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

All right. Good morning, everybody. So my name is Ross Sandler. I run the Internet team here at Barclays. We're super excited to have David, Tu and Kevin from 1stDibs to kick off the conference this morning.

So just to start, guys, maybe we could dive in on long-term growth rates? So we've been growing pretty nicely here in 2021. Your guidance assumes about a mid-teens growth rate. So how do we accelerate GMV growth back up to your 25% long-term target? Is that going to be relatively easy to achieve? And what kind of buyer growth do we need to see on the consumer side of your business to bring the aggregate GMV growth back up to 25%?

Sure. So first of all, thanks, Ross, for having us. In terms of the long-term growth rates, we're very comfortable with our 25% target. We happen to be in a period right now, as many e-commerce companies are, where we're comping particularly in sort of, a, historically strong COVID growth that will continue through Q2 next year. But our strategy is straightforward. So we believe our base kind of platform, if you will, e-commerce business, can grow in the sort of mid-teens sustainably. And then on top of that, we have 2 significant identified growth levers, one of which we launched a few weeks ago on November 12, the second of which we'll launch in first half of next year. The first of those is the auctions and the second is international. So just briefly, the basic rationale for our auctions is that we have over $10 billion worth of product in the marketplace that does not get sold, owing to the longer than average sales cycles in this industry. When we do our research, it emerges very clearly that the single biggest reason that deters nonbuyers from buying is the lack of price discovery. Auctions not only solve this, but obviously are a well-accepted purchase format in this category over many centuries. And then secondly, in terms of international, I think that's relatively intuitive. Half this market is outside the U.S. If you don't speak English, you can't use 1stDibs today, which also means we can't do local language paid marketing. We see that show up in lower traffic than its proportionate to population and demand in this market. And then secondly, and importantly, conversion rates from non-U.S. buyers that are half that of U.S. buyers. Tu, anything to add in terms of some of the other questions?

Yes. The only thing that I would note is the trade business is doing well for us right now. Part of it is because we were adversely impacted in the trade business in 2020. So we did have a smaller comp. And in the long run, we do expect that the consumer business will outpace the growth of the trade business that even if you look at the 2-year stack growth rate for trade versus consumer, 2021 versus 2019, the consumer business is growing faster.

That's great. And David, you just mentioned some of these key initiatives, maybe can we talk about like we've launched auction, we're getting international cranked up next year. But just, yes, the investment levels required to unlock these growth opportunities and, yes, over the next few years, what do you see as the biggest of the ones you mentioned?

Yes. I mean the investment levels, in general, that are required for us to launch new features like this have been relatively modest, just given the sort of breadth and scale of the existing platform. In auctions, in particular, we were able to bring that to market in a very short amount of time. I think it was, I don't know, less than 6 months of development time. I'll leave the kind of marginal cost detail to Tu. But in general, what I like about where we are is that it is reflective -- both of these are reflective of the fact that, again, we have built out the primary use cases in the platform. So these new initiatives are more a matter of adapting an existing platform to a kind of either a new audience in the case of international or new purchase format in the case of auctions rather than creating a new platform from scratch. I'd say the 2 growth levers have different characteristics. I personally feel like auctions can have a very large impact on the business and it's more efficient to scale in the near term. International requires quite a bit of translation cost as well as a burn-in period to gain credibility or authority with Google in order to power both SEO and paid. So well, I think in the long run, international has a very high opportunity. It will take longer to achieve that than I think auctions will. Tu, do you want to fill that in?

Yes. I think you covered most of it. Of all of the initiatives international will have the most meaningful impact in terms of our upfront investment and the form of investment would be, first, on translation cost. There will be an upfront cost in Q4 and Q1. And because we're translating 100% of the content on the platform. So new listings, all of the items that we have and all of the e-mail and editorial. From that, they will only -- we will only incur incremental translation costs for any new content. And then once we launch the localized features in H1 of next year, we'll start to layer on marketing spend in the second half of the year.

