1stdibs.Com, Inc. (DIBS) Q4 2024 Earnings Report, Transcript and Summary

Good morning, and thank you for standing by. My name is Kelvin and I will be your conference operator today. At this time, I would like to welcome everyone to the 1stdibs Fourth Quarter 2024 Earnings Call. [Operator Instructions] I would now like to turn the call over to Kevin LaBuz, Head of Investor Relations and Corporate Development. Please go ahead.

Good morning, and welcome to 1stdibs Earnings Call for the quarter and year ended December 31, 2024. I'm Kevin LaBuz, Head of Investor Relations and Corporate Development. Joining me today are Chief Executive Officer, David Rosenblatt and Chief Financial Officer, Tom Etergino. David will provide an update on our business, including our strategy and growth opportunities, and Tom will review our fourth quarter financial results and first quarter outlook. This call will be available via webcast on our Investor Relations website at investors.1stdibs.com. Before we begin, please keep in mind that our remarks include forward-looking statements including, but not limited to, statements regarding guidance and future financial performance, market demand, growth prospects, business plans, strategic initiatives, business and economic trends, including e-commerce growth rates, international opportunities and competitive position. Our actual results may differ materially from those expressed or implied in these forward-looking statements as a result of risks and uncertainties, including those described in our SEC filings. Any forward-looking statements that we make on this call are based on our beliefs and assumptions as of today and we disclaim any obligation to update them, except to the extent required by law. Additionally, during the call, we will present GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-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 are on a year-over-year basis, unless otherwise noted. I will now turn the call over to our CEO, David Rosenblatt. David?

Thanks, Kevin. Good morning, and thank you for joining us today. I am pleased to share the progress we made in the fourth quarter. We exceeded our guidance, achieved our highest GMV growth since 2021 and gained market share. In 2022 and 2023, we reduced operating expenses, rationalized our product lineup and maintained our focus on conversion. These actions paid off in 2024. While full year GMV was flat following a 15% decline in 2023, we exited the year with GMV growing 9% in the fourth quarter, the fastest pace in 3 years. For the year as a whole, conversion, active buyers, orders, revenue and gross profit all inflected back to growth. Tighter focus and accelerated product velocity are fueling these gains. Throughout 2024, we doubled down on what was working while reallocating resources from lower return projects to higher return projects, driving higher conversion rates.

Revenue growth occurred against the backdrop of continued weakness in our market. According to the National Association of Realtors, U.S. home sales, a key driver of furniture demand, neared a 30-year low in 2024. In addition, syndicated credit card data showed that the broader online furniture and premium home furnishings markets contracted. This downturn is cyclical, not structural. We expect that the market for luxury real estate and luxury home goods will eventually rebound, and we continue to see a large and compelling opportunity in that market. As such, we are investing selectively in the long-term drivers of our success. Doing so will enhance the value that we bring to buyers and sellers and strengthen our competitive position. Returning to revenue growth is an important step toward realizing our long-term vision. We aspire to build a business serving hundreds of thousands of active buyers, generating billions in GMV and hundreds of millions in revenue while delivering strong profitability and free cash flow. We recognize that there is a long way to go and the path there likely won't be linear, but we are pleased to be on a positive trajectory after a difficult few years.

We also made progress on our path to profitability in 2024 by remaining vigilant on expenses and maintaining strict efficiency thresholds on performance marketing. On an annual basis, operating expenses declined for the second consecutive year, and we delivered our best adjusted EBITDA margins as a public company. Relative to 2023, revenue increased by $3.6 million and adjusted EBITDA increased by $5.3 million due to expense reductions and high incremental flow-through, demonstrating our operating leverage potential. After resetting expenses in 2022 and 2023, our path to profitability now depends on sustaining revenue growth and maintaining operating leverage. Our asset-light model allows us to scale GMV and revenue without proportionate increases in our workforce. Approximately 60% of our operating expenses are headcount related and our plan for 2025 is to hold headcount flat and unlock operating leverage at mid-single-digit revenue growth.

