1stdibs.com reports record adjusted EBITDA margins and plans for positive cash flow by 2026 amid strategic realignment efforts.

OPERATOR - (00:00:00)

Including but not limited to, statements regarding guidance and future financial performance, market demand, growth prospects, business plans, strategic initiatives, business and economic trends, 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 - (00:01:11)

David thanks Kevin and good morning everyone. The third quarter was a breakthrough period for efficiency and execution, demonstrating our commitment to financial discipline. We delivered revenue and GMV at the high end of guidance and critically disciplined expense management drove adjusted ebitda margins to negative 1%, a 13 percentage point improvement year over year, well above the high end of guidance and our best as a public company. We now expect to generate positive adjusted ebitda in the fourth quarter and for the full year 2026. Reflecting this strong financial performance and our clear line of sight to free cash flow generation, our board has authorized a new $12 million share repurchase program. Generating free cash flow creates an opportunity to return capital, particularly if we continue to trade at a discount to our assessment of intrinsic value. We are also proving that this efficiency doesn't come at the expense of market leadership. We continued to grow and gain market share even in a tough environment. This combination of operational execution and financial rigor is the story of the quarter. The core of our third quarter effort was to build a more efficient growth engine. We achieved this by realizing a net headcount reduction, new performance, marketing efficiencies and other cost savings totaling $7 million annually while growing our product development capacity. We believe that our growth potential is unlocked by investing in product and engineering. Historically, we disrupted this market via technology and we are committed to maintaining that principle. In September, we executed a targeted reduction in overall headcount not only to save costs but to reallocate capital, shifting headcount away from sales and marketing roles and into technology development. The net effect is a strategic shift in our workforce composition. While overall headcount is lower, we are actively increasing our product and engineering team. Our conviction is simple, the most scalable and highest ROI way to meet the core needs of our buyers and sellers is through technology. This strategic realignment was anchored by the arrival of Bradford Schellhammer in August as our new Chief Product Officer and Chief Marketing Officer. This isn't just an efficiency play, it's a growth strategy. We are now primed to modernize our marketing channels, shifting investment towards high engagement formats like social, video and personalized communications, driving growth via content and community. This marketing reorganization in combination with increasing our product development capacity significantly enhances our operational agility and allows us to deliver richer, more consistent value at every customer interaction. The focus in the third quarter was on architecture and foundation. We began a deep review of our highest leverage opportunities in four core business drivers fueling new buyer growth, retaining and engaging existing buyers, improving monetization and ensuring seller success. We are currently developing our 2026 product roadmap and are excited to share more details during our fourth quarter earnings call. Turning to the third quarter funnel performance demonstrated clear evidence that our product led strategy continues to produce results. Our ongoing optimization efforts drove our eighth consecutive quarter of conversion growth, proving the compounding impact of our continuous product iteration. We also saw AOV strength during the quarter while we observed a slowdown in traffic. The combination of conversion growth and rising average order value drove GMV acceleration. That success in conversion was driven by specific product initiatives designed to increase buyer trust. Our most significant launch in the third quarter directly targeted a major point of buyer friction pricing. Competitive pricing is a key pillar of our product strategy. The objective here is to ensure that the marketplace offers fair and transparent item prices and shipping costs. Over the past year we have built the foundation for this through the full rollout of our machine learning based pricing models across all verticals which bring transparency to a historically opaque market and reinforce buyer trust. In the third quarter, we introduced the technology to enforce another component of this strategy price parity with tools like Google Lens and browser extensions, making it easier than ever for buyers to comparison