Got it. That's helpful. Okay. If we dig in a little bit further on the auction opportunity. So David, you mentioned that there's $10 billion of listings on the platform. I think Sotheby's and Christie's are doing over $10 billion in GMV right now this year, how much of that makes sense to find its way to an online platform like 1stDibs? And what's the value prop for a seller to bring their listings to 1stDibs instead of like a traditional auction house and could auction open up new categories? I don't know what the $10 billion of GMV that Sotheby's is doing encompasses in terms of their categories, but could it unlock new opportunities for you guys?

So I think longer term, having an auction format clearly gives us the ability to compete for that $10 billion. In the near term though the dynamic is very different. Sotheby -- and, I think, favorable to us. Sotheby's and Christie's start every quarter from scratch, basically, right? They have to go out, get new products and then put it through their auctions. In our case, we're starting with -- by targeting the product that is already existing on the 1stDibs' marketplace. So we have the item. It's in our database. We have the item description, photography, all of that. We have the seller. And in many cases, we already have the buyer as well. So the -- rather than going after new property as Sotheby's and Christie's do, we're targeting, in the first instance, our existing property and simply applying a new purchase format that we think addresses the single biggest reason why people don't buy on 1stDibs. I think longer term, though, now that we have this capability, of course, there is optionality around going after the -- not just Sotheby's and Christie's, but there are plenty of other auction houses in this market as well for new property.

Got it. Okay. Shifting gears a little to the margin outlook and just overall profitability, Tu, maybe this one for you. Can you walk us through the path to getting to breakeven? And where is the leverage in the model going to come from? When do you expect us to get there? And how big do we have to be to reach breakeven?

Yes. So it's worth noting that we were adjusted EBITDA profitable in certain months in 2020 on a lower GMV and revenue than we have today. So we have the ability to breakeven today if we choose to. And we decided to invest in growth because of the large opportunities that we have in front of us, but also because we believe that scale in a marketplace model will ultimately drive financial returns. Given our high gross margin of 71% and that -- our cost base is variable with very low CapEx, we do expect to generate operating leverage from all major expense lines. So even looking at -- versus 2019, we have been making strides in getting to that path to profitability across all of our expense lines. And we expect this to continue to be on that path going forward. The margins that we have today is really a reflection of our decision to invest in growth.

Got it. That's helpful. Okay. Back to the growth initiatives, David, so you mentioned international and a bigger push next year. Can you walk us through just what the opportunity is there what kind of GMV do you see from international kind of medium to long term what percent of your buyers and sellers are currently outside the U.S. and then like kind of what's the steps of the playbook to doing the localization that you just mentioned? .

So today, on the supply side, roughly half of our sellers and 40% of our items are from outside the U.S., primarily, although not exclusively, in Western Europe. On the demand side, roughly, it's about 20% of our buyers are from outside the U.S. What can that be? I mean if this market is similar to other comparable markets, demand is roughly half outside of the U.S. So that is, I think, the long-term goal is for demand in our business to reflect sort of overall global demand for this market, steps to get there. By far, the biggest challenge, as you mentioned, is translation. We've got 1.3 million items, each of which is unique. We also need to translate the kind of permanent seller and buyer experience as well. So we're going to start in a couple of markets in Western Europe. And then once we have that platform and we've got the learning curve, we can extend that outside of those 2 markets and then ultimately beyond Europe. I think of all of those things that I mentioned, probably the longest burn-in period is gaining Google authority for the purpose of first SEO and then paid. How long does that take? I don't know exactly. I mean it's -- I think to get to where we want to be, it's going to be more than a year in the U.S. We've put a lot of effort into SEO, and even here where we already started with strong authority, it took over a year before we began to see the -- kind of see that show up in terms of elevated ranking. So outside the U.S., we're starting from scratch. Nevertheless, we have the playbook. We're the largest player in town. And so we're very highly confident that we know how to do it. But again, it takes time.

That's good. One thing you guys have talked about is the NFT initiative. So how should we think about that opportunity over time. There's a bunch of NFT marketplaces cropping up every day. So I guess given the crowded landscape, how does 1stdibs differentiate? And what are the areas within digital art, collectibles, et cetera, that you plan on going after and NFTs?