Moving to quarterly results. We finished the year on a high note with GMV up 9%. Quarterly GMV revenue and adjusted EBITDA margins all exceeded the high end of guidance. From a funnel perspective, conversion rates grew for the fifth consecutive quarter. Traffic declines moderated and average order value inflected from a headwind to a tailwind. Increasing conversion remains our operational priority and highest leverage activity. We continue to see great momentum here with improving conversion rates for both new and returning buyers. These gains are being driven by our heightened pace of product velocity. The number of A/B tests we ran during the quarter grew double digits sequentially and triple digits year-over-year, hitting a new record. Consistent with previous quarters, increasing conversion was the primary focus of our product development efforts, and we had several notable wins during the quarter. First, we launched a machine learning-based pricing model for jewelry, providing stronger, more precise recommendations tailored to maximize conversion. This is the second category for which we have rolled out ML pricing recommendations following on from furniture in the third quarter. We expect that continued progress on determining market pricing for our products, gaining seller adoption of these prices and communicating them to buyers effectively will be prerequisites for continued conversion gains. We also believe that our relative market share gives us a unique ability to implement these 3 pricing-related priorities.

Second, we re-architected the back end of checkout to significantly increase speed. Every second matters. There's a strong relationship between decreasing checkout speed and improving conversion rates. Today, our checkout experience is meaningfully faster, resulting in higher checkout completion and conversion. Third, we increased the prominence of our seller recommendations. This helped to increase the engagement and adoption of our seller recommendations, which are aimed at increasing sell-through and conversion. The increased volume of features and enhancements is a function of an accelerated pace of testing, the result of a product development culture that has become more entrepreneurial over the past 18 months. This was a significant contributor to conversion growing double digits in 2024.

Turning to supply. We ended the quarter with approximately 5,900 unique sellers, down 24%. As we mentioned last quarter, churn was elevated due to the retirement of our essential seller program in late November. Of the approximately 2,200 unique sellers affected by this change, over 1,200 upgraded to a monthly subscription plan. In total, the churn cohort accounted for less than 30 basis points of GMV over the trailing 12 months and under 40 basis points of listings. Although unique seller count has been volatile due to subscription pricing optimizations, we continue to see steady listings growth and ended the quarter with over 1.8 million listings, up 5%. Looking ahead, we expect churn to normalize in the first half of 2025 and continued listings growth.

Turning to 2025. While we believe that the worst of the down cycle for luxury home furnishings is now behind us, the pace and timing of recovery remain uncertain. In light of this, we are looking to create our own luck through self-help initiatives to increase GMV and revenue, improve margins and win market share. Our road map focuses on creating value for both sides of the marketplace to cement our leading position in online luxury design. For buyers, this means reducing friction and building trust. For sellers, this means delivering tools and insights to drive more sales. In a historically opaque market, we can add a lot of value by providing transparency. Building on foundational work completed in 2024, our road map is anchored by 4 themes. The first is accelerating organic traffic growth. Given that approximately 70% of our traffic is organic, improvements here should drive efficient buyer acquisition. Projects include improving site performance, refining our site structure and improving the size and effectiveness of our e-mail marketing program. The second is competitive pricing. Our prices are often perceived as being too high, impacting buyer trust and conversion. The objective here is ensuring that listings and shipping costs are transparently and accurately priced. Work streams include expanding the use of machine learning-driven pricing models across all categories, expanding the number of product display page views with a shipping quote and improving the accuracy of shipping quotes. We know from our internal data that items with shipping quotes have higher conversion rates compared to those that don't. So increasing the prevalence of shipping quotes and the accuracy of those quotes should boost conversion. The third is continuing to optimize our conversion funnel. We want to make it easier for shoppers to find and buy the perfect item. Projects include improving personalization and discovery, enhancing buyer incentives, optimizing the design and performance of our various surfaces, especially mobile web and empowering sellers to better manage and optimize their listings. Last, we are focused on elevating the level of service we provide with initiatives like faster case resolution, expanded live chat support and proactive communication on common issues. These efforts are designed to drive conversion through greater customer satisfaction and higher repeat rates.