shop. Price inconsistencies between platforms can undermine buyer trust and damage our brand reputation, potentially creating an incentive for buyers to circumvent our platform. To combat this, we launched the first phase of an automated enforcement mechanism that ensures that items listed on our marketplace are priced at or below their price on competing sites in accordance with our terms of service. So far, nearly 90% of identified violations have been remedied by sellers. This is a critical step in reinforcing trust as pilot data showed that that items updated to parity saw conversion increases. This initiative moves our policy from soft guidance to consistent automated enforcement, ensuring a more confident and frictionless experience for buyers and driving higher GMV for compliant sellers. Price parity proves that our team can solve complex problems. To make sure that we can tackle even more ambitious initiatives faster, we are making significant advancements in integrating AI into our product development process. We view AI as a powerful tool to drive both internal efficiency and customer value. This quarter our focus was on maximizing employee productivity within engineering. We estimate that over 25% of all new code is being written by AI, accelerating our development process. By building AI into our workflows, we are ensuring that our new leaner cost structure maximizes output and product velocity. Beyond engineering efficiency, we are actively incorporating an AI component into every major initiative in our roadmap. We also continue to make progress in our advertising program by leveraging our high quality, high intent audience for our core sponsored listings. The third quarter focused on efficiency, expanding inventory, and optimizing the ad load for better seller visibility. More strategically, we successfully launched our first non endemic advertiser in late September. This validates the value of our audience, but the revenue opportunity is still nascent and will develop over time. Moving to the Health of our Supply the third quarter underscored our commitment to high quality, high performing inventory. We ended the period with nearly 1.9 million total listings, marking continued growth up 1%. As anticipated, the number of unique sellers continues to stabilize following our 2024 pricing actions. We ended the quarter with approximately 5,800 unique sellers, indicating that the major headwind from the essential seller program is now largely behind us. This disciplined strategic focus resulted in a healthier, more valuable marketplace, with the churned cohort having a minimal impact on GMV and listings. This strategic pruning allows us to reinforce our core value proposition. Our 2025 seller sentiment survey confirmed that FirstDibs is now the primary sales channel for our sellers, surpassing their own showrooms for the first time. This finding underscores the platform's growing relevance and reinforces our unique position as the premier essential destination for luxury design. Because we've successfully aggregated supply around the highest quality dealers, we expect to be in a strong competitive position when the luxury market rebounds. Given the significant product enhancements we have delivered to our dealers, we believe the platform now offers a dramatically higher ROI for our sellers. Our ability to deliver this high ROI is a direct result of sustained investments in marketplace technology. To ensure that we can continue to invest in the technology that powers their success, we executed a subscription pricing action on certain seller cohorts on October 1st. This marks our first broad based increase for this segment since 2019. This decision reinforces the status of the platform as an essential sales channel, underpins the platform's long term sustainability and provides a tangible tailwind to our recurring revenue. In closing, the third quarter was defined by focus and execution. We successfully executed a major strategic realignment, fundamentally redesigning our organization to prioritize high ROI technology investments and further reduced our cost structure. The result we we delivered our best adjusted EBITDA margin as a public company, confirming that this realignment represents a major step forward on our path to profitability. Our commitment to reaching adjusted EBITDA positive is absolute and we have maintained this rigor while successfully reallocating capital to technology that will serve as the engine for our future expansion. We continue to gain market share and we now have the durable financial model needed to to capitalize on the next phase of E commerce growth. We've built the foundation. Now we're ready to accelerate. Thank you for your continued support. I will now turn it over to Tom to review our third quarter financial results and fourth quarter outlook.

