1stdibs.com, Inc.

The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1. Good day, and thank you for standing by. Welcome to the FirstDibs.com second quarter 2022 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kevin LaBuzz. Please go ahead.

Good morning and welcome to First Dibs Earnings Call for the quarter ended June 30th, 2022. I'm Kevin LaBuzz, Head of Investor Relations and Corporate Development. Joining me today are CEO David Rosenblatt and CFO Tom Edergino. 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.firstdibs.com. Before we begin, please keep in mind that our prepared 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 and dynamics, including e-commerce growth rates and our potential responses thereto, 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 risk 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 non-GAAP to GAAP measures is included in today's earnings press release, which you can find at 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. Amid a challenging operating environment for e-commerce and home goods, we deliver GMV and revenue within our guidance range and EBITDA margin above our guidance range. as we managed expenses in light of continued soft consumer conversion. We strengthened our balance sheet and streamlined our business with the sale of Design Manager for $14.8 million, generating a healthy $9.7 million return on our purchase price. Lastly, we're pleased with early signs of traction in our key strategic initiatives, auctions, international expansion, and supply growth. During the quarter, some business trends remained resilient as compared to our last earnings report, while others softened. First, I'll review what remained resilient. Traffic growth accelerated versus the first quarter due to SEO gains, and upper funnel activity in general remained robust. Trade growth continued, and returning buyer conversion increased as well. Supply growth remains healthy, helped by our pricing test, we're adding new sellers at three times last year's monthly run rate. Additionally, seller churn remains at historic lows. Finally, our strategic initiatives are making solid progress. While metrics are moving in the right direction, these efforts are in their early stages, and GMV contribution isn't yet large enough to offset softening new buyer conversion. Now on to what softens. Most importantly, consumer growth, which is historically 70 to 75% of GMV, declined further due to conversion softness, particularly for new buyers. While we're bringing more traffic to the marketplace, it's not converting at historical rates. There are multiple factors at play here. In addition to economic uncertainty, consumers are spending less online in favor of out-of-home experiences, such as travel and dining out. In addition, We are seeing a traffic mix shift towards mobile web, which is a lower converting device type. Given softening demand, we have begun recalibrating our expenses, which Tom will review in more detail. With two-thirds of our GMV from furniture, we're at the intersection of e-commerce and home goods, two areas negatively impacted by increased mobility post-COVID and heightened economic uncertainty. We see this most significantly in lower conversion rates. We have begun and intend to continue responding forcefully to this changed set of circumstances. At the same time, what encourages us is that, with the exception of new buyer conversion, we believe the long-term drivers of our competitiveness and the value we provide to buyers and sellers remain healthy. Traffic growth accelerated in the second quarter. Our organic traffic mix increased. Supply growth is robust and seller churn is low. Auctions are improving sell-through and new buyer activation rates. Additionally, 50% of auction buyers in the second quarter have never purchased from First Dibs before. Lastly, while we intend to continue to invest responsibly in auctions, international expansion, and supply growth, we are reprioritizing projects and continuing to identify cost efficiencies. so that when demand for home categories rebounds, our business will be more efficient and in a stronger, more competitive position. We are committed to re-accelerating GMV growth and enhancing shareholder value, and are reviewing multiple paths to help us achieve these objectives. Alternatives may include buy and sell side M&A, capital return strategies and partnerships, as well as revisions to our operational objectives and priorities. We are working with our financial advisors at Allen & Company to evaluate all options. Turning to operations, we continue to enhance our platform for buyers and sellers. Similar to the first quarter, top of funnel activity remains healthy, with traffic, registrations, and item favorites growing by double digits. Organic traffic mix increased by over five percentage points year over year, driven by continued strength in SEO, coupled with a pullback in paid spend. Re-accelerating GMV growth is a top priority. Our largest lever is improving conversion, particularly for new buyers and on mobile web. In addition to our strategic initiatives, we have a number of projects and tests underway focused on this. During the second quarter, we prioritize projects to increase checkout entry and reduce purchase friction. For example, We launched improvements for low inventory pages, tested increasing the visibility of items with lower shipping costs and search, and improved the discovery of auctions listings, which have higher sell-through and conversion rates. Conversion is a game of incremental gains. The goal is to keep accumulating small wins that compound over time. On the supply side, our seller team launched a bulk upload tool. saving sellers time and supporting listings growth. Additionally, we rolled out inventory lifecycle recommendations, which suggest age and engagement-based actions to help sellers optimize sell-through. We also made meaningful progress in our strategic initiatives, which