1stdibs.Com, Inc. (DIBS) Earnings Call Transcript & Summary

Okay. Good morning, everyone, and welcome to First Annual Needham Consumer Tech and E-comm Conference. My name is Anna Andreeva. I'm a senior equity analyst here at Needham, focusing on consumer e-commerce space. And we're very excited, next stop, to have 1stdibs. From the company, we have CEO, David Rosenblatt; CFO, Tu Nguyen; and IR, Kevin LaBuz. And for those who don't know 1stdibs, this is a leading online marketplace for design. And we really love the tagline the company uses, The Most Beautiful Things on Earth.

1stdibs has just reported their 3Q. And to kick it off, we're asking our companies 3 questions. First off, what was the biggest surprise in the third quarter, either on the positive or on the negative side? Secondly, how are you approaching the fourth quarter? And the third, what are the most things you're bullish for '22 and conversely cautious on?

Okay. Great. Should I just stick through them? Or how should...

Sounds great.

Yes. Okay. Great. So first question is, what was the biggest surprise in the third quarter? The biggest surprise for us was that our consumer business was stronger than we had expected, especially relative to our exit run rate in Q2. So we actually lowered our Q3 overall GMV forecast relative to our IPO model, although we ended -- and we ended up hitting that IPO model. So perhaps we were a little bit too cautious. And why did it happen? I mean, I think as with many things, it wasn't just one reason. We had stronger-than-expected organic traffic growth. That in part was a result of a specific product focus that we placed on it, but there was a Google algorithm change that helped us quite a bit. Secondly, I think from a macro point of view, again, it's hard to attribute numbers to this. But certainly, the fact that our products are all secondary market, meaning they're in stock and ready to ship, helped us given the overall environment. And I think overall, it validated our belief that the long-term opportunity for this company is much bigger on the consumer side than our other customer type interior designers. That said, the entire interior design business is probably the second pleasant surprise that came in a little bit out of what we expected it to. But again, in the long run, in terms of the thesis and what we kind of optimize our investment in favor of, it is the consumer business, and that consumer business performs better than we had anticipated. How are we approaching the fourth quarter? I think, again, it's worth noting that the -- as we all know, that the macros are more volatile than normal this year. And historically -- and so again, like I think where that's -- we're a sort of -- we're cautious in terms of what we expect from Q4 relative to historical performance. So historically, we've seen roughly 15% to 20% kind of sequential quarterly growth in the fourth quarter, versus that, the midpoint of our guidance represents growth of 9% quarter-over-quarter. So again, I think that reflects both the sort of lack of predictability in the volatility of the external market and also the fact that we are comping a pretty strong fourth quarter last year. That said, the quarter has been healthy so far. And we've also executed well on our second area of focus, which is new product development. So in the third quarter, we launched NFTs. This quarter, on November 12, I think it was, we launched auctions, which so far has met our expectations and which we think in the long run could be a significant lever of growth. Third question, what are some of the things you're most kind of excited about and also things that you're cautious about in '22? So on the optimistic side, I mean, this is something I mentioned before, which is we've been very focused since we went public on increasing our pace of new product introduction. And we've executed very well against that. Again, we launched our NFT marketplace in August. We launched auctions, as I mentioned in November. We will be launching -- we are investing quite a bit right now, and we'll be launching international demand side expansion in the first half of next year. And I'm particularly pleased that we're, again, executing kind of on time and on budget in each of those. And I believe that we'll start reaping the benefit of them next year. What are we cautious about for '22? I think we sort of recognize the obvious, which is our comps are tougher. So Q1, in particular, last year, was an unusually strong quarter for us. We grew 64% year-over-year, and that just raises the bar for this year. But again, I think where all this comes together and why I'm especially optimistic about '22 is that I think as we get past those comps, that's also the time where we begin to receive the benefit of some of these new initiatives as well as continued execution in the core on things like SEO and so on. So I -- again, on balance, I'm very optimistic about '22, especially for the period once we get past these comps.

Okay. That's great. Super helpful. I appreciate that. Just picking up on the auction opportunity, congrats there. It just sounds really, really exciting. Can you talk about how meaningful do you think that will be to your GMV? If the launch is successful, specifically, what metrics are you looking at to gauge that? Maybe talk about the value prop for both buyers and sellers. And I guess this one is to Tu, if I'm not mistaken, you didn't include any of the upside from the auctions in your fourth quarter guide. Maybe talk about the rationale for that.