Tom - (00:11:54)

Thanks David Good morning everyone. Our record third quarter margin performance validates the comprehensive effort to improve efficiency that we began in 2022 by protecting and growing our technology investments. We have structurally lowered our operating expenses while enhancing our long term growth trajectory, setting the stage for sustainable margin expansion in the years ahead. Our commitment to efficiency is clear. Operating expenses were down 6% year over year and down 10% when excluding severance costs. This reduction is fundamentally changing the profitability curve of this business. Third quarter performance confirms we are making good progress on our path to profitability by structurally lowering our breakeven point. I will now walk you through the details that support these outcomes from a funnel perspective. Third quarter results validate the effectiveness of our product roadmap. Our ongoing optimization efforts drove our eighth consecutive quarter of conversion growth which accelerated during the period. AOV also rebounded while we observed a partial offset due to softening traffic growth driven in part by our reduction in performance marketing spending. The combination of conversion growth and AOV rebound drove the GMV acceleration. GMV was up 5% in the third quarter versus down 2% in the second quarter on platform average order value of nearly $2,700 and median order value of approximately $1,300 were both up. This dynamic was driven by a slight mix shift towards higher value orders. In addition, the year ago period also included auction orders which had below average AOVs creating an easier comparable base. Returning to Funnel trends Traffic softened driven by lower paid traffic where we tightened efficiency thresholds and reduced performance marketing spending. We ended the quarter with over 75% of traffic from organic sources, up 3 percentage points year over year. This organic strength is a key financial advantage reflecting the power of our brand and a low dependence on performance marketing to drive traffic. Both our core buyer segments, trade and consumer, grew gmv. This broad based growth confirms the platform's value proposition with the trade segment driving slightly stronger growth year over year. Vertical performance highlights the diversification of our marketplace art, which accounts for a low teens percentage of total GMV was the fastest growing vertical up double digits. We also saw strong GMV growth in jewelry and vintage and antique furniture. Active buyers totaled approximately 63,200 at quarter end, up 1%. Turning to supply, we ended the quarter with approximately 5,800 unique sellers, down 17% as seller count continued to normalize following our 2024 pricing actions, we closed the quarter with nearly 1.9 million listings, up 1%. This outcome shows that the elevated churn from our pricing optimizations was successfully isolated to low impact sellers resulting in de minimis financial impact in both GMV and listings. Our focus remains on the quality of our supply base. Moving on to the income statement, net revenue was $22 million, up 4%. Transaction revenue, which is tied directly to GMV, was approximately 75% of total revenue, with subscriptions making up most of the remainder. Take rates declined approximately 40 basis points year over year due primarily to a mix shift in order value. Gross profit was $16.3 million, up 9%. Gross profit margins were 74%, up 3 percentage points year over year. Gross profit margins included a non recurring insurance recovery related to a prior shipping matter which contributed approximately 1 percentage point to our reported margins. On an adjusted basis, gross profit margins were at the high end of our 71 to 73% guidance range. Sales and marketing expenses were $8 million, down 13% excluding severance charges of approximately $800,000. Sales and marketing expenses were down 22%. This outcome is a direct reflection of our continued expense discipline and the strategic realignment we executed in September. We realized savings from lower personnel costs and simultaneously tightened our performance marketing efficiency thresholds. Sales and marketing as a percentage of revenue was 36%, down from 44% a year ago. Technology development expenses were $5.9 million, up 8% driven by higher headcount related costs due to our annual merit increases awarded in March and additional bonus awards in the quarter. As a percentage of revenue, technology development was 27% up from 26% a year ago. General administrative expenses were $6.4 million, down 7% due primarily to lower headcount related costs. As a percentage of revenue, general Administrative expenses were 28% down from 32% a year ago. Lastly, provision for transaction losses were approximately $790,000, 4% of revenue flat year over year. Total operating expenses were $21 million, a 6% decrease. Excluding severance costs of roughly $800,000, operating expenses were down 10%. The strategic realignment executed in September fundamentally changes our profitability equation. The estimated $7 million in annual savings structurally lowers the revenue level required for us to break even. A reduction in performance marketing spend is the largest component of these savings achieved by raising our efficiency thresholds for new consumer acquisition. While this deliberate decision will reduce our paid traffic volume, it confirms our commitment to self sufficiency. We are leveraging this reduction to create a more efficient cost structure that can achieve profitability with minimal reliance on top line. Adjusted EBITDA loss was approximately $240,000 compared to a loss of $3 million last year. Adjusted EBITDA margin was a loss of 1% compared to a loss of 14% a year ago. Moving on to the balance sheet, we ended the quarter with a strong cash cash equivalents and short term investments position of $93 million. We maintain a robust cash position, but our future focus is on free cash flow generation. Following this quarter's success in cost reduction, we now have a clear line of sight to generating positive adjusted EBITDA and free cash flow. This confidence is why our board has authorized a new $12 million share repurchase program. As we ramp free cash flow generation over time, our financial flexibility increases, allowing us to be opportunistic with capital deployment. Given our belief that our shares are currently trading at a discount to their intrinsic value, this represents an excellent opportunity for shareholder value creation. Turning to the outlook, our guidance reflects quarter to date results and our forecast for the remainder of the period. We forecast fourth quarter GMV of 90 to $96 million down 5% to up 2% net revenue of $22.3 million to $23.5 million down 2% to up 3% an adjusted EBITDA margin of positive 2% to positive 5%. Our GMV guidance reflects continued conversion and AOV growth, a slowdown in traffic due in part to our higher efficiency thresholds in performance marketing. This trade off is strategic. We are accepting lower traffic and lower near term order volume in exchange for significantly higher margins and better unit Economics Our revenue guidance reflects the full quarter benefit of the seller subscription price increase which took effect on October 1st. Our adjusted EBITDA margin guidance reflects structural efficiency gains from the lower performance marketing and personnel costs following the September strategic realignment. Seasonally higher revenue and gross profit margins at the high end of our 71 to 73% range. In addition, our fourth quarter expense base reflects a temporary tailwind of approximately $300,000 from the strategic realignment. The immediate savings from the reduction of sales and marketing roles creates a short term benefit to margins that will moderate as we onboard the product and engineering roles over the next few quarters. In summary, the third quarter was a pivotal period. We continue gaining market share while structurally reducing the revenue needed to break even. The cost reductions we implemented led directly to our best adjusted EBITDA margins as a public company. This gives us high confidence in our outlook we are tracking to achieve positive adjusted EBITDA and free cash flow in the fourth quarter and for the full year of 2026 assuming low single digit revenue growth, a major financial milestone that proves we are successfully building a capital efficient and resilient business model. 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 - (00:21:33)

