GigaCloud Technology - Q2 2024
August 7, 2024
Transcript
Operator (participant)
Thank you all for standing by. Welcome to GigaCloud Technology's Second Quarter 2024 Earnings Conference Call. During today's call, all participants will be in listen-only mode. Joining us today from GigaCloud Technology are the company's founder, chairman, and Chief Executive Officer, Larry Wu; its president, Dr. Iman Schrock; and its Chief Financial Officer, David Lau. Iman will give a performance and operational overview, and David will share the financial results. After that, there will be a question-and-answer session. As a reminder, this conference call contains statements about future events and expectations that are forward-looking in nature, and actual results may differ materially. Additionally, today's call and webcast will include non-GAAP financial measures within the meaning of SEC Regulation G.
When required, reconciliation of all non-GAAP financial measures to the most direct comparable financial measures, calculated and presented in accordance with GAAP, can be found in today's press release as well as on the company's website. With that, I would like to turn the call over to Larry for opening remarks. Please go ahead.
Larry Wu (Founder, Chairman, Director, and CEO)
Thank you, operator, and welcome everyone to today's call. This quarter marks a significant milestone for our company as we achieve the record revenue growth for the sixth consecutive quarter. Additionally, despite the industry-wide challenge, including 7% year-over-year decline in retail furniture sales in the first half of 2024 in the United States, and the elevated ocean shipping costs, our Adjusted EBITDA increased substantially. These results underscore the strong demand for our marketplace and its ability to streamline the efficiency of the global wholesale supply chain while we connect the buyer and sellers of large, non-standard items seamlessly around the globe. Our acquisition with Noble House and Wondersign and the launch of our first industry-first BaaS, or Branding-as-a-Service, are already contributing to our success.
In the second quarter, we successfully introduced Noble House-related SKUs to our marketplace, which contributed approximately $57 million in GMV. The first half of this year has been extremely productive, and we are driving continued progress, sustainable and profitable growth as a leader and a disruptor of the B2B e-commerce technology solution. We were honored to be added to the Russell 2000 Index through their recent reconstitution. Now, I will turn the call over to Iman to provide more color on our operational highlights.
Iman Schrock (President)
Thanks, Larry. I'd like to add my welcome to those joining us today. We are happy to share that for the first time in our history, our GigaCloud Marketplace GMV reached and surpassed $1 billion in the twelve months ended June 30. Let's dig into that. For the trailing twelve months, as of June 30, GigaCloud Marketplace GMV increased by over 80%, eclipsing our first quarter growth by approximately 17 percentage points. This momentum was driven by a remarkable increase in our buyer and seller base. We welcomed 265 new sellers and 2,906 new buyers on a net basis, expanding our 3P seller community by nearly 40% to a total of 930, and our buyer base by a record-breaking 67% year-over-year to 7,257 at the end of the second quarter.
Furthermore, average buyer spending climbed 8.3% to more than $151,000, demonstrating the increasing engagement our marketplace participants and the additional value our platform provides. By all metrics, our marketplace is thriving, and we see many opportunities to continue this trajectory. Our average buyer spend as a whole decreased slightly compared to Q1 due to the uptick in recent growth, as we have observed a significant influx of over 900 buyers to our marketplace in the last quarter, whom we typically expect to start at lower initial trading volume. Average spend per buyer for participants that joined us prior to Q2 have continued to increase on a sequential basis. GMV in our 3P marketplace grew 76% from a year ago and totaled approximately $572 million for the trailing twelve months ended June 30, 2024.
3P sellers accounted for 52.1% out of our total marketplace GMV for the same period. Combined with our 1P strategy, we have the pieces in place to continue growing the GigaCloud Marketplace, while further improving efficiency and value for all participants. As I mentioned last quarter, our growth resulted from GigaCloud's highly robust technology suite that transforms and facilitates the way suppliers and retailers of large parcel and non-standard items connect and transact. Now, I'd like to give you a progress update on our BaaS offering, which was officially launched in the second quarter with our ecosystem brand, Christopher Knight Home. We built this unique solution to provide furniture suppliers with a streamlined and efficient way to build their brands, which has been a long-standing challenge throughout the industry. We have observed significant enthusiasm and interest in our BaaS program since we announced it.
