or above their capacity. So we're doing 3 things to really mitigate the losses

[Operator:]

And our next question comes from the line of Justin Post with Bank of America Merrill Lynch.

[Justin Post:]

One just quick numbers question. Can you give us any help on the mix of revenues between -- sorry, between transaction and non-transaction? And as you change the fee structure and have less people on subscriptions, what does that mean for overall take rates? And then I have a couple of follow-ups.

[Tom Etergino:]

So yes, this is Tom. The rough breakout of transactional is about 70-30. Can you repeat the second part of that question?

[Justin Post:]

On the call, you mentioned more sellers are kind of joining the platform subscription-free, I think you said 85%. So just wondering, as more people adopt kind of that format of pricing, what does that mean for overall take rates as you think out the next couple of years?

[David Rosenblatt:]

Yes, I can answer that, Justin. So the new seller pricing plan so far has -- we've been quite happy with. Actually, we've tripled the growth rate or the number of sellers, rather, that we've added in the first quarter versus Q1 a year ago. The program is designed to be take rate neutral. So that's how we think about it.

[Justin Post:]

Great. And then I guess the last one is on auctions. Obviously, you've got some new data here. You mentioned it's kind of higher conversion. Is it at all material to GMV or something that could be helpful as you get out to Q4? And how do you think about that now that you have a quarter into it about converting, I think you said last quarter, $14 billion of inventory. But is it something that could make a difference by Q4 or next year?

[David Rosenblatt:]

Yes. So we're quite happy with the progress so far. Our focus, given that it just launched basically mid-Q4, has been on the operational or behavioral drivers that ultimately convert into GMV. So specifically, our focus in the first quarter was on helping educate sellers to price in a way that is most effective for the auction format, and we went from 1% of items meeting our pricing criteria to roughly 20%. The impact of that operationally was we basically doubled orders in Q1 versus Q4, albeit at a lower AOV than in Q4, but that's okay because, again, what we're optimizing for is effective pricing for this format. In terms of making headway on the kind of the opportunity that this product is pointed at, which as you point out, was primarily conversion, specifically new buyer conversion, we did see, as I mentioned in the script, that conversion rates for new buyers for auction items were about 3x that of conversion from non-auction items. If you look at that conversely on a supply basis, sell-through for items in auction was about 2x sell-through for items in the marketplace. So we are making progress against our strategic objectives, specifically in terms of being able to better monetize the large amount of unsold inventory in the marketplace. We continue to make progress each quarter. I don't want to put a kind of specific quarter on when it turns into any specific GMV number, but again, we're very happy with the inputs there, and we're confident that it will translate into GMV growth.

[Justin Post:]

Last question, on the 2Q guidance, if you take the midpoint, it's down $9 million or $10 million for GMV quarter-over-quarter. Going back to '19, it was flattish. Clearly, last year, it was down as well on weird pandemic stuff. But any reason why quarter-over-quarter, it's down. Is that normal seasonality? Or is it some of the macro factors have really intensified here in April?

[David Rosenblatt:]

Yes. So there are a lot of growth areas in the business. And I think it's worth calling that out. I mean trade, for example, had a very strong quarter. And again, all the kind of inputs to that business continue to remain very healthy. Top of funnel, as we mentioned before, is also very healthy. Returning buyer conversion grew year-over-year. The primary driver of the GMV softness in Q2 is on conversion and specifically new buyer conversion. So what's happening is we're getting a lot of growth from SEO traffic, in particular, and that has among the lowest conversion rates of all of our traffic channels. And in particular, those growth rates -- rather the change in conversion from that channel declined. And we feel like we have a pretty good handle on why. Certainly, part of that has to do with macros. Part of it also has to do with things that are specific to that channel, and we're working on addressing those.

[Operator:]

And our next question comes from the line of Ross Sandler with Barclays.

[Ross Sandler:]

I just wanted to follow up on that trade comment. So the fact that, that's holding up pretty well is interesting. Is there like a reason, like a noticeable difference in like the end customer, either being like more premium? Or do these designers just have a larger backlog that maybe they're working through currently that the consumer part of your business is more a reflection of like people feeling the pinch in real time? Just curious, like, is that -- is it a little more insulated to recessionary impact on the trade side. And if you're adding more trade buyers, can you potentially grow through it, I guess, is the question. So that would be number one. And then on the freight increases, like you guys did a good job of improving the pre-quote margin, so nice job there in the first quarter. But are higher shipping costs in general just deterring people from buying? Any color on that versus, I guess, the less bulky items that wouldn't be subject to huge shipping costs. And then last one is 1/3 of traffic from international, is that a good proxy for kind of the North Star? I think international GMV is at like 7% or something like that? Is that how we should think about that? And any early read on the Germany? I know it's only been a couple of weeks, but any additional reads there?