Yes. So those are all the right questions, what we talk about all day long. The way I think about it is in terms of portfolio theory, we always want to have a range of growth initiatives, starting with the most predictable and the least risky and extending to the kind of highest beta. So I would put the NFT offering in that higher beta category. Obviously, it could be very large. At the same time, there's a lot of risk associated both with the evolution of the market itself and our own ability to outcompete these other marketplaces. There are several other marketplaces. I think our right to win is to participate in this market in a way that's consistent with the way that we compete in every other market, which is focusing on very high-quality artists. So we're not focused on the collectibles market, which is what drives most of OpenSea's volume, we're focused on NFT on digital art specifically. And we found that our pitch has resonated quite well with artists. Part of the theory of the case here is that given the attention and energy and investment that's going into this category, there will be a huge amount of supply, especially as minting tools develop and become easier to use. And in general, the medium mainstreams. And in this market, as with our preexisting markets, in a world where there's a ton of supply, there's a need for curation, there's a need for education, there's a need for sort of comfort on the part of the buyer that what they're buying is actually will stand the test of time. So that's what we do in other markets. We feel like we can do it here as well. What does it take to get there? We've built out a chunk of the technology. There's still core functionality like support for secondary sales, which is sort of definitional to this market, which we don't have. So that's in our kind of second wave of product releases, which will hopefully be in the first quarter. And then beyond that, the most important thing is developing more scale and demand channels like Twitter and Discord that we've never used that are not relevant in our other markets that are brand new to us, right? So we're focused on all of those things. We regard it as a long-term project. We think this NFT market will be here forever. And again, we do feel like it falls within our right to win. At the same time, we recognize it's higher risk than everything else that we're doing. But it's important to have those types of projects in our growth portfolio.

That's great. Yes. If we back up to just vertical categories and category expansion. So vintage and antique has been like the wheelhouse for you guys forever, and I think in the third quarter, it was about half your GMV. Can you talk about how you expanded beyond vintage and antique to the other half, which is now jewelry, new and custom furniture, art, how long did that process take? And is the expansion to these other new areas -- is that playbook replicable?

Yes. So let me just start by saying that in the IPO roadshow process, one of the questions I get asked quite often is sort of what is your single most important differentiating asset as a company? And I've always felt that the answer to that is trust. We have the consumer trust in particular, that's required to be able to sell high average order value items. Items that are regarded as much as investments as they are nice things to put in on one's home. And so that -- where you see that is in an AOV, of course, that's 5x to 6x higher than other public luxury, many other public luxury players. So what I believe is that the sort of truest test of adjacency for us is that it does the category require consumer trust from the market maker in order to be able to drive sales. And that's much more important than kind of functionality that's specific to any vertical or a brand that's kind of associated with that vertical and so on. And that's why we've been able to be successful in jewelry and/or in these other categories, despite the fact that furniture is very different. People regard what they buy from us as long-term investment grade collectibles and that applies equally to the non V&A, nonvintage and antique categories as it has vintage and antique. The second sort of economic and behavioral -- marketing behavioral argument for us to expand into these other categories is purchase frequency. The one thing that we don't have relative to many other marketplaces is very high purchase frequency and short sales cycles, right? We have the opposite. So the more that we having gained this trust, the more things we can sell to a given buyer, the more we can drive up frequency. And then lastly, of course, vintage and antique furniture is the smallest of the nature categories that we're in and these other categories like jewelry and so on are many, many times larger. So we've been successful in all of those categories. Those categories segment further into new and custom contemporary and secondary market. So we sell contemporary jewelry along with secondary market jewelry. Same thing in art, we don't sell primary market fashion, but we regard fashion is all a little bit different. We embarked on the diversification approach sort of in the mid-teens-ish, so kind of each has followed a different path. But as you can see today, we've gone from 100% of our GMV in vintage and antique furniture to only 50%. And I think in the long run, what to expect? My own expectation is that growth in these categories will ultimately approximate the relative size of each of the TAMs. They're not the -- there's no direct competitor really in any of them that looks like us. So the competition is mostly substitutes. So if you believe as I do in the ability of marketplaces to bring unique benefits, versus retailers versus even some of our own sellers selling directly, then there's no reason why, again, growth in the -- like I said, growth in those categories shouldn't be proportionate to the size of each one.

