Welcome, everybody. I am Aaron Kessler, Senior Internet Analyst at Raymond James. With us today for our next presentation will be 1stDibs. Joining us from 1stDibs is David Rosenblatt, CEO, Tu Nguyen, CFO, as well as Kevin LaBuz, Head of Investor Relations. I'll be moderating the call for about the first 25 minutes. If you do have questions, feel free to send them in through Zoom. If you want to send me an email, that's fine as well, aaron.kessler@raymondjames.com. With that, we'll jump into some Q&A. Maybe first, just for those who are not familiar with 1stDibs, Dave, if you can maybe just provide a brief discussion of how 1stDibs evolved from its founding. Maybe also might be helpful when the current iteration of 1stDibs really took shape, and maybe provide an overview of the company's mission statement as well. Thanks.
Absolutely. Thanks, Aaron. Thanks for having us. I'll start very quickly with just a quick story. When I was introduced to this company by Benchmark, which provided the Series A investment into 1stDibs, I too hadn't heard of it. I remember the first guy I called was my interior designer, who was working on a project for my wife and me at the time, and I asked him, "Hey, Russell, have you heard of this company, 1stDibs?" He said, "I heard of it. 50% of both of the projects that we're doing for you are sourced from 1stDibs." That was sort of the initial indication that there was something real here. The story of the company is we were founded in 2001 to put the Paris Flea Market, which is the design district in Paris, online for the benefit of U.S. consumers and designers, primarily designers.
From that point, and very shortly thereafter, actually, it was really triggered by 9/11, the founder moved the company to New York, which is where we're based today. From that point until 2016, the company was very small, focused entirely on vintage and antique furniture, and most importantly, employed a kind of pay-for-performance advertising business model. What that meant is that we had professional sellers. We don't source from consumers, but only dealers and galleries and people like that. Professional sellers who were vetted would list items on the marketplace in exchange for paying effectively a fixed monthly fee. All contact between buyer and seller thereafter, up to the purchase itself, would happen off platform. Think kind of a fancy or high-end Craigslist.
My team and I, who joined in conjunction with the Benchmark Series A, switched the business model in 2016 from that advertising focus to an e-commerce model. In the e-commerce model, of course, all communication between buyer and seller, up to and including the order, happen on platform versus the way it happened before. Since then, we've grown the company from basically zero in online GMV to over $400 million this year. We've had two other priorities. That kind of process of changing the business model and building out the technology platform, which was not a trivial task, has been our number one priority. Alongside that, we've had two other priorities. One is building the supply side of our business outside of the U.S. Today, 40% of our items and half our sellers are from outside the U.S.
However, we have not yet localized on the demand side, which represents a meaningful non-incremental opportunity. The third priority has been diversifying away from vintage and antique furniture into the much larger, higher growth categories of art, jewelry, and new and custom, meaning contemporary, furniture. Today, those are our fastest growing categories. As we look forward, we still feel like it's very early innings. This is a five-year-old company, essentially. The adoption rate of digital or the adoption of digital is just now beginning in our industry. Competitive intensity is relatively low, and we bring unique and very powerful assets, I believe, to the task.
The last thing I would say is as I sort of conceptualize the market opportunity myself, the way I think about it is, this is a market where the two largest incumbent market makers, Sotheby's and Christie's, together do over $10 billion of GMV a year. They're primarily non-digital. They primarily employ the auction format. We, again, from my perspective, that represents our opportunity as a company.
Yep. Great. That's helpful. Maybe to those points, maybe just discuss a little bit the disruption to the legacy models across some of your areas, including discovery, trust, logistics, et cetera. In your view, should this be kind of a winner-take-most market? A lot of these items are unique, non-commoditized items, which seems like that would lend itself to a winner-take-most type of marketplace.
Yeah. First of all, look, I think the benefits that we bring to bear in this market are similar to what other digital disruptors have achieved and/or been able to bring to market in other markets. First of all, we can dramatically expand the scale of both supply and demand. We have 1.2 million items listed on the marketplace. The auction houses sell a fraction of that. Similarly, on the demand side, we can scale using conventional customer acquisition channels, as well as we have a very strong organic traffic capability. Secondly, we can offer, I think, a better experience. There's much less friction online. We have a message center that today supports tens of thousands of conversations a month between buyer and seller. We support a range of purchase formats. We facilitate shipping. We offer much more detailed item descriptions than the incumbents can.
All of those things, again, they're consistent with the benefits that digital bring to traditional markets in general. Is it a winner-take-all market? Listen, I think that, as you put it yourself, I think most markets that are amenable to digital disruption by marketplaces are a winner-take-all, primarily because the concept of increasing returns to scale. The larger we get, the better we get, and the better the customer experience we provide to both the buyer and seller. Another simple way to think about it is that we have a very pure form of a network effect, and so as we grow, again, the benefits that we bring to the marginal seller and buyer grow as well. We very much have that.