[David Rosenblatt:]

Ross, so just taking those in order. First trade. So we are seeing strength in trade, both in terms of kind of actual spend, also in terms of our sales pipeline and what our designers are reporting to us in terms of their own pipelines. Why is that happening? Is it a different market than the rest of our business? I mean I think it's more of a direct proxy, of course, on the luxury real estate market, which remains very strong. And yes, our buyers do tend to rely on designers. So as long as that market remains healthy and the volume of new sales maintains, then I think that business will remain healthy for us. I'd say another point there is that we've now been in the business for, I don't know, 4-ish years or so. And I think just the more that interior designers use 1stDibs to source, the more it becomes embedded in their muscle memory, the further up the learning curve they become. Designers tend to shift firms. They typically bring their kind of approach to purchasing from firm to firm. So I think there is something of a network effect there as well that we're benefiting from. But obviously, it's very hard to quantify that. In terms of shipping, look, I mean, we -- the market is dynamic enough that I don't know that we have a kind of specific ability to quantify it. However, intuitively, of course, as shipping prices increase, it has to have a negative effect on conversion, particularly for the roughly kind of 20%, 25% of our order volume that is freight rather than parcel. And then third, in terms of the North Star in international, as we said it a couple of times, I mean, conversion rates for non-U.S. buyers are roughly half that of U.S. buyers. I don't know that, that closes 100%, but in terms of the goal, that is the goal. I would say, though, a couple of other things to caveat that, right? One is it takes a while to get there. We just, for example, we launched Germany 2 weeks ago. We just submitted our German site map to Google for SEO indexing. We launched France today. We, of course, haven't done that yet. Once we get some traction on SEO, then we'll layer in paid. So that is out a bit as well. So I think -- and that's a primary source of leverage we have in terms of driving growth. And then, of course, we have ultimately new markets beyond that. So -- and then lastly, once we're a local language, we also have the ability to localize the supply side, meaning translate our seller tools into local languages in addition to translating the consumer experience, which is what we've done to date, which should allow us to expand supply. So everything I said does provide, I think, a healthy long-term runway for international. But it's also not something that happens overnight. In terms of Germany, specifically, which I think was your last question, it's too early. It's only 2 weeks. And I think what we're encouraged by is that the launches were smooth from a technical point of view and from a marketing point of view. But again, it was only a couple of days ago that we submitted the site map for indexing by Google. And so we haven't -- it's a little bit too early to draw any conclusions in terms of performance.

[Operator:]

Our next question comes from the line of Spencer Tan with Evercore ISI.

[Spencer Tan:]

I had one just around the mix between cross-vertical and single vertical buyers, maybe over the last couple of quarters, how that's trended? I know that, that was kind of a really big positive for you guys at the time of the IPO. And then actually, maybe just to follow up on that. In your newer verticals, so new and custom furniture, art, jewelry, et cetera, what kind of verticals do you have the most confidence around growing through the back half of this year, understanding that it's a pretty difficult macro environment? But just any color behind vertical mix, and then as well as the single 2 multiple vertical buyer trends would be great.

[David Rosenblatt:]

Yes. In terms of share of wallet, meaning cross-vertical purchasing, those trends have remained relatively constant over the last quarter. In terms of how we feel about different sort of differential category performance, right now, our new and custom, meaning contemporary furniture category, and our fashion categories are growing the fastest. What's very encouraging is that the fashion category has significantly ramped up its supply growth, its posting activity. And so again, I think we do expect to see that continue. New and custom is helped by strength in trade, their primary buyers of new and custom furniture. So again, just the same fundamentals -- as long as the fundamentals don't change, we don't expect to see a dramatic change in the relative growth rates versus what we saw in Q1, which was -- which had new and custom and fashion growing the fastest.

[Operator:]

Thank you. And this does conclude today's question-and-answer session. Ladies and gentlemen, this also does conclude today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.