Yes. So why don't I start with the economic opportunity and the value props to buyers and sellers. And then Tu, you can talk about metrics and GMV impact. So the economic opportunity is very straightforward. We have $11 billion worth roughly in terms of face value of product that's listed on our marketplace. Against that, we'll do a little bit south of $500 million in gross sales this year. So that is a result of the fact that this industry has longer sales cycles than most others. And -- but it also creates an opportunity, right? Anything we can do to increase our monetization of the difference between those 2 things is obviously an enormous opportunity. The second thing that's on the -- more on the supply side. I mean, in terms of the buyer focus, one of the things that's notable about this company is that when you look at conversion rates of returning buyers versus first-time buyers, there's a much larger gap than in most other companies than I've ever been around. In other words, once people buy for the first time, they tend to come back and they buy very at healthy rates. However, getting that first order, it can be -- it can take a while to be a challenge. Where you see that in numbers is also in the difference between the 3.5 million registered users we have versus the 72,000 active buyer trailing 12-month count, right? So again, the difference between those 2 is pretty big. We do a lot of surveys to understand why people are sometimes, why they [ can't ] take some time to make that first purchase. And not surprisingly, it has nothing to do with the quality of the inventory. It has only to do -- or even logistics. It has only to do with the price. The top 2 reasons are either, I don't know what the price should be because these are one-of-a-kind items, or it seems a little bit expensive and I have no basis really to judge. So auctions, of course, address both of those head on. And so it removes, again, the 2 biggest obstacles that are in the way of us kind of activating more of those 3.5 million registered users. In terms of the value prop, I think we have a better auction product actually than anyone else. I mean, first of all, in terms of our speed of commercialization, if you think about it, we already have the buyer, we have the seller and we have the item, right? So it's not like we need to go and get those 3, which is the case with many other auction platforms. And then the second thing is that, again, it's sort of a natural complement to everything out to our other preexisting purchase formats. We support fixed price. We support negotiated price. So it's a pretty logical extension of what we do. And then lastly, in terms of the product itself, when you compare it to other auction products, it's better in many ways. So we don't charge a buyer's premium. So it's less expensive, in most cases, for buyers. We support messaging between buyer and seller. So in a normal auction anywhere else, you can't talk to the seller as a bidder while the auction is in process. In many cases, shipping is already known in advance, so there are no costs afterwards. And then lastly, we have a pretty healthy buyer protection policy, which, again, is not the case in most local auction houses, where auctions are [indiscernible]. So for all those reasons, again, I think it's the right product for the right time. And I'm optimistic about its impact. Tu, do you want to talk about metrics and GMV impact?

Sure, sure. So we assume no material GMV impact in Q4, instead, are using Q4 to collect data to inform a few metrics that would help future guidance as well as product optimization. So those metrics include [ seller ] adoption, right? So of our seller base, how many sellers opt into auctions and how much supply do they elect to move in to auction? Sell-through rate, so of all of the items that are listed for auctions, how many of them are sold within 7 days. So that's currently the time line of each of our options today. And then thirdly, which is the composition of those GMV. So much to David's point, one thesis is that using auctions as a way for price discovery, and hence, helping first-time buyer conversion rate. We will continue to watch whether that's the take. I would expect that in the more immediate terms, actually, that auctions might have more traction with our existing buyers, our returning buyers, because they are used to the sites, they used to using 1stdibs as a platform. But really, the goal for us is to use auctions as a way to acquire new buyers. So how do we get all of this data to really not just help informing guidance in the future, but really introducing different optimizations on the auctions product in order to continue to grow first-time buyer conversion rate?

Okay. Okay. Got it. No. That's great. Very helpful. I should have mentioned this earlier, if anybody has a question, please enter the question in the dashboard or e-mail me at [email protected], and we'll be happy to go through those questions. Competitively, so interesting, what's happening in this space. You have the 2 incumbents, right, Sotheby's and Christie's together do, I think, over $10 billion in GMV per year, but these are pretty much non-digital entities. So digital adoption in this space is still very early on. How do you see that evolving? And do you see any other disruptive online competitors to 1stdibs?

