NASDAQ:DIBS 1stdibs.Com Q3 2024 Earnings Report $2.45 -0.03 (-1.21%) Closing price 05/2/2025 04:00 PM EasternExtended Trading$2.46 +0.00 (+0.20%) As of 05/2/2025 04:05 PM Eastern Extended trading is trading that happens on electronic markets outside of regular trading hours. This is a fair market value extended hours price provided by Polygon.io. Learn more. Earnings HistoryForecast 1stdibs.Com EPS ResultsActual EPS-$0.15Consensus EPS -$0.13Beat/MissMissed by -$0.02One Year Ago EPS-$0.081stdibs.Com Revenue ResultsActual Revenue$21.19 millionExpected Revenue$21.61 millionBeat/MissMissed by -$420.00 thousandYoY Revenue GrowthN/A1stdibs.Com Announcement DetailsQuarterQ3 2024Date11/8/2024TimeBefore Market OpensConference Call DateFriday, November 8, 2024Conference Call Time8:00AM ETUpcoming Earnings1stdibs.Com's Q1 2025 earnings is scheduled for Wednesday, May 14, 2025, with a conference call scheduled on Friday, May 9, 2025 at 8:00 AM ET. Check back for transcripts, audio, and key financial metrics as they become available.Conference Call ResourcesConference Call AudioConference Call TranscriptPress Release (8-K)Quarterly Report (10-Q)SEC FilingEarnings HistoryCompany ProfilePowered by 1stdibs.Com Q3 2024 Earnings Call TranscriptProvided by QuartrNovember 8, 2024 ShareLink copied to clipboard.There are 7 speakers on the call. Operator00:00:00Thank you for standing by. My name is John, and I will be your conference operator for today. At this time, I would like to welcome everyone to the First Debs.com, Inc. Third Quarter 2024 Earnings Conference Call. All lines have been placed on mute mute to prevent any background noise. Operator00:00:14After the speakers' remarks, there will be a question and answer session. I would now like to turn the call over to Kevin Labuzz, Head of Investor Relations and Corporate Development. Please go ahead. Speaker 100:00:35Good morning, and welcome to FirstDib's earnings call for the quarter ended September 30, 2024. I'm Kevin Labuzz, Head of Investor Relations and Corporate Development. Joining me today are Chief Executive Officer, David Rosenblatt and Chief Financial Officer, Tom Energino. David will provide an update on our business, including our strategy and growth opportunities, and Tom will review our Q3 financial results and Q4 outlook. This call will be available via webcast on our Investor Relations website at investors. Speaker 100:01:131stdibs.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, 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 will present GAAP and non GAAP financial measures. Speaker 100:02:13A reconciliation of GAAP to non GAAP measures is included in the state'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? Speaker 200:02:35Thanks, Kevin. Good morning and thank you for joining us today. 3rd quarter results reflect continued improvements across our key focus areas. For the 2nd consecutive quarter, we achieved year over year revenue growth, accelerating order growth and sequential active buyer growth. We achieved this progress despite prolonged softness in the luxury housing market, which is experiencing the largest slump since the mid-1990s. Speaker 200:03:03Despite continued conversion gains and accelerating order growth, GMV contracted due to weaker than expected average order values, which we see as temporary. We anticipate returning the GMV growth in the 4th quarter driven by further conversion gains and moderating AOV headwinds. Our adjusted EBITDA margins came in toward the low end of guidance. Relative to the 2nd quarter, margin compression primarily reflects seasonally lower revenue as operating expenses remained flat sequentially. In the Q4, we anticipate some additional margin compression due to seasonal increases in performance marketing. Speaker 200:03:44While margins will be down year over year, we are focused on improving efficiency and positioning the business for sustainable growth. Given the muted demand environment, we are focused on lowering the growth threshold required to achieve operating leverage. Our preliminary 2025 plan targets generating operating leverage at mid single digit revenue growth. Reviewing the Q3, increasing conversion remains our operational priority and highest leverage activity. We maintain momentum here. Speaker 200:04:18Conversion rates have grown over the past year and growth accelerated again in the Q3. Encouragingly, these gains are broad based with new and returning buyers both seeing double digit improvements. Additionally, returning buyer conversion hit another record high. Conversion wins fueled order growth, which increased to 7%. Continuing with funnel dynamics, traffic headwinds were stable versus the Q2, but AOV was softer than anticipated, depressing GMV. Speaker 200:04:51Tom will provide more detail later on, but based on quarter to date trends, we believe this dynamic will moderate in the Q4. Order growth and active buyer trends are accelerating at a time when the luxury housing market and high end furniture sales remain soft. According to the National Association of Realtors, U. S. Existing home sales are on track for their worst year since 1995 for the 2nd year in a row. Speaker 200:05:19This is a cyclical issue, not a structural one. Although calling the timing of a recovery is difficult, demand for luxury homes and high end furnishings will eventually rebound. When it does, we stand to benefit from our ongoing operational improvements and lower cost structure. However, we strongly believe in creating our own luck and are not waiting around for the market to recover. We demonstrated this in 20222023 by reducing operating expenses and narrowing our focus. Speaker 200:05:51We are demonstrating this today by accelerating our pace of product velocity and reallocating resources from lower return projects to higher return projects. Regarding product velocity, the number of AD tests we ran during the quarter grew double digits sequentially and triple digits year over year, hitting a new record. Increasing conversion was the primary focus of our tests and we had several notable wins. 1 was integrating urgency metrics into our mobile app product detail page, boosting the rate at which buyers placed orders. Another was incorporating pricing guidance into our make offer flow, increasing the number of offers that converted into orders. Speaker 200:06:37Given the highly considered nature of our listings, many orders involve negotiations between buyer and seller. Because over 40% of orders originate as buyer initiated negotiations, optimizing this process is a target rich opportunity and will be an area of continued experimentation. Lastly, we launched our 1st machine learning based pricing model for furniture, providing stronger, more precise recommendations tailored to maximize conversion. Competitive inventory pricing is one of 3 focus areas on our product roadmap. To achieve this, we have a multi pronged approach ranging from enforcing price parity policies to incorporating machine learning based pricing recommendations. Speaker 200:07:23Despite recent gains, there is significant headroom to increase conversion, grow orders and expand our active buyer base. For example, active buyers and new buyer conversion remain approximately 10% 30% below their peaks. Given our long runway of opportunities, we expect to meaningfully outperform historical levels over time. Auctions is another area where we are not sitting still. After a thorough review, we decided to discontinue the feature in late September for two reasons. Speaker 200:07:571st, auctions was intended to induce sellers to price more competitively. We now have a road map that we believe will accomplish this more effectively and applies to all listings rather than only those in auction. 