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

Great. Welcome, everybody. I am Aaron Kessler, senior Internet analyst at Raymond James. Pleased to have with us for our next presentation this morning, 1stDibs. And presenting for 1stDibs today are Dave Rosenblatt, CEO; and Tu Nguyen, CFO. I will be doing some Q&A for about 30 minutes. We'll have 10 minutes at the end for Q&A as well. If you do have questions, feel free to enter it in the Zoom box or feel free to e-mail me if you can't figure that out to [email protected].

So welcome, guys. And maybe to start off, just if you want to talk a little bit about just the overview of 1stDibs and maybe kind of how the business has evolved from its original founding and then maybe some of the initiatives you've taken, David, since you've joined the company to kind of transform the model even more.

Sure. So 1stDibs -- first of all, thank you for having us and me, Aaron. So a quick background of 1stDibs. 1stDibs is a classic 2-sided marketplace. The supply side are vetted professional sellers. So we don't source from consumers, and it requires approval on the part of the business to be allowed to sell. So the supply side is over 4,000 vetted professional sellers across luxury design, jewelry, art and fashion. The demand side is a combination of consumers, and about 1/3 of our business is selling to interior designers. The company was formed quite some time ago. It was about 20 years old in the Paris flee market, which is a neighborhood in Paris dedicated to luxury design. And the originally idea -- original idea was to create a listings business for the purpose of those 2 buyer constituencies I mentioned, primarily in the U.S. The key change in our history was in 2016, 5 years ago, when we switched the business model from what it had been, a listings/advertising business to an e-commerce business. In the e-commerce model, I guess probably the easiest way to think about it is think about switching from being a sort of fancy version of Craigslist to eBay. In the e-commerce model, all contact between buyer and seller happens on the platform up to and including the order itself. So that has been the primary focus of our strategy up until now, along with 2 other strategies. One has been geographical diversification. So when we started, despite the fact that we were started in Paris, we very quickly became basically a U.S.-only business. And then secondly, vertical diversification. So again, when I joined the business, which is now about 10 years ago, and for much of our history, almost all of our supply was in the original vintage and antique furniture market. That industry is relatively small. And so the strategy has been to take the brand equity that we gained as a result of our first-mover advantage in that category and diversify into other categories. We've done that such that vintage and antique furniture is now diluted down to roughly 50% of our total GMV. So business model change in favor of e-commerce, geographic diversification and vertical diversification has brought us to where we are today.

Got it. Great. And then for those investors maybe who don't know just kind of the size of the TAMs that you're addressing, can you just address the TAMs for your core market as well as the personal luxury goods market? And where do you -- maybe which areas do you think you're taking share from the most?

Yes. I mean the core market that we're in today is roughly -- depending on how you measure, something like an $80 billion or so market. So it's a large one. I think easier to conceptualize actually than the market size itself for some of the other participants in this market. So Sotheby's and Christie's, for example, together do roughly $10 billion worth of GMV a year. Another data point in the market recently, there's a company called LiveAuctioneers, which is owned by ATG, which is a public company in the U.K., which is an online marketplace whose sellers are local auction houses. So they'll do over $600 million of GMV this year. So again, I think -- and then we've got the many, many substitutes who represent competition to us in specific verticals and geographies.

Got it. And I think it's pretty obvious. And maybe you just can provide an overview of some of disruption that you're doing versus some of the legacy models. Obviously, a much better user experience, much better seller experience. Maybe just detail some of the ways you think you're really disruptive to these legacy models.

Yes. I think the easiest way to think about it is how this industry works before 1stDibs existed. So the business in almost all of our verticals was primarily local and, importantly, local to those who happen to live in 1 of 5 or 6 major cities in the country or the world, right, like New York, L.A., Miami, London and so on. So starting on the supply side, the real change that 1stDibs created for our suppliers is the ability to reach a global market, number one, which they couldn't before; and then number two, for them to be able to sell online at all, which really wasn't possible and didn't happen before 1stDibs existed. We do a lot of other things for them, but those are probably the 2 biggest disruptive components of our value prop to suppliers. And on the demand side, similarly, it starts with access to product, which again before 1stDibs was only local. And then secondly, I would say we've disrupted the actual purchase process itself at every step of the funnel, everything from discovery, which I've talked about; to being able to communicate online between the buyer and the seller to being able to buy anonymously, which is important in this market; to bundling payment and checkout to offering trust and a buyer guarantee, which in many -- in most cases, individual sellers don't; and to offering all sorts of technology, of course, to contribute to things like personalization and so on, e-mail marketing, again, none of which exist before us.

