Q3 2022 1stdibs.Com Inc Earnings Call

November 9, 2022

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Good day and welcome to the first Dibs Dot Com, Inc. Q3, 2022 earnings conference call. At this time, all participants are in listen only mode.

After the Speakers' presentation there'll be a question answer session and instructions will be given at that time. As a reminder, this call may be recorded I would like to turn the call over to Kevin The bus head of Investor Relations and corporate development you may begin.

Good morning, and welcome to first Dibs earnings call for the quarter ended September 32022.

I'm, Kevin the Buzz head of Investor Relations and corporate development.

Joining me today are CEO David Rosenblatt.

Hi, Gena.

David will provide an update on our business, including our strategy and growth opportunities.

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 got first dibs Dot com.

Before we begin please keep in mind that our remarks include forward looking statements.

But not limited to statements regarding guidance and future financial performance.

Market demand.

Growth prospects.

Plans strategic.

Initiatives.

Evaluation of alternatives.

And economic trends and dynamics, 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.

Putting 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.

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.

Lastly.

Please note that all growth comparisons 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.

Despite a challenging environment for e-commerce and home goods in general, we deliver <unk> revenue and adjusted EBITDA margins above the high end of our guidance straw.

Strength in jewelry and high value orders bolstered GMP, while adjusted EBITDA margins benefited from cost cuts. Additionally, we continued making progress on our strategic initiatives auctions international expansion and supply growth.

We are focused on improving efficiency and aim to emerge from this challenging period with more growth drivers and a leaner cost structure for.

For the past two quarters, we have aligned expenses to lower demand by drastically curtailing hiring increasing performance marketing efficiency targets and reducing head count by approximately 15%.

As a result, adjusted EBITDA margins improved sequentially despite quarter over quarter declines in revenue.

Third quarter operating trends were broadly consistent with those of the second quarter traffic growth was healthy organic traffic mix improved four percentage points due to continued strength in SCO combined with higher efficiency targets on performance marketing.

Supply acquisition remained brisk and seller churn stayed at historical lows.

Once again, returning buyer conversion increased but this was offset by softness in new buyer conversion.

Our strategic initiatives are gaining traction auctions represented 6% of total orders in the quarter up from 4% in the second quarter traffic growth to our localized French and German sites accelerated sharply.

And we added new sellers at three times last year's rate.

One new dynamic this quarter was the change in the composition of GMP growth.

Through the end of the second quarter, we had seen average order value grow for the prior seven quarters. However.

Declined in the third quarter.

At the same time order growth rates improved month over month throughout the quarter Encouragingly. This trend has continued.

Into October .

We believe <unk> declines are driven by two factors first the growth of auctions, which has a lower <unk> than fixed price purchases.

An increasing percentage of overall orders under $1000 we.

We believe this reflects shifting consumer behavior in favor of lower priced items amid macroeconomic uncertainty.

We don't see declining <unk> as a negative our goal is growing <unk> and active buyers lower <unk> expands the market. This was one of the strategic rationales for launching auctions.

<unk> exists at a variety of price points from under $100 to over $100000.

Our objective is serving buyers across the luxury spectrum, while maintaining our strict vetting standards and world class supply.

While the near term environment is challenging our trusted brand and world class supply gives us confidence in the future over the past two decades first dibs has become synonymous with high quality one of a kind items you won't see a line item for trust on our income statement or balance sheet, but it underpins everything we do.

No.

This trust allows us to transact in categories and price points rare and E. Commerce. For example in spite of overall <unk> declines we saw a record number of orders over $100000 driven by jewelry.

Number of these where engagement rings, indicating the level of trust, we have with consumers for their most important vacations.

We are committed to re accelerating <unk> growth and enhancing shareholder value and are reviewing multiple paths to help us achieve these objectives.

Including our ongoing review of various strategic options for the business with our financial advisors at Allen and company.

Turning to operations, we remain focused on the drivers of our business improving conversion, realizing efficiencies expanding supply growing auctions and expanding internationally.

Improving new buyer conversion is our largest lever to re accelerating <unk> growth today subdued home goods demand economic uncertainty a traffic mix shift from returning buyers to new buyers and the device mix shift from desktop and App to mobile web our conversion headwinds.

Everything we do is focused on overcoming these including our strategic initiatives and day to day product and marketing enhancements.

Conversion is a game of incremental gains that compound over time.

We are testing learning and Iterating during the third quarter. For example, we added more product recommendations to low inventory pages improving conversion for those pages.

We also built and tested a new model based on item listing attributes to enhanced search and browse rankings lastly, we implemented <unk> as a payment option in the U S. So far approximately two thirds of coroner checkouts have come from first time buyers.

Improving efficiency is another priority for example, this quarter, we completed a number of initiatives to improve operational productivity through product enhancements and operational improvements we reduced overall client service inbound volume by over 20%, while maintaining high customer satisfaction.

Action.

Going forward, we will continue focusing on projects to improve efficiency.

Our supply team made efficiency gains as well working cross functionally with product management, we launched a new self service onboarding experience for sellers, allowing us to onboard higher volumes of sellers without adding head count.

Our goal is to aggregate the world's most beautiful items, regardless of where they're located while maintaining high curatorial standards.

<unk> growth is a strategic priority because it drives traffic makes search more robust and increases our ability to make a match between buyers and sellers.

Our new seller pricing tests continues to drive supply acquisition at Triple Our 2021 monthly average.

