1Stdibs.Com - Q3 2022

Transcript

Operator (participant)

Good day, and welcome to the 1stDibs.com, Inc. Q3 2022 earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there'll be a Question and answer session. Instructions will be given at that time. As a reminder, this call may be recorded. I would like to turn the call over to Kevin LaBuz, Head of Investor Relations and Corporate Development. You may begin.

Kevin LaBuz (Head of Investor Relations and Corporate Development)

Good morning, and welcome to 1stDibs Earnings Call for the Quarter E+

nded September 30, 2022. I'm Kevin LaBuz, Head of Investor Relations and Corporate Development. Joining me today are CEO David Rosenblatt and CFO Tom Etergino. David will provide an update on our business, including our strategy and growth opportunities, and Tom will review our third quarter financial results and fourth 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, evaluation of alternatives, business and economic trends and dynamics, including e-commerce growth rates and our potential responses to them, 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 discuss GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to 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'll now turn the call over to our CEO, David Rosenblatt. David?

David Rosenblatt (CEO)

Thanks, Kevin. Good morning, and thank you for joining us today. Despite a challenging environment for e-commerce and home goods in general, we delivered GMV, revenue, and adjusted EBITDA margins above the high end of our guidance. Strength in jewelry and high-value orders bolstered GMV, while adjusted EBITDA margins benefited from cost cuts. Additionally, we continued making progress on our strategic initiatives, auctions, international expansion, and supply growth. We are focused on improving efficiency and aim to emerge from this challenging period with more growth drivers and a leaner cost structure. For the past two quarters, we have aligned expenses to lower demand by drastically curtailing hiring, increasing performance marketing efficiency targets, and reducing headcount by approximately 15%. As a result, adjusted EBITDA margins improved sequentially despite quarter-over-quarter declines in revenue. Third quarter operating trends were broadly consistent with those of the second quarter. Traffic growth was healthy.

Organic traffic mix improved 4 percentage points due to continued strength in SEO combined with higher efficiency targets on performance marketing. Supply acquisition remained brisk, and seller churn stayed at historical lows. Once again, returning buyer conversion increased, but this was offset by softness in new buyer conversion. Our strategic initiatives are gaining traction. Auctions represented 6% of total orders in the quarter, up from 4% in the second quarter. Traffic growth to our localized French and German sites accelerated sharply, and we added new sellers at three times last year's rate. One new dynamic this quarter was a change in the composition of GMV growth. Through the end of the second quarter, we had seen average order value grow for the prior seven quarters. However, AOV declined in the third quarter. At the same time, order growth rates improved month-over-month throughout the quarter.

Encouragingly, this trend has continued into October. We believe AOV declines are driven by two factors. First, the growth of auctions, which has a lower AOV than fixed price purchases. Second, an increasing percentage of overall orders under $1,000. We believe this reflects shifting consumer behavior in favor of lower priced items amid macroeconomic uncertainty. We don't see declining AOV as a negative. Our goal is growing GMV and active buyers. Lower AOV expands the market. This was one of the strategic rationales for launching auctions. Luxury exists at a variety of price points, from under $100 to over $100,000. Our objective is serving buyers across the luxury spectrum while maintaining our strict vetting standards and world-class supply. While the near term environment is challenging, our trusted brand and world-class supply give us confidence in the future.

Over the past two decades, 1stDibs has become synonymous with high quality, one-of-a-kind items. You won't see a line item for trust on our income statement or balance sheet, but it underpins everything we do. This trust allows us to transact in categories and price points rare in e-commerce. For example, in spite of overall AOV declines, we saw a record number of orders over $100,000 driven by jewelry. A number of these were engagement rings, indicating the level of trust we have with consumers for their most important occasions. We are committed to re-accelerating GMV growth and enhancing shareholder value, and are reviewing multiple paths to help us achieve these objectives, including our ongoing review of various strategic options for the business with our financial advisors at Allen & Company. Turning to operations.

We remain focused on the drivers of our business, improving conversion, realizing efficiencies, expanding supply, growing auctions, and expanding internationally. Improving new buyer conversion is our largest lever to re-accelerating GMV growth. Today, subdued home goods demand, economic uncertainty, a traffic mix shift from returning buyers to new buyers, and a device mix shift from desktop and app to mobile web are conversion headwinds. Everything we do is focused on overcoming these, including our strategic initiatives and day-to-day product and marketing enhancements. Conversion is a game of incremental gains that compound over time. We're testing, learning and iterating. During the third quarter, for example, we added more product recommendations to low inventory pages, improving conversion for those pages. We also built and tested a new model based on item listing attributes to enhance search and browse rankings. Lastly, we implemented Klarna as a payment option in the U.S.