Got it. Great. And then you hit on it a little bit in terms of your vertical expansion in Q3. Vintage and antique, as you mentioned, was kind of roughly 50% of your GMV. Can you talk about how you've expanded the marketplace beyond vintage and antique into the newer categories, jewelry, new and custom and art? And how long does this generally take in terms of some of those vertical expansion? And is this strategy replicable going forward?

Yes. I mean one of the questions I was asked pretty frequently during the IPO process is what is your most important differentiator or your most core asset, and I believe that our most important invaluable asset is the consumer trust that we have to be able to sell high average order value items online. So if you compare our AOV, which is well over $2,000, it's 5x to 6x higher than the most recently published AOV of The RealReal, for example, and also Farfetch. So both businesses commonly associated with luxury. So we have an ability via the trust that consumers have placed in us to be able to give them the comfort to make high average order value purchases online. And the idea, as I mentioned earlier, behind our vertical diversification has been to find other categories where that trust applies equally well to our original core vertical of vintage and antique furniture, and that has worked well. So today, jewelry, our new and custom design, meaning contemporary design, is another big leg of this for all kind of important components of the company. What we look for is exactly what I described. It's the sale process that requires trust and that also works well with the technology platform we have that, again, is something that we think is unique. In my experience, it is unique that accommodates a pretty complex order path, along with the ability for the buyer and seller to communicate throughout the negotiation process. And I think it's super early days. I mean jewelry is obviously -- fine jewelry is a very large market. We're in it, both in terms of contemporary jewelry and also the secondary market, also called the [ stage ] jewelry. Same thing with art. Same thing with contemporary design. And again, the adoption still of the Internet of these verticals is very, very low. The last thing I would say on it is the competitive intensity in these verticals is high to the extent that there are lots of substitutes. But it's low in the sense that there's no company out there that looks like us in the sense of being a multi-vertical luxury digital marketplace with all of the reach and the assets that we have.

Specific to the art category, how much of the art galleries have you seen move online at this point? There's still a lot of local art galleries in a lot of the big cities out there. How much of that have you seen move online?

Yes. Quite a bit. I mean it's become a major category for us. Again, I still think it's early days and the art market is complicated and segments into kind of super high-end segment of the market, which has not yet moved online for the most part, and then a kind of lower-price segment of the market, which has. We're focused on the latter. But that's undergoing the same secular changes that those verticals are.

Got it. Great. And either for you or for Tu. The long-term growth targets you've laid out is roughly 25% GMV growth. That would kind of imply an acceleration versus what we're seeing in the back half of the year and into Q4. Can you just walk us through some of the plans that you have to accelerate GMV growth going forward? And maybe what areas are you most optimistic about as we go into 2020?

I can take that, and David, you can chime in. So just on our existing growth rate, right, I think it's helpful to note the 2-year stack growth rate to normalize for 2020. And so on a 2-year stack basis, we are -- we're growing at 57% in Q3. And at the midpoint of our guidance for Q4, that implies a 54% growth rate. That said, we have a number of initiatives that we're very excited about for next year that we do expect the comps continuing to get tougher going into Q1 of next year but then normalize into the second half of the year. So some of those initiatives are what David has mentioned, right: auctions, something that we launched a few weeks ago; international, we decided to accelerate investment in international into Q4 of this year, and we hope to be in market -- in those markets in H1 of next year that should have GMV impact towards the second half of the year; and then continuing to expand on our core business, right? So the new verticals that we are in today, for example, in Q3, we saw that 60% of the new buyers that we brought on in Q3 purchased in a vertical outside of vintage and antique. So we see a ton of new opportunities to continue to grow our business outside the vintage and antique within our core business. So those are the 3 things that I'm very optimistic about going into the second half of 2022.

