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spk06: Good day, and thank you for standing by. Welcome to the FirstDibs.com Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would like to hand the conference over to your speaker today, Kevin LaBuzz, Head of Investor Relations. Please go ahead.
spk05: Good evening, and welcome to First Dib's earnings call for the quarter ended September 30th, 2021. I'm Kevin LaBuzz, Head of Investor Relations. Joining me today are CEO David Rosenblatt and CFO Tu Nguyen. David will provide an update on our business, including our strategy and growth opportunities, and Tu 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.firstdibs.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 risk 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 the replay of this call. I'll now turn the call over to our CEO, David Rosenblatt.
spk01: Thanks, Kevin. Good evening, and thank you for joining us today. Before we begin, I'd like to take a moment to thank our wonderful sellers, buyers, and employees for making First Dibs a leading marketplace for the world's most beautiful designs. I'd also like to thank our investors for their support. In the third quarter, we made progress on our strategic priorities and delivered strong financial results. GMV grew 25% year-over-year and revenue 22%. Our two-year stacked GMV growth rate, which normalizes the impact of COVID, was 57%. We ended the quarter with nearly 72,000 active buyers, up 35% year-over-year. Designers remained busier than ever, and trade GMV hit a quarterly record. In addition, consumer GMV growth picked up in the back half of the quarter relative to what we saw exiting June, when consumer traffic growth moderated. The supply chain disruptions roiling many industries have not impacted us to date for a few key reasons. First, The majority of our listings are secondary market items and require no manufacturing. Second, Vintage and Antique Furniture, which represents half of our GMV, is by definition in stock and ready to ship. As an example, Vintage and Antique Furniture orders delivered in October 2021 have the same shipping speeds as orders fulfilled in October 2019. Third, our platform enables buyers to filter for local sellers and avoid shipping entirely. We've heard from trade buyers in particular that these attributes are helping us win market share. We see a large opportunity as luxury shopping shifts online. Our primary focus is on growing GMV and the liquidity of the First Dibs marketplace. As I mentioned last quarter, we have more growth initiatives in process and on the roadmap, than at any point in our history. Each one represents a potentially meaningful GMV opportunity. Growing our marketplace creates financial value via increasing returns to scale and improves customer value via an improved buyer and seller experience. For example, this morning we launched First Dibs Auctions, which provides a new way to discover and own the world's most beautiful things. This new purchase format leverages our existing supply and demand and adds a common luxury purchase format to our marketplace. We're kicking it off with a collection curated by the home goods designer Jonathan Adler and Simon Doonan, former creative ambassador at large for Barneys New York. Auctions are an efficient means of price discovery and, therefore, an effective way to sell one-of-a-kind items, whose value can be indeterminate. We've learned from our consumer research that one of the main reasons why people don't buy from First Dibs is that it's difficult for non-professionals to ascertain pricing for rare and unique items. Auctions addresses this concern. In addition to aiding price discovery, our approach to auctions includes consumer-friendly differentiators like not charging a buyer's premium, providing upfront shipping costs in many cases, and covering all purchases with the First Dibs Buyer Protection Program. We see several benefits to buyers, sellers, and First Dibs. Over time, we expect auctions will create urgency, increase sell-through, aid price discovery, generate new marketing hooks, and as a result, help convert more of our 3.5 million registered users into buyers. We enter the auction market with a key advantage. The buyer, the seller, and the item are already on the First Dibs marketplace. For our initial launch, we have thousands of listings spanning our marketplace, including Birkin bags, estate jewelry, iconic mid-century modern furniture, rare art prints, and many other items with starting bids under $1,000. Because this is a new feature, Our near-term focus is on raising awareness of the format among existing customers. Auctions is the second new growth initiative that we've launched as a public company. Our first was expanding the first DIBS marketplace in August to include an NFT, non-fungible token, vertical. Our goal was to prioritize speed to market and then to iterate and enhance the platform as we gather data and feedback. We accomplished our primary launch objectives, bringing a blockchain-native product to market quickly, securing differentiated and high-quality content from recognized crypto creators, holding six exhibitions, and building community by launching an NFT-dedicated presence on Discord and Twitter. Our top NFT sale was for 19 ETH, about $60,000 at the time, from the digital artist OgiWorlds. whereas most sales have been at the 1 to 2 ETH range, or roughly 4,500 to 9,000 at current rates. Additionally, we've adopted features from the NFT platform to other parts of our marketplace, like adding auto-playing video to our search and browse tab. We see the blockchain as a game-changing technology for our industry and believe that digital art will grow into a significant market. Our unique ability to sell rare and one-of-a-kind