2nd, we determined that the resources allocated to the feature were not commensurate with its financial contribution and that they would be better deployed elsewhere. Approximately 10% of engineering time was spent working on auctions related projects, but it generated roughly 2% of GMV and 5% of orders. This move reduces complexity, making it faster to build new features, simpler to run tests and easier to maintain existing features. Speaker 200:08:40Supply is another area where we challenged assumptions and took action. After reviewing the initiative, we decided to retire the Essential Seller program on November 1. Launched in January 2022, the offering provided a subscription free pricing option. This was a great tool for seller acquisition, but the bulk of these sellers did not engage deeply with the platform. Compared to subscription paying sellers, essential seller engagement was materially lower on a number of fronts, including listings, sales and logins. Speaker 200:09:14From our data, we know that engagement is a precursor to seller success. For instance, more listings correlates with more sales. As a result, in late 2023, we shifted our seller acquisition strategy and monetization approach to concentrate on fewer, but more highly engaged sellers. Retiring the essential seller program is another step in this direction. Although unique seller count has been volatile due to policy changes, we continue to see steady listings growth and ended the quarter with over 1,800,000 listings, up 7%. Speaker 200:09:49Healthy listings growth should continue in the 4th quarter. We ended the quarter with nearly 7,000 unique sellers, down 13%. As anticipated, seller churn remains elevated as we manage out low performing sellers. Consistent with previous quarters, the majority of churn was initiated by us due to low engagement or performance. In total, the churn cohort accounted for less than 20 basis points of GMV over the trailing 12 months and under 40 basis points of total listings. Speaker 200:10:25Churn will be temporarily elevated in the Q4 as we retire our essential seller program. This change requires existing essential sellers to upgrade to a monthly subscription plan to remain on the marketplace. Approximately 2,200 unique sellers are affected. We expect the change to modestly increase revenue while reducing operational complexity, and we will provide an update on our Q4 call. Because our path to profitability will be driven by operating leverage, we are focused on ensuring that resources are best deployed to accelerate and sustain growth. Speaker 200:11:02Discontinuing auctions and winding down the essential seller program are two examples of this. We are also not sitting still with capital allocation. After completing a $25,000,000 share repurchase program in June, we instituted a new $10,000,000 repurchase program in August. We believe that this will be very accretive in the long run given that we are buying back shares at a discount to our assessment of intrinsic value. The size of our opportunity, our operational progress and the fact that we are well positioned to capitalize on a market recovery. Speaker 200:11:37We are not waiting for external conditions to improve. We are creating opportunities through deliberate action, be it cost reductions, resource allocation or share repurchases. By focusing on what matters most, we have made progress across key metrics. Although it can be hard to measure progress in a market that is contracting, we feel that positive momentum in conversion, order growth, active buyers and revenue as well as our continued focus on costs are building a solid foundation to drive results when the market rebounds. Thank you for your continued support. Speaker 200:12:12I will now turn it over to Tom to review our Q3 financial results and Q4 outlook. Speaker 300:12:18Thanks, David. We delivered GMV revenue and adjusted EBITDA margins near the low end of our guidance range the stronger than anticipated AOB headwinds weighed on GMV growth. As I will detail later on, we see this as a temporary dynamic. In contrast, we believe conversion gains and order growth are durable trends. GMV was $84,600,000 down 5%. Speaker 300:12:44On a sequential basis, GMV growth rates decelerated approximately 7 percentage points. This was driven by lower than anticipated AOV, partially offset by accelerated order growth. Average order value of approximately $2,500 was down 11%. In contrast, median order value of approximately $1200 was down 3%. The latter is less impacted by fluctuations in high value orders. Speaker 300:13:142 variables drove AOB down. First, we lapped a record quarter for orders over $100,000 Last year, these orders accounted for over 8% of GMV compared to our historical average of 3% to 5%. 2nd, high value orders were roughly 2% of GMV this quarter, slightly below typical ranges. While Q3 guidance contemplated the 1st dynamic, it did not anticipate the 2nd. This combination resulted in a stronger than expected average order value headwind weighing on GMV growth. Speaker 300:13:51As the Q3 AOV was consistent with July and then GMV growth would have been 4 percentage points higher. We have not seen any change in inventory makeup, on-site engagement or seller discounts. This combined with stable median order value trends leads us to believe that both the AOB strength last year and the AOB softness this year are outliers. Additionally, relative to the 3rd quarter, AOB trends improved in October, both on an absolute dollar and year over year basis. In contrast to the AOB dynamic, which we view as temporary, we see a long runway for conversion gains. Speaker 300:14:33Conversion rates have now increased year over year for 4 straight quarters. In the Q3, conversion rates increased double digits for both new and returning buyers. Additionally, returning buyer conversion hit a new record. We are confident in our roadmap and see ample headroom to increase conversion over time. Traffic headwinds were stable sequentially with performance marketing optimizations and higher performance marketing investment offsetting softer organic traffic. Speaker 300:15:04We ended the quarter with approximately 70% of traffic from organic sources and 30% from paid. Returning to GMV, consumer GMV and trade GMV declined at similar rates. Vintage and antique furniture posted GMV growth, while all other verticals declined. In contrast, orders grew in all verticals except art. We entered the quarter with approximately 62,500 active buyers down 1% year over year, but up 2% sequentially. Speaker 300:15:39This was our 2nd straight quarter of sequential growth. Because active buyers are