Yeah. Got it. Great. Then just maybe diving into some of the verticals, and you mentioned a couple of those, but if we look at trends in vintage and antique, obviously some of the newer categories, including new and custom furniture, jewelry and watches, how should investors be thinking about the growth profile for these going forward? Then the expectation of growth in vintage antique versus some of these newer categories.
Yeah. Through the pandemic, in other words, over the last 12 to 18 months, growth rates on the furniture, the vintage and antique furniture category, which is our historical core, and for many years was the only category we were in, have been very healthy. However, in the long term, if you believe, as I do, that growth rates will approximate or be reflective of market size, we feel like the bigger opportunities in the long run are in the much larger markets of contemporary design, what we call new and custom furniture, art and jewelry. That's been the case over the last couple of years. I think what we disclose publicly is that the combination of fashion, which is very small for us, and vintage and antique furniture, is now, I think, roughly, it's a little bit north of 50% of our total GMV.
Again, in the long run, I expect the other categories to grow faster in proportion to the size of those markets.
Got it. Great. Just maybe a fact that maybe is misunderstood by investors, how much of the products on the site are more unique in nature or maybe less more commoditized items, smaller runs on the site today? Because I think investors maybe just assume you're competing against more mass market players as well.
No, I mean, the foundation of our network effects is the fact that we have supply that's not only valuable, but unique to us.
The large majority of product on 1stDibs is both one of a kind and also only findable on 1stDibs, as well as if it comes from a gallery, the gallery's website, or if it's from a dealer, a dealer's website, and so on. Not on other marketplaces.
Yeah. Great. Then maybe a question for you or two. Last quarter, you obviously talked a bit about some seasonality you're starting to see, particularly on the consumer side of the business as we're lapping a difficult comp from 2020. Just maybe if you can give us some insights into what you're seeing or any updates thus far in Q3, just in terms of trends in the business, and if you're thinking just return to more normal seasonality as people got outside more, and maybe as we get back into Q4, people go back inside, start to order more for your home again.
Sure. I can take that. I would say that what we saw in Q2 is less seasonal, right? I would say there is more of an impact of the reopening-
of a pretty drastic difference in terms of the environment that we were all at home for like a year. Suddenly, we can be outside again. I don't think that's seasonal in the sense that it's the summer, it's really more to do with the fact that the economy reopened. In terms of seasonality, though, we do have some seasonal impact as of Q4. In Q4 tends to be our biggest quarter. Last year, it was about 31% of our total GMV. It's unlike other retail businesses where potentially 80% of the business comes from the holiday. We do see some seasonal impact in verticals like jewelry and fashion.
What we have observed so far since the last time we spoke during our earnings, is that we were expecting that the consumer behavior will continue to stabilize versus the level that we have seen in June. Right? If consumer behavior deviates from that assumption, obviously we'll see different performance from the consumer business. In terms of the trade business, we are seeing the opposite impact with reopening. Our trade business were adversely impacted in 2020, because a lot of the times the trade couldn't get in front of their clients to do their work. A lot of that project has been postponed into 2021, and so we're seeing a higher growth rate from our trade business.
Again, if you look at on a two-year stack basis, our consumer business is still growing at a faster rate than our trade business, and that is very much a representation of the larger opportunity that the consumer business is.
Got it. Great. Then just in terms of the long-term growth drivers, it seems like your biggest opportunity is really growing the buyer base. I think buyer share is less than 1% today of the market opportunity. Obviously, you're targeting more of a higher-end demographic, but how should we think about the strategy to really greatly expand that buyer base? You have $10 billion plus of merchandise on the site. Obviously, your GMV is a decent amount smaller than that. If we think about the opportunity in terms of that TAM, obviously it's much greater, which leads you to believe that growing the buyer base will be the biggest opportunity. Just interested in some of the strategies there from a marketing or partnership strategy as well?
I think that is right, that the biggest opportunity lies on the demand side. We got a whole slew of initiatives there. First of all, just in terms of expanding audience and traffic and so on, we're early in the process of digital marketing, so we just started testing video last month. Given the visual nature of the products we sell, we're pretty optimistic about that, specifically in terms of connected TV and accountable media like YouTube and so on. Second is what I mentioned earlier, what we call demand-side localization, or basically making it possible to use the product in local language with local services, right? Non-English speaking customer service reps, logistics carriers, that sort of thing. Conversion rates on non-U.S. buyers are half that of U.S. buyers.