items online places NFTs squarely within our right to win. Our priority over the next several quarters is to continue enhancing our platform and building marketplace liquidity. NFTs are an example of a potentially large market that we entered with modest incremental investment. International expansion is another priority for us. We plan to have our initial local language product in market in the first half of 2022, but see building an international business as a multi-year process. Our initial international focus will be on Western Europe, where we see the largest opportunity. We'll be stepping up our localization investments in the fourth quarter and into 2022. Today, without local language sites, Nearly 40% of our sellers and 20% of our buyers are located outside the United States. We believe that launching localized products will improve conversion for non-U.S. buyers over time. It also allows us to invest in paid and organic marketing to grow local audiences. Turning to the third quarter, cross-functional investments in SEO continue to pay off. Average rank improved and SEO traffic growth accelerated from approximately 20% year-on-year in the second quarter to over 30% in the third. We had prioritized SEO investment in 2019, and this is now paying dividends. Progress in SEO is the sum of many incremental improvements. For example, this quarter we launched new creator pages, giving us the opportunity to improve rank, for queries like Hans Wegner. Looking ahead, we'll keep scaling our page and content creation while ensuring that our site health and speed is highly performant. Enhancing the buyer and seller experience is another focus for us, and we made progress here too this quarter. We refreshed our item sort order to emphasize items more likely to drive buyer engagement and are testing additional personalization features. In art, we launched filters for size and orientation, and in jewelry, we added the option for buyers to design and customize pieces. Additionally, we launched a mobile version of item upload, allowing our over 4,300 sellers to create and publish listings end-to-end from their phone. These are a few examples of the incremental enhancements that our product and engineering teams work on day in and day out. Continually improving the buyer and seller experience has earned us the trust of consumers and designers. This trust is our greatest asset. In the third quarter, we delivered solid GMV growth and made progress on our strategic initiatives in the face of lingering macro uncertainties. As we look forward, we're well positioned to benefit from the continued shift to digital and and the extensibility of our platform, which allows us to efficiently enter adjacent markets, launch new features, and unlock large GMV opportunities, like auctions and NFTs, with modest startup investments. In 2021, we've stepped up our cadence of bringing new products to market. As we look to the fourth quarter and beyond, I'm excited about our roadmap and our pace of execution. I'll now turn it over to Tu, who will discuss our third quarter financial results and outlook.
spk02: Thanks, David, and good evening, everyone. We delivered strong results in the third quarter, which I will review, along with providing a fourth quarter outlook. Third quarter GMV was $109 million, up 25%, with traffic, average order value, and conversion all growing year on year. On a two-year stack, GMV growth was 57% compared to 48% in the second quarter. Our third quarter guidance assumed strong trade demand and consumer demand consistent with our June exit velocity. Trade had a record GMV quarter, and consumer demand exceeded our expectation, driving GMV upside versus guidance. Relative to June, consumer AOV increased and consumer traffic growth held steady. Turning to trade, designers noted being busier than usual over the summer months when clients are historically less engaged. As David mentioned, the vast majority of our listings are in stock and ready to ship, making our marketplace less susceptible to supply chain disruptions. Further, our buyers, sellers, shipping routes, and carriers are well diversified, and we haven't been subject to the same delays as mass-produced items traveling via sea freight to U.S. ports. As we cycled through more difficult year-over-year growth comparisons, consumer GMV growth slowed relative to the second quarter, but improved from where we exited June. On a two-year stack, consumer GMV grew 65% and trade GMV grew 53%. While our near-term consumer GMV growth will be impacted by the combination of tough comps, lingering macro uncertainties, and the impact of the economy reopening. We continue to believe that consumer will drive our growth long-term. As a reminder, when we reference trade GNV or consumer GNV, we are speaking of the subsets of on-platform GNV attributable to each of these buyer groups. Additionally, all comparisons are on a year-over-year basis, unless otherwise noted. Similar to the second quarter, new and custom furniture and fashion were our fastest-growing verticals. GMV Mix was split 50-50 between vintage and antique furniture and all other verticals. We continued to grow our marketplace and solidify our position as one of the leading online destinations for luxury design. In the third quarter, nearly 60% of new buyer orders were outside of vintage and antique furniture. Our marketplace had nearly 72,000 active buyers, up 35%. Orders grew 16%, and average order value increased 9%. We saw AOV growth across both of our buyer groups. Orders greater than $10,000 increased 38% in the third quarter. AOV growth was driven by growth in new and custom furniture, which has above average AOV. AOV growth demonstrates the trust that our sellers and buyers have in our platform to transact high-value