trailing 12 month metric, it is a lagging indicator. Encouragingly, order growth is a leading indicator of future active buyer growth. Based on quarter to date trends, we expect continued order growth in the 4th quarter, which is supportive of further active buyer improvements. On the supply side of the marketplace, we experienced steady listings growth, closing the quarter with over 1,800,000 listings, up 7%. Speaker 300:16:11We ended the quarter with nearly 7,000 unique sellers, down 13%. The decline in the number of unique sellers was due to higher than usual churn. The majority of it was initiated by us related to policy changes in late 2023. This churn had a de minimis impact on GMV and listings. We anticipate elevated churn in the Q4 due to sunsetting the essential seller program. Speaker 300:16:38However, we do not expect this to have a meaningful impact on GMV revenue or listings. Additionally, churn should normalize in the first half of twenty twenty five. Turning to the P and L. Net revenue was $21,200,000 up 3%, marking the 2nd consecutive quarter of year over year growth. Transaction revenue, which is tied directly to GMV, was approximately 75% of total revenue with subscriptions making up most of the remainder. Speaker 300:17:09Take rates improved modestly due to a combination of several factors, including a higher proportion of orders below our $25,000 commission break, growing GMV contribution from low subscription sellers, which carry a higher commission rate and a revised commission break structure that went into effect late in Q4 of 2023. Gross profit was $15,000,000 down 1%. Gross profit margins were 71%, down approximately 2 percentage points, primarily driven by higher shipping and payment processing expenses. Sales and marketing expenses were $9,100,000 up 9%, driven by increased performance marketing investment enabled by new optimizations and improved attribution and headcount related expenses due to our annual merit increases awarded in March. Sales and marketing as a percentage of revenue was 44%, up from 41% a year ago. Speaker 300:18:06Technology development expenses were $5,500,000 up 21 percent driven by higher headcount related costs through our annual merit increases awarded in March and some selective hiring. As a percentage of revenue, technology development was 26%, up from 22%. General and administrative expenses were $6,900,000 up 1%, with higher headcount related expenses due to our annual merit increases awarded in March and higher professional service fees being offset by lower rent expense attributable to the sublease of our former headquarters at 51 Astor Place. As a percentage of revenue, general administrative expenses were 32%, down from 33%. Lastly, provision for transaction losses were approximately $950,000 4 percent of revenue, up from 3%, primarily driven by an increase in bad debt expense. Speaker 300:19:01Total operating expenses were $22,400,000 up 10% year over year, but flat sequentially. Adjusted EBITDA loss was $3,000,000 compared to a loss of $1,800,000 last year. Adjusted EBITDA margin was a loss of 14% versus a loss of 9% last year, due primarily to higher technology development and sales and marketing expenses. Given our June 2023 cost reductions, we are lapping our low watermark for operating expenses this quarter. Looking forward, we remain focused on lowering the revenue growth thresholds required to achieve operating leverage. Speaker 300:19:39Moving on to the balance sheet, we ended the quarter with a strong cash, cash equivalents and short term investments position of $109,000,000 In August, we initiated a new $10,000,000 share repurchase program. During the quarter, we repurchased approximately $900,000 worth of shares. Since launching our 1st share repurchase program in August 2023, we have repurchased approximately 5,100,000 shares for a total of $26,100,000 Turning to the outlook. Our guidance reflects quarter to date results and forecast for the remainder of the period. We forecast 4th quarter GMV of $86,000,000 to $93,000,000 flat to up 8 percent net revenue of $21,400,000 to $22,700,000 up 2% to up 8% and adjusted EBITDA margin loss of 17% to 13%. Speaker 300:20:35Our GMV guidance reflects continued conversion wins and order growth and moderating AOV headwinds. From a macro perspective, our outlook also assumes a continuation of the soft demand environment we have seen throughout 2024 due to prolonged softness in the luxury housing and high end discretionary markets. It also contemplates a few one off items, the U. S. Election, which creates more competition for attention and mind share and a shorter holiday shopping season. Speaker 300:21:04Our adjusted EBITDA margin guidance reflects gross margins towards the low end of our recent 71% to 73% range, a sequential increase in operating expenses driven by a seasonal increase in performance marketing. Excluding this increase in performance marketing, we expect operating expenses to be approximately flat sequentially. Our results reflect both the realities of a challenging market and the progress we are making through disciplined execution. Despite AOB headwinds, we delivered solid progress across key areas, including active buyers, conversion gains and order growth. These developments show that our strategy is working. Speaker 300:21:45As we phase out auction and the essential seller program, we are concentrating resources on the highest impact projects and strengthening our foundation to benefit from an eventual market rebound. While challenges remain for luxury housing and high end discretionary, we are gaining market share and are optimistic about our trajectory. We appreciate your continued support and look forward to updating you on our progress in the coming quarters. Thank you. I will now turn the call over to the operator to take your questions. Operator00:22:16Thank you. Ladies and gentlemen, we will now begin the question and answer session. Our first question comes from the line of Nick Jones with Citizens JMP. Please go ahead. Speaker 400:22:37Great. Thanks for taking the questions. Could you kind of remind us when we speak to the AOV headwinds and how we should be thinking kind of a timeline to when those will abate or stabilize? And then I have a second question that's kind of your venture. Speaker 300:22:56Hey, Nick. This is Tom. I'll take that one. Yes, sure. So our AOV headwinds that we experienced in Q3 really were twofold, right? Speaker 300:23:06First, last year, so this year we are lapping a record quarter for orders over $100,000 from Q3 of 2023, where it represented about 8% of our GMV. Typically that number is about 3% to 5% of our GMV. Additionally, in Q3 of this year, orders over $100,000 represented about 2% of GMV. So they underperformed our normal historic averages. So the combined result of those two things really was the result of what caused our headwinds. Speaker 300:23:47Looking into Q4, what we're seeing is that is starting to subside. We saw that October was more normalized from what we've seen in the past and what was up from our August to September numbers. So we see that in Q4, we're going to start to see more normalized average order values. Speaker 