We signed over 650, new sellers in the quarter ending September with over 6700 seller accounts up over 40%.

Because we are a marketplace a one of a kind items breadth matters, adding supply improves marketplace liquidity and ultimately grows demand.

We are seeing this play out for example, one of our new dealers a specialist in fine minerals made their first sale of high value order to a collector in September the pair have subsequently connected on additional orders. An example of how adding supply drives DMV.

Looking ahead, we're focused on inventory lifecycle management, which is targeted at helping sellers succeed on the marketplace by providing guidance on pricing and choice of purchase format.

We continued seeing great traction in auctions with bidders orders GMP and supply all growing double digits sequentially.

<unk> accounted for 6% of orders against 3% of supply.

We had 41000 unique auction listings up from 25000 in the second quarter.

Since launch art and jewelry have been the top performing verticals accounting for approximately 70% of orders highlighting the value of operating across multiple verticals.

Auctions <unk> remains below $1000. We believe this more accessible price point helps engage and activate new buyers.

Over 50% of bidders in the third quarter had never purchased from first as before.

Additionally, about 30% of first time bidders registered in place their first bid on the same date.

Even if they don't win the auction bidders provide their contact information payment details and signal about what they are interested in this.

This is valuable first party data for our product and marketing teams.

Since launch we've enhanced the auctions product experience through weekly updates during the third quarter, we improved discovery with new onsite touch points and increase the visibility of existing auction modules.

We also broadened the reach of our behavioral emails and launched push notifications to drive urgency and bidding activity.

Our next step is focusing on driving demand and optimizing pricing in.

In the fourth quarter, we are beginning work to refine pricing recommendations and provide sellers more guidance around what categories and listings performed best.

Turning to international this was our first full quarter operating localized sites in Germany, and France. Our initial focus is driving traffic to those sites and performance here has been encouraging.

Traffic from German and French IP addresses grew over 375% year over year, albeit off a low base driven by two factors first we started testing local language performance marketing in French and German second we're starting to see benefits from our pages being indexed and low.

Languages.

SCO traffic grew approximately 200% year over year in both markets.

The vast majority of these sessions came from users who haven't purchased from first did before.

Given our consideration cycle is about 100 days it will take time to convert this traffic into orders.

Our international product team incorporated on the fly machine translation into the messaging center, allowing buyers and sellers to communicate in the language, they're most comfortable with.

They are also working to grow our E mail file in France, and Germany, which will help to drive organic traffic and repeat purchases. We also launched customer support on Whatsapp.

It takes years to build a successful international business, but we are happy with our progress so far.

Despite a difficult environment for e-commerce, our platform displayed its unique value this quarter.

Success with high value orders is testament to the trust, we built with buyers and sellers and the strength of the first dibs brand.

<unk> come to us for our unique world class supply and they trust us for their most meaningful purchases.

We believe that subdued e-commerce demand is a temporary dynamic in the two decades before COVID-19 ecommerce penetration increase predictably when demand rebounds, as we believe it will we will have a leaner cost structure and more growth drivers, including auctions localized marketplaces and <unk>.

Increased supply.

As we manage through this challenging period, our aim is to deepen our competitive position and become more efficient.

We are already seeing progress here with adjusted EBITDA margins improving sequentially despite lower revenue.

Additionally, we are encouraged that despite lower <unk>.

Year over year order growth rates improved throughout the quarter and into October .

Unlike the current demand environment, our trusted brand and world class supply are durable assets, giving us confidence in the future.

I'll turn it over now to Tom to review, our third quarter financial results and fourth quarter outlook.

Thanks, David.

The strength in jewelry and high value orders, we delivered <unk> revenue and adjusted EBITDA margins above the high end of our guidance range.

Lower revenue adjusted EBITDA margins improved sequentially as a result of our cost reductions.

<unk> was $99 2 million down 9%.

Similar to the first half of the year traffic growth remained strong while conversion softened, particularly for new buyers.

This was partially offset by modest increases in returning buyer conversion.

Both trade and consumer <unk> declined <unk>.

<unk> with recent quarters trade growth was relatively stronger we are encouraged that trade orders were flat while <unk> declined.

Turning to vertical performance all verticals declined with the exception of Julie which grew mid teens jewelry, our second largest vertical behind vintage and antique furniture has grown every quarter since mid 2018.

Strengthened Julie was helped by a record number of high value orders highlighting the benefit of spanning multiple verticals.

Consistent with recent quarters than just cheap furniture accounted for less than 50% of GMB.

Nearly 60% of our first time orders camera categories, jewelry, new and custom furniture art and.

In fashion.

Over the past seven quarters average order value grew.

In the third quarter, it declined 3% driven by a mix shift to auctions as well as an overall higher percentage of orders under $1000. Additionally.

Additionally, our median order value, which is insulated from quarter over quarter fluctuations and high value orders has declined on a monthly sequential basis since June .

While average order value and median order value declined order growth rates improved month over month throughout the quarter a trend that continued into October .

<unk> economic uncertainty order volume is resilience.

Luxury on first is available at a variety of price points and vertical during the quarter meeting order value was approximately $250 and over 40% of orders were under $1000.

We ended the quarter with approximately 68000 active buyers down 5% year over year and 2% quarter over quarter.

We expect this metric to be choppy near term as we manage through a period of softer demand.

On the supply side of the marketplace. When we closed the quarter with over 6700 seller accounts up over 40%.

Turning to operations improving efficiency is a priority during.