Got it. Okay. Tu, maybe a question for you on -- a little bit more on the financial side. If we look at expanding into NFTs and auction and some of these new concepts in the future. How do we think about the take rate in those areas relative to your core business?

Yes. So auctions has the same take rate as our core business because the value prop are the same. We offer bioproduction, facilitated shipping and the supply is actually the same. NFT take rate, to start, is lower, so at 5% because unlike other parts of our business, we do need to build the supply side from scratch. And so we're going in with a more creative friendly take rate. Worth noting that in terms of the margin for NFT, right, we don't have all of the costs associated with supporting an order, which is digital like we do on the physical marketplace.

Okay. Maybe just a quick follow-up on that. So the operating expenses around NFT build-out would be just kind of R&D and the usual upfront cost. But then once that gets going, lower take rate but potentially higher than company average operating margin. Is that the right way to think about NFT?

Yes, that's right. And mainly, when you take a step back and look at our cost of revenue, a big component of that are our operations team, which support shipping, customer service and all of that, which we don't expect to incur with NFTs because everything is digital and on the blockchain.

Got it. Okay. And then on marketing expense, so how do we think about just the overall marketing strategy that you guys have had kind of -- you had a reset in 2019. And given all these new categories and new initiatives, including international how should we think about the overall kind of high-level marketing strategy going forward?

Yes. So in terms of the strategies, I'd say, auctions and international are leveraging our existing playbook. So the go-to-market strategies are the same for auctions and international with our core business. NFT is a bit different. NFTs we're leveraging Twitter and Discord. So these are the 2 channels that we don't use for our core business. In terms of the investment, though, I would say that international like we discussed, will require that upfront investment. We will start to layer on paid marketing for international in the second half of next year. I do expect that just similar to when we launched paid acquisition in the U.S. that to start, all of the channels will be new to us. So we'll be less efficient than the core business, as we test into new channels. But I do expect that we'll be able to get data and optimize those channels quickly and get back to our core ROI efficiency threshold for the international channels. But to start, again in 2022, we do expect both within translation, paid acquisition that, that will be an upfront investment for us for the international markets that we're hoping to launch.

Got it. Okay. And then I guess just rounding this out, you mentioned, Tu, earlier some of the comp issues for trade versus consumer, and I think your business like part of it benefited from the pandemic, part of it was kind of a headwind. So I guess, just if we look at the cohort level, how do you feel about where we are today in the fourth quarter '21 versus those aspects of your business last year, how are the cohorts performing? And as you add in these new categories, are you starting to see evidence of an uptake in frequency of purchase and at the cohort level? Any comments about how the cohorts are performing?

Yes. So we brought on a very large set of new cohort of buyers during -- let say, at the start COVID last year. And because our purchase cycle is slightly longer, right? We do watch the buyer behavior over the course of the year to understand the repeat purchase behavior. And what's been very encouraging is that both in terms of engagement metrics as well as return rate for the newer cohorts those has been very consistent with our prior to COVID cohort. So a little bit more challenging for us in terms of forecast is understanding exactly whether the buyer was going to return within 6 months, 8 months or 12 months. But within that 12 months, we have seen that the retention rate has been very stable. So that's hugely encouraging to see. And then in terms of progress on increasing the frequency of purchase, we've seen that we've been able to make progress there. So we're continuing to grow the buyers who purchase in multiple verticals at a faster rate than the company average. And so those buyers do have higher LTV. We think that there's still opportunities for us to continue to improve that rate. And then lastly, for the newer verticals, that also has allowed us to bring on new buyers as well. So in Q3 60% of the new orders that were made on the platform were outside of our vintage and antique core business. And so not only that the newer verticals has allowed us to increase frequency of purchase but that also allowed us to reach a much wider base of audience.

Great. That's great. All right, guys. Well, look, this has been super helpful and congrats on the IPO and getting out of the gate. And thanks for kicking us off here at the Barclays TMT Conference, and we'll wrap there.

Thanks for having us, Ross. Appreciate it.

Thank you.