400:24:14Got it. That's helpful. And then, some of the residential real estate, both companies that have kind of reported this quarter and kind of the I think the consensus around next year is kind of more muted volumes, maybe up a little bit, couple of 100 1,000 existing home sales. Given the correlation in the luxury housing market, do you have any updated thoughts as to kind of the timeline to more normalized transaction volumes? And I think with the election over, there's some thoughts that some of the policy may end up being inflationary, which would potentially impact rates. Speaker 400:24:48I guess just curious, is that informing maybe why you're revisiting what it takes to drive leverage? Or is this any thoughts on kind of the longer term picture to kind of a more normalized environment given the correlation of what you're having? Thank you. Speaker 200:25:03Hey, Nick, it's David. Thank you for the question. Look, we're not macroeconomic forecasters. So what we try to do though is index our performance to the market. The biggest driver certainly is the luxury real estate market. Speaker 200:25:19We also look at syndicated credit card data having to do with luxury furnishing. And we were actually pretty happy with our performance versus market in the last quarter. I mean, I think the BofA data said that luxury furnishing spend was down 8%. And compared to that, obviously, orders grew 7%, which was a sequential increase from 5% last quarter. Revenue was up 3% and active buyers grew for the 2nd quarter in a row on a sequential basis. Speaker 200:25:48And as Tom said, we think the AOV trend will normalize in the 4th quarter. So looking beyond that, I mean, again, I'm not our goal is to try to grow faster than the market and take share. And what our performance says in Q3 is by the metrics that we look at, that happened. And we think the sort of drivers that are causing that won't change next year. And if we get some kind of market recovery, that's a plus, but we're not anticipating 1. Speaker 400:26:19Got it. Thank you both. Operator00:26:23Our next question comes from the line of Mark Mahaney with Evercore. Please go ahead. Speaker 500:26:29Hey, thanks. Two questions, please. I think, David, you talked about cutting back on or reducing or removing auctions format. Can you just talk about how material you think that is could be to the business? How material has it been? Speaker 500:26:42And then secondly, I think you gave some color commentary on next year revenue growth being mid single digit percent. And I guess maybe this is a question for Tom. Is the cost structure such that mid single digit percent allows you to get to EBITDA breakeven for the full year? Or how should we think about what that top line forecast suggests for the bottom line? Thank you. Speaker 200:27:04Mark, sure. So the financial impact of auctions is relatively minimal. I think auctions accounted for 5% to 6% of orders and 2% of revenue. And so again, we think we'll what we're going to do is remove auctions. What we have done is remove auctions, redeploy those resources and other initiatives focused on pricing, and we think that's a positive reallocation of capital. Speaker 200:27:33Otherwise, we wouldn't have done it. So I don't think the net effect will be negative. And I think it's important to note, the reason why we're pulling back from it is because the original purpose of introducing more efficient and market based pricing on the site is better served by other pricing strategies that we have that we feel very good about. And specifically, what we're doing is we're focused on using machine learning to produce price recommendations to both sellers and buyers. We've rolled out our first category recently and we have plans to roll it out to the remaining ones. Speaker 200:28:13But we think unlike auctions, which of course only impact items in auction, this machine learning based approach to introducing more rational or market based pricing impacts all items on the marketplace and therefore should have a much bigger impact on overall conversion and ultimately growth. Speaker 300:28:33Hi Mark, this is Tom. I'll take the second question. Let me clarify, we were not and do not give forward looking guidance past 1 quarter. So we were not guiding towards any number for 2025. What we were stating, what I was talking about is that we are reviewing the business. Speaker 300:28:53We're always identifying opportunities to improve our efficiency and drive operating leverage. And what we're right now focused on is lowering our revenue growth threshold required to generate further operating leverage. And we're looking at the mid single digits of revenue growth in order to start showing additional operating leverage. And that's what we are talking about for 2025. Operator00:29:24The next question comes from the line of Ralph Schackart with William Blair. Please go ahead. Speaker 600:29:30Good morning. Two questions if I could. I think you talked about accelerating order growth again in Q4. Just curious, is that a trend you saw, I guess, quarter to date that gives you sort of the confidence that that will continue? And then can you just remind me going back to some of your prior comments about churn normalizing in the first half of twenty twenty five? Speaker 600:29:49And what are the factors that will help churn normalize? Thank you. Speaker 500:29:57Hey, Ralph. Speaker 200:29:59So on order growth, I think what we had said was that in Q3, we had sequentially accelerating order growth. I don't think we talked about anticipated order growth in Q4. Of course, at the midpoint of guidance in Q4, we do expect GMV to be back to kind of mid single digit growth. So I don't know if that was a number that you're referring to. But regardless, no guidance on order growth for Q4, but we did see a sequential increase in order growth in Q3. Speaker 200:30:31In terms of seller churn, the background to that is roughly 2 years ago, we launched a program called Essential Seller, which offers sellers a 0 subscription fee option. That resulted in a significant increase in the number of sellers. But what we learned is those sellers were much less engaged than subscription fee paying sellers. And so what we have been in the process of doing for the last couple of quarters, but which kind of culmination or is reaching its culmination this quarter is terminating that program and converting the remaining sellers into fee paying, so sub fee paying sellers. And so that will be over this quarter. Speaker 200:31:17We don't think then that, that will impact, as you note and as we said in the script, a higher than average churn number for this quarter. However, in terms of the metrics that ultimately really matter, listings growth and GMV impact and so on, there's really no real impact. Listings grew 7% last quarter. We anticipate something similar this quarter. And both the well, primarily the GMV, but also the listings impact will be sub 0.5 percentage point going forward. Speaker 200:31:52In terms of churn itself, that will stabilize beginning in the Q1 once we're done fully transitioning the remaining essential sellers onto sub fee paying packages. Speaker 600:32:03Okay, great. Thanks, David. Operator00:32:08As there are no further questions at this time, that concludes our Q and A session as well as FirstDib's earnings conference call. Thank you all for attending today's session and for your participation. You may now disconnect. Have a pleasant day, everyone.Read morePowered by Conference Call Audio Live Call not available Earnings Conference Call1stdibs.Com Q3 202400:00 / 00:00Speed:1x1.25x1.5x2x Earnings DocumentsPress Release(8-K)Quarterly report(10-Q) 1stdibs.Com Earnings Headlines1stDibs Announces the 1stDibs 50 for 2025April 28, 2025 | businesswire.comIs 1stdibs.com, Inc. 