So far, approximately two-thirds of Klarna checkouts have come from first-time buyers. Improving efficiency is another priority. For example, this quarter we completed a number of initiatives to improve operational productivity. Through product enhancements and operational improvements, we reduced overall client service inbound volume by over 20% while maintaining high customer satisfaction. Going forward, we will continue focusing on projects to improve efficiency. Our supply team made efficiency gains as well. Working cross-functionally with product management, we launched a new self-service onboarding experience for sellers, allowing us to onboard higher volumes of sellers without adding headcount. Our goal is to aggregate the world's most beautiful items, regardless of where they're located, while maintaining high curatorial standards. Supply growth is a strategic priority because it drives traffic, makes search more robust, and increases our ability to make a match between buyers and sellers.

Our new seller pricing test continues to drive supply acquisition at triple our 2021 monthly average. We signed over 650 new sellers in the quarter, ending September with over 6,700 seller accounts, up over 40%. Because we're a marketplace of one of a kind items, breadth matters. Adding supply improves marketplace liquidity and ultimately grows demand. We are seeing this play out. For example, one of our new dealers, a specialist in fine minerals, made their first sale, a high-value order, to a collector in September. The pair have subsequently connected on additional orders, an example of how adding supply drives GMV. Looking ahead, we're focused on inventory lifecycle management, which is targeted at helping sellers succeed on the marketplace by providing guidance on pricing and choice of purchase format.

We continued seeing great traction in auctions with bidders, orders, GMV, and supply all growing double digits sequentially. Auctions accounted for 6% of orders against 3% of supply. We had 41,000 unique auction listings, up from 25,000 in the second quarter. Since launch, art and jewelry have been the top performing verticals, accounting for approximately 70% of orders, highlighting the value of operating across multiple verticals. Auctions AOV remains below $1,000. We believe this more accessible price point helps engage and activate new buyers. Over 50% of bidders in the third quarter had never purchased from 1stDibs before. Additionally, about 30% of first-time bidders registered and placed their first bid on the same day. Even if they don't win the auction, bidders provide their contact information, payment details, and signal about what they're interested in.

This is valuable first-party data for our product and marketing teams. Since launch, we've enhanced the auctions product experience through weekly updates. During the third quarter, we improved discovery with new on-site touch points and increased the visibility of existing auction modules. We also broadened the reach of our behavioral emails and launched push notifications to drive urgency and bidding activity. Our next step is focusing on driving demand and optimizing pricing. In the fourth quarter, we're beginning work to refine pricing recommendations and provide sellers more guidance around what categories and listings perform best. Turning to international. This was our first full quarter operating localized sites in Germany and France. Our initial focus is driving traffic to those sites, and performance here has been encouraging.

Traffic from German and French IP addresses grew over 375% year over year, albeit off a low base, driven by two factors. First, we started testing local language performance marketing in French and German. Second, we're starting to see SEO benefits from our pages being indexed in local languages. SEO traffic grew approximately 200% year over year in both markets. The vast majority of these sessions came from users who haven't purchased from 1stDibs before. Given our consideration cycle is about 100 days, it will take time to convert this traffic into orders. Our international product team incorporated on-the-fly machine translation into the messaging center, allowing buyers and sellers to communicate in the language they're most comfortable with. They're also working to grow our email file in France and Germany, which will help to drive organic traffic and repeat purchases.

We also launched customer support on WhatsApp. It takes years to build a successful international business, but we are happy with our progress so far. Despite a difficult environment for e-commerce, our platform displayed its unique value this quarter. The success with high-value orders is testament to the trust we've built with buyers and sellers and the strength of the 1stDibs brand. Buyers come to us for our unique world-class supply, and they trust us for their most meaningful purchases. We believe that subdued e-commerce demand is a temporary dynamic. In the two decades before COVID, e-commerce penetration increased predictably. When demand rebounds, as we believe it will, we will have a leaner cost structure and more growth drivers, including auctions, localized marketplaces, and increased supply. As we manage through this challenging period, our aim is to deepen our competitive position and become more efficient.