We have successfully launched the initial pilot phase with a carefully selected group of 8 marketplace sellers. The overall level of additional strong interest from both existing and new sellers has far exceeded our expectations.... This early momentum reinforces our belief that BaaS will be a powerful tool in strengthening and expanding our service offerings, empowering marketplace participants with a diverse toolbox to drive growth and success. Last quarter, we discussed addressing accelerating demand through the expansion of our fulfillment footprint. Our global fulfillment network has 42 prime locations in five countries, comprising of more than 10 million sq ft of fulfillment space. We are driving efficiencies and transactions among marketplace participants, and our established fulfillment centers across the U.S. are averaging over 90% utilization rate, and we are actively seeking additional space to accommodate continued rapid growth.
Our integrations of Noble House and Wondersign are moving forward nicely and as planned. In the second quarter, we introduced Noble House-related SKUs to our marketplace, which contributed approximately $57 million of GMV in the three months ended June 30, 2024. Currently, only 5% of the SKUs are accessible to our external buyers, with the majority remaining with the original Noble House channels. Moving forward, we plan on gradually opening up these SKUs to external participants. As communicated previously, we expect to achieve breakeven with Noble House later this year, with anticipated profitability in the first half of 2025. We are extremely bullish on our marketplace and the opportunities ahead. GigaCloud disrupted the B2B online marketplace with a unique business model that connects buyers and sellers of large parcel merchandise to efficiently grow their own businesses in a cost-effective way.
Now, I will turn the call over to David for a more, more detailed review of our financial results. David?
David Lau (CFO)
Thanks, Iman. I'll now walk through our second quarter numbers in more detail. Please note that all figures quoted have been rounded. Our second quarter results demonstrate strong execution against our growth strategy. Total revenues more than doubled year-over-year to $311 million in Q2, an increase roughly of 24% on a sequential basis. This is a direct result of our ongoing efforts to expand our marketplace, product and service offerings, and of our ability to capture growing market opportunities. Diving deeper into the revenue, specifically, service revenues from GigaCloud 3P grew more than 97% to $85 million, a direct reflection of enhanced engagement of our marketplace participants. Product revenues grew more than 105% to $225 million in Q2.
We're pleased to report that our strategic investments from the previous year are yielding strong revenue returns. The impressive performance of Noble House outdoor product line contributed significantly to our second quarter sales, highlighting the effectiveness of our growth strategy. Furthermore, our fastest growing European markets continue to lead the way in product sales growth, achieving 139% year-over-year growth. Cost of Revenues were $234 million for the second quarter, compared with $113 million. While the absolute amount increased as a reflection of the investment we've made to support the soaring demand of our marketplace, the percentage to total revenues of 75% remained relatively stable for the second quarter compared to last year, demonstrating our ability to manage costs effectively amidst rapid growth and changing environment.
Gross profit for the second quarter increased approximately 90% to $76 million. Gross margin percentage contracted slightly as we continued to build our fulfillment infrastructure, with newly leased centers ramping up to full operational efficiencies. Additionally, increased delivery costs and temporary industry-wide ocean freight rates spiked in late April and May. However, we observed a moderation in rates during July and remain vigilant in monitoring this dynamic. Total operating expenses amount to $49 million for the second quarter, compared with $17 million. Such expenses are associated with our ongoing infrastructure development required to meet growing demand of our B2B platform. Breaking this down further, selling and marketing expenses were $19 million, compared with $10 million, driven mainly by higher staffing-related costs, higher commissions and advertising costs, and higher platform service fees paid to certain third-party e-commerce websites.