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Email Address About 1stdibs.Com1stdibs.Com (NASDAQ:DIBS) operates an online marketplace for luxury design products worldwide. Its marketplace connects customers with sellers and makers of vintage, antique, and contemporary furniture; and home décor, jewelry, watches, art, and fashion products. 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There are 7 speakers on the call. Operator00:00:00Thank you for standing by. My name is John, and I will be your conference operator for today. At this time, I would like to welcome everyone to the First Debs.com, Inc. Third Quarter 2024 Earnings Conference Call. All lines have been placed on mute mute to prevent any background noise. Operator00:00:14After the speakers' remarks, there will be a question and answer session. I would now like to turn the call over to Kevin Labuzz, Head of Investor Relations and Corporate Development. Please go ahead. Speaker 100:00:35Good morning, and welcome to FirstDib's earnings call for the quarter ended September 30, 2024. I'm Kevin Labuzz, Head of Investor Relations and Corporate Development. Joining me today are Chief Executive Officer, David Rosenblatt and Chief Financial Officer, Tom Energino. David will provide an update on our business, including our strategy and growth opportunities, and Tom will review our Q3 financial results and Q4 outlook. This call will be available via webcast on our Investor Relations website at investors. Speaker 100:01:131stdibs.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, 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 will present GAAP and non GAAP financial measures. Speaker 100:02:13A reconciliation of GAAP to non GAAP measures is included in the state'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? Speaker 200:02:35Thanks, Kevin. Good morning and thank you for joining us today. 3rd quarter results reflect continued improvements across our key focus areas. For the 2nd consecutive quarter, we achieved year over year revenue growth, accelerating order growth and sequential active buyer growth. We achieved this progress despite prolonged softness in the luxury housing market, which is experiencing the largest slump since the mid-1990s. Speaker 200:03:03Despite continued conversion gains and accelerating order growth, GMV contracted due to weaker than expected average order values, which we see as temporary. We anticipate returning the GMV growth in the 4th quarter driven by further conversion gains and moderating AOV headwinds. Our adjusted EBITDA margins came in toward the low end of guidance. Relative to the 2nd quarter, margin compression primarily reflects seasonally lower revenue as operating expenses remained flat sequentially. In the Q4, we anticipate some additional margin compression due to seasonal increases in performance marketing. Speaker 200:03:44While margins will be down year over year, we are focused on improving efficiency and positioning the business for sustainable growth. Given the muted demand environment, we are focused on lowering the growth threshold required to achieve operating leverage. Our preliminary 2025 plan targets generating operating leverage at mid single digit revenue growth. Reviewing the Q3, increasing conversion remains our operational priority and highest leverage activity. We maintain momentum here. Speaker 200:04:18Conversion rates have grown over the past year and growth accelerated again in the Q3. Encouragingly, these gains are broad based with new and returning buyers both seeing double digit improvements. Additionally, returning buyer conversion hit another record high. Conversion wins fueled order growth, which increased to 7%. Continuing with funnel dynamics, traffic headwinds were stable versus the Q2, but AOV was softer than anticipated, depressing GMV. Speaker 200:04:51Tom will provide more detail later on, but based on quarter to date trends, we believe this dynamic will moderate in the Q4. Order growth and active buyer trends are accelerating at a time when the luxury housing market and high end furniture sales remain soft. According to the National Association of Realtors, U. S. Existing home sales are on track for their worst year since 1995 for the 2nd year in a row. Speaker 200:05:19This is a cyclical issue, not a structural one. Although calling the timing of a recovery is difficult, demand for luxury homes and high end furnishings will eventually rebound. When it does, we stand to benefit from our ongoing operational improvements and lower cost structure. However, we strongly believe in creating our own luck and are not waiting around for the market to recover. We demonstrated this in 20222023 by reducing operating expenses and narrowing our focus. Speaker 200:05:51We are demonstrating this today by accelerating our pace of product velocity and reallocating resources from lower return projects to higher return projects. Regarding product velocity, the number of AD tests we ran during the quarter grew double digits sequentially and triple digits year over year, hitting a new record. Increasing conversion was the primary focus of our tests and we had several notable wins. 1 was integrating urgency metrics into our mobile app product detail page, boosting the rate at which buyers placed orders. Another was incorporating pricing guidance into our make offer flow, increasing the number of offers that converted into orders. Speaker 200:06:37Given the highly considered nature of our listings, many orders involve negotiations between buyer and seller. Because over 40% of orders originate as buyer initiated negotiations, optimizing this process is a target rich opportunity and will be an area of continued experimentation. Lastly, we launched our 1st machine learning based pricing model for furniture, providing stronger, more precise recommendations tailored to maximize conversion. Competitive inventory pricing is one of 3 focus areas on our product roadmap. To achieve this, we have a multi pronged approach ranging from enforcing price parity policies to incorporating machine learning based pricing recommendations. Speaker 200:07:23Despite recent gains, there is significant headroom to increase conversion, grow orders and expand our active buyer base. For example, active buyers and new buyer conversion remain approximately 10% 30% below their peaks. Given our long runway of opportunities, we expect to meaningfully outperform historical levels over time. Auctions is another area where we are not sitting still. After a thorough review, we decided to discontinue the feature in late September for two reasons. Speaker 200:07:571st, auctions was intended to induce sellers to price more competitively. We now have a road map that we believe will accomplish this more effectively and applies to all listings rather than only those in auction. 