Executing on our 2025 road map will build on the progress we made in 2024, solidifying our leading position in online luxury design. We aim to accelerate growth, improve margins and capture market share, all while strengthening our foundation for scalable long-term success.

Turning to capital allocation. Given the continued disconnect between our rising confidence in the business and our assessment of intrinsic value compared to our market price, we remained active with share repurchases. In 2024, we repurchased approximately 5.6 million shares for $28.1 million, including approximately 1.3 million shares in the fourth quarter. We believe that this will be very accretive in the long run given the size of our opportunity, our operational progress and the fact that we are well positioned to capitalize on a market recovery. We exited 2024 from a position of strength. After navigating a challenging few years, our renewed momentum, market share gains and margin improvements validate our strategy. These milestones reflect our market leadership and the strategic actions we've taken. In 2025, we intend to build on this momentum by sustaining growth, expanding market share and driving towards profitability. Thank you for your continued support. I will now turn it over to Tom to review our fourth quarter financial results and first quarter outlook.

Thanks, David. GMV revenue and adjusted EBITDA margins exceeded the high end of our guidance range, driven by improving conversion funnel dynamics, a rebound in average order value and continued vigilance on expenses. GMV was $94.5 million, up 9%, the fastest pace we've seen in 3 years. This performance is in stark contrast to our end markets, which continue to contract, signifying market share gains. On a sequential basis, GMV growth rates accelerated approximately 14 percentage points. This was driven by moderating traffic declines, continued conversion improvements and higher-than-anticipated average order values. Average order value of approximately $2,600 was up 2% and median order value of approximately $1,200 was up 4%. This compares to declines in the third quarter. This rebound was driven by a slight mix shift away from orders under $1,000. In total, these orders accounted for approximately 46% of total in the fourth quarter, down from just over 47% a year ago. There's no other digital marketplace at our scale, which has the buyer and seller trust to transact at our average order value across multiple verticals. We're able to deliver qualified buyers at price points ranging from under [ $100 ] to over $1 million.

Return to funnel trends, traffic declines moderated with improvements to organic traffic being partially offset by slower paid traffic growth. We ended the quarter with approximately 70% of traffic from organic sources and 30% from paid. Conversion gains moderated versus the third quarter but remained healthy. Conversion rates have now increased year-over-year for 5 straight quarters. We are confident in our road map and see ample headroom to increase conversion over time. Returning to GMV, consumer GMV and trade-in GMV both grew. GMV increased for all verticals, except for new and custom furniture, which was down 1%. Encouragingly, Vintage & Antique furniture, our largest vertical, grew double digits. We ended the quarter with approximately 64,300 active buyers, up 6% year-over-year and 3% sequentially. This is the first quarter of year-over-year active buyer growth since the second quarter of 2022 and the third consecutive quarter of sequential growth on an absolute basis.

On the supply side of the marketplace, we experienced steady listings growth, ending the quarter with over 1.8 million listings, up 5%. We ended the quarter with approximately 5,900 unique sellers, down 24%. As anticipated, seller churn was elevated due to retiring our essential seller program in November. Of the approximately 2,200 unique sellers affected by this change, over 1,200 upgraded to a monthly subscription plan. Seller churn had a de minimis impact on GMV and listings. We expect churn to normalize in the first half of 2025.