Got it. Great. And then just maybe quickly onto auctions as well as the opportunity that you've recently launched in November. How should we think about the key benefits to buyers and sellers of the auctions model versus of your more current fixed price model? And the question I had is, I guess, can you just maybe walk through the logistics of the auction model, how that will work? Is it like a 1-week auction, 2 weeks? And then do you think you have enough bid density to -- for this to really be successful?

Yes. So it's -- currently, there are weeklong time to auctions. So very straightforward. The seller sets the starting price. That's the reserve price, and then we see what happens. Listen, I think auctions fit very naturally into the business. I mean let's just start very quickly. There's the kind of economic rationale or logic, which is we have roughly, I don't know, somewhere between, in terms of face value, $10 billion to $11 billion worth of product on the marketplace. Because of the longer-than-average sales cycles associated with this industry, we'll sell roughly 5% or so of it this year. So that leaves a lot of product. And we've done a ton of research, and we asked our registered buyer or registered users who have not yet become buyers, why is it that you haven't bought? And in almost all cases, the primary reason is the inability to do price discovery, which kind of makes sense given that we're a marketplace of one-of-a-kind items with a relatively high AOV. Etsy has a similar issue, but it doesn't really matter when you have a sub-30 AOV or whatever they have, right? When you've got an AOV that's at our number, it does matter. So we have a bunch of initiatives pointed to that, but I think auctions is the biggest and the most important of those. And the fit is obvious, right? I mean auctions solve that because they are, in fact, the most efficient vehicle for price discovery in the market. The product itself will also be -- is differentiated from others in a couple of senses. One is that we have a message center. So in most cases -- all cases actually that I know of, it's impossible for buyer and seller to communicate through the auction. We're also bundling the shipping price in most cases with the price of the item. We offer our typical 1stDibs buyer guarantee and so on. So all the things that people expect from and receive from core 1stDibs are included in the auction product, which makes it -- in addition to that sort of economic logic that I described, makes it a product that we think is genuinely differentiated. So I think it's -- look, sellers want to sell, and buyers want to make sure that they have good prices. So again -- and then I guess the last thing I would say is that this isn't like introducing auctions into an industry that's never seen it before, right? It's a fairly commonplace mechanism, and it exists because of the price discovery need that I talked about earlier. And then in terms of how we were going to commercialize it, the advantage we have here is we already have the seller on our platform. We already have the item itself on our platform. And in many cases, we have the buyer on our platform with the buyer's payment information. So again, the sort of step to commercialize this thing is not quite as high -- not nearly as high as it would be if we were coming at it from scratch.

Got it. That's helpful. Great. And then just maybe quickly on international as well, which seems like a fairly large opportunity for 1stDibs, and you already have a lot of your traffic there. So if you can just maybe provide us an update on kind of percentage of traffic, supply that comes internationally as well as revenues? And then how should investors think about the opportunity both in '22 as maybe you launch some new markets, local language markets as well as the longer-term opportunity in some of the international areas?

Okay. Let me just sort of start with what international is for us. And then, Tu, you can talk about how that translates into investment requirements and GMV impact. So today, 40% of our items are from outside the U.S., 50% of our sellers. However, the experience itself is English language only. So nothing is localized. We don't do any local language marketing to grow audience, and the experience itself all the way through payment methods and so on is not optimized at all for non-English language, non-U.S. buyers. So the goal is to change all of those things and to be in market in the first half of next year with -- in Western Europe at least, our first couple of markets, with local item description -- with local language item descriptions supported by local language marketing, payment methods, all those things that I described. Tu, do you want to talk about how we think about it in terms of the economic model?