During the second quarter, we began taking steps to align our costs to current demand. This work accelerated in the third quarter.

In late September we made the difficult decision to reduce our headcount by approximately 10%.

Related severance charges amounted to approximately $600000.

Starting in the fourth quarter, we expect this head count reduction to generate approximately $1 $5 million of savings on a quarterly basis or roughly $6 million annually.

Between our September reduction and limiting backfill store attrition head count is down 15% from the second quarter peak to the end of October .

Cost savings initiatives are ongoing to date, we've reduced head count limited hiring to critical roles drastically reduced the number of open positions lower performance marketing spend by increasing efficiency targets and started rationalizing non head count costs at.

At the end of the second quarter, we also streamlined our business and strengthened our balance sheet by selling design manager for $14 8 million.

We continue to look for other cost savings opportunities, including actively marketing, our New York office, where rent expense is approximately $4 million per year.

While there's more work to be done the impact of cost reductions are showing up on the P&L.

To the second quarter adjusted EBITDA margin improved by roughly one percentage point, despite sequential declines in revenue.

Total operating expenses declined approximately 6% quarter over quarter.

You exclude one time severance charges operating expenses declined 8% sequentially.

Compared to last year <unk> declined approximately $10 million in revenue declined by $2 $8 million. Despite this adjusted EBITDA was approximately $100000 lower year over year as we throttled back expenses. This reflects expense reductions in the second and third quarter, but does not include the impact of our late September head count reduction.

Which will start to be reflected in the fourth quarter.

We expect to enjoy the leverage of our leaner cost structure, while demand rebounds.

Turning to the P&L net revenue was $22 $7 million down 11% transaction revenue, which is tied directly to GMB was approximately 70% of revenue with subscription is making up the bulk of the remainder.

Financial results for this quarter exclude design manager pro forma for the sale of design manage our revenue was down approximately 9% year over year and 4% quarter over quarter.

Gross profit was $15 $5 million down 14%.

Gross margins were 68% down from 71% a year ago.

Gross margins declined as payroll and benefits hosting in co location costs and stock based compensation increased as a percentage of revenue.

Similar to the second quarter higher hosting in co location costs, a result of stronger traffic growth without offsetting GMB.

Sales and marketing expenses were $11 1 million down 14% driven by lower performance marketing spend partially offset by one time severance payments related to our September restructuring.

Similar to the second quarter, we pulled back on performance marketing and increased our efficiency thresholds due to softening conversion and example of re calibrating expenses to match demand.

Sales and marketing as a percentage of revenue was 49% down from 50% a year ago.

Technology development expenses were $6 $4 million up 33% driven by higher stock based compensation and higher salary and benefits, including one time severance payments related to our September restructuring as.

As a percentage of revenue technology development was 28% up from 19%.

General and administrative expenses were $6 $7 million up 11% driven by higher stock based compensation and payroll and benefits we realized over $200000 in savings on D&O insurance as we continue to aggressively negotiate contracts as they renew.

As a percentage of revenue general and administrative expenses were 30% up from 24%.

Lastly, provision for transaction losses were $1 2 million, 5% of revenue flat year over year.

Adjusted EBITDA was a loss of $5 5 million compared to a loss of $5 $4 million last year.

Adjusted EBITDA margin was a loss of 24% versus a loss of 21% last year.

Year over year change was driven by lower revenue and higher technology development spending.

Moving to the balance sheet, we ended the quarter with a strong cash and cash equivalents position of $158 million.

Turning to the fourth quarter outlook, we've seen muted quarter to date seasonality. Our guidance assumes this trend continues for the remainder of the quarter, we forecast fourth quarter <unk> of $96 million to $103 million.

Down 19% to 13%.

Net revenue of $22 2 million to $23 $3 million down, 18% to 13% and adjusted EBITDA margin loss of 24% to 20%.

GMP guidance reflects a number of converging factors, including shifting consumer behavior ongoing economic uncertainty conversion headwinds, particularly for new buyers and limited visibility.

Declining <unk>.

And that <unk> contribution from strategic initiatives.

Please offset quarter softness.

Turning to adjusted EBITA margins guidance reflects savings from our third quarter head count reduction and ongoing expense management. However, some of the savings from our September head count reduction will be partially offset by seasonal expenses in marketing and operations.

As always our goal is to grow <unk> and drive operating leverage with the ultimate aim of growing free cash flow per share, we're becoming more efficient by identifying and realizing incremental cost savings and reallocating existing resources to projects showing the highest potential.

This work isn't finished but we're already starting to see tangible results with adjusted EBITDA margins improving sequentially. Despite lower <unk> revenue, we will continue to diligently manage expenses and expect to benefit from a leaner cost structure when demand rebounds.

Thank you for your time I will now turn the call over to the operator to take your questions.

Thank you if you'd like to ask a question. Please press star one.

Our first question comes from Mark Mahaney with Evercore ISI. Your line is open.

Okay, if I could ask a couple of questions. Please first.

How broad do you think the appeal of options is to both buyers and sellers on the platform. So it's gone from 4% to 6% now of transactions is there a natural level, where you think it could go to there are certain categories or price points that wouldn't make sense.

Our off limits for auctions from either a buyer or seller perspective, so just how big you think auctions could be.

Mark its David.

I think it's pretty broad I mean as measured by a couple of or in a couple of ways. One is simple. This is when you look at the market landscape. There are comps out there of companies that are kind of at least from a high level.

<unk> similar to ours in terms of both supply and demand are in the kind of.