General and administrative expenses totaled $26 million, compared with $7 million last year. This increase primarily was due to the concentrated granting and vesting of our share-based awards, higher staffing costs, including R&D efforts to accommodate expansion of our business, higher professional service fees, and increase in rental expense related to fulfillment centers, and also the set of expense required to bring our new fulfillment centers fully operational. A major component of our G&A expense is related to our people-centric approach. We believe our employees are our greatest asset, and we strategically invest in their development and growth. To attract, retain, and incentivize top talents, our compensation programs include share-based awards, which have traditionally been granted in the second quarter of each fiscal year, with the majority of granting vesting immediately in the same quarter upon grant.
Share-based awards expense total $13.9 million, compared to $1.5 million last year, as the company's share price increased significantly year-over-year. The impact of these strategic investments and the industry-wide ocean shipping cost is reflected in our net income margin. We remain confident in our ability to deliver sustained profitability as our financial performance remains strong across key metrics. Our net income grew nearly 47% to $27 million. Adjusted EBITDA demonstrated robust growth, increasing approximately 72% to $43 million in the second quarter. Adjusted EPS for the quarter increased 69% to $1.03. We're strong in our cash positions and continue to generate strong, positive cash flows with our effective cash management strategy. At the end of June, our cash, cash equivalents, restricted cash and investments position was $209 million.
We have strategically allocated $10 million in CapEx during the second quarter, which primarily relates to facility preparation to enhance our global fulfillment capabilities. We remain debt-free, with no outstanding borrowings, and the liabilities on our balance sheet primarily related to our fulfillment center leases, which have increased considerably to support our substantial growth. I'll wrap things up with our outlook for the third quarter, where we anticipate revenues will be in the range of $266 million-$282 million. Thank you all for joining us today. Operator, we're ready for questions. Thank you.
Operator (participant)
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Ryan Meyers from Lake Street Capital Markets. Please go ahead.
Ryan Meyers (Senior Research Analyst)
Hey, guys. Thank you for taking my question. First one for me, I just kind of want to unpack the second quarter revenue number. Obviously, you guys came in well ahead of your expectations. Maybe just kind of walk us through, provide a little bit more detail on what you saw during the quarter, where ultimately you were able to kind of report numbers that were a bit better than what you originally expected.
David Lau (CFO)
Yeah, absolutely. Perhaps I'll take a stab, and others, please feel free to chime in. Like I said earlier, we're integrating the Noble House business, and Noble House is very strong in the outdoor section.
Ryan Meyers (Senior Research Analyst)
Mm-hmm.
David Lau (CFO)
We are able to increases that portion into our entire SKU portfolio. We mentioned earlier that Noble House-related SKUs were added into the B2B marketplace, and that amounts to roughly $57 million in GMV, and that's really kind of what kind of blew out the quarter for us.
Ryan Meyers (Senior Research Analyst)
Okay. Got it. That's helpful. And then kind of thinking about that as well as we think about the third quarter guidance, I mean, what, you know, what would you need to maybe see to come in at the high end of that range or even better than that initially guided range? Is it more Noble House integration, or is it just an improvement in the overall kind of GMV across the business? Just kind of help me think about that.
David Lau (CFO)
Yeah, I guess it's all the above. I think when we were projecting how Q3 is gonna look like for us, we incorporate what we think, Noble House is gonna contribute, to the quarter, and obviously, the evolution and the growth and the expansion of the, the B2B, the organic marketplace. So I, I guess it's both organic and inorganic growth that, we put into consideration when we, projected our Q3 outlook.
Ryan Meyers (Senior Research Analyst)
Okay, got it. And then last question for me: I know, you know, freight rates have been a drag on the gross margins. Just kind of walk us through maybe how we should be thinking about gross margins for Q3 and Q4 as freight rates are probably changing for you guys.