Yes, sure. So just to build on what David mentioned, right? So the last time that we disclosed international metrics, and much of the trend hasn't really substantially deviated from that, is 30% of our traffic comes from outside of the U.S. But in terms of demand, only about 20% of our demand are from those countries. And so by that math, the conversion rate from international buyers is much lower than the conversion rate of our U.S. buyers. And so we're very much focused on what can we do in order to improve that conversion rate from international buyers, right? So a few things in terms of translation, making it locally available in local language and localizing the experience, so either through payment method as well as expanding the fulfillment carriers, that network that we have today to better support these local markets. So that's on the platform side. And then we never really invested in international demand outside of English language countries. And so the 2 benefits of translation is, one, we are able you come up when you search for 1stDibs in your local language, right? SEO was never possible if you don't speak or search in English. So 1stDibs would now come up when you search for share in that local language. And then two, be able to start testing into paid media in these local markets as well. And so those are going to be kind of the levers that we're going to watch as we move into -- initially, in this Western Europe markets, where we do at the moment already have the supply existing in those markets.

Got it. Great. And then a couple of questions on advertising. Obviously, still a long runway to go in terms of further buyer penetration. Kind of what's the current strategy in terms of increasing the buyer base on 1stDibs? And I think you may have mentioned IDFA in the last conference call. Just any updates there and how you're dealing with some of the IDFA headwinds at this point?

Yes. Tu, do you want to take that?

Yes. So in terms of IDFA, just taking a step back, right, IDFA really impacts our app traffic. So app traffic accounts for about 5% of our total traffic, but it's much higher converting. And so we did estimate that IDFA had some impact on our GMV, but not a material impact in Q3. We do expect that Q4 because generally, seasonally, it's a higher traffic quarter for us, that we might see more impact from IDFA. But that said, our strategy in terms go-to-market for buyer acquisition has been a few things: one, focusing on improving conversion, right, so it's all of the platform optimization that you see on the site; and then two, continuing to test into new channels. We don't want to be reliant on any one channel. And then part of the reason why we weren't materially impacted by IDFA is because throughout this year, we have been more aggressive into testing into new channels. So I'd say that is the same playbook as we think about international. We're going to focus on testing. All of these new channels will be brand new to us. So we'll test into new channels and, using the data that we have, figure out which channels work and which don't. And then we'll continue to optimize the program as appropriately as we can. But again, very similar playbook with what we have done in the U.S. so far.

Got it. Great. And then maybe just for those who -- investors who are not aware, can you just talk a little bit about the buyer demographics, buyer, user, maybe how that's changing? Maybe just also if you can discuss maybe the cohort behavior of recently acquired customers as well.

Sure. Why don't I start with the first question? And then, Tu, you can take on the cohort question. So in terms of demographics, we do skew, I would say, sort of mass affluent. Our average order value, I don't know, it's around $2,600, but the median order value is closer to $1,100. So obviously, that implies that half of what we sell was below -- roughly below $1,000, well within the reach of the mass affluent buyer. The way we think about merchandising and kind of supply aggregation and so on is that we're searching for high-quality product that doesn't necessarily always translate into the most expensive product, right? Like if this coffee mug is the best coffee mug ever made, maybe it will cost $50 or $60. That's not the same price as a $30,000 vintage Rolex or something like that. And that is -- I'd say beyond that, our audience definitely skews female and today skews U.S. as well because of the fact that we haven't localized beyond English-speaking countries. Tu, do you want to talk about cohort performance?

Yes. So we've been very pleased with the cohort performance of the recent acquired cohorts that we have so far. Again, we do have a longer product purchase cycle, right? We normally look at retention within a year. And outside of that, we also look at engagement metrics, which is an indicator of repeat purchases. And so on both fronts, we've seen that -- what I would call the [ coast ], sort of the during COVID cohort that we brought on. We did bring on a very large number of new buyers. And both in terms of engagement metrics as well as return metrics, they have been consistent with our prior cohort. The other data that we look at is also we've seen AOV increases on the platform as well as on new buyers as well. So AOV is obviously not something that we as a company optimize for, right? So if we have a buyer that wants to come on and buy something for $50 versus $5,000, we are happy to have both segments of buyers. But as I said, we've proven the ability to continue to grow AOV, which again is an indication of the trust that buyers have on the platform. And also speaking about in terms of the LTV and the quality of cohorts, we have seen that metric continue to strengthen this year versus last.

Got it. Great. And maybe you can just talk for a minute about the trade business as well, which I think you talked about a lot of interior designers. Probably -- I assume 90% plus are aware of 1stDibs. Can you just give us an update on trends you're seeing within the trade business this year? And maybe kind of how penetrated is the trade business for you at this point as well?