Traffic is, or the number of buyers from outside the U.S. is only 19% of the total, despite the fact that 40% of our items are from outside the U.S. In general, the market size is approaching half in terms of the global market. Those are things that are addressing top of the funnel and to some degree, a little bit lower in the funnel. Beyond that, we feel like we have an opportunity to grow new buyer activation. Specifically, we have 3.5 million registered users of 1stDibs versus our trailing 12-month active buyer count of 69,000. When we do the research on why people go to the site regularly and don't buy, not surprisingly, it has to do with price discovery and not really even necessarily feeling like it's too expensive, but just not really understanding the basis for the price.
These are, for the most part, one-of-a-kind products, and there's no reference price for most of them. Again, we've got a bunch of initiatives targeted at that. I think probably the biggest one is the potential of introducing new purchase formats, right. Buy now, pay later is one. Auctions potentially are another one. That's obviously probably the most efficient form of price discovery. Again, beyond that, we have a whole bunch of more incremental platform features that are targeted at increasing conversion, related to logistics, bringing down shipping costs, increasing pre-quote coverage, increasing the presence of video on product pages, things like that.
Got it. Great. Just diving in for a little bit into the NFT space, which I guess is a bit of a debate that you see, and obviously 1stDibs entered into the NFT space more recently. What's your thoughts on how big the NFT landscape could be? Obviously, we're still very early. How do you expect NFTs to evolve? Why is 1stDibs well positioned to be a leader in the NFT space?
Yeah. I do feel like NFTs are within our right to win. Again, my perspective has always been that the asset that is most powerful of ours and most specific to us is that we have the consumer trust required to sell expensive, sometimes expensive, rare, and valuable items. NFTs correspond perfectly to that. We're already market makers in the fine art category and related and so on. In that sense, NFTs are an extension of that on the supply side and very consistent with what buyers expect from us on the demand side. I do believe that the NFT market is here to stay. I think it's going to be big. Again, it makes sense to me, right?
I mean, why wouldn't digital art that can be displayed on one's phone or one's wall or one's car potentially, and so on, other places, why wouldn't that evolve into a significant new medium? The specific form that it takes in the long run, the way in which it's sold and supported and so on, has yet to be defined. Our goal in entering this market was to get in early, to do it in a way that is native to the blockchain. We don't support fiat, for example, meaning normal currency. You have to buy in Ethereum. We targeted a really high-quality class of artists, which we were successful in onboarding. Again, we were able to do this in a very cost-effective way.
We spent less than $1 million to launch our initial NFT marketplace, and we were able to do that because of the breadth and the robustness of the existing technology platform that we've been working on for the last six-plus years. Again, to your point, Aaron, what happens to this market? I'm not sure that we have a crystal ball that's better than anyone else's. The point is we were able to create real optionality on what could be a large market with a fairly modest investment and deliver in a way that's consistent with both buyer expectations for who we are and also in a way that's very seller and artist, in this case, friendly. We'll see.
Yep, got it. Just you mentioned international. Just to quickly get your thoughts on the opportunity there as well as how we should think about maybe the timing of potential localization, and are you seeing any really entrenched players from a digital perspective internationally today, or is that pretty greenfield?
We have a team working on it with a very strong leader who has experience in localization of other consumer experiences. The plan is to bring it to market sometime in the first half. It's a fairly complicated task. We have to figure out how do you get 1.2 million items translated. Again, the stuff I was talking about earlier, build a customer service and a logistics infrastructure and capability, translate the customer experience, begin to scale up local marketing in local languages, and so on. At the same time, I think it's such a sort of fundamental and large part of this market that I don't see how we can achieve our ambitions without it. We also start with a very strong supply advantage that I mentioned. What's the competitive landscape there?
I think in international, as with the rest of our markets, there's no company that looks like us in the sense of being multi-category. There are vertical specific players, right? Chairish/Pamono, two small companies that merged recently, is one. They're almost primarily in the vintage and antique furniture market. There's no one else really at scale, no other digital marketplace, other than maybe an eBay that's at scale in any of our other categories, like jewelry or art or so on, and fully localized. Rather, our competitive are large retailers, substitutes, right? Local and otherwise. In that sense, not that different from the U.S. competitive landscape.
Got it. Great. Just from a cost perspective, maybe a couple of questions for Tu. Just one on the EBITDA margins. You kind of expect to reach roughly 30% longer term. Can you just give us a sense for kind of the path to profitability or the path to a 30% EBITDA margin? Maybe not exact timing, just where you expect to see the most leverage. There's obviously some recent investor concerns around inflation, I guess both from a physical world standpoint in terms of shipping costs, maybe some concerns around higher advertising costs as well. Just your thoughts on some of these higher costs for doing business today.