I don't know $6 million to $800 million <unk> range. We believe we think we have better products. We think we have a better consumer experience.

I think in terms of sellers it absolutely solves a commercial need that is more important in this economy than ever before right. It provides an efficient way to liquidate inventory and generate cash.

In our case put that product in the hands of qualified buyers and then on the demand side. We I just start with the fact that we have very low sell through rate, we have over $14 billion worth of product listed on the marketplace.

You know what our <unk> will be this year.

So the balance between those two things all of our research that is the primary reason why our sell through rates are what they are is that price is perceived to be too high in many cases people don't really understand that they have the ability to negotiate what we see that reflected in the difference in conversion rates between returning buyers who are familiar with how the <unk>.

Platform works and new buyers.

And what we're seeing is that auction. So far has addressed those strategic opportunity. So on a sell through basis sell through is to ask what it is in the marketplace on the demand side conversion rates are significantly higher for new buyers and they are for the marketplace.

50% of people, who have registered to bid or people, who are new to file.

It's doing its job at the same time, it's a different way of living and working for our sellers pricing needs to evolve to a more auction friendly to more auction friendly ranges.

And secondly, we ourselves are learning what sells right and so far jewelry and art have outperformed other categories.

So again, we're still early MFS were still in the process of both learning ourselves and teaching our sellers and how to work with auctions and then lastly, how to grow awareness among buyers, but again I'd sort of go back to those fundamentals, especially that sell through number and the comps and to me that says, it's a big opportunity in front of us.

Yes.

And then if I could do one follow up please on international I know this is the first full quarter for France and Germany.

I may have missed it but did you disclose how material if at all that.

Areas, where in terms of.

<unk> or revenue or whats implied in the guidance for.

Q4, or just talk about the ramp like how long do you think it will take for those segments for those two international markets to be material to the business overall.

And so this is the first full quarter for the localized version of France in our French and German experiences. The initial focus after ensuring that the product is stable, which it is.

It's a develop our Seo capability. We're pleased we were pleased to see that organic traffic grew 200% year over year. So we feel like we're off to a good start there. The next steps will be to build the infrastructure to build kind of E mail files to market to and then also put paid behind it right now it's not a material.

Part of our CMV, Tom do you want to talk about how that's sort of how you think about the curve over the next several years I think that the.

The curve on internationally.

A little bit longer.

So going into 2023, we're not going to give guidance.

Our guidance on that right now but.

It'll start to ramp up.

I don't think that we'll be breaking it out probably.

Into the first half at least of next year.

As it becomes.

Larger we will reconsider that.

But yes.

We're thinking that this is it takes time to grow the traffic, we're seeing great traffic growth in the first full quarter of us having it.

But the monetization is.

We'll come.

At a slower rate.

Okay. Thank you David Thank you Tom.

Our next question comes from Trevor Young with Barclays. Your line is open.

Great. Thanks, two if I may.

First just given the current business mix and contemplating the ongoing cost savings I think you mentioned because of the reduction enforce a million and a half Q on Q improvement also potentially sub leasing the New York Office space I guess at a high level is there a certain level of <unk> that we should be thinking about at which point you would reach that EBITDA breakeven.

Not looking for specific quarter, or 23 guide or anything like that but just trying to assess like how much lift do we need to have from call. It the <unk> guide to get to some sort of breakeven point.

Yes, thanks for the question so.

Yes.

Youre right. So over the past few quarters, we have taken significant costs out of the business right in August .

We made some decisions to pull back on Ftes in September .

We've made the difficult decision to reduce our head count.

By about 10%, we've drastically reduced the number of open positions. We have that we're hiring four we've lowered performance marketing spend by increasing our efficiency targets and we started rationalizing our non head count costs. So as you have seen our P&L starting to reflect our progress right at the end.

October our head count was down 15% versus the second quarter peak operating expenses declined approximately 6% quarter over quarter.

And thats, despite lower revenue adjusted EBITDA margins improved sequentially and lastly, we expect our September head count reductions to reduce quarterly operating expenses by about $1 $5 million, a quarter or $6 million annually.

No.

Also redeploying our resources to the highest potential projects. For example, we moved engineering resources from NFC is two auctions and projects had increased conversion and engagement.

And you know kind of going forward, we are focused on identifying and realizing additional efficiencies.

And diligently managing our expenses.

I just want to remind everyone. We reaccelerate GMB growth is a precondition to us achieving that breakeven mark.

As we've discussed on prior calls we have an asset light business model with high operating leverage that operating leverage cuts both ways, though so in times of declining GMP and revenue there is pressure on EBITDA when GM growth returns, though we will be well positioned to realize the operating leverage in the model.

With a high percentage of additional revenue hitting the bottom line.

I will not we are not giving specific guidance on.

Dates for breakeven.

But we are doing everything we can to realize additional efficiencies and keeping our cost in line with with our with our GMP and revenue.

That's really helpful color, Tom so it sounds like kind of embedded in that though is at some point you need to see some <unk> recovery to reach that path to breakeven.

The second question is just on the self serve.

For more sellers, how do you balance that lower touch versus your historically higher touch embedding process, which buyers maybe view is a bit more of an endorsement that these are credible sellers, perhaps theyre less likely to have an authentic goods and so forth how do you balance those two factors.

So we haven't seen sort of any criteria at all.

What we did seems in the cellar test is the range of pricing mechanisms that we're offering sellers previously we had a one size fits all that included a very high relatively high subscription fee that was kind of hard to stomach for lots of sellers, who didn't have any experience or familiarity with first dibs.