We are already seeing progress here with adjusted EBITDA margins improving sequentially despite lower revenue. Additionally, we are encouraged that despite lower AOV, year-over-year order growth rates improved throughout the quarter and into October. Unlike the current demand environment, our trusted brand and world-class supply are durable assets, giving us confidence in the future. I'll turn it over now to Tom to review our third quarter financial results and fourth quarter outlook.

Tom Etergino (CFO)

Thanks, David. Powered by the strength in jewelry and high-value orders, we delivered GMV revenue and adjusted EBITDA margins above the high end of our guidance range. Despite lower revenue, adjusted EBITDA margins improved sequentially as a result of our cost reductions. GMV was $99.2 million, down 9%. Similar to the first half of the year, traffic growth remained strong while conversion softened, particularly for new buyers. This was partially offset by modest increases in returning buyer conversion. Both trade and consumer GMV declined. Consistent with recent quarters, trade growth was relatively stronger. We are encouraged that trade orders were flat while AOV declined. Turning to vertical performance, all verticals declined with the exception of jewelry, which grew mid-teens. Jewelry, our second-largest vertical behind vintage and antique furniture, has grown every quarter since mid-2018.

Strength in jewelry was held by a record number of high-value orders, highlighting the benefit of spanning multiple verticals. Consistent with recent quarters, vintage and antique furniture accounted for less than 50% of GMV. Nearly 60% of our first-time orders came from categories jewelry, new and custom furniture, art, and fashion. Over the past 7 quarters, average order value grew. In the third quarter, it declined 3%, driven by a mix shift to auctions, as well as an overall higher percentage of orders under $1,000. Additionally, our median order value, which is insulated from quarter-over-quarter fluctuations in high-value orders, has declined on a monthly sequential basis since June. While average order value and median order value declined, order growth rates improved month-over-month throughout the quarter, a trend that continued into October. Despite economic uncertainty, order volume is resilient.

Luxury on 1stDibs is available at a variety of price points and vertical. During the quarter, median order value was approximately $1,250, and over 40% of orders were under $1,000. We ended the quarter with approximately 68,000 active buyers, down 5% year-over-year, and 2% quarter-over-quarter. We expect this metric to be choppy near-term as we manage through a period of softer demand. On the supply side of the marketplace, we closed the quarter with over 6,700 seller accounts, up over 40%. Turning to operations, improving efficiency is a priority. During the second quarter, we began taking steps to align our costs to current demand. This work accelerated in the third quarter. In late September, we made the difficult decision to reduce our headcount by approximately 10%.

Related severance charges amounted to approximately $600 thousand. Starting in the fourth quarter, we expect this headcount reduction to generate approximately $1.5 million of savings on a quarterly basis or roughly $6 million annually. Between our September reduction and limiting backfills for attrition, headcount is down 15% from the second quarter peak to the end of October. Cost savings initiatives are ongoing. To date, we've reduced headcount, limited hiring to critical roles, drastically reduced the number of open positions, lowered performance marketing spend by increasing efficiency targets, and started rationalizing non-headcount costs. At the end of the second quarter, we also streamlined our business and strengthened our balance sheet by selling Design Manager for $14.8 million.

We continue to look for other cost savings opportunities, including actively marketing our New York office, where rent expense is approximately $4 million per year. While there's more work to be done, the impact of cost reductions are showing up on the P&L. Relative to the second quarter, adjusted EBITDA margin improved by roughly 1 percentage point despite sequential declines in revenue. Total operating expenses declined approximately 6% quarter-over-quarter. If you exclude one-time severance charges, operating expenses declined 8% sequentially. Compared to last year, GMV declined approximately $10 million, and revenue detoclined by $2.8 million. Despite this, adjusted EBITDA was approximately $100 thousand lower year-over-year as we throttled back expenses.

This reflects expense reductions in the second and third quarter, but does not include the impact of our late September headcount reduction, which will start to be reflected in the fourth quarter. We expect to enjoy the leverage of our leaner cost structure while demand rebounds. Turning to the P&L, net revenue was $22.7 million, down 11%. Transaction revenue, which is tied directly to GMV, was approximately 70% of revenue, with subscriptions making up the bulk of the remainder. Financial results for this quarter exclude Design Manager. Pro forma for the sale of Design Manager, revenue was down approximately 9% year-over-year and 4% quarter-over-quarter. Gross profit was $15.5 million, down 14%. Gross margins were 68%, down from 71% a year ago.