David Lau (CFO)
Yeah, I think, Well, I think if you look at the current freight rate, you'll see that it's actually gradually normalizing. It's still on the higher end, and we had a fixed rate contract that we mentioned in our last earnings call that is already in place and in execution. So I think there will be some compression to margin overall, but we don't expect that to be significant in magnitude.
Ryan Meyers (Senior Research Analyst)
Okay, got it. Thank you for taking my questions.
David Lau (CFO)
Absolutely. Thank you.
Operator (participant)
Thank you. Once again, if you wish to ask a question, please press star one on your telephone. Your next question comes from Matt Koranda from Roth Capital Partners. Please go ahead.
Matt Koranda (Managing Director and Senior Research Analyst)
Hey, guys. Just on Noble House, you mentioned, I guess, 5% of the SKUs available to buyers on the marketplace, and that's generating already, I guess, $57 million in GMV. So how long until we see 100% of the SKUs available on the marketplace? And then, you know, should we assume a sort of ratable revenue improvement once you make all of the SKUs available to the marketplace?
David Lau (CFO)
Iman, you want to take that one?
Iman Schrock (President)
Sure. Hi, Matt. So with Noble House, the intention is to preserve the existing sales channel as of right now. So we're slowly and gradually utilizing the marketplace to open up the SKUs in a calculated way to the marketplace participants, and we have ongoing plans to do this on a regular basis. And you should see like, you know, more of the top line kind of slowly, you know, contribute in that sense. And-
Matt Koranda (Managing Director and Senior Research Analyst)
Okay.
Iman Schrock (President)
Okay.
Larry Wu (Founder, Chairman, Director, and CEO)
Yeah, maybe [crosstalk].
Matt Koranda (Managing Director and Senior Research Analyst)
All right.
Larry Wu (Founder, Chairman, Director, and CEO)
I think the idea we're having is that we're trying to balancing utilizing the marketplace to help Noble House product to, you know, to generate, you know, incremental growth in their sales. But at the same time, we're also trying to prioritize our relationship with, you know, the major B2B channels that the Noble House used to have a strong relationship with. So the idea is, I think probably we're going to make 20%-30% of the Noble House product be available on the marketplace, but we're trying to keep the majority of them with the major, you know, B2C partners we're having.
Matt Koranda (Managing Director and Senior Research Analyst)
Okay. All right, that, that's helpful. Thanks, Larry. And then just, I guess inventory is building a little bit more, quarter-over-quarter, and just wanted to hear sort of the drivers there. I would assume you're bringing in additional SKUs from Noble House, but maybe just talk about what you're doing on the inventory front with Noble House and the core business.
Larry Wu (Founder, Chairman, Director, and CEO)
Yeah, this is Larry. I will take this one. I think we understand, although the turn of the Noble House product usually 'cause it's a little bit slower than the Giga product, but we still placed a pretty sizable order to the whole supply chain of the Noble House, because we understand just because the bankruptcy, our vendors need those kind of a funding. And also, the same time that we also try to provide the confidence to our channel partners. But, you know, we will gradually try to improve the turn of the Noble House product, try to get those return efficiency to be close to our traditional Giga products as closely as possible.
The other reason is on, usually when the ocean shipping price goes up, because of the cost we're paying for an ocean product, although the quantity of the products keep the same, usually because of the increase of ocean shipping, the dollar value could, you know, increase, for that reason. That also happened for the last time when the ocean shipping, you know, cost went up. And you can, you know, check our historical data to get the idea of that mechanism.
Matt Koranda (Managing Director and Senior Research Analyst)
Okay. All right, got it. On the outlook, I guess, maybe I'll ask it this way. One, why the sequential revenue decline in the third quarter relative to the second? I guess that breaks the trend that you guys have been on, the nice trend over the last couple of years. So maybe just speak to sort of why we see that declining sequentially. And then also, maybe if you could, I'd love to hear you just break out service versus product expectations, just because product does seem to be becoming a little bit more important with Noble House and you guys generating more revenue, both on and off platform from Noble House.