So bear that fixed cost and so in response to that we offer now a range sort of a sliding scale of higher subscription and low low commission too.

Higher commissions and low to no sub fees. That's what's resulted in the tripling of our kind of the rate at which we're adding suppliers.

What we've seen is that those suppliers are healthy and they have high quality products.

But the next step is to evolve the pricing test to create incentives for them to post more and more actively since that correlates with success on the marketplace.

Great. Thanks, David I appreciate it.

Our next question comes from Ralph <unk> with William Blair. Your line is open.

Good morning, Thanks for taking the question on marketing efficiency increases you talked about getting better performance, maybe if you could provide some color on some of the steps that you're taking there and maybe some.

And the more opportunities you might have here to gain more efficiencies.

Okay.

Sure. This is Tom.

So what we've done is we analyze every channel that we have paid spending within marketing and.

What we're doing we do this on a reg.

Irregular basis.

We're taking out the least efficient spend.

In favor of obviously continuing to spend in the most favorable places and spending up to a.

Our maximum allowable that we set.

And so what we've what we're doing is we are bringing those.

Those allow those we managing the allowable that we're that we're spending against and we're managing the channels in which we're spending them in.

Great and just in terms of softness in new buyers.

It's obviously, a large lever to getting you back to accelerating GMB. Another macro is tough, but maybe you could sort of isolate the top one or two priorities to sort of reverse this trend to the extent you can tough.

The macro environment. Thank you.

Yes, I mean listen to overall as we look at the funnel.

As we've said in past quarters and it remains the case most parts of the funnel are very healthy. So traffic growth is very strong as strong as it's ever been.

Conversion has held up both for trade buyers and for returning buyers engagement is very healthy as measured by things like registrations in favor and <unk> and so on.

Have a kind of single.

The biggest driver of our.

<unk> weakness, which has been new buyer conversion right new buyer conversion is a function of a couple of things certainly the macros don't help but we've also seen a significant shift in traffic in favor of our lowest converting channel mobile web.

So we're doing a lot in that regard we've got lots of operational.

Projects that are intended to improve that things like for example, adding new payment methods, we added corn.

Adding the number of items on search results pages when people get to first dibs from Google from Seo.

And of course, our primary strategic initiatives.

<unk> International supply growth are all pointed at conversion.

I would say to add to that there was another kind of an interesting dynamic that we saw for the first time in a couple of quarters. This past, one which was.

It had to do with the relationship between <unk> and order volume. So what we had seen for the seven quarters, leading up to the third quarter.

Increases in the year over year growth rate of.

That seems to beginning in July for each month since July through October we've seen declines in pretty significant declines.

We think thats attributable to a couple of factors. One again clearly is the kind of macroeconomic end.

For example, the.

The kind of product range that we've seen the highest growth in orders has been the sub $1000 price range.

And then second is the increasing share of total orders that is auctions auctions by design has a lower price point.

Conversely in probably not unrelated beginning at the same time, we've seen sequential improvements each month.

Year over year order growth to the extent that in October order growth was actually positive on a year over year basis. So again, those two things are likely related.

But it's encouraging to us because.

That order sort of resilience of the order number suggests that again this platform retains its relevance might even possibly be growing share in the face of a weak overall E comm market.

And ultimately expands our Tam so while in the near term it has a negative effect on <unk> in the long run by expanding our market. It could be very helpful. The last thing I would say on that is.

That is not coming at the expense of our strength and the Super High <unk>.

<unk> pricing segment and September as an example, we had our all time record high months in terms of the number of orders over $100000.

Okay, great. Thank you.

Our next question comes from Curtis Nagle with Bank of America. Your line is open.

Hi, good morning, Thanks for taking the questions.

So I just wanted to focus on the strength.

Alright.

That was definitely stood out in the quarter.

How much was that related to I guess, a strong post COVID-19 wedding season and can.

Should we expect some deceleration going into <unk> on basic seasonality is that the case.

So.

Alright, Thanks for the question as Lori just as a reminder, for those who may not be aware jewelry is our second largest vertical.

We did have a strong quarter in fact jewelry has grown <unk> on a year over year basis every quarter in the third quarter of 2018.

And I think it's just sort of in terms of the fundamentals, it's well suited to what we do it's our biggest market is highly fragmented on the supply side shipping costs are low returns are fairly straightforward and it benefits from the consumer Trust.

Which we think is one of our strongest competitive advantages.

So we benefited.

From.

A number of factors one of them was the high growth and high OE orders that I mentioned in relation to the previous question.

We did sell a bunch of high price engagement rings.

I guess likely is seasonal.

But beyond that I think again, the sort of long term trend has been has been positive. There. So I don't know I don't know if I'm really in a position to kind of attribute that strength to any very specific kind of temporal factor.

Instead, it's likely more of a function of just the sort of macro industry factors that I mentioned before.

Okay fair enough.

And then just to follow up on the <unk> Guide.

Just how.

How much of that or I guess is that fully incorporating.

The most recent announcements in terms of head count cuts.

It sounds like it probably is but I'm not sure there and which lines where do you see the greatest impact within Opex.

Yes, hi.

So in the fourth quarter, we're going to see the savings.

So.

Sorry in the fourth quarter.

We're going to see muted.

You did seasonality.

Savings that we're going to see.

We're going to see $1 $5 million.

