1stdibs.com, Inc.

Good morning, ladies and gentlemen. Welcome to FirstTips.com Inc. Third Quarter 2023 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 1-1 on your telephone. You will then get an automatic message advising your hand is raised. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Melanie Goins, General Counsel at FirstDibs.com. Melanie, you may begin.

Good morning, and welcome to First Dibs Earnings Call for the quarter-ended September 30, 2023. I'm Melanie Goins, General Counsel. Joining me today are 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.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, 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?

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 increased from the high 60s to the low 70s. Adjusted EBITDA 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. Reengineering 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 have been outweighed by countervailing negative macros, we are nonetheless encouraged by this positive trend. There's no doubt that we are working through a period of soft demand and low visibility for luxury home goods and consumer discretionary spend. Although growth rates are far from where we'd like them to be, three factors give us confidence in our direction of travel. The first of these is increasing e-commerce penetration. According to the Census Bureau, U.S. e-commerce penetration has steadily increased from approximately 1% of retail sales in 2000 to just over 15% in the second quarter of 2023. Following volatility during COVID-19, e-commerce penetration has now reverted to pre-pandemic trends. Our expectation is that there's a long runway ahead for e-commerce. Historically, U.S. e-commerce sales have grown mid-teens annually. While this will naturally slow as the industry matures, we believe that high single digits or low teens growth rates are a reasonable ballpark for U.S. e-commerce. Second, the concept of luxury is as old as humanity. Globally, luxury sales have outpaced GDP growth over the past two decades, according to Bain & Company and Altagamma. Between 1996 and 2019, global luxury sales compounded at 6% per year, compared to global GDP growth of roughly 3% per the World Bank. Third, the world is getting wealthier. According to the UBS Global Wealth Report, there were nearly 60 million millionaires globally at the end of 2022. Our seven largest markets, the US, the UK, France, Canada, Switzerland, Australia, Germany, and Italy are home to over 36 million millionaires. This compares to our active buyer base of approximately 63,200 at the end of the third quarter. Furthermore, UBS forecasts that the number of millionaires globally will exceed 85 million by 2027. Of course, you don't need to be a millionaire to shop on first dibs, but growing wealth is a tailwind for luxury demand. These three secular drivers underpin our confidence in our market opportunity. However, at present, we're operating through a period where cyclical factors, like a slowdown in the luxury housing market and subdued demand for high-end discretionary items, are overwhelming these secular trends. Large purchases like housing and furniture can easily be deferred, but not indefinitely. Eventually, the cycle will turn, as it always does. We believe that we're currently tracking in-line or better to industry trends for high-end furniture and are setting ourselves up to benefit disproportionately when this cycle shifts. As we navigate this challenging period, our competitive advantages also give us confidence in the future. Over the past two decades, we have developed attributes that are valuable and difficult to replicate, including aggregating a fragmented offline supply base, the ability to reach a global audience of high net worth individuals, building a trusted brand that instills buyers with the confidence required to transact online at high AOVs, deep relationships with the trade, and cultivating a deep well of unique expert content resulting in strong SEO domain authority and high organic traffic mix. These are durable and hard to replicate advantages. Turning to the quarter, the supply side of the marketplace remains healthy. We once again saw mid-teens listings growth and strong seller acquisitions. On the demand side, traffic growth slowed as we intentionally pulled back on our least efficient performance marketing channels, making overall traffic growth negative. Organic traffic continued to grow, albeit at a lower rate. During the quarter, organic traffic accounted for nearly 80% of the total, up from roughly 70% a year ago. We were pleased that our prioritization on growing our conversion rate continues to bear fruit. For the fifth quarter in a row, our year-over-year decline in conversion rates improved and are approaching flat. The third quarter improvement was driven by returning buyer conversion, which was the highest since late 2021. We're benefiting from our new A-B test framework, with the number of tests up over 100% year-over-year. While not every test succeeds, overall, the higher test velocity resulted in a higher number of features being put into market, which we believe is contributing to the improvement in conversion rates. In addition to ramping up our testing cadence, we're also working on a number of multi-quarter technology projects. The first is changing our payment processor, which we expect to benefit conversion by increasing the number of payment methods we're able to accept, especially internationally. The second is improving our shipping services for sellers. The third is leveraging machine learning to enhance personalization and pricing recommendations. We expect these projects to begin going live by the end of the first quarter of 2024, and we look forward to providing updates in future quarters. Moving on, we continue to see solid organic traffic growth in France and Germany. SEO sessions from German and French IP addresses grew 60%. Paid traffic growth in these markets declined as we intentionally pulled back on performance marketing, which was a headwind to order growth. However, conversion rates improved. We also saw organic traffic growth accelerate for Italian and Spanish IP addresses as our sites are starting to be indexed by search engines. But it remains very early days in these markets. Auction orders grew 7%, accounting for 7% of total orders. During the quarter, our product development effort focused on supply quality, conversion, and discoverability. As part of our June restructuring, we shifted dedicated resources from international and auction to areas like checkout and seller experience where we see more immediate payoffs. This is an example of the hard trade-offs we've had to make as we focus on achieving profitability. Our logic here is that the highest return to product and engineering investment are to platform-wide projects. For example, we expect changing our payment processor to benefit US and international buyers, auction and marketplace buyers, and trade and consumer buyers. Turning to supply, seller and listing growth remain robust. We ended the quarter with over 9,100 seller accounts, up over 30%. Additionally, listings grew 16% to over 1.7 million items. Continuing the trend of healthy listings growth we've seen for the past several years After a year and a half of very strong growth We're shifting our acquisition focus to prioritize sellers who have the ability to list and sell at scale as a result We expect to see continued healthy listings growth, but a lower number of new sellers added per quarter in summary While we continue to face headwinds from the luxury housing market and diminished consumer appetite for discretionary purchases, we believe we're performing in line with high-end furniture sales. Facing these headwinds, we made the difficult decisions required to calibrate our expenses to soft demand. We saw the benefits of our leaner cost structure in expanded gross margins, meaningfully lower operating expenses, reduced cash burn, and delivering our best EBITDA margins yet as a public company. While our cash balance and lower cash burn rate give us a strong liquidity position, we are not complacent about the need to reaccelerate GMV and revenue. Our focus is on shepherding our existing resources to accomplish this, working on a smaller set of projects that offer the highest potential returns. The team is nimbler and moving faster. We believe that significantly increasing the pace of our new feature testing contributed to continued improvement in conversion rates. Although visibility is low and growth isn't where we would like it to be, rising e-commerce penetration, increasing luxury demand, and growing global wealth portend a long runway. I'll now turn it over to Tom to review our third quarter financial results and fourth quarter outlook.