Gross margins declined as payroll and benefits, hosting and co-location costs, and stock-based compensation increased as a percentage of revenue. Similar to the second quarter, higher hosting and co-location costs were the result of stronger traffic growth without offsetting GMV. Sales and marketing expenses were $11.1 million, down 14%, driven by lower performance marketing spend, partially offset by one-time severance payments related to our September restructuring. Similar to the second quarter, we pulled back on performance marketing and increased our efficiency thresholds due to softening conversion, an example of recalibrating expenses to match demand. Sales and marketing as a percentage of revenue was 49%, down from 50% a year ago. Technology development expenses were $6.4 million, up 33%, driven by higher stock-based compensation and higher salary and benefits, including one-time severance payments related to our September restructuring.

As a percentage of revenue, technology development was 28%, up from 19%. General and administrative expenses were $6.7 million, up 11% driven by higher stock-based compensation and payroll and benefits. We realized over $200,000 in savings on D&O insurance as we continue to aggressively negotiate contracts as they renew. As a percentage of revenue, general and administrative expenses were 30%, up from 24%. Lastly, provision for transaction losses were $1.2 million, 5% of revenue, flat year-over-year. Adjusted EBITDA was a loss of $5.5 million compared to a loss of $5.4 million last year. Adjusted EBITDA margin was a loss of 24% versus a loss of 21% last year. This year-over-year change was driven by lower revenue and higher technology development spending.

Moving to the balance sheet, we ended the quarter with a strong cash and cash equivalents position of $158 million. Turning to the fourth quarter outlook, we've seen muted quarter-to-date seasonality. Our guidance assumes this trend continues for the remainder of the quarter. We forecast fourth quarter GMV of $96 million-$103 million, down 19%-13%. Net revenue of $22.2 million-$23.3 million, down 18%-13%. Adjusted EBITDA margin loss of 24%-20%. GMV guidance reflects a number of converging factors, including shifting consumer behavior, ongoing economic uncertainty, conversion headwinds, particularly for new buyers and limited visibility, declining AOV, and that GMV contribution from strategic initiatives will increasingly won't offset broader softness.

Turning to adjusted EBITDA margins, guidance reflects savings from our third quarter headcount reduction and ongoing expense management. However, some of the savings from our September headcount reduction will be partially offset by seasonal expenses in marketing and operations. As always, our goal is to grow GMV and drive operating leverage with the ultimate aim of growing free cash flow per share. We are becoming more efficient by identifying and realizing incremental cost savings and reallocating existing resources to projects showing the highest potential. This work isn't finished, but we're already starting to see tangible results with adjusted EBITDA margins improving sequentially despite lower GMV and revenue. We will continue to diligently manage expenses and expect to benefit from a leaner cost structure when demand rebounds. Thank you for your time. I'll now turn the call over to the operator to take your questions.

Operator (participant)

Thank you. If you'd like to ask a question, please press star one one. Our first question comes from Mark Mahaney with Evercore ISI. Your line is open.

Mark Mahaney (Senior Managing Director and Head of Internet Research)

Okay. If I could ask you a couple of questions, please. First, how broad do you think the appeal of auctions is to both buyers and sellers on the platform? If it's gone from 4%-6% now of transactions, is there a natural level where you think it could go to? Are there certain categories or price points that wouldn't make sense, you know, that are off limits for auctions from either buyer or seller perspective? Just how big do you think auctions could be?

David Rosenblatt (CEO)

Mark, it's David. Yeah, I think it's pretty broad. I mean, as measured by a couple of or in a couple of ways. I mean, one, the simplest is when you look at the market landscape, there are comps out there, companies that are kind of, at least from a high level, reasonably similar to ours in terms of both supply and demand. They're in the kind of, you know, I don't know, 600-800 million GMV range, we believe. We think we have better products. We think we have a better consumer experience. I think in terms of sellers, you know, it absolutely solves a commercial need that is, you know, more important in this economy than ever before, right? It provides an efficient way to liquidate inventory and generate cash.