items online. Net revenue of $25.6 million grew 22%, driven by GMV growth. Transaction revenue, which is directly tied to GMV growth, was approximately 70% of revenue in the quarter, with subscriptions making up the bulk of the remainder. Gross profit was $18.1 million, up 23%. Gross profit margin was 70.6%, up 70 basis points from a year ago. Gross margin expansion was driven by improved efficiency from automation and lower amortization. Sales and marketing expenses were $12.9 million, up 51%, driven primarily by growth in demand generation expenses. In the third quarter, we continue scaling our core performance marketing program, as well as testing new channels like connected video and direct mail prospecting. Our focus is acquiring new buyers. The vast majority of our performance marketing spend is on platforms like Google and Facebook, where we have strict efficiency targets. The remainder is testing, where we experiment with new channels. When a channel meets our ROI threshold, we graduated to our core program. Sales and marketing as a percentage of revenue was 50% compared to 41% a year ago as we scaled our demand generation efforts. A note on marketing channels, as more users have upgraded to iOS 14, we saw some headwinds on retargeting. We estimate this had an approximately two to four million impact to GMV in the third quarter. Through the third quarter, App accounted for roughly 5% of our total sessions and was our highest converting channel. In response, we are targeting new tactics to engage iOS users and increasing our focus on registrations and engagement to gather first party data. Technology development expenses were 4.8 million up 17% due to higher headcount. As David mentioned, investment here is directed at both incremental investments as well as our portfolio of growth initiatives like auctions and international expansion. In the fourth quarter, we'll be focused on testing personalization and beginning product localization work in addition to commercializing auctions and enhancing the functionality of our NFT platform. As a percentage of revenue, technology development was 19% this quarter, flat year over year. G&A expenses were $6.1 million, up 108%, and 24% of revenue, up from 14% a year ago. The increase was primarily driven by expenses related to operating as a public company, including B&O insurance and increased headcount. Lastly, Provisions for transaction losses were $1.3 million, up 39%, driven primarily by GMV growth and increased chargeback claims. Provisions for transaction losses were 5% of revenue, flat year-over-year. Adjusted EBITDA loss was $5.4 million, compared to half a million last year. Adjusted EBITDA margin loss was 21% versus 2% last year. This year-over-year change was driven by higher G&A expenses due to a full quarter of public company costs and continued investments in sales and marketing. For context, due to COVID uncertainty, we pulled back on investments starting in the second quarter of 2020 and resumed investing for growth in 2021. We see many opportunities to grow our marketplace and cement our leadership position in online luxury design. As such, growing GNV in a disciplined manner remains our priority. Our asset-light business model, highly variable cost structure, and stable buyer-cohort behavior give us the confidence to invest. We expect to generate operating leverage and free cash flow and expand adjusted EBITDA margins over time as we grow GNV and revenue. Moving on to the balance sheet, we ended the third quarter with a strong position of $167 million in cash and cash equivalents. Now, turning to our outlook, we forecast fourth quarter GMV of $117 million to $121 million, equating to a year-over-year growth between 10% and 14%, and a two-year stack of approximately 52% to 56%. Net revenue of $26.5 million to $27.2 million, equating to a year-over-year growth between 11% and 14%, and a two-year stack of approximately 41% to 44%. Adjusted EBITDA margin loss of 21% to 18%. Given near-term uncertainties, we'd like to share some additional context on the assumptions underlying our fourth quarter guidance. Given a dynamic and uncertain macro environment, we are assuming more muted seasonality this year. Historically, we've seen approximately 15% to 20% quarter-over-quarter growth in the fourth quarter. The midpoint of our guidance represents growth of 9% quarter-over-quarter. We assume continued IDFA headwinds and no material GMV contribution from auctions. Turning to adjusted EBITDA margin guidance, fourth quarter guidance reflects our decision to accelerate investments in international expansion. From a modeling perspective, we expect to see technology and development expenses as the percentage of revenue increase in the fourth quarter relative to the third quarter. Localization requires an upfront investment for translating all of our listings and content. While we're not providing specific guidance beyond the fourth quarter, we note tougher year-over-year GMV growth comparisons continue into the first half of 2022. As a reminder, in the first quarter of 2021, GMV grew 64% year-over-year. Additionally, we will begin to lap the 2021 trade recovery in the first quarter of 2022. While an evolving and unpredictable macro landscape impacts the near-term outlook, we are confident in our strategy and roadmap. We are proud of the progress that the First Diff team made in the third quarter and are excited about our future opportunities. This includes growing our newer verticals, international expansion, and adding new purchase formats like auctions. We are in the initial phase of many of our growth initiatives, and will continue to prioritize investments in sustainable growth over near-term profitability. Thank you for your time. David and I will now take your questions.