I'll review in more detail below. Auctions are making great progress. Bidder activity, order volume, and GMV continue to grow sequentially. In June, for example, auctions accounted for over 5% of total orders as compared to 1% of supply, and this trend carried over into July. In addition to higher sell-through rates, another strategic rationale for building auctions was activating new buyers. During the quarter, 50% of bidders had never made a purchase on first dibs. Auctions' average order value was under $1,000, less than half of the AOV in our marketplace overall. Lower AOV is what we expected for auctions and is consistent with a value-oriented channel. Lastly, auction supply continues to ramp. We added 20,000 new auction listings in the second quarter, up 100% from the first quarter. However, that's just a fraction of our 1.4 million listings. We believe there's ample opportunity to meaningfully expand supply from our existing items. Since launch, we've enhanced the auctions product experience through weekly updates. The focus this quarter was building features that optimize for value and urgency to drive bid participation by, for example, displaying the original list price in search and browse and on product pages to highlight value. We also built tools for scaling auction events. These are curated groupings of items with the same launch date, akin to a physical auction. Events drive urgency, traffic, and bid participation. Starting in May, we increased the cadence of curated events to monthly from every other month. Additionally, our work to boost supply and set competitive auctions pricing is ongoing. Given the success we're seeing, we are evaluating shifting existing resources to auctions. June also marked the first full month of operations for both of our localized sites. Germany went live on April 26, and France launched on May 10. Users in these countries can now search in local languages, see search results that prioritize items located in Europe, and experience a fully localized customer journey, including currency, customer service, and shipping. While it's still early, we believe we're seeing promising performance in both markets. Given the highly considered nature of our purchases, Our first priority is growing traffic from performance marketing and SEO. Traffic from French IP addresses grew 60% year-over-year during the quarter, while traffic from German IP addresses grew over 75% year-over-year, even though these sites launched late in the quarter. Building an international business is a multi-year process, and we're off to a great start. Our development philosophy is to prioritize speed to market and then test and iterate as we gather data and feedback. For the rest of the year, our international focus will be optimizing foreign language paid marketing, building SEO authority, and introducing product enhancements like incorporating real-time machine translation into our message center. We see a meaningful long-term international opportunity. Today, About 40% of our sellers, one-third of our traffic, and one-fifth of our buyers are located outside the United States. Because supply begets demand for two-sided marketplaces, accelerating supply growth is another priority. Our goal is to aggregate the world's most beautiful items, regardless of where they're located, while maintaining our curatorial standards. Supply drives traffic, makes search results more robust, and increases the chances that we'll make a match. Given our long tail of one-of-a-kind listings, providing buyers with more options should ultimately translate into higher order volumes. Our new seller pricing test, which launched in January, continued to perform well. We signed over 700 new sellers in the second quarter, ending June with over 6,100 seller accounts. The number of sellers and listings continued to grow at healthy double-digit rates, and our monthly seller acquisition was triple our monthly average in 2021, consistent with the first quarter. We expect the pace to slow during the summer when many sellers take vacation. As a reminder, we launched a pricing test for new sellers in January. This allows sellers to choose the plan that best fits their business and includes a subscription-free tier with a higher commission rate. This reduces friction by lowering the upfront cost of trying first dibs and remains the most popular option for new sellers. Despite material growth in our seller base, the absolute number of churn sellers declined year over year. As I mentioned above, while we believe the metrics for auction, international, and supply growth are trending in the right direction, these efforts are in their early stages and GMV contribution isn't yet large enough to offset softening demand. Over the past few months, the market for NFTs has slowed dramatically, and we were not immune. While we continue to believe in the long-term promise of the digital art market, given the reduced near-term outlook, we have paused incremental investment in our NFT platform. During the quarter, GMB growth rates softened month over month from April through June, and this trend has carried over into July. Given the slowdown, we're focusing on what we can control and taking actions to better align expenses to demand. For example, we have drastically reduced the number of open roles, limited hiring to critical positions, and increased the efficiency targets on our performance marketing spend. However, fundamentals like traffic and supply growth remain healthy, and our strategic initiatives are gaining traction, which we believe in turn sets us up for future success. We intend to continue adjusting to the environment while focusing on the strategic initiatives that we believe will drive our long-term growth. We are also working with our financial advisors at Allen & Company to review multiple paths to enhance GMV growth and shareholder value. When e-commerce growth rebounds, we expect to be more focused, more efficient, and poised to capitalize.