In our case, put that product in the hands of qualified buyers. On the demand side, you know, I just start with the fact that we have very low sell-through, right? We have over $14 billion worth of product listed on the marketplace. You know what our GMV will be this year. The balance between those two things, you know, all of our research says the primary reason why our sell-through rates are what they are is that the price is perceived to be too high. In many cases, people don't really understand that they have the ability to negotiate. Where what we see that reflected in is the difference in conversion rates between returning buyers who are familiar with how the platform works and new buyers.

What we're seeing is that auctions so far has addressed those strategic opportunities. On a sell-through basis, sell-through is 2x what it is in the marketplace. On the demand side, conversion rates are significantly higher for new buyers than they are for the marketplace. 50% of people who have registered a bid are people who are new to 1stDibs. It's doing its job. At the same time, it's a different way of living and working for our sellers. Pricing needs to evolve to more auction-friendly ranges. Secondly, you know, we ourselves are learning what sells, right? So far, jewelry and art have outperformed other categories. You know, again, we're still early in this.

We're still in the process of both learning ourselves and teaching our sellers in how to work with auctions and then lastly, how to grow awareness among buyers. Again, I sort of go back to those fundamentals, especially that sell-through number and the comps. To me, that says it's a big opportunity in front of us.

Mark Mahaney (Senior Managing Director and Head of Internet Research)

Then if I could do one follow-up, please. On international, I know this is the first full quarter for France and Germany. I may have missed it, but did you disclose how material, if at all, that those areas were in terms of GMV, GOV or revenue or what's implied in the guidance for Q4 or just talk about the ramp, like how long you think it will take for those segments, for those two country international markets to be material to the business overall. Thanks.

David Rosenblatt (CEO)

This is the first full quarter for the localized version of France and/or French and German experiences. The initial focus after ensuring that the product is stable, which it is to develop our SEO capability. We were pleased to see that organic traffic grew 200% year-over-year. We feel like we're off to a good start there. You know, the next steps will be to build the infrastructure, to build kind of email files to market to, and then also put paid behind it. Right now, it's not a material part of our GMV. Tom, do you wanna talk about how that's, you know, sort of how you think about the curve over the next several years?

Tom Etergino (CFO)

Yeah. I think that the, you know, the curve on international is a little bit longer. So, you know, going into 2023, we're not gonna give guidance on that right now. But, you know, it'll start to ramp up. I don't think that we'll be breaking it out, probably, you know, into the first half, at least of next year. You know, as it becomes larger, we'll reconsider that. But, you know, we're thinking that this is, you know, it takes time to grow the traffic. We're seeing great, you know, traffic growth in the first full quarter of us having it.

The monetization is, you know, will come, you know, at a slower rate.

Mark Mahaney (Senior Managing Director and Head of Internet Research)

Okay. Thank you, David. Thank you, Tom.

Operator (participant)

Our next question comes from Trevor Young with Barclays. Your line is open.

Trevor Young (Director and Equity Research Analyst)

Great. Thanks. Two, if I may. First, just given the current business mix and contemplating the ongoing cost savings, I think you mentioned, you know, because of the reduction in $4.5 million, you know, quarter-over-quarter improvement, also potentially subleasing the New York office space. I guess at a high level, is there a certain level of GMV or revs that we should be thinking about at which point you'd reach that EBITDA breakeven? Not looking for a specific quarter or 2023 guide or anything like that, but just trying to assess, like how much lift do we need to have from, call it the 4Q guide to get to some sort of breakeven point.

Tom Etergino (CFO)

Yeah, thanks for the question. You know, you're right. Over the past 2 quarters, we have taken significant costs out of the business, right? In August, we made some decisions to pull back on NFTs. In September, we've made the difficult decision to reduce our headcount by about 10%. We've drastically reduced the number of open positions we have that we're hiring for. We've lowered performance marketing spend by increasing our efficiency targets, and we've started rationalizing our non-headcount costs. You know, as you've seen, our P&L is starting to reflect our progress, right? At the end of October, our headcount was down 15% versus the second quarter peak. Operating expenses declined approximately 6% quarter-over-quarter, and that's, you know, despite lower revenue, adjusted EBITDA margins improved sequentially.

Last, you know, we expect our September headcount reductions to reduce quarterly operating expenses by about $1.5 million a quarter or $6 million annually. You know, we're also redeploying our resources to the highest potential projects. For example, we've moved engineering resources from NFTs to auctions and projects that increase conversion and engagement. You know, kind of going forward, we are focused on identifying and realizing additional efficiencies and diligently managing our expenses. You know, I just wanna remind everyone, you know, re-accelerating GMV growth is a precondition to us achieving that break-even mark. As we've discussed on prior calls, we have an asset-like business model with high operating leverage. That operating leverage cuts both ways, though. In times of declining GMV and revenue, there is pressure on EBITDA.