Yes. There's really no company that looks like us, in general, right? We're the only multi-category fully digital luxury marketplace. So our competition, I think, for the most part, are substitutes, right? So you could buy jewelry from us or you could go to Tiffany's. You could buy fashion from us or you could go to a local reseller. In many cases, that reseller is already on 1stdibs. So I think -- and again, these are large markets. There are lots of people that sell these things. So that, to me, is the primary source of competition. The auction houses, I view more as a kind of indicator of the market opportunity, in the way that you described. They're marketplaces, like us. They tend to do it differently and they have a different value prop and so on. They're very, very low volume, high AOV. So I think, again, I -- that $10 billion of GMV is quite consciously what I think of as the opportunity for us. And to some degree, there is some area of overlap. But for the most part, it's not -- we don't compete directly for either supply or demand that will likely change over time. But today, it's not that. So what is our approach? It really is to exploit the competitive advantages and differentiators the digital marketplaces offer, right? So breadth of selection, the lowest possible purchase friction, the ability to connect buyers and sellers across geographies, being multi-vertical, building data and profiles and so on of our buyers so we can better personalize and deliver them the best possible service. Those are all things that are not able to be provided by our, again, mostly substitute competitors.

Okay. Okay. That's great. You had such upon international opportunity and pivoting into that starting next year. I think you had said, as much as 40% of all the items are outside of the U.S., and the market overall is approaching half of the market globally being international. Yet I think only 20% of your buyers are, in fact, international currently. Maybe talk about which markets do you plan to focus on initially, the time line for that and the investments that are needed? Any of the marketing that you need to do? I think historically, my understanding is dibs has not done any marketing outside of the U.S.

Yes. That's -- you state the business opportunity and case better than I can. And you're right, that historically, we haven't done any non-English language marketing. So that's both the -- that is a pretty good summary of the opportunity. How are we addressing it? The -- a couple of ways, right? I mean one big part of this, of course, obviously, is translation. We have to translate customer experience in terms of the persistent user experience, features of the site and so on. And then secondly, we've got 1.3 million items on the site, each of which has its own item description and so on. So that needs to not just be translated, but we need to figure out a kind of scalable way to translate newly listed items as well. So that's a big area of focus. And some of those costs are going to show up this quarter for us in advance of the launch of the business. But beyond that, there are a bunch of other things you need to do, too, right? We need to customize logistics and fulfillments, kind of capabilities by market. Some of that actually is -- comes ahead of the launch. So for example, this week, we're launching pre-quotes on the majority of parcel items based in Europe for shipment both within Europe and to the U.S. But most of it are things -- most of the capabilities are things that we want to have post launch. And then the last thing I would say on that is the other point you alluded to, which is probably over time, where we get the most kind of leverage and growth from demand side localization is by developing and scaling both in SEO, meaning organic traffic capability and also a paid capability. So that does take time. Google requires us to do all sorts of things to build authority, and that includes things like local language editorial and so on. But we're going to kick that off likely second half, sort of after we launched the product. And that's the kind of thing that I think can grow forever, but we'll start with a relatively low impact next year.

What's a -- I don't know if you've looked at this, but what is the unaided or aided brand awareness for the brand here in the U.S. and internationally?

Yes. It's been a while actually since we've done it in the U.S. And when -- we haven't entered in outside the U.S. because we know that it's going to be pretty close to 0. And again, that's the opportunity. People who are active in this market will seek us out, right? So I mean the 20% of demand that we do get from outside the U.S. are highly motivated people, who are educated on this market. But the opportunity, of course, is everyone else. And those people are a very small percentage. So honestly, we don't really need to do a research. It's low.

Okay, okay. Got it. You mentioned 3.5 million registered users compared to, I think, 72,000 active buyers. How has the conversion been from user to buyer historically? And what are you doing specifically to drive that? I think you said that initial first purchase may be difficult, maybe it's the price and understanding the value that you're getting. But then the repeat purchase is pretty substantial. So maybe talk about that, and again, some of the initiatives in place to drive that further.

