GigaCloud Technology Inc Q3 FY2023 Earnings Call

Good day and thank you for standing by. Welcome to the GigaCloud Technology Third Quarter 2023 Earnings Call and Webcast. Joining us today from GigaCloud Technology are the company's Founder, Chairman and CEO, Larry Wu, the company's President, Dr. Iman Schrock, and the company's Chief Financial Officer, David Lau. On today's call, Iman will give an overview of the company's performance and details of the company's operational results, and David will share the company's financial results. After that, we'll conduct a question and answer session. As a reminder, this conference contains statements about future events and expectations which are forward-looking in nature. Statements on this call may be deemed as forward-looking and actual results may differ materially. Today's call and webcast will include non-GAAP financial measures within the meaning of the SEC Regulation G. When required, reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with the GAAP can be found on today's press release as well as on the company's website. Please note that today's conference is being recorded. I would now like to turn the conference over to our speaker, Mr. Larry Wu, Chairman and CEO. Please go ahead, sir.

Thank you, operator, and thank you everyone for joining us today. First, I want to express my gratitude to the entire Giga family for another remarkable quarter. The dedication you have shown is integral to the continued success of GigaCloud, and it won't be the same without it. Since we last spoke, GigaCloud not only posted three consecutive quarters of record-breaking results, we have also closed on two strategic acquisitions that accelerate both our growth in our B2B ecosystem as well as strengthen our penetration into brick-and-mortar channels. Before turning to Iman to discuss these two acquisitions in detail, on a high level, we could not be more pleased with our results in the quarter, which featured an approximately 40% year-over-year increase in our total revenue and an incredible 150% increase in our year-over-year adjusted EBITDA. As we mentioned in our press release, this marks our third consecutive quarter of record profitability, showcasing the incredible earning potential and flexibility of our supplier-fulfilled retailing business model. Keep in mind that these results are purely organic as we did not close either acquisition within the period and are a result of our unwavering commitment to ensuring the success of our GigaCloud B2B marketplace participants. As Iman will speak to shortly, our acquisition of Noble House will provide additional scale, diversity of product, and supply chain enhancement in the brick-and-mortar market with the launch of our new GIGA IQ package. And with that, I would like to turn the call over to Iman Schrock, President of GigaCloud, for a more detailed discussion on the quarter and our two acquisitions. Iman?