spk06: At this time, to ask a question, please press star then 1 on your touch-tone phone. And to remove yourself from the queue, just press the pound key. And once again, that's star 1 for questions. And please limit yourself to one question and one follow-up. Our first question will come from Justin Post from Bank of America. You may begin.
spk08: Great. Thanks for taking my question. David, maybe we'll start with you, and then I'll follow up on marketing. Can you talk about the inventory on the site, and if auctions go well, how would that evolve over the next couple of years, kind of help sell and move that inventory? And then how do you get the liquidity to make sure sellers get good prices? Thank you.
spk01: Thank you, Justin. So in terms of inventory, you know, the way we regard auctions is it's an additional way to monetize the existing listings on the site. So we've got, you know, and this is a pretty good summary of the opportunity. We've got 1.2 million products listed on the site. You know, we'll do less than 500 million in GMV this year, which leaves over $10 billion in face value terms of products. which now are able to be bought through an additional format. And when we look at the reasons why people don't buy, the predominant reason has to do with price, either a difficulty in doing price discovery or a belief that the price is too high. Auctions obviously address both. So we feel like we don't need a lot of new inventory for auctions to have a meaningful GMV impact. That said, how sellers use auctions as a tool remains to be seen, and it very well could pull an additional inventory, but it's not needed. In terms of generating demand, you know, again, one of the commercialization advantages we have in this product is that we already have the supply side. We have the item. We have the buyer. The only thing that we're lacking is the format. So, again, I don't view demand as a bottleneck. I think the biggest challenge we have in terms of commercialization is is more about raising awareness among our buyers that we have this format, particularly since many of them have worked with us for over 20 years and have habituated to an environment that obviously doesn't have auctions.
spk08: Got it. And then maybe one follow-up on marketing for two. Marketing came in a little higher than our estimates. And just wondering, and I know I appreciate IDFA challenges for everyone, but what are you seeing with your return on marketing spend and any changes there and And how do you think about bringing that down over the next few years as a percentage of revenue?
spk02: Yeah, thanks for that question, Justin. So our sales and marketing span is made up of two components, right? One is headcount and the other is performance marketing. Our headcount investment is on platform teams like SEO, email, lifecycle, which has been scaling with revenue and GMV, and we expect that to continue into the new year. And then our performance marketing is made up of core programming testing. And within our core program, we have a set ROI. Relative to 2020, we have increased testing as a way to find new acquisition channels to scale. If a test channel meets our ROI, we will then graduate it to our core program. The year-over-year growth rate that you see in Q3 is partly a reflection of our low investment year in 2020, when we pull back on acquisition due to COVID uncertainty, and also a function of increased testing in 2021. If you look at our two-year CAGR for sales and marketing, that is growing at a slower rate than GMV and revenue growth. A note on Q3, we started Q3 slightly less efficient than where we wanted to be, and as a result, quickly made improvements and increased the efficiency throughout Q3 and that efficiency improvement will continue into Q4. So, again, looking into Q4, we would expect that sales and marketing as a percentage of revenue will come down versus the level that you saw in Q3. And then one note I would say that, you know, as we scale marketing, we saw that our cohort quality remains stable, which gives us confidence to continue to invest. And we'll intentionally... about diversifying our channels as a way to scale acquisition, but also to reduce exposure to any one channel. And as we have seen, could have a significant impact on the business, like an example of IBFA. And overall, we are pleased with the ROI that we've been seeing. We're going to see more leverage in Q4, and we'll continue to focus on increasing BioLTV to further increase that efficiency.
spk06: Great. Thank you. Our next question will be from Ross Sandler from Barclays. You may begin.
spk03: Hey, everybody. Question on the auction format. Do trade buyers participate in this, or is it just for the DTC consumer side of the business? And then I think you guys said consumer might have accelerated late in the third quarter, so I'm just trying to reconcile that comment and the pretty solid 25% GMV growth With the low teens guidance for 4Q, what do you see in between consumer and trade in the fourth quarter? Thanks a lot.