Yes. So we've actually made great strides on that. It's still low in absolute terms, although in percentage terms, we've grown it quite a bit. I would say it's a whole slew of things, right? I mean, Bill Gurley, the, I think, investor from Benchmark, who was our investor, said that growing conversion is a ground war, and that's sort of the way we approach it. So I mean, it's everything from making it clear that it is possible to negotiate, which is it's not something that most other e-commerce platforms support. We need to educate our buyers, both to its existence and also on how to use it. 2 things like -- I'll give you an example, actually, we just released a product about 2 weeks ago that was very successful, where -- for people who landed on, not the homepage, but on category pages coming from Google. So for example, you search for, I don't know, now like chokers, right, the necklace, you would land on a category page. Instead of just showing a list of items, we then break that out into sort of different adjacent type of necklaces, right, and also show price points. So in other words, we create lots of doors that then guide people into a path that corresponds to what interests them. We call it guided discovery. So I don't have the numbers in front of me, but the impact was meaningful, right? So there are many things like that. Auctions is probably the biggest opportunity. I mean, again, the biggest obstacle is price, and auctions are the most efficient form of price discovery in economics. But really, there are literally hundreds of things like that, right? It's increasing the coverage of pre quotes, meaning the percentage of items, for which we have a competitive shipping quote, in advance of somebody checking out. Just lots and lots of stuff. Another big one is mobile web, right? So like we have -- now we have 1/3 more traffic on mobile web than we do on the desktop, right? So the more we optimize our mobile web experience and -- conversion went up. So it's just many, many things like that.

How are you guys on the app? And what has been the app adoption for the business?

Yes. So Tu, you can -- I remember the absolute numbers. I think it's about -- app is about, I don't know, 5% to 7% of our traffic. Is that right?

5%, yes.

Yes. 5%. Because -- the conversion rate, interestingly is, depending on the month, 3x to 4x higher than all of our other channels. It's 3x to 4x higher than desktop. It's even higher versus mobile web. So like a lot of companies, we have an effort to induce people to download the app and so on.

Okay, okay. Sure. The category...

We just released our iPad -- first ever iPad app last quarter. iPad is a lower -- much lower than the phone, but still, there's an opportunity there.

Okay. Okay. Congrats. Well, we'll check it out. The category expansion, [indiscernible] is pretty meaningful as well. And the -- as you talk about getting new users and converting those users to buyers, I think, historically, the vintage and antique was as much as half of your GMV. And I know you've been pivoting and expanding the marketplace into jewelry, and new and custom furniture as well as art. Maybe talk about the mix of the business. How you see that progressing over the next couple of years? And what is the delta in the take rates across those categories?

Sure. So I'll start with the first question. And Tu, you can take the take rate question. In terms of the category diversification, so when I joined this business, I had 3 priorities. One was to switch the model from what it was at the time, which was advertising-based to e-commerce, done. The second was to globalize the business. Almost all of our supply was in the U.S. Today, half of our sellers are outside the U.S. And the third was to take the brand equity that we had gained as a result of our first-mover advantage in vintage and antique furniture and kind of amortize that or use that as a way to get into other bigger, higher-velocity verticals, right? The reason I say that is, while we have many great attributes as a marketplace business, purchase frequency is not one of them, right? There's only so often that people buy expensive addition antique furnitures. Yet at the same time, we had a brand that could accommodate organic expansion into other verticals. So we went from 100% of sales from vintage and antique furniture down to, as you know, 50%. So that effort has been successful. The other categories, mostly jewelry and art and new and custom furniture, although what I'm about to say doesn't apply to that as much, are -- they're much bigger than vintage and antique furniture, all 3 of those are. But importantly, they're also more Internet-friendly, right? So it's a lot easier to ship jewelry. It's a lot easier to do returns for jewelry and so on, and art as well than it is for furniture. So again, that's been a big driver of that, going from 100% vintage and antique furniture down to 50%. And when you look at those markets, the competitive intensity is very low. I mean there's really no major incumbent marketplace in any of them. And they're more Internet-friendly. They work very well with our brand promise. And there, we're able to cross-sell all of those categories into our existing customer base. And now with auctions, we have another purchase format, another way to buy out of those categories. So again, we're on the lookout for categories beyond that. However, we're incredibly early. And I think there's -- generally, our focus is much more on growing our share of these verticals than it is on continuing to find new ones. But opportunistically, if one were to present itself, we would go after it, as we did with NFTs most recently.