Larry Wu (Founder, Chairman, Director, and CEO)
Yeah, I think, the first thing is I need to point out, you know, Noble House business has a strong seasonality because they're strong with outdoor furniture. So the contribution for Q2 was very significant from their legacy business. But definitely for that part is, you know, where we're seeing the Q3 sales number won't be as strong as Q2 for the Noble House product. At the same time, I think, you know, everybody understand that the whole industry have been experiencing very strong headwinds over quite, you know, a while in the past, I think more than one year.
So, for the furniture industry as a whole, that we're very, you know, cautious about, you know, managing, our growth, and, you know, and also the resources that we're putting in, so that, that's the, the reason you're seeing, the sequential, you know, growth, you know, where we're what we're providing.
Matt Koranda (Managing Director and Senior Research Analyst)
Okay, got it. Maybe last one really quickly. Just, if you could touch on the margin trajectory into the third quarter, maybe what the outlook may imply. I know, David, earlier, you mentioned you don't expect as much of an impact from the recent ocean freight increase. Maybe can you just put a finer point on why not this, you know, why things are a little bit different this time around?
David Lau (CFO)
Yeah, Matt. As I mentioned, we have a fixed rate contract that we sign with various shipping companies, which we never had, I guess two years ago, when we saw ocean shipping rates surge. So this time, we're different, we're hedged, we're protected. Obviously, we're not hedged 100% of the volume, but because we have some of these fixed rate contracts, we're better protected on any further surge in ocean shipping rates.
Matt Koranda (Managing Director and Senior Research Analyst)
And how far... Any characterization of how far out we're hedged? I would assume these are annual sort of contracts, so maybe it works out through this year, but any comfort you can provide folks around sort of, you know, timing, duration of that hedge?
David Lau (CFO)
I'm not sure if I could disclose too much. I mean, obviously, these are pretty sensitive contracts, but what I can say is we have pretty sizable of our volume being hedged using these fixed price contracts.
Matt Koranda (Managing Director and Senior Research Analyst)
Okay, got it.
Larry Wu (Founder, Chairman, Director, and CEO)
Yeah, I think, you know, several things will, you know, happens is because of the hedging mechanism. One is, obviously, that there's a good chance that we can see that the ocean shipping, you know, revenue, the margin, there's a chance that we can see improvement. This is because of, the difference of, you know, spot rate and the contract rate is getting, wider. So, but it's the same time that, for our, you know, 1P business, the cost is, you know, kind of, will be negatively impacted, you know, for the, the 1P cost. But at the same time, we will try to-...
You know, introduce new product and try to get the opportunity to, you know, do the pricing based on, you know, the updated or new ocean shipping costs. That's the few things that will happen the same time. So a little bit kind of, you know, complicated situation, but you try to sum up everything that we see, you know, probably moderate and kind of, you know, pressure of the margin.
But, because of the hedging mechanism and the pricing repricing opportunity and different direction that the 1P and 3P business margin will, you know, go, I think, you know, that's the reason that they will expect, you know, that the change won't be as crazy as we saw in the last time that the ocean shipping, you know, rate went up.
Matt Koranda (Managing Director and Senior Research Analyst)
Okay. Helpful, Larry. Thank you.
Operator (participant)
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Thomas Forte from Maxim Group. Please go ahead.
Thomas Forte (Managing Director and Senior Research Analyst)
Great, thanks. So congrats, Larry and team, on the quarter. I have three questions. I'll go one at a time. For my first question, I wanted to ask the one I get asked most often by investors: What is enabling you to outperform the category by such a large margin? Your sales growth in the second quarter is more than 100%, and the home category was down more than 10%. And then, what gives you confidence you can continue to take market share in the future?