spk01: Hi, Ross. The auction format is available to all users of the marketplace. Two, do you want to talk about consumer?
spk02: Yes. So relative to Q3, and again, some context, we saw consumer traffic slow down in June. And coming out of June into Q3, we saw that traffic from consumer growth has still held steady. Consumer AOV has increased, and you are right, on a two-year stack basis, consumer GMV growth with 65% relative to 55% in Q2. So we are seeing a two-year growth stack acceleration in Q3. On the trade side, we reached a record quarter for trade, so we're very pleased about that. And on the questions in terms of Q4, As you know, we don't comment on intra-quarter performance. But that said, the midpoint of our guidance still assumes that we are growing sequentially by 9% quarter over quarter. We are assuming more muted seasonality this year than prior years. So we tend to see 15% to 20% growth sequentially in the fourth quarter versus the third quarter. Given the volatility that we've seen so far this year with consumer behavior and the information that we have to date, we're just assuming that Q4 is going to be a more muted seasonal quarter than what we have seen in the past. But on a two-year set basis, that still represents a healthy growth rate of 54%. And last thing to note, given that we launched auction today, we are assuming no material GMB impact from auctions. But we'll use Q4 as a way for us to collect more data and inform future guidance on the GMB contribution from auctions going forward.
spk06: Thank you. Our next question will come from Spencer Tan from Evercore ISI. You may begin.
spk07: Hi. Thanks for taking the question. Just, like, I guess one high-level question. From the cohort data that you're seeing, you know, in regards to maybe pre-COVID, well, pre-COVID cohorts versus cohorts acquired during the pandemic, could you just provide us a little bit of color how you're seeing retention and GMV growth there within those cohorts? Thank you.
spk02: Yeah. So thanks, Spencer, for that question. So just a reminder, we brought on a large volume of new buyers during the pandemic. We grew active buyers by over 60% versus Q3 2019. And buyer cohort quality is something that we pay very close attention to. We've been very pleased to see that the new buyer cohort quality has been consistent with our prior buyer cohorts. As you saw, we saw that our AOV grew year over year, even though AOV is not something that we optimize for. It is an indication of the health of the buyers that we continue to bring on the platform. And we see AOV growth this quarter for both the trade and the consumer market. So, again, very pleased with what we've seen so far in terms of the buyer quality, and we're very much focused on continuing to increase that buyer frequency and, therefore, increasing the overall LTV of the existing buyers that we have.
spk07: Got it. Thank you so much.
spk06: Thank you. Once again, that's Star 1 for any questions or follow-up. Our next question will come from Ralph Chakard from William Blair. You may begin.
spk04: Hi everyone, this is Marianne for Ralph. Thanks for taking your question. David, you had discussed the NFT platform. Can you help us better understand how that has trended on a month-over-month basis compared to your expectations? And if possible, can you provide any additional color on how you view that longer-term opportunity or potential TAM? Thank you.
spk01: Sure. Thank you. So we're optimistic about the long-term NFT opportunity. We believe that digital art, the blockchain is obviously real, and digital art will emerge as a viable and growing long-term category. We launched our NFT platform in early August. The initial goals were to, A, make sure that we had a robust blockchain-native technology that worked. B, our goal was to launch with supply that was consistent with the quality level of our overall inventory on the rest of the site. And we were successful in that. We launched with a number of very well-respected crypto creators. And then lastly, our third goal was to launch two new marketing channels, a Twitter handle for Sibs NFT, and then also a Discord presence, which was a first for us. So all three of those goals were met. The technology was stable, the supply was high quality, and the marketing channels were established. And if you recall, we said at the time of launch that we were not expecting material GMV in the near term. That said, we have been able to put some points on the board. We had a $60,000 sale in dollar terms. Obviously, it's all in EIF. and average pricing has been between $4,000 and $9,500. That said, it's still super early for us, and our focus is on growing all three of those prongs. So we're still lacking some table stakes functionality, like, for example, support for secondary sales, and we have a long way to go in terms of adding a critical mass of supply and also growing our demand channels. So that's what we're focused on. But, again, in terms of the long-term opportunity, we think it's big and we think it's real, and we believe that we have a strong right to win in this market.
spk04: Okay, great. Thank you very much.
spk06: Thank you. I'm not showing any further questions at this time. I'd like to turn it back over to David for any closing remarks.
spk01: Thank you all for joining our conference call, and happy holidays as well. Thanks.
spk02: Thank you.
spk06: And this will conclude our conference call for today. Thank you for participating. You may now disconnect. Have a great day.
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