2nd, we determined that the resources allocated to the feature were not commensurate with its financial contribution and that they would be better deployed elsewhere. Approximately 10% of engineering time was spent working on auctions related projects, but it generated roughly 2% of GMV and 5% of orders. This move reduces complexity, making it faster to build new features, simpler to run tests and easier to maintain existing features. Speaker 200:08:40Supply is another area where we challenged assumptions and took action. After reviewing the initiative, we decided to retire the Essential Seller program on November 1. Launched in January 2022, the offering provided a subscription free pricing option. This was a great tool for seller acquisition, but the bulk of these sellers did not engage deeply with the platform. Compared to subscription paying sellers, essential seller engagement was materially lower on a number of fronts, including listings, sales and logins. Speaker 200:09:14From our data, we know that engagement is a precursor to seller success. For instance, more listings correlates with more sales. As a result, in late 2023, we shifted our seller acquisition strategy and monetization approach to concentrate on fewer, but more highly engaged sellers. Retiring the essential seller program is another step in this direction. Although unique seller count has been volatile due to policy changes, we continue to see steady listings growth and ended the quarter with over 1,800,000 listings, up 7%. Speaker 200:09:49Healthy listings growth should continue in the 4th quarter. We ended the quarter with nearly 7,000 unique sellers, down 13%. As anticipated, seller churn remains elevated as we manage out low performing sellers. Consistent with previous quarters, the majority of churn was initiated by us due to low engagement or performance. In total, the churn cohort accounted for less than 20 basis points of GMV over the trailing 12 months and under 40 basis points of total listings. Speaker 200:10:25Churn will be temporarily elevated in the Q4 as we retire our essential seller program. This change requires existing essential sellers to upgrade to a monthly subscription plan to remain on the marketplace. Approximately 2,200 unique sellers are affected. We expect the change to modestly increase revenue while reducing operational complexity, and we will provide an update on our Q4 call. Because our path to profitability will be driven by operating leverage, we are focused on ensuring that resources are best deployed to accelerate and sustain growth. Speaker 200:11:02Discontinuing auctions and winding down the essential seller program are two examples of this. We are also not sitting still with capital allocation. After completing a $25,000,000 share repurchase program in June, we instituted a new $10,000,000 repurchase program in August. We believe that this will be very accretive in the long run given that we are buying back shares at a discount to our assessment of intrinsic value. The size of our opportunity, our operational progress and the fact that we are well positioned to capitalize on a market recovery. Speaker 200:11:37We are not waiting for external conditions to improve. We are creating opportunities through deliberate action, be it cost reductions, resource allocation or share repurchases. By focusing on what matters most, we have made progress across key metrics. Although it can be hard to measure progress in a market that is contracting, we feel that positive momentum in conversion, order growth, active buyers and revenue as well as our continued focus on costs are building a solid foundation to drive results when the market rebounds. Thank you for your continued support. Speaker 200:12:12I will now turn it over to Tom to review our Q3 financial results and Q4 outlook. Speaker 300:12:18Thanks, David. We delivered GMV revenue and adjusted EBITDA margins near the low end of our guidance range the stronger than anticipated AOB headwinds weighed on GMV growth. As I will detail later on, we see this as a temporary dynamic. In contrast, we believe conversion gains and order growth are durable trends. GMV was $84,600,000 down 5%. Speaker 300:12:44On a sequential basis, GMV growth rates decelerated approximately 7 percentage points. This was driven by lower than anticipated AOV, partially offset by accelerated order growth. Average order value of approximately $2,500 was down 11%. In contrast, median order value of approximately $1200 was down 3%. The latter is less impacted by fluctuations in high value orders. Speaker 300:13:142 variables drove AOB down. First, we lapped a record quarter for orders over $100,000 Last year, these orders accounted for over 8% of GMV compared to our historical average of 3% to 5%. 2nd, high value orders were roughly 2% of GMV this quarter, slightly below typical ranges. While Q3 guidance contemplated the 1st dynamic, it did not anticipate the 2nd. This combination resulted in a stronger than expected average order value headwind weighing on GMV growth. Speaker 300:13:51As the Q3 AOV was consistent with July and then GMV growth would have been 4 percentage points higher. We have not seen any change in inventory makeup, on-site engagement or seller discounts. This combined with stable median order value trends leads us to believe that both the AOB strength last year and the AOB softness this year are outliers. Additionally, relative to the 3rd quarter, AOB trends improved in October, both on an absolute dollar and year over year basis. In contrast to the AOB dynamic, which we view as temporary, we see a long runway for conversion gains. Speaker 300:14:33Conversion rates have now increased year over year for 4 straight quarters. In the Q3, conversion rates increased double digits for both new and returning buyers. Additionally, returning buyer conversion hit a new record. We are confident in our roadmap and see ample headroom to increase conversion over time. Traffic headwinds were stable sequentially with performance marketing optimizations and higher performance marketing investment offsetting softer organic traffic. Speaker 300:15:04We ended the quarter with approximately 70% of traffic from organic sources and 30% from paid. Returning to GMV, consumer GMV and trade GMV declined at similar rates. Vintage and antique furniture posted GMV growth, while all other verticals declined. In contrast, orders grew in all verticals except art. We entered the quarter with approximately 62,500 active buyers down 1% year over year, but up 2% sequentially. Speaker 300:15:39This was our 2nd straight quarter of sequential growth. Because active buyers are trailing 12 month metric, it is a lagging indicator. Encouragingly, order growth is a leading indicator of future active buyer growth. Based on quarter to date trends, we expect continued order growth in the 4th quarter, which is supportive of further active buyer improvements. On the supply side of