Larry Wu (Founder, Chairman, Director, and CEO)
I think the key reason is we're introducing a new business model that obviously you know is you know proved to be a one that is providing better efficiency in the supply chain. I think that's the key reason that we... We don't do business in the way that you know most of business you know companies doing it. I think that's the most fundamental reason, but obviously that you see those kind of difference in the efficiency from company to company. So you know the quality of the management also you know a contributor to those difference. I think you know the major one is the business model.
The minor one would be, I think, the way we manage the company, I would say that.
Thomas Forte (Managing Director and Senior Research Analyst)
Thanks, Larry, for that. On my second question, you noted gross margin pressure from new warehouse additions. Historically, how has optimization improved over time for new warehouses?
Iman Schrock (President)
Maybe I can take a stab at this one. Typically, with a new leased facility, before it becomes fully operational, it takes approximately 4-6 months for us, you know, as far as the racking and the whole process goes. That includes, like, all this, you know, shelving, the forklifts, the rental, staffing, and there's a ramp-up period of 4-6 months, I would say.
Thomas Forte (Managing Director and Senior Research Analyst)
Excellent. For my third and final question, can you give your current thoughts on strategic M&A, both from an opportunity standpoint and your strategy?
Larry Wu (Founder, Chairman, Director, and CEO)
Yeah. This is Larry. Maybe I take this one. I think, you know, we'll be focusing on looking for opportunity that either can help grow the volume in the ecosystem or to help us to, you know, expand the reach of our ecosystem. I think Noble House and Wondersign are two very good example for that kind of idea. I think Noble House was the one that help us to, you know, bring in a lot of the new SKU that we were not as strong with, especially outdoor. And Wondersign is, you know, a solution company that will help our customer to get a better reach that they didn't have to before.
I think that's two, you know, very good example that we have with our M&A strategy.
Thomas Forte (Managing Director and Senior Research Analyst)
Great. Thank you, Larry.
Larry Wu (Founder, Chairman, Director, and CEO)
Thank you.
Operator (participant)
Thank you. Your next question comes from Sean Lu from Panoramic Capital. Please go ahead.
Sean Lu (Investment Analyst)
Hi, Larry. You mentioned an increase in stock-based awards earlier. Can you talk a bit more on this? Seems like it's concentrating Q2, but want to make sure I understand you correctly. Are we expecting the same awards in the following quarters?
Larry Wu (Founder, Chairman, Director, and CEO)
Usually, you know, majority of the stock-based compensation will happen in Q2, because, you know, most of those stock compensation is, you know, highly kind of a performance-based. So when we have access to, you know, all the you know the data from the previous year, that we will, you know, reward those contributors in the team based on that, you know, performance data. That's the reason why that you're seeing majority of the stock-based concentration stock-based compensation that happen, you know, kind of concentrated in Q2. So as David explained that, I think the increase is, you know, most of them were caused by the increase of the stock price.
Although, you know, the shares, you know, awarded didn't change too much, but actually, you know, because of the stock price went up so much, so then that's absolute number increase. And then another reason is, actually I didn't, you know, pay myself, you know, stock, you know, stock in the previous year because, you know, as a CEO, I just feel I should be responsible for the, relatively, you know, not really kind of, you know, very exciting result for the, you know, the 2022. As a CEO, I think I should, you know, take that responsibility. So I didn't get, you know, any stock-based compensation for that year.
But, for 2023, I think we, you know, we delivered pretty impressive, you know, financial results. So, I also, you know, got, you know, compensated for the performance of, you know, I did for 2023. I think these are the two major, you know, factors that, you know, that impacted the stock-based compensation number you're seeing.
Sean Lu (Investment Analyst)
Thank you, Larry.
Operator (participant)
Thank you. There are no further questions at this time. I'll now hand back to David for closing remarks.
David Lau (CFO)
Great. Thank you all for your continued support. We're excited about our recent growth and future prospects, and we look forward to speaking with you again next quarter. If you have any questions, please feel free to reach out to the team. Thank you all.
Operator (participant)
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.