Yes. I mean the trade business has been very healthy for us this year, I think, primarily for 2 reasons. One, they were disproportionately negatively affected by COVID. And so we're still comping softer numbers than obviously is typical for the interior designer industry. And then secondly, as we all know, the real estate market in general, but the luxury market in particular, has come roaring back. So we've benefited from that. Going forward though, we expect the growth rates to kind of regress to more normal historical averages. And all of our energy as a company is really on the consumer side primarily because the size of those markets is just so much bigger in general. And specifically with the markets that we're focused on, like jewelry and art, those are almost exclusively consumer markets. So going forward, we expect trade to decline as a percentage of GMV for a long time.

Got it. Great. And I think you discussed a little bit on the last earnings call in terms of the supply chain, saying you haven't seen much disruption thus far. Any update you can provide us on the supply chain as we go into Q4 here, what you're seeing currently?

Yes. So far, we have not, I mean, I think for a couple of reasons, the most important of which is that we're in the secondary market, not the primary market. So we don't have to deal with things like -- the things that manufacturers have to worry about. Second is we're not as exposed to the -- specifically, the Trans-Pacific trade routes. And then lastly, there always is, for most buyers, a local auction, right, even if the thing they really want is not local. So again, it hasn't been nearly as much of an issue for us as it has been for others.

Got it. Yes. Have you disclosed what percentage of your sales are from the Trans-Pacific route? Is that a smaller percentage than maybe Europe to U.S.?

We haven't. But it is. Yes, I mean, again, primarily because most of our international supply is in Europe, not in Asia.

Got it. Great. And then just maybe for Tu. When you think about longer-term EBITDA margins, you've got roughly 30% plus long-term EBITDA margin. How should we think about maybe the path to profitability in terms of where the biggest areas of leverage are? And is there a right way to think about it in terms of the scale of the platform to achieve that?

Yes. So those are great questions. And I just want to mention that in certain months in 2020, we were adjusted EBITDA profitable. And so unlike potentially at a marketplace where they need to get to a certain GMV in order to get to profitability, we have the ability to do that today if we choose to. And so the margin that we have right now is more a reflection of our deliberate decision to invest in growth. So longer term, where do we see the path to getting to that profitability level? I would say that was across all of our major cost line items, right? So G&A, we do have a step-up function in terms of cost this year because of public company expenses. We're going to see that leverage towards the second half of next year where we comp the full year of public company cost. Sales and marketing, I'd say half of that right now are on head count, right? So these are teams that -- what I call like platform team. So SEO, e-mail, paid. It takes the same amount of team and people to reach 1 million users versus switching 10 million users, and we do expect those teams to scale with revenue and GMV. The remainder of that cost is on variable sales and marketing, right? So that's what I call like paid and promotion. And for that, we do have strict ROI on the core programs. And the decision on whether we want to be more aggressive on sales and marketing is really around whether we want to invest more into testing, which allows us the ability to scale our acquisition effort even more. I think barring any kind of one-off upfront investment like international as an example, right, so we do -- we'll incur translation costs upfront in Q4 of this year and Q1 of next year. But after that, incremental cost of translation is minimal relative to that upfront cost initially.

Got it. Great. And maybe just finally, any areas that you would highlight maybe that are areas that are underappreciated by investors today? Or curious if there might be areas of confusion for investors at this point as well.

I mean I think we've hit on most of them, which are market size. The only thing I would say is that I think when you look at the conversion rates in this business, conversion rates from returning buyers are quite high. So once we get somebody to buy, actually, both return rates, visit rates and conversion rates are fairly high. I think the opportunity is more around sort of those -- that phenomenon I mentioned earlier, right, the fact that we have 3.5 million registered buyers or registered users versus the trailing 12 months number of 72,000. And we got a bunch of stuff pointed at that, the important of which is auctions and localization. But again, I think what we have is a track record that once people become a buyer, they exhibit extremely healthy return and repeat purchase rates.

Got it. Great. And with that, I think we'll wrap up. I want to thank David and Tu for participating today. Have a good night. Thanks, guys.

Thanks. Bye.

Thank you.