Okay. Yes. And on the questions in terms of take rate, it's worth noting that our take rate is made up of subscription revenue as well as e-commerce revenues, right? So we take on average like 15% on the GMV that the sellers generate on the platform. And then in addition to that, sellers also pay us a subscription fee as well. So all in, there is not a substantial difference right now in terms of the take rate across different verticals. Obviously, if we look at vintage and antique furniture businesses in the U.S. pay us the highest subscription rate. And so the take rate overall for furniture is slightly higher than what we would take on a fashion. I think there is opportunity for us to simplify our take rate and overall rate card even more. So watches, as an example, has a much lower take rate in the market than what we're charging right now. That might be a deterrent to our ability to continue to potentially grow our supply. And so something that we're actively looking at on how we can continue to move the barrier, which is take rate, to sellers joining the platform.

Okay. Okay. Great. That's very helpful. Just as a follow-up on NFT, and congrats on the launch, that's right, one of the more recent initiatives. How do you think about the road map to scaling that?

Yes. I mean that is the road map. It is to gain scale, mostly on -- well, so let me take a step back. There -- for everything we do, there are 3 parts, right, 3 components: supply, demand and platform. So on the platform side, there are still some kind of fundamental areas of functionality that we need to build. For example, one of the unique advantages of the crypto art category is the ability for creators to benefit from secondary sales, right? In other words, they sell once, gets sold again. They can make some money from that second sale. So we need to build support for that, which isn't in the product today. There are probably 4 or 5 other examples of things like that. But that will happen. We'll get to it in the market sometime in the first quarter. And then the -- our focus is really on adding more supply and adding more demand. Supply is in part a function of product functionality. Today, artists don't have the ability to self-publish onto our marketplace. We're going to give them that ability. And then on the demand side, we launched Twitter and Discord presences, which are the main marketing channels for this market and which are channels we didn't have before. And now it's a matter of, again, exactly as you say, of gaining scale. So look, we believe that crypto art is a category that's here to stay, and we believe it falls within our right to win. We've had some early success in terms of high average order value sales. But again, you put it well, which is it's all about getting to scale right now, and that's our focus.

So as -- maybe this is a Tu question. As you guys think about your longer-term opportunity to grow GMV in a 25% range, that's not what you guided for the fourth quarter. And I understand all of the headwinds and uncertainty out there as well as the tough compare. But looking out, as you think about some of the building blocks towards that longer-term growth, lots of different initiatives at the company, as we just discussed, lots of very exciting ones. But how do you think about some of the building blocks to get there?

Yes. And so just to note, at the midpoint of our guidance for Q4, GMV growth is still in excess of 50% on a 2-year stack basis. And so on a normalized basis, again, we have such a unusual comp in 2020. Of that normalized one-year basis, we're still growing in excess of 25%. The comps do get harder for us in Q1 and Q2 of next year. But in terms of the building blocks, it's everything that we discuss today. We're very excited about auctions. I think we're going to get more data very soon with this launch in Q4. International is a huge opportunity for us, right? So 20% of our GMV today comes from outside of the U.S. That is despite any marketing and investment that we have done so far. And so we do believe that there is a great market outside of the U.S. We do believe that we have the supply. We are prioritizing markets that we already have a supply advantage. International investment is likely to take longer than something like auctions because there's a lot more to build out there. There's marketing awareness. There's product localization. So we're very focused on growing that market. But again, in terms of 2022, in terms of the compositions of where the GMV is coming from, we're still very much focused on our core business today, which is growing the U.S. market, layer on international, which, again, I think that we would expect more material impact coming into 2023. And then auctions, again, I think that will -- post Q4, we're going to have a much better read in terms of the contribution of auctions into our overall GMV in 2020 -- 2022.

Okay. Okay. Makes sense. We'll stay tuned. I guess since we have you, just a question on the IDFA impact for the business. You called out, I think, that was a $2 million to $4 million hit to GMV in the third quarter as a result of some of the changes. And you also said efficiency in marketing actually build as the quarter progressed. Can you discuss specifically what was done to offset that negative impact? And how do you think about potential changes from the privacy pressures going forward?