the marketplace, we experienced steady listings growth, closing the quarter with over 1,800,000 listings, up 7%. Speaker 300:16:11We ended the quarter with nearly 7,000 unique sellers, down 13%. The decline in the number of unique sellers was due to higher than usual churn. The majority of it was initiated by us related to policy changes in late 2023. This churn had a de minimis impact on GMV and listings. We anticipate elevated churn in the Q4 due to sunsetting the essential seller program. Speaker 300:16:38However, we do not expect this to have a meaningful impact on GMV revenue or listings. Additionally, churn should normalize in the first half of twenty twenty five. Turning to the P and L. Net revenue was $21,200,000 up 3%, marking the 2nd consecutive quarter of year over year growth. Transaction revenue, which is tied directly to GMV, was approximately 75% of total revenue with subscriptions making up most of the remainder. Speaker 300:17:09Take rates improved modestly due to a combination of several factors, including a higher proportion of orders below our $25,000 commission break, growing GMV contribution from low subscription sellers, which carry a higher commission rate and a revised commission break structure that went into effect late in Q4 of 2023. Gross profit was $15,000,000 down 1%. Gross profit margins were 71%, down approximately 2 percentage points, primarily driven by higher shipping and payment processing expenses. Sales and marketing expenses were $9,100,000 up 9%, driven by increased performance marketing investment enabled by new optimizations and improved attribution and headcount related expenses due to our annual merit increases awarded in March. Sales and marketing as a percentage of revenue was 44%, up from 41% a year ago. Speaker 300:18:06Technology development expenses were $5,500,000 up 21 percent driven by higher headcount related costs through our annual merit increases awarded in March and some selective hiring. As a percentage of revenue, technology development was 26%, up from 22%. General and administrative expenses were $6,900,000 up 1%, with higher headcount related expenses due to our annual merit increases awarded in March and higher professional service fees being offset by lower rent expense attributable to the sublease of our former headquarters at 51 Astor Place. As a percentage of revenue, general administrative expenses were 32%, down from 33%. Lastly, provision for transaction losses were approximately $950,000 4 percent of revenue, up from 3%, primarily driven by an increase in bad debt expense. Speaker 300:19:01Total operating expenses were $22,400,000 up 10% year over year, but flat sequentially. Adjusted EBITDA loss was $3,000,000 compared to a loss of $1,800,000 last year. Adjusted EBITDA margin was a loss of 14% versus a loss of 9% last year, due primarily to higher technology development and sales and marketing expenses. Given our June 2023 cost reductions, we are lapping our low watermark for operating expenses this quarter. Looking forward, we remain focused on lowering the revenue growth thresholds required to achieve operating leverage. Speaker 300:19:39Moving on to the balance sheet, we ended the quarter with a strong cash, cash equivalents and short term investments position of $109,000,000 In August, we initiated a new $10,000,000 share repurchase program. During the quarter, we repurchased approximately $900,000 worth of shares. Since launching our 1st share repurchase program in August 2023, we have repurchased approximately 5,100,000 shares for a total of $26,100,000 Turning to the outlook. Our guidance reflects quarter to date results and forecast for the remainder of the period. We forecast 4th quarter GMV of $86,000,000 to $93,000,000 flat to up 8 percent net revenue of $21,400,000 to $22,700,000 up 2% to up 8% and adjusted EBITDA margin loss of 17% to 13%. Speaker 300:20:35Our GMV guidance reflects continued conversion wins and order growth and moderating AOV headwinds. From a macro perspective, our outlook also assumes a continuation of the soft demand environment we have seen throughout 2024 due to prolonged softness in the luxury housing and high end discretionary markets. It also contemplates a few one off items, the U. S. Election, which creates more competition for attention and mind share and a shorter holiday shopping season. Speaker 300:21:04Our adjusted EBITDA margin guidance reflects gross margins towards the low end of our recent 71% to 73% range, a sequential increase in operating expenses driven by a seasonal increase in performance marketing. Excluding this increase in performance marketing, we expect operating expenses to be approximately flat sequentially. Our results reflect both the realities of a challenging market and the progress we are making through disciplined execution. Despite AOB headwinds, we delivered solid progress across key areas, including active buyers, conversion gains and order growth. These developments show that our strategy is working. Speaker 300:21:45As we phase out auction and the essential seller program, we are concentrating resources on the highest impact projects and strengthening our foundation to benefit from an eventual market rebound. While challenges remain for luxury housing and high end discretionary, we are gaining market share and are optimistic about our trajectory. We appreciate your continued support and look forward to updating you on our progress in the coming quarters. Thank you. I will now turn the call over to the operator to take your questions. Operator00:22:16Thank you. Ladies and gentlemen, we will now begin the question and answer session. Our first question comes from the line of Nick Jones with Citizens JMP. Please go ahead. Speaker 400:22:37Great. Thanks for taking the questions. Could you kind of remind us when we speak to the AOV headwinds and how we should be thinking kind of a timeline to when those will abate or stabilize? And then I have a second question that's kind of your venture. Speaker 300:22:56Hey, Nick. This is Tom. I'll take that one. Yes, sure. So our AOV headwinds that we experienced in Q3 really were twofold, right? Speaker 300:23:06First, last year, so this year we are lapping a record quarter for orders over $100,000 from Q3 of 2023, where it represented about 8% of our GMV. Typically that number is about 3% to 5% of our GMV. Additionally, in Q3 of this year, orders over $100,000 represented about 2% of GMV. So they underperformed our normal historic averages. So the combined result of those two things really was the result of what caused our headwinds. Speaker 300:23:47Looking into Q4, what we're seeing is that is starting to subside. We saw that October was more normalized from what we've seen in the past and what was up from our August to September numbers. So we see that in Q4, we're going to start to see more normalized average order values. Speaker 400:24:14Got it. That's helpful. And then, some of the residential real estate, both companies that have kind of reported this quarter and kind of the I think the consensus around next year is kind of more muted volumes, maybe up a little bit, couple of 100 1,000 existing home sales. Given the correlation