Sure. To your questions about the long-term path to getting to 30% EBITDA margin, I would say that we have an asset-light and scalable business model with very high gross margin in excess of 70%. Because of that high gross margin, we have the ability to get to profitability today if we choose to. In fact, we reach adjusted EBITDA profitability in certain months in 2020 on a much smaller GMV base, right? Really the loss margin that we are seeing now is a result of our deliberate choice to prioritize growth over profitability, because we do believe that the larger scale will drive longer-term value for the company, right? We just talk about winner takes all for this market when we still have a very long runway of attractive investments to make.
In thinking about that path to reaching 30% in margin in long term, that will be driven across the board in operating expense like Sales and Marketing, Tech and Dev, and G&A. As an example, we have been consistently be able to get operating leverage out of our Tech and Dev expense because of how extensible our platform is. In terms of Sales and Marketing, I would say that half of those expenses right now are in headcount, right? Those are the team that work on platform initiatives like SEO, Paid Email, where we would expect to have operating leverage. In the near term, though, we want to still be very aggressive in experimenting and testing out new acquisition channels.
Again, going back to the point where if we continue to see good ROI on some of the initiatives that we have on the roadmap, we want to be able to accelerate the rate to which we implement those initiatives. Again, I think want to make the point that it is truly a deliberate decision to trade off between optimizing for growth in the near term over reaching short-term profitability.
Got it.
Then to your other questions in terms of shipping costs and inflationary pressure, we have not seen that significantly impact our business yet. Obviously, a lot of the initiatives that we have on the roadmap, we evaluate that on an ROI basis. So, to the extent that we see some adverse impact in terms of cost, we obviously will have either HSL ROI threshold, and we'll make that on a case-by-case basis. For now, we have not really seen that as impactful on our business as maybe some other of our peers do.
Yep. Okay, great. Maybe just for Tu as well, can you just discuss maybe some of the recent cohort behavior in terms of recently acquired customers? Are you seeing customers buy more, buy across more categories, et cetera?
Yeah. We have been very pleased with the quality of the buyer cohorts that we have brought on. Again, there was one question mark in terms of the buyers that we bring on during the pandemic, right? How are they going to behave. I think, again, even with the reopening, we have seen that the pandemic, what do we call it? The pandemic buyer segment has been as consistent as the prior cohort of buyers that we have acquired. That gives us confidence in continuing to invest in acquisition, because of that stability in buyer quality.
To your second questions in terms of customer behavior and how is that changing, we have also seen that buyers who purchase in two or more verticals, which is something that we focus on, the GMV contribution from those buyers has been increasing. Again, there's another thesis for us to continue to focus on retention and continuing to focus on acquisition because we have the ability to continue to grow the LTV of those buyers.
Great. That's helpful. Maybe just a general question, just maybe your thoughts if there's any kind of misunderstandings from investors right now. Obviously, you said David made a nice insider buy, I believe, recently as well. It'd be good to get your thoughts on maybe where investors are, maybe they're too short-term focused on some of the softening seasonal trends or as the economy opened up. Obviously, you're very bullish on the long-term growth and the margin perspective as well.
Tu, do you want to start and-
Yeah. Again, I think that it is helpful to look at our performance on a longer term basis, right? We talk a lot about the two-year stack as an example, because we really do see a difference in terms of the dynamics of the business in 2020. The two-year stack really gives us an understanding of a more normalized growth rate for the business, not just in terms of total GMV, but as you start to break it down between trade and consumer, that also is more indicative of where the business is going. I think fundamentally, everything that we have looked at in terms of buyer cohort quality as well as seller cohort quality have been very consistent.
We have seen with the reopening that sellers are posting at the same rate, and we are able to acquire sellers at the same rate as we have done before. We are very confident that from the seller side, the switch to online and online being one of the key distribution channel is here to stay, right? In terms of business performance, there's going to be more volatility given the environment that we are operating in today in the near term. I think the fundamentals really will be driving the long-term performance of the company and in every aspect of the business, we continue to see very healthy growth across the board.
I would just say, I did make an insider purchase after the correction after the last earnings call. Look, I've been around a lot of Internet companies over a long period of time, and most recently, companies I'm on the boards of, like Farfetch and Twitter, have had corrections as well. When I look at this, the fundamentals are about as healthy as any company I've ever been a part of. We're in a large market, low competitive intensity, low capital intensity, high network effect, increasing returns to scale. We have happy customers, CSAT, NPS scores are high, our returning buyer cohort is very healthy, and so on. Again, I feel like the stock, we're a brand new baby on the public market. We have a low flow.
It's an inefficient market that we're in, and I felt like it was a good opportunity to increase exposure to a company that I already have pretty significant exposure to.
Yeah, exactly. Great. Anything you think we missed? I think we covered a lot.
I think that's good, and yeah, unless there's anything else that's on your mind.
Great. No, I think that's good. Definitely want to thank David and Tu for joining today, and we'll talk to everyone soon. Thanks so much. Have a good one.