Thank you, Larry. And thanks again, everyone, for joining us. Our results this quarter speak for themselves by the appeal and the earning potentials of our supplier-fulfilled retailing model, a big testament to the commitment and execution of the entire GigaCloud team. We continue to revolutionize the way of transacting big and bulky products in a cross-border landscape through our innovative technology platform, and we are seeing continued momentum on this front. Before we go through some of our operational highlights for this quarter, I first wanted to discuss our two acquisitions, Noble House and Wondersign in more detail. Let's start with Noble House, which closed on October 31 for a purchase price of $85 million. We acquired Noble House through a bankruptcy process where we acquired substantially all assets in this transaction. Noble House is a leading B2B furniture distributor with over 8,000 SKUs across 100 categories covering both indoor and outdoor furniture. In addition to providing GigaCloud with an extensive network of third-party channel partners and suppliers from around the world, Noble House will provide significant warehouse expansion and synergistic cost savings for both 1P and 3P shipping volume. This additional supplier diversity and sourcing coverage will significantly strengthen our supply chain and expand our product offerings in newness and diversity, which we believe is essential to attracting new high-quality buyers and sellers to the B2B marketplace. Furthermore, the acquisition expands our existing network of warehouses by 2.3 million square feet serving to enhance our fulfillment infrastructure and ensure timely, accurate deliveries, allowing GigaCloud to expand our operations into Canada and add a new sourcing origin in India. Finally, Noble House provides relationships with top retailers including Amazon, Target, Wayfair, Lowe's, Beyond, formerly known as Overstock, and Walmart, which greatly expands the ability of our sellers to reach their target customers. Moving on, we'd like to delve deeper into the strategic acquisition of Wondersign, concluded on November 16 for a total consideration of $10 million in cash. Wondersign, a Tampa, Florida-based innovator in cloud-powered digital signage and electronic catalog management, is set to broaden GigaCloud's footprint within the physical retail sector. This integration is pivotal in the launch of our new avant-garde GIGA IQ package. Leveraging Wondersign’s established network of over 2,500 retail locations, the GIGA IQ package is designed to offer consumers a streamlined experience to explore, select, and transact GigaCloud's diverse product offerings through our retail partners, outlets, and stores. These purchases will be processed via the physical store, with GigaCloud facilitating the order fulfillment and dropshipping process, mirroring the efficiency of our B2B marketplace operation. The intent behind acquiring Wondersign is to transition the GigaCloud marketplace into an intuitive end-user oriented platform, enhancing the transactional journey for both marketplace affiliates and the retail clientele. Together, we are confident that the acquisition of Noble House and Wondersign will enhance GigaCloud's scale, volume, and reach beyond our organic growth. These integrations aim to further accelerate our momentum, offering customers more diverse ways to connect and transact, ultimately positioning us as a leader in the global B2B landscape. Now let's walk through some of the organic operational highlights of the quarter. Our GigaCloud Marketplace GMV grew approximately 41% year-over-year to $684.8 million in the TTM period. On the seller side, the platform saw an approximate 43% year-over-year increase in active 3P sellers, which ended at 741 for the quarter. As I mentioned last quarter, we view the expansion of our 3P ecosystem as a crucial part of our platform expansion and achieving scale in our supplier-fulfilled retailing model. While we continue to devote a significant amount of time and resources to quickly vetting and onboarding new third-party sellers to our platform, we expect to see the acquisition of Noble House add a significant number of sellers. We continue to see our 3P seller marketplace GMV growth accelerate in the third quarter, increasing 67% year-over-year to $369.5 million in the TTM period, which accounted for 54% of our total marketplace GMV in the same period. As I mentioned on our prior calls, while our 1P approach remains an integral part of our business strategy, we ultimately believe that the growth of our organic 3P GMV will be very important to the scaling of our business, and we see positive momentum in our organic 3P growth rate continuing to drive a larger and more productive marketplace. Moving on to the buyer side, we saw active buyers increase to 4,602 in the 12 months ended September 30, 2023, an increase of approximately 10% from the year prior period, with average spend per active buyer making a significant 28.5% jump from the year prior period to approximately $149,000. We continue to see growth in the number of high-quality, high-volume buyers that we seek to attract to the platform, as demonstrated by the significant increase in the average buyer spend. We will continue to invest in our platform and believe there is still a long runway of organic growth that can be achieved as we penetrate new markets around the world. Clearly, this was a blockbuster quarter of organic results for GigaCloud, subsequently a transformative one in the fourth quarter, which saw GigaCloud close two important acquisitions, Noble House and Wondersign. We believe that these moves have provided GigaCloud the additional scale and the reach it's needed to position the company for success and additional market share in the near and long term. As Larry mentioned, we posted our third consecutive quarter of record profit, resulting in year-to-date net income of $58.5 million as of September 30. Organically, we are seeing promising growth across all KPIs with the rise of approximately 41% of total GMV from the comparable TTM period, approximately 10% more active buyers than the comparable TTM period, an increase of 28.5% in average spend per active buyer over the comparable TTM. And with that, I would like to turn the call over to David Lau, CFO, for a more detailed overview of third quarter financials. Thank you.