Attributable to the reduction in force that we had at the end of September So none of that was actually included in the Q3 results.

But some of that will is that savings will be offset by.

By some seasonal expenses that we have.

Kind of long lead time marketing projects, such as like our holiday catalog.

As well, we're expecting to see some.

<unk> higher logistics costs.

<unk>.

And so.

So some of that savings will be offset in Q4.

Based on the on those types of factors.

Okay. Thank you.

Our next question comes from Nick Jones with JMP Securities. Your line is open.

Great. Thanks for taking the questions I have.

Two I guess first.

As you try to think about conversion stability.

Sounds like traffic is growing nicely kind of overall conversion as Don I guess thats attributable to newer buyers I mean, what does that indicate on kind of the timing. It takes it take these new buyers and convert them into repeat and when that kind of shows up in conversion stability or I guess, when <unk> kind of started tracking with traffic growth and then I have a follow up.

Yes.

What we have seen some encouraging trends in conversion recently the rate of decline of our new buyer conversion.

Stabilized and actually improved recently.

But look we're throwing the kitchen sink at it everything we do is focused on growing conversion one way or another.

It's probably premature to call timing on that but.

But I mean, you make a good point, which is if we can the goal is to continue growing traffic at the same rate and stabilized conversion and if we do that that will result in a healthy order trends, which again as I mentioned before is what we saw and what we've seen over the last couple of months in which culminated in positive order growth in October but.

We're in a volatile environment and there are a lot of moving parts of this business into the economy and things that impact our performance. So I think it's a little early for us to call with any degree of confidence when that when that inflection point is.

Got it and then a follow up.

You've done a good job of kind of adding a lot of supply to the marketplace that enhances SCL, how do you balance kind of driving SCO within maybe the Google ecosystem on broader search and then.

How adding increased supply to the platform impacts search and discovery within the first day of platform and does that kind of impact.

Kind of users are able to find what they're looking for like if they come on for something they find on Google in EMEA.

Navigate.

Somewhere else or is that they realize they wanted something else of that impacting the kind of onsite search and discovery.

Yes, so it's a good question.

Certainly the more items, we have on the marketplace.

Higher the burden there is on us to improve ways define relevant inventory for a given user that said we are a marketplace of long tail, one of a kind items and so the bigger problem than having too few items sorry, too. Many items is that we have.

Often too few for a given search query. So for example, one of the phenomena that I described earlier, that's contributing to our decline in new buyer conversion rates is the increasing proportion of traffic that we're getting from Google Seo.

The large percentage of those users land on search results pages on <unk> that have either.

<unk> number or no product listings when that happens the bounce rate is very high and the conversion rate is very low so a big part of the motivation and adding supply and as well as other product changes that we're making including adding recommendations and so on those pages is to increase the number.

Of items on those pages and in that way decrease the conversion rate. So it's somewhat counterintuitive, but I think the headline is in a marketplace of kind of long tail hard to find items, increasing supply actually we believe can help conversion.

Makes sense. Thank you.

Our next question comes from Aaron Kessler with Raymond James Your line is open.

Great. Thanks, guys.

On the strategic review anything you can share from that where some of the cost reduction initiatives part of that and then second last quarter you kind of.

And there are a number of headwinds to the business I think you sort of economic uncertainty consumers spending less.

For lower sorry in out of home experiences low growth overall for interest bearing as well as kind of traffic mix shift to mobile and most of these factors continue to weigh in Q3 or does some do you see some easing of some of these factors as well. Thank you.

Sure. So first in terms of the strategic review process as we announced last quarter, we did retain Allen and company as our advisors and we are working with them to explore the full range of ways to enhance shareholder value the.

The motivation for this is our belief that the current valuation does not reflect either of the strength of the brand or the long term potential of the business and we are committed to growing shareholder value and as part of that we want to look at every possible alternative those alternatives of course will could include everything from kind of a sell side transaction too.

Buy side transactions to kind of a redeployment of cash everything is on the table. It is also possible because a lot of this isn't under our control that we may decide the best course of action is not to do any transaction or make a change.

Of course until we have something to announce we can't announce anything so.

So that's kind of the summary on.

On the strategic review process in terms of changes to the underlying drivers.

I think probably the biggest one is on the negative side as I've mentioned.

With the exception of jewelry.

Is it started to decline beginning in July in each of our verticals on the positive side.

Order growth as I've mentioned before the kind of year over year change in order growth has started to increase beginning in July got better every month, culminating in.

The best months, it's had in a while in October that of course was more than offset by declines in <unk>, but still that long term trend is positive it adds to our buyer rolls. It gives us kind of crack of the LTV from those those buyers and indicates the kind of the relevance overall of the platform.

And I'd say the other thing is the other data point that I mentioned, which is new buyer conversion rates the rate of decline of new buyer conversion rates did bottom out again.

Again I would be.

Foolish in this environment to make a prediction as to what will happen in the future, but that is what we saw and then of course lastly, new buyers I mean, sorry, returning buyer conversion rates and trade buyer conversion rates.

<unk> constant.

Were actually marginally positive in the quarter.

Great. Thank you.

There are no further questions. Thank you for your participation in today's program. This does conclude the program and you may now disconnect everyone have a great day.

The conference will begin shortly.

As Johan during Q&A, you can dial one one.

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Good day and welcome to the first is Dot Com, Inc. Q3, 2022 earnings conference call. At this time, all participants are in a listen only mode.

After the Speakers' presentation, there'll be a question and answer session.