We will now begin the question and answer session. If you would like to ask a question, please raise your hand now. If you have dialed into today's call, please press Star 9 to raise your hand and Star 6 to unmute. Please stand by while we compile the Q&A roster. Your first question comes from the line of Ralph Shackart with William Blair. Your line is open. Please go ahead.

Ralph Shackart - Equity Analyst - (00:22:01)

Good morning. Thanks for taking the question. Maybe just kind of kick things off. Could you provide a bit more color on the rationale and the benefits you expect from your September strategic realignment? Sounds like you've made some, you know, fairly significant changes here, particularly in performance marketing strategy. But if you sort of outline, you know, the major benefits you expect beyond just, you know, the important sort of movement to a positive EBITDA, then I have a follow up. Thanks.

David - (00:22:28)

Hey, Ralph. Sure. So this September realignment was really the most recent stage of a process that began three years ago in order for us to get to break even. And I think it's worth noting that in total this process has reduced our GMV break even by almost $250 million. Throughout the process, we've really been focused on all parts of our cost structure. Headcount performance marketing, which you mentioned as well as external vendor relationships. The goal for this one was really twofold. First, to achieve adjusted EBITDA profitability in the fourth quarter of this year, and then also to maintain that profitability and also reach positive free cash flow for the full year 2026. And then second, importantly, to reallocate headcount and non headcount investment, from sales and marketing to higher ROI engineering and product development. And so we're now at a point where roughly 50% of our headcount is in product engineering, which I think is a good place to be.

Ralph Shackart - Equity Analyst - (00:23:37)

Great. And sounds like you had a pricing increase, like you said, on October 1st. Can you give us a sense of, you know, the order of magnitude there and, you know, how the platform has performed since you, you know, pushed through the. The price increase?

UNKNOWN - (00:23:53)

All right, what was the second part of the question?

Ralph Shackart - Equity Analyst - (00:23:56)

Just on the price increase, what the reaction has been from as a result of pushing that through?

David - (00:24:04)

Yeah, so, I mean, in general, we. We try to make sure that our prices to sellers align with the value that we create. We've obviously made a lot of improvements and investments into the platform since 2019, yet we really haven't meaningfully changed rates over that time. And so this was a very targeted combined subscription increase. And also at certain price points, commission increase. The subscription part of it only impacted about 20% of our sellers and, you know, amounted to roughly a 10% increase for those 20%. And we saw no meaningful increase in churn as a result, I think because of the proportionality between value creation and the cost that we charge our sellers.

Ralph Shackart - Equity Analyst - (00:24:55)

Okay, great. Thanks, David.

OPERATOR - (00:24:59)

There are no further questions at this time. This concludes today's call. Thank you for attending, and you may now disconnect.