Thanks, Iman. Before we discuss our financials and details, I'd like to share with you some important corporate initiatives in the quarter. First, our share repurchase program, which we had announced on June 14 of this year. Our Board of Directors authorized a share repurchase program under which the company may purchase up to $25 million of its Class A ordinary shares in a 12-month period. I'm very pleased to share that for the launch of our share repurchase program through September 30, 2023, we have purchased approximately 215,000 Class A ordinary shares in the open market for a total price of approximately $1.6 million. With approximately $23.4 million remaining on the share repurchase authorization, we'll continue to look to repurchase shares when valuation levels warrant. Second, we are transitioning from a foreign private issuer, or FPI, to S-Filer status, where we'll have the same reporting and disclosure obligations as domestic companies. We're pleased to report that we're on track to transition to an S-Filer on January 1, 2024, when GigaCloud will be subject to the same reporting disclosure and filing obligations as other S-Form issuers. Starting next year, you can expect the same cadence of filings such as 10-Ks and 10-Qs. We believe this move will continue to build confidence in the GigaCloud story, and we continue to be focused on shareholder engagement and transparency. Now I'd like to walk you through our third quarter's numbers in more detail. As Larry mentioned, I'd like to reiterate that the numbers I'll be discussing are all organic GigaCloud numbers, as neither acquisition mentioned had closed in the period ending September 30, 2023. Our total revenues for the third quarter were $178.2 million, which was an increase of 39.2% year-over-year and 16.4% quarter-over-quarter. Breaking this down for the third quarter, service revenue from GigaCloud 3P saw a 27.2% year-over-year increase to $51.5 million. Product revenue from GigaCloud 1P saw a 38.1% year-over-year increase to $80.4 million. Product revenue from off-platform e-commerce saw a 58% year-over-year increase to $46.3 million. These increases correspond with a 40.8% year-over-year gain in total market GMV, which ended the third quarter at $684.8 million on a TTM basis. Our revenue growth is a testament to the continued adoption of our supplier-fulfilled retailing business model. Moving on to our gross profit for the third quarter, it was $48.9 million, which was an increase of 117.3% year-over-year and resulted in a gross margin of 27.4% versus 17.6% in the year prior period. These increases in gross margin were largely a result of the continued normalization of ocean shipping rates from the all-time highs in the first six months of 2022. Our total operating expenses for the third quarter were $17.2 million, which was a decrease of 6% year-over-year from $18.3 million. Breaking this down for the third quarter, selling and marketing expenses increased 61.8% year-over-year to $11 million. General and administrative expenses decreased 49.6% year-over-year to $5.8 million. Research and development costs were $0.4 million in the third quarter of 2023 versus none in the third quarter of 2022. The increases were due to an increase in staff costs relating to selling and marketing personnel, an increase in platform services fees incurred to certain third-party e-commerce websites, and system-wide technological upgrades on GigaCloud Marketplace to support the company's growth. These were offset by the decrease in G&A expenses, which was primarily due to a decrease in share-based compensation expenses. On the bottom line, our net income for the third quarter was $24.2 million, which was an increase of approximately 3,357.1% year-over-year from $0.7 million. This resulted in basic and diluted earnings of $0.59 per share versus $0.01 per share a year ago. Our share-based compensation expense in the third quarter was $317,000 versus $8.9 million in the year prior. As I mentioned in our previous call, we incurred a large one-time SBC charge of $8.9 million related to our IPO in the third quarter of 2022. Our SBC charges will be more evenly spaced going forward, and we do not expect to see a single quarter with such a large SBC charge in that magnitude in the future. This resulted in adjusted EBITDA for the third quarter of 2023 of $29.8 million, an increase of 150.4% year-over-year from $11.9 million. Moving on to our balance sheet, we ended the third quarter with $214 million in cash, a net increase of approximately $70.5 million from the quarter end of December 31, 2022, and an increase of $32.5 million for the quarter ended June 30, 2023. As Iman and Larry mentioned, subsequent to the quarter, we acquired Noble House for approximately $85 million and Wondersign for approximately $10 million. Both of these acquisitions were funded exclusively with cash from our balance sheet. Finally, I want to briefly mention our financial outlook. For the fourth quarter, we're now expecting total revenues in the range of $217 million to $223 million, which will represent an approximately 75% gain over the year prior period at the midpoint. Thank you all for joining. With that, I'd like to ask the operator to open the line for questions.

Thank you. We are now going to proceed with our first question. And the questions come from the line of Matt Koranda from ROTH. Please ask your question.