And the second will be given at that time as a reminder, this call may be recorded I would like to turn the call over to Kevin <unk> head of Investor Relations and corporate development you may begin.

Good morning, and welcome to first Dibs earnings call for the quarter ended September 32022.

I am Kevin the Buzz head of Investor Relations and corporate development.

Joining me today are CEO , David Rosenblatt, and CFO , Tom matter Gina.

David will provide an update on our business.

<unk>, our strategy and growth opportunities.

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 <unk> first did dot 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.

Both prospects.

Business plans and strategic initiatives.

Evaluation of alternatives.

And economic trends and dynamics, 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.

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.

Lastly, please.

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.

Despite a challenging environment for e-commerce and home goods in general, we deliver <unk> revenue and adjusted EBITDA margins above the high end of our guidance straw.

Strength in jewelry and high value orders bolstered gmg, while adjusted EBITDA margins benefited from cost cuts. Additionally, we continued making progress on our strategic initiatives auctions international expansion and supply growth.

We are focused on improving efficiency and aim to emerge from this challenging period with more growth drivers and a leaner cost structure for.

For the past two quarters, we have aligned expenses to lower demand by drastically curtailing hiring increasing performance marketing efficiency targets and reducing head count by approximately 15%.

As a result, adjusted EBITDA margins improved sequentially despite quarter over quarter declines in revenue.

Supply acquisition remain brisk and seller churn stayed at historical lows. Once again, returning buyer conversion increased but this was offset by softness in new buyer conversion.

And we added new sellers at three times last year's rate.

One new dynamic this quarter was the change in the composition of GMB growth.

Through the end of the second quarter, we had seen average order value grow for the prior seven quarters. However, <unk> declined in the third quarter.

At the same time order growth rates improved month over month throughout the quarter Encouragingly. This trend has continued.

Into October .

We believe <unk> declines are driven by two factors first the growth of auctions, which has a lower <unk> than fixed price purchases.

An increasing percentage of overall orders under $1000. We believe this reflects shifting consumer behavior in favor of lower priced items amid macroeconomic uncertainty.

We don't see declining <unk> as a negative our goal is growing GMP inactive buyers lower <unk> expands the market. This was one of the strategic rationales for launching auctions.

Luxury exists at a variety of price points from under $100 to over $100000.

Our objective is serving buyers across the luxury spectrum, while maintaining our strict vetting standards and world class supply.

This trust allows us to transact in categories and price points rare and E. Commerce. For example in spite of overall <unk> declines we saw a record number of orders over $100000 driven by jewelry.

A number of these where engagement rings, indicating the level of trust, we have with consumers for their most important vacations.

We are committed to re accelerating <unk> growth and enhancing shareholder value and are reviewing multiple paths to help us achieve these objectives.

Including our ongoing review of various strategic options for the business with our financial advisors at element company.

Turning to operations, we remain focused on the drivers of our business improving conversion, realizing efficiencies expanding supply growing auctions and expanding internationally.

Improving new buyer conversion is our largest lever to re accelerating <unk> growth today subdued homegoods demand economic uncertainty a traffic mix shift from returning buyers to new buyers and the device mix shift from desktop and App to mobile web our conversion headwinds.

Everything we do is focused on overcoming these including our strategic initiatives and day to day product and marketing enhancements.

Conversion is a game of incremental gains the compound over time.

Testing learning and Iterating.

During the third quarter for example, we added more product recommendations to low inventory pages improving conversion for those pages.

Improving efficiency is another priority for example, this quarter, we completed a number of initiatives to improve operational productivity through.

Through product enhancements and operational improvements, we reduced overall client service inbound volume by over 20%, while maintaining high customer satisfaction.

Going forward, we will continue focusing on projects to improve efficiency.

Our goal is to aggregate the world's most beautiful items, regardless of where they're located while maintaining high curatorial standards.

Supply growth is a strategic priority because it drives traffic makes search more robust and increases our ability to make a match between buyers and sellers.

Our new seller pricing tests continues to drive supply acquisition at Triple Our 2021 monthly average we signed over 650, new sellers in the quarter ending September with over 6700 seller accounts up over 40%.

Because we are a marketplace a one of a kind items breadth matters.

Adding supply improves marketplace liquidity and ultimately grows demand.

We are seeing this play out for example, one of our new dealers a specialist in fine minerals made their first sale of high value order to a collector in September the.

The pair have subsequently connected on additional orders, an example of how adding supply drives DMV.

Looking ahead, we're focused on inventory lifecycle management, which is targeted at helping sellers succeed on the marketplace by providing guidance on pricing and choice of purchase format.

We continued seeing great traction in auctions with bidders orders GMP and supply all growing double digits sequentially.

Auctions accounted for 6% of orders again, 3% of supply.

You had 41000 unique auction listings up from 25000 in the second quarter.

Since launch art and jewelry have been the top performing verticals accounting for approximately 70% of orders highlighting the value of operating across multiple verticals.

Auctions <unk> remains below $1000. We believe this more accessible price point helps engage and activate new buyers.

Over 50% of bidders in the third quarter had never purchased from first as before.

Additionally, about 30% of first time bidders registered in place their first bid on the same date.

Even if they don't win the auction bidders provide their contact information payment details and signal about what they are interested in.

This is valuable first party data for our product and marketing teams.

We also broadened the reach of our behavioral emails and launched push notifications to drive urgency and bidding activity.

Our next step is focusing on driving demand and optimizing pricing in.