When GMV growth returns, though, we will be well positioned to realize the operating leverage in the model, with a high percentage of additional revenue hitting the bottom line. You know, we are not giving, you know, specific guidance on dates for break even, but we are doing everything we can to realize additional efficiencies and keeping our cost in line with our GMV and revenue.

Trevor Young (Director and Equity Research Analyst)

That's a really helpful color, Tom. It sounds like kind of embedded in that, though, is at some point you need to see some, you know, GMV recovery to reach that path to break even. Second question, just on the self-serve onboarding for more sellers, how do you balance that, you know, lower touch versus your historically higher touch vetting process, which buyers maybe view as, you know, a bit more of an endorsement that these are credible sellers, perhaps they're less likely to have inauthentic goods and so forth. How do you balance those two factors?

David Rosenblatt (CEO)

We haven't changed our vetting criteria at all. What we did change in this seller test is the range of pricing mechanisms that we're offering sellers. Previously, we had a one size fits all that included a very high or relatively high subscription fee. That was kind of hard to stomach for lots of sellers who didn't have any experience or familiarity with 1stDibs to bear that fixed cost. In response to that, we offer now a range, sort of a sliding scale of higher subscription and low commission to higher commissions and low to no sub fees. That's what's resulted in the tripling of our kind of the rate at which we're adding suppliers. What we've seen is that those suppliers are healthy, and they have high quality product.

Tom Etergino (CFO)

you know, the next step is to evolve the pricing test to create incentives for them to post more and more actively, since that correlates with success on the marketplace.

Trevor Young (Director and Equity Research Analyst)

Great. Thanks, David. Appreciate it.

Operator (participant)

Our next question comes from Ralph Schackart with William Blair. Your line is open.

Ralph Schackart (Analyst)

Good morning. Thanks for taking the questions. On marketing efficiency increases, you talked about getting better performance. Maybe if you provide some color on, you know, some of the steps that you're taking there and maybe some of the, you know, the more opportunities you might have here to gain more efficiencies?

Tom Etergino (CFO)

Sure. This is Tom. What we've done is, you know, we analyze every channel that we have paid spend in within marketing and what we're doing, you know, we do this on a regular basis. We're taking out the least efficient spend, in favor of obviously continuing to spend in the most favorable places and spending up to a maximum allowable that we set. What we're doing is we are bringing those allowables. We're managing the allowable that we're spending against, and we're managing the, you know, channels in which we're spending them in.

Ralph Schackart (Analyst)

Great. Just in terms of softer in spend of new buyers, which is obviously a large lever to getting you back to accelerating GMV. I know the macro is tough, but maybe you could sort of isolate, you know, the top one or two priorities to sort of reverse this trend to the extent you can, you know, in a tough macro environment. Thank you.

Tom Etergino (CFO)

Yeah. I mean, listen, overall, as we look at the funnel, you know, as we've said in past quarters, and it remains the case, you know, most parts of the funnel are very healthy. Traffic growth is very strong, as strong as it's ever been. You know, conversion has held up both for trade buyers and for returning buyers. Engagement is very healthy as measured by things like registrations and favoriting and so on. You know, we have a kind of single biggest driver of our, you know, GMV weakness, which has been new buyer conversion, right? New buyer conversion is a function of a couple things. Certainly, the macros don't help, but we've also seen a significant shift in traffic in favor of our lowest converting channel, mobile web.

David Rosenblatt (CEO)

You know, we're doing a lot in that regard. We've got lots of operational projects that are intended to improve that. Things like, for example, adding new payment methods. We added Klarna. Adding the number of items on search results pages when people get to 1stDibs from Google, from FBO. Of course, our primary strategic initiatives, you know, auctions, international supply growth, are all pointed at conversion. You know, I would say to add to that, there was another kind of interesting dynamic that we saw for the first time in a couple of quarters this past one, which had to do with the relationship between AOV and order volume. What we had seen for the seven quarters leading up to the third quarter was increases in the year-over-year growth rate of AOV.