Turning to the P&L. Net revenue was $22.8 million, up 9%, marking the third consecutive quarter of year-over-year expansion and our fastest growth rate in 3 years. Transaction revenue, which is tied directly to GMV, was approximately 75% of total revenue, with subscriptions making up most of the remainder. Take rates were stable year-over-year. Gross profit was $16.5 million, up 10%. Gross profit margins were 72%, up approximately 1 percentage point. Sales and marketing expenses were $10.5 million, up 22%, driven by severance expenses, seasonal increases in performance marketing and headcount-related expenses due to our annual merit increases awarded in March. Sales and marketing as a percentage of revenue was 46%, up from 41% a year ago. Technology development expenses were $5.5 million, up 23%, driven by higher headcount-related costs due to our annual merit increases awarded in March and some selective hiring, including our machine learning team. As a percentage of revenue, technology development was 24%, up from 21%. General and administrative expenses were $6.6 million, up 6% with higher headcount-related costs due to our annual merit increases awarded in March and higher professional service fees. As a percentage of revenue, general and administrative expenses were 29%, down from 30% a year ago. Lastly, provision for transaction losses were approximately $840,000, 4% of revenue, flat year-over-year. Total operating expenses were $23.4 million, up 16% year-over-year. Excluding onetime severance charges, operating expenses increased by 12% year-over-year and 1% sequentially due to seasonal increases in performance marketing spend. On this basis, operating expenses have been approximately flat for the past 3 quarters. Adjusted EBITDA loss was $1.6 million compared to a loss of $1.7 million last year. Adjusted EBITDA margin was a loss of 7%, a 1 percentage point improvement year-over-year. Looking forward, we remain focused on lowering the revenue threshold required to achieve operating leverage. In 2025, our expense base is set up to deliver operating margin leverage at mid-single-digit revenue growth. Additionally, we plan to keep headcount flat year-over-year.

Moving on to the balance sheet. We ended the quarter with a strong cash, cash equivalents and short-term investments position of $104 million. During the quarter, we repurchased approximately $5.3 million worth of shares. Since launching our first share repurchase program in August of 2023, we have repurchased approximately 6.4 million shares for a total of $31.6 million. At the end of December, we had approximately $3.8 million of outstanding authorization remaining.

Turning to the outlook. Our guidance reflects quarter-to-date results and our forecast for the remainder of the period. We forecast first quarter GMV of $90 million to $96 million, down 2% to up 5%. Net revenue of $21.7 million to $22.8 million, down 2% to up 3% and adjusted EBITDA margin loss of minus 12% to minus 8%. Our GMV guidance reflects continued conversion gains, traffic declines and average order value growth. From a macro perspective, our outlook assumes a continuation of the soft demand environment we saw throughout 2023 and 2024 due to prolonged softness in the luxury housing to high-end discretionary markets. Additionally, we are lapping a leap year, which translates into a roughly 100 basis point drag on year-over-year growth rates. Our adjusted EBITDA margin guidance reflects gross margins in the 71% to 72% range, increased headcount-related costs due to 1-month of annual merit increases in March and higher health insurance premiums, increased professional service fees, particularly on audit and SOX-related items and a provision for transaction losses of approximately 4% of revenue, in line with historic levels. While not providing annual guidance, it is worth noting that we expect GMV to grow year-over-year in 2025, assuming no major changes in the macro environment. Our annual merit cycle goes into effect on March 1, so the full impact of higher salaries will be felt in the second quarter. On an annualized basis, our 2025 plan targets generating operating leverage at mid-single-digit revenue growth and keeps headcount flat. In conclusion, we're proud of the progress we've made this year, highlighted by a strong return to growth in the fourth quarter and clear market share gains. Importantly, we've reduced operating expenses for the second straight year, demonstrating our commitment to financial discipline. Moving forward, we're focused on maintaining this balance, driving growth, capturing market share and generating operating leverage as the business scales. We appreciate your continued support and look forward to updating you on our progress in the coming quarters. Thank you. I will now turn the call over to the operator to take your questions.

[Operator Instructions] Your first question comes from the line of Nick Jones of Citizens.