In the fourth quarter, we are beginning work to refine pricing recommendations and provide sellers more guidance around what categories and listings performed best.

Languages.

SCO traffic grew approximately 200% year over year in both markets.

The majority of these sessions came from users who haven't purchased from first did before.

Given our consideration cycle was about 100 days it will take time to convert this traffic into orders.

Our international product team incorporated on the fly machine translation into the messaging center, allowing buyers and sellers to communicate in the language, they're most comfortable with.

We're also working to grow our E mail file in France, and Germany, which will help to drive organic traffic and repeat purchases. We also launched customer support on Whatsapp.

It takes years to build a successful international business, but we are happy with our progress so far.

Despite a difficult environment for e-commerce, our platform display this unique value this quarter.

Success with high value orders is testament to the trust, we built with buyers and sellers and the strength of the first dibs brand buyer.

Buyers come to us for our unique world class supply and they trust us for their most meaningful purchases.

We believe that subdued e-commerce demand is a temporary dynamic in the two decades before Covid e-commerce penetration increase predictably when demand rebounds, as we believe it will we will have a leaner cost structure and more growth drivers, including auctions localized marketplaces.

Increased supply.

As we manage through this challenging period, our aim is to deepen our competitive position and become more efficient.

We are already seeing progress here with adjusted EBITDA margins improving sequentially despite lower revenue.

Additionally, we are encouraged that despite lower <unk>.

Year over year order growth rates improved throughout the quarter and into October .

Unlike the current demand environment, our trusted brand and world class supply are durable assets, giving us confidence in the future.

I will turn it over now to Tom to review, our third quarter financial results and fourth quarter outlook.

Thanks, David.

The strength in jewelry and high value orders, we delivered <unk> revenue and adjusted EBITDA margins above the high end of our guidance range. Despite.

Despite lower revenue adjusted EBITDA margins improved sequentially as a result of our cost reductions.

<unk> was $99 2 million down 9%.

Similar to the first half of the year traffic growth remained strong while conversion softened, particularly for new buyers. This was partially offset by modest increases in returning buyer conversion.

Both trade and consumer <unk> declined consistent with recent quarters trade growth was relatively stronger we are encouraged that trade orders were flat while <unk> declined.

Frank and Julie was helped by a record number of high value orders highlighting the benefit of spanning multiple verticals.

System with recent quarters than just your antique furniture accounted for less than 50% of GMB.

Nearly 60% of our first time orders camera categories, jewelry, new and custom furniture art and.

In fashion.

Over the past seven quarters average order value grew.

In the third quarter, it declined 3% driven by a mix shift to auctions as well as an overall higher percentage of orders under $1000.

Additionally, our median order value, which is insulated from quarter over quarter fluctuations and high value orders has declined on a monthly sequential basis since June .

While average order value and median order value declined order growth rates improved month over month throughout the quarter a trend that continued into October .

Economic uncertainty order volume is resilience.

Luxury on first gives us available at a variety of price points and vertical during the quarter meeting order value was approximately $250 and over 40% of orders were under $1000.

We ended the quarter with approximately 68000 active buyers down 5% year over year and 2% quarter over quarter.

We expect this metric to be choppy near term as we manage through a period of softer demand.

On the supply side of the marketplace, we closed the quarter with over 6700 seller accounts up over 40%.

Turning to operations improving efficiency is a priority during.

During the second quarter, we began taking steps to align our costs to current demand. This work accelerated in the third quarter.

In late September we made the difficult decision to reduce our headcount by approximately 10%.

Related severance charges amounted to approximately $600000.

Starting in the fourth quarter, we expect this head count reduction to generate approximately $1 $5 million of savings on a quarterly basis or roughly $6 million annually.

Between our September reduction and limiting backfill for attrition head count is down 15% from the second quarter peak to the end of October .

At the end of the second quarter, we also streamlined our business and strengthened our balance sheet by selling design manager for $14 $8 million.

We continue to look for other cost savings opportunities, including actively marketing, our New York office, where rent expense is approximately $4 million per year.

While there's more work to be done the impact of cost reductions are showing up on the P&L relative.

Relative to the second quarter adjusted EBITDA margin improved by roughly one percentage point, despite sequential declines in revenue.

Total operating expenses declined approximately 6% quarter over quarter. If you exclude one time severance charges operating expenses declined 8% sequentially.

Compared to last year, <unk> declined approximately $10 million and revenue declined by $2 $8 million. Despite this adjusted EBITDA was approximately $100000 lower year over year as we throttled back expenses. This reflects expense reductions in the second and third quarter, but does not include the impact of our late September head count reduction.

Which will start to be reflected in the fourth quarter.

We expect to enjoy the leverage of our leaner cost structure, while demand rebounds.

Financial results for this quarter exclude design manager pro forma for the sale of design manage our revenue was down approximately 9% year over year and 4% quarter over quarter.

Gross profit was $15 $5 million down 14%.

Gross margins were 68% down from 71% a year ago.

Gross margins declined as payroll and benefits hosting in co location costs and stock based compensation increased as a percentage of revenue.

Similar to the second quarter higher hosting in co location costs result of stronger traffic growth without offsetting GMP.

Sales and marketing expenses were $11 1 million down 14% driven by lower performance marketing spend partially offset by one time severance payments related to our September restructuring.

Similar to the second quarter, we pulled back on performance marketing and increased our efficiency thresholds due to softening conversion and an example of re calibrating expenses to match demand.