That changed beginning in July. For each month since July through October, we've seen declines in AOV, pretty significant declines. We think that's attributable to a couple of factors. You know, one, again, clearly is the kind of macroeconomic and, you know, for example, the kind of product range that we've seen the highest growth in orders has been the sub-$1,000 price range. Then second is the increasing share of total orders that is auctions. Auctions, by design, has a lower price point. You know, conversely, and probably not unrelated, beginning at the same time, we've seen sequential improvements each month in year-over-year order growth. To the extent that in October, order growth was actually positive on a year-over-year basis.

Again, those two things are, you know, likely related, but it's encouraging to us because, you know, that order, the sort of resilience of the order number suggests that, again, this platform, you know, retains its relevance, might even possibly be growing share in the face of a weak overall e-com market, and ultimately expands our TAM. While in the near term, it has a negative effect on GMV in the long run, by expanding our market, it could be very helpful. The last thing I would say on that is that is not coming at the expense of our strength in the super high AOV luxury pricing segment. In September, as an example, we had our all-time record high month in terms of the number of orders over $100,000.

Operator (participant)

Great. Thank you. Our next question comes from Curtis Nagle with Bank of America. Your line is open.

Curtis Nagle (Managing Director and Senior Equity Research Analyst)

Good morning. Thanks for taking the question. I just wanted to focus on the strength in jewelry that was definitely standing out in the quarter. How much was that related to, I guess, a strong post-COVID wedding season? You know, should we expect some deceleration going into 4Q on basic seasonality if that's the case?

David Rosenblatt (CEO)

Thanks for the question. Jewelry, just as a reminder for those who may not be aware, jewelry is our second largest vertical and did have a strong quarter. In fact, jewelry has grown GMV on a year-over-year basis every quarter since the third quarter of 2018. I think it's just sort of in terms of the fundamentals, it's well suited to what we do. It's our biggest market. It's highly fragmented on the supply side. Shipping costs are low, returns are fairly straightforward, and it benefits from the consumer trust, which we think is one of our strongest competitive advantages. It benefited, you know, from a number of factors. One of them was the growth and high AOV orders that I mentioned in relation to the previous question.

We did sell a bunch of high-priced engagement rings, you know, which I guess likely is seasonal. Beyond that, I think, you know, again, the sort of long-term trend has been positive there. I don't know if I'm really in a position to kind of attribute that strength to any very specific kind of temporal factor. I think instead it's likely more a function of just the sort of macro industry factors that I mentioned before.

Curtis Nagle (Managing Director and Senior Equity Research Analyst)

Oh, okay. Fair enough. Then just to follow up on the Q4 guide, I guess, how much is that? Or I guess, is that fully incorporating, you know, the most recent announcements in terms of headcount cuts? It sounds like it probably is, but not sure there. Which lines would we see the greatest impact within OpEx?

Tom Etergino (CFO)

In the fourth quarter, you know, we're gonna see muted seasonality, savings that we're gonna see. We're gonna see $1.5 million attributable to the reduction in force that we had at the end of September. None of that was actually included in the Q3 results. Some of that savings will be offset by some seasonal expenses that we have in kinda long lead time marketing projects, such as like our holiday catalog, and as well, we're expecting to see some seasonally higher logistics costs.

David Rosenblatt (CEO)

you know, so some of that savings will be offset in Q4 based on those types of factors.

Curtis Nagle (Managing Director and Senior Equity Research Analyst)

Okay. Thank you.

Operator (participant)

Our next question comes from Nick Jones with JMP Securities. Your line is open.

Nick Jones (Research Analyst)

Great. Thanks for taking the questions. I have two, I guess. First, as we try to think about conversion stability, sounds like traffic is growing nicely, kind of overall conversion is down. I guess that's attributable to newer buyers. I mean, what does that indicate on kind of the timing it takes to take these new buyers and convert them into repeat, and when that kinda shows up in conversion stability, or I guess when GMV kinda starts tracking with traffic growth? Then I have a follow-up.

David Rosenblatt (CEO)

Yeah, I mean, you know, what we have seen some encouraging trends in conversion recently. The rate of decline of our new buyer conversion has stabilized and actually improved recently. You know, look, we're throwing the kitchen sink at it. Everything we do is focused on growing conversion one way or another. You know, I just think it's probably premature to call timing on that. I mean, you know, you make a good point, which is, you know, the goal is to continue growing traffic at the same rate and stabilize conversion. If we do that'll result in healthy order trends, which again, as I mentioned before, is what we saw, what we've seen over the last couple of months and which culminated in positive order growth in October.