I guess, first, as we think about kind of marketing strategy as you look to kind of navigate, I guess, kind of depressed home transactions, particularly on the luxury side, what are kind of the key channels or investments you're making there throughout this kind of earnings cycle, we keep hearing folks increasingly look to build integrations with meta products and kind of focus on mid-funnel as a way to kind of show selection to shoppers kind of where they are. Can you kind of talk about how you're thinking about your marketing strategy this year?

Yes. I mean, when we think of marketing strategy, we think of it more in terms of customer acquisition. Of course, we have efforts focused on retention and cross-selling and upselling and so on. But I mean, the most important part of marketing for us is customer acquisition. I think we were happy that in Q4 that we were able to achieve higher volumes without relaxing our return criteria and threshold. We've seen a lot of success on Facebook actually. And beyond that, we've continued to make incremental improvements in our historically primary channels, the biggest of which is Google.

Great. And then maybe a second question. Agentic AI is a big focus. It seems like your platform, given kind of the uniqueness of the listings and the breadth of listings might be well equipped to kind of benefit from Agentic AI. Can you talk about any efforts you guys have with Agentic AI or just touch on or dive deeper into AI more broadly?

Yes. So it's an important focus for us, and we think that AI and ML, in particular, will have a meaningful impact on both the revenue and the cost side over time. So we built a team at the end of Q3. So we've been added for a little bit over -- sorry, Q3 -- Q4 of 2023. So we've been added for a little bit more than a year. The initial and I think, kind of highest return projects have been related to pricing. So in Q3, for example, we rolled out an ML model to recommend optimal pricing to our furniture sellers. In Q4, we rolled that out to our jewelry category, and we'll complete the rest of it in 2025. We are also pointing ML at shipping pricing. For us, that's a big source of leverage, I think, bigger than most e-commerce companies. And that's both ensuring that we have as high coverage of pre-quotes as possible and also that, that pricing is as competitive as possible. And then beyond that, there -- a lot of the applications are similar to those in other companies, and those are all on our road map, things like personalization, customer service agents and so on. But I think where we are most focused right now and where we expect to see the biggest return is from pointing ML at pricing.

Your next question comes from the line of Austin Riddick of Evercore.

A quick one for me. Outside of the macro, what are the main levers to bring adjusted EBITDA closer to positive territory? And how are you balancing those measures with investments in growth?

Yes. This is Tom. I'll take that. I mean our key to getting to breakeven and adjusted EBITDA positive is really going to be centered around revenue growth. We are very disciplined on expenses. We continue to -- we remain disciplined on expenses, and we will stay that way. But our breakeven, our EBITDA positive will come from additional revenue -- sustained revenue and GMV growth. What we are aiming to do in 2025 around our expense base is to deliver operating margin leverage at mid-single-digit revenue growth. So we're structuring our expenses to produce better bottom line once we exceed that mid-digit revenue growth in 2025.

Your next question comes from the line of Ralph Schackart of William Blair.

Just in terms of -- in the script today, you referenced mid-single-digit revenue growth, I think, for 2025. I just want to clarify, is that what you're contemplating for 2025? Or is that sort of the optimal level that you would need or the condition you would need to return back to showing leverage in the model?

No. I think what we were talking about was we don't give guidance for the full year, but we sort of wanted to give directional, I don't know, confidence that we believe that we have the ability to grow GMV this year and without putting numbers on it. And I think, look, it's important to kind of zoom out for a second and recognize that '24 over '23 was, I think, an important inflection point for us as a company. The prior year GMV shrink by 15% in line with the market. And last year, GMV was flat, of course, with a pretty healthy exit rate -- GMV growth rate, and we expect to see GMV growth to continue into 2025. At the same time, it's also important to note that our expense base is set out to deliver operating margin leverage in the mid-single digits of revenue growth. So that may have been what you're referring to. Hopefully, that clarifies it.

It does.

There are no further questions at this time. With that, ladies and gentlemen, that concludes your conference call. We thank you for participating and ask that you please disconnect your lines.