Yes. So a few things that we're focusing on, for IDFA in particular, one is to test working with new vendors to target the same iOS users. And then 2, focusing on collecting first-party data through registration and engagement of the platform. So those are the 2 things that we'll focus right now in order to overcome the impact of IDFA. And on a broader perspective in terms of sales and marketing, we're going to focus on continuing to test into new marketing channels, right? One of the reasons why we were impacted by IDFA, but not materially is because we do have a very diversified set of marketing channels to bring on users. We're not dependent on any one single point of [indiscernible]. And so I think the learning for us is to continue to experiment into different channels, and therefore, having a diversified set of channels to bring on new users going forward.

Okay. Okay. That's helpful. On the longer-term profitability, and I know that that's longer term, but you talked about reaching 30% EBITDA margins. Which levers do you think you have that you see as the most opportunity to show that operating leverage?

Yes. So I think worth noting that we were adjusted EBITDA profitable in certain months in 2020. So again, scale is not a deterrent for us to reaching profitability because of our high gross margin as well as virtually very low CapEx. But we're very far much focus on growth right now. So that's reflected in all the projections that we made, sales and marketing as well as in product and development. In terms of where we expect to generate the most leverage, I would say that that's across all the value cost line. So of course, it will start with G&A. We had a step-up cost this year due to public company costs. That should get deliver leverage next year, right? So that's very much short term and immediate. Our cost of revenue right now is 71%. So that's high, but there is still room for us to improve margin through more automation. And that improvement will be more incremental over time. I would say sales and marketing in terms of how we can get leverage there is through increasing our by LTV. So that's through a lot of the things that we're doing today, right, expanding into newer verticals so that we can increase the frequency of purchase with our existing customers, growing into international market where the conversion rate of international buyers right now is only a portion of what it is for U.S. buyers. So anything that we can do to improve the conversion rate of buyers on the platform, that should generate leverage on sales and marketing. And lastly, we've been able to prove to get leverage in our product and development line. That's an area where we want to continue to invest. But again, I think that, that is -- we're not expecting to grow headcount at the same rate as we're growing the business because a lot of the work that the team are working on scales, right, with the number of users we have on the platform. So across the board, I would say that we have to see a very clear path to reaching that 30% EBITDA margin long term. In the very near term, we'd still have a very small percentage of the market, and therefore, very much focused on continuing to grow that market share.

Okay. Okay. Great. That makes sense. David, picking up on something you had mentioned earlier. In this supply chain environment, 1stdibs certainly should be a beneficiary, right, less than half of all items on the platform are outside of the U.S. Plus, I think the seller base should be very diversified. So how are you communicating that relative advantage to the consumer? And is the consumer aware of your differentiated position from that standpoint just even as we think about the holiday approaching?

Yes. I mean I'd say any existing customer certainly is aware because they work with us and they know what we do. In terms of new customers, we communicate through all of our normal channels, both advertising and also on site and through e-mails and so on. And also, when you navigate through the experience, we have pop-ups and so on that kind of induce you or make you aware that it's possible to buy from local sellers. So that's what we do.

Okay. Okay. Great. So we have only just a couple more minutes. What would you say should be the biggest takeaway to investors? And maybe as you think about the stock, what's the 1 or 2 things that are most misunderstood about the company currently?

Yes. Listen, I would say it's incredibly early, right? I mean we'll do less than $500 million in GMV this year. The industries we operate in are close to $100 billion. Sotheby's and Christie's, which were the closest comp to us. As you pointed out, do $10 billion a year, it's early in the secular shift and it's early in our development as a company. I could not be a stronger believer personally in the opportunity. I mean I make a very low cash comp. I own a meaningful percentage of this business. And I bought another $2 million worth of stock basically since our first public earnings report also again last week. So again, I'm a really a big believer. We have great fundamentals, strong network effect, customer retention, good product experience, lots of growth adjacencies, 2 of which we've launched in the last 2 quarters. So again, I think it's really early. And what's the one thing that's most misunderstood is that this is a product that is inaccessible to most customers. Our median order value is close to $1,000, which means half of the things we sell are under $1,000, which is not a -- it's not a company for billionaires or even centimillionaires. It's a company for the mass affluent and the sort of aspirational design lovers. And that is a very large market.

Okay. No. That's terrific. Well, thank you so much to the 1stdibs team. And thank you to everyone listening in, and happy early Thanksgiving, everyone.

Thanks. You too. Happy Thanksgiving.

Okay. Take care.

Bye. Take care. Bye.

Bye.