We're in a volatile environment, and there are a lot of moving parts to this business and to the economy and things that impact our performance. I think it's a little early for us to call with any degree of confidence, you know, when that inflection point is.

Nick Jones (Research Analyst)

Got it. A follow-up. You've done a good job kind of adding a lot of supply to the marketplace, that enhances SEO. How do you balance kind of driving SEO within maybe the Google ecosystem on broader search? How adding increased supply to the platform impacts search and discovery within the 1stDibs platform, and does that kind of impact kind of users able to find what they're looking for? Like, if they come on for something they find on Google, and then they, you know, need to get somewhere else or they realize they wanted something else. Is that impacting the kind of on-site search and discovery? Thanks.

David Rosenblatt (CEO)

Yeah. It's a good question. You know, certainly the more items we have on the marketplace, the higher the burden there is on us to improve ways to find relevant inventory for a given user. That said, you know, we are a marketplace of long tail, one of a kind items. The bigger problem than having too few items, or sorry, too many items, is that we have very often too few for a given search query. You know, for example, one of the phenomena that I described earlier that's contributing to our decline in new buyer conversion rates is the increasing proportion of traffic that we're getting from Google via SEO. A large percentage of those users land on search results pages on 1stDibs that have either, you know, a small number or no product listings.

When that happens, the bounce rate is very high and the conversion rate is very low. A big part of the motivation in adding supply and as well as other product changes that we're making, including, you know, adding recommendations and so on on those pages, is to increase the number of items on those pages and in that way decrease the bounce rate. It's somewhat counterintuitive, but I think the headline is, in a marketplace of kind of long tail, hard to find items, increasing supply, actually, we believe, can help conversion.

Nick Jones (Research Analyst)

Makes sense. Thank you.

Operator (participant)

Our next question comes from Aaron Kessler with Raymond James. Your line is open.

Aaron Kessler (Analyst)

Great. Thanks, guys. Maybe just on the strategic review, anything you can share from that? Were some of the cost reduction initiatives part of that? Second, last quarter, you kind of noted a number of headwinds to the business. I think you said economic uncertainty, consumer spending less in out-of-home experiences, low overall furniture spend, as well as kind of traffic mix shift to mobile. Did most of these factors continue to weigh in Q3, or do you see some easing in some of these factors as well? Thank you.

David Rosenblatt (CEO)

Sure. First, in terms of the strategic review process, as we announced last quarter, we did retain Allen & Company as our advisors, and we are working with them to explore the full range of ways to enhance shareholder value. You know, the motivation for this is our belief that the current valuation does not reflect either the strength of the brand or the long-term potential of the business. We are committed to growing shareholder value. As part of that, we wanna look at every possible alternative. Those alternatives, of course, will, you know, could include everything from a kind of sell-side transaction to buy-side transactions to kind of a redeployment of cash. Everything is on the table.

It's also possible, because a lot of this isn't under our control, that we may decide that the best course of action is not to do any transaction or make a change. Of course, until we have something to announce, you know, we can't announce anything. That's kind of the summary on the strategic review process. You know, in terms of changes to the underlying drivers, I think probably the biggest one is on the negative side, as I've mentioned, AOV, with the exception of jewelry, is started to decline beginning in July in each of our verticals. On the positive side, order growth, as I've mentioned before, the kind of year-over-year change in order growth has started to increase beginning in July.

Got better every month, culminating in, you know, the best month it's had in a while in October. That, of course, was more than offset by declines in AOV, but still, that long-term trend is positive. It adds to our buyer rolls. It gives us a kind of crack at the LTV from those buyers and indicates the kind of you know the relevance overall of the platform. I'd say, you know, the other thing is the other data point that I mentioned, which is new buyer conversion rates. You know, the rate of decline of new buyer conversion rates did bottom out. Again, I would be, you know, foolish in this environment to make a prediction, you know, as to what will happen in the future, but that is what we saw.

Of course, lastly, returning buyer conversion rates and trade buyer conversion rates remained constant and were actually marginally positive in the quarter.

Aaron Kessler (Analyst)

Great. Thank you.

Operator (participant)

There are no further questions. Thank you for your participation in today's program. This does conclude the program. You may now disconnect. Everyone, have a great day.