in the luxury housing market, do you have any updated thoughts as to kind of the timeline to more normalized transaction volumes? And I think with the election over, there's some thoughts that some of the policy may end up being inflationary, which would potentially impact rates. Speaker 400:24:48I guess just curious, is that informing maybe why you're revisiting what it takes to drive leverage? Or is this any thoughts on kind of the longer term picture to kind of a more normalized environment given the correlation of what you're having? Thank you. Speaker 200:25:03Hey, Nick, it's David. Thank you for the question. Look, we're not macroeconomic forecasters. So what we try to do though is index our performance to the market. The biggest driver certainly is the luxury real estate market. Speaker 200:25:19We also look at syndicated credit card data having to do with luxury furnishing. And we were actually pretty happy with our performance versus market in the last quarter. I mean, I think the BofA data said that luxury furnishing spend was down 8%. And compared to that, obviously, orders grew 7%, which was a sequential increase from 5% last quarter. Revenue was up 3% and active buyers grew for the 2nd quarter in a row on a sequential basis. Speaker 200:25:48And as Tom said, we think the AOV trend will normalize in the 4th quarter. So looking beyond that, I mean, again, I'm not our goal is to try to grow faster than the market and take share. And what our performance says in Q3 is by the metrics that we look at, that happened. And we think the sort of drivers that are causing that won't change next year. And if we get some kind of market recovery, that's a plus, but we're not anticipating 1. Speaker 400:26:19Got it. Thank you both. Operator00:26:23Our next question comes from the line of Mark Mahaney with Evercore. Please go ahead. Speaker 500:26:29Hey, thanks. Two questions, please. I think, David, you talked about cutting back on or reducing or removing auctions format. Can you just talk about how material you think that is could be to the business? How material has it been? Speaker 500:26:42And then secondly, I think you gave some color commentary on next year revenue growth being mid single digit percent. And I guess maybe this is a question for Tom. Is the cost structure such that mid single digit percent allows you to get to EBITDA breakeven for the full year? Or how should we think about what that top line forecast suggests for the bottom line? Thank you. Speaker 200:27:04Mark, sure. So the financial impact of auctions is relatively minimal. I think auctions accounted for 5% to 6% of orders and 2% of revenue. And so again, we think we'll what we're going to do is remove auctions. What we have done is remove auctions, redeploy those resources and other initiatives focused on pricing, and we think that's a positive reallocation of capital. Speaker 200:27:33Otherwise, we wouldn't have done it. So I don't think the net effect will be negative. And I think it's important to note, the reason why we're pulling back from it is because the original purpose of introducing more efficient and market based pricing on the site is better served by other pricing strategies that we have that we feel very good about. And specifically, what we're doing is we're focused on using machine learning to produce price recommendations to both sellers and buyers. We've rolled out our first category recently and we have plans to roll it out to the remaining ones. Speaker 200:28:13But we think unlike auctions, which of course only impact items in auction, this machine learning based approach to introducing more rational or market based pricing impacts all items on the marketplace and therefore should have a much bigger impact on overall conversion and ultimately growth. Speaker 300:28:33Hi Mark, this is Tom. I'll take the second question. Let me clarify, we were not and do not give forward looking guidance past 1 quarter. So we were not guiding towards any number for 2025. What we were stating, what I was talking about is that we are reviewing the business. Speaker 300:28:53We're always identifying opportunities to improve our efficiency and drive operating leverage. And what we're right now focused on is lowering our revenue growth threshold required to generate further operating leverage. And we're looking at the mid single digits of revenue growth in order to start showing additional operating leverage. And that's what we are talking about for 2025. Operator00:29:24The next question comes from the line of Ralph Schackart with William Blair. Please go ahead. Speaker 600:29:30Good morning. Two questions if I could. I think you talked about accelerating order growth again in Q4. Just curious, is that a trend you saw, I guess, quarter to date that gives you sort of the confidence that that will continue? And then can you just remind me going back to some of your prior comments about churn normalizing in the first half of twenty twenty five? Speaker 600:29:49And what are the factors that will help churn normalize? Thank you. Speaker 500:29:57Hey, Ralph. Speaker 200:29:59So on order growth, I think what we had said was that in Q3, we had sequentially accelerating order growth. I don't think we talked about anticipated order growth in Q4. Of course, at the midpoint of guidance in Q4, we do expect GMV to be back to kind of mid single digit growth. So I don't know if that was a number that you're referring to. But regardless, no guidance on order growth for Q4, but we did see a sequential increase in order growth in Q3. Speaker 200:30:31In terms of seller churn, the background to that is roughly 2 years ago, we launched a program called Essential Seller, which offers sellers a 0 subscription fee option. That resulted in a significant increase in the number of sellers. But what we learned is those sellers were much less engaged than subscription fee paying sellers. And so what we have been in the process of doing for the last couple of quarters, but which kind of culmination or is reaching its culmination this quarter is terminating that program and converting the remaining sellers into fee paying, so sub fee paying sellers. And so that will be over this quarter. Speaker 200:31:17We don't think then that, that will impact, as you note and as we said in the script, a higher than average churn number for this quarter. However, in terms of the metrics that ultimately really matter, listings growth and GMV impact and so on, there's really no real impact. Listings grew 7% last quarter. We anticipate something similar this quarter. And both the well, primarily the GMV, but also the listings impact will be sub 0.5 percentage point going forward. Speaker 200:31:52In terms of churn itself, that will stabilize beginning in the Q1 once we're done fully transitioning the remaining essential sellers onto sub fee paying packages. Speaker 600:32:03Okay, great. Thanks, David. Operator00:32:08As there are no further questions at this time, that concludes our Q and A session as well as FirstDib's earnings conference call. Thank you all for attending today's session and for your participation. You may now disconnect. Have a pleasant day, everyone.Read morePowered by