Hey, guys. Good morning. Just wanted to see if you could unpack the fourth quarter revenue outlook that you provided in a bit more detail. So the $217 million to $223 million, how much of that outlook is from the organic services and products business? And how much is coming from the Noble House acquisition? Maybe also if you could speak to Wondersign and if that's contributing anything to your revenue outlook for the fourth quarter?

Hey, Matt, it's David here. So for the fourth quarter, we didn't close our Noble House acquisitions until November 1, and we anticipate approximately $30 million of our revenue guidance will be contributed by Noble House. But going forward, we don't plan to provide two separate revenue guidance in our press release. The way we look at it is we're going to provide a single combined revenue number as we're trying to integrate the Noble House business. So it's going to be increasingly difficult for us to just single out what the Noble House revenue guidance is going to be. And then on Wondersign, given kind of the size of Wondersign relative to our overall financial profile, we didn't account for any revenue guidance in the quarter.

Does that answer your question, Matt?

Sorry about that. I was on mute. So I guess that implies a core revenue outlook for the fourth quarter of $190 million. Maybe could you speak to what's driving the growth outlook in the organic business first? And then I wanted to come back to Noble and kind of talk about profitability and the expectations there?

Sure. As you can see in this quarter, third quarter, you've seen more and more users are signed up and onboarded on our platform. Users are starting to understand and appreciate the value we bring through our supplier-fulfilled retailing model. This directly enhances sellers' or suppliers' profitability. And for buyers, which are retailers and resellers, they're able to operate in a more asset-light fashion, particularly in a challenging macroeconomic environment, helping them streamline their operating costs. So this is a win-win situation for all of our marketplace participants. And for our 1P business, which is the product business, we continue to increase and diversify our SKU count, which is a key growth driver for our product business. We continue to dedicate our focus to recruit sellers on a global basis. Once you start to onboard more users, you see more volume coming in, which ultimately gives you an edge in our overall logistics offering and makes our pricing more competitive. Once you start seeing volume and traction, the three pieces will feed into each other and the growth momentum will continue, and that's what we're expecting in the fourth quarter and beyond.

Okay. I guess what I'm trying to get at is, it's like a north of 50% year-over-year growth mark that you're guiding to for the fourth quarter. Just trying to get to sort of which component of the business is driving that. It sounds like probably both sides. Any way to think about breaking out the product revenue outlook, which has been accelerating over the last couple of quarters versus the service revenue that you'd expect?

We don't really provide guidance to that level. But what I could say is that right now the split is 70% 1P, 30% 3P. So without consolidating the Noble House deal, I think that split will continue to carry on. So I hope that kind of answers the questions that you have in mind.

Yeah. That's directionally helpful. And then on Noble, I guess, just making sure that we're thinking about this correctly, Noble House will likely fall into the 1P product revenue side of the business, I would assume. And then maybe could you speak to sort of how we should be thinking about gross margins and operating margins for Noble House in the fourth quarter, and I would also like some general commentary on how to think about profitability of that business as you plug it into your system?

Yeah. I think right now, it's pretty hard and early on to really talk about what the overall profitability is going to look like. I think the management team is now drawing all of our attention and energy to integrate the business. We're trying to realize the synergies through revenue expansion opportunities and cost-cutting initiatives. We have several levers to pull in the medium to long term to increase profitability, and our number one priority is to integrate and recognize all the potential synergies in the next couple of quarters. I don't know if Larry or Iman have anything more specific that we can share with Matt.

No, I think that was a good response. And obviously, this acquisition is a substantial acquisition for the GigaCloud team. We are putting in our best effort behind it to create synergies and to eliminate redundancies. Our goal is to try to turn things around within the next few quarters, and we'll update the investor community on that progress.

Okay. But if I'm trying to model profitability from Noble as we plug it into your model, should we assume it's dilutive to EBITDA margins for the initial few quarters and then we sort of get the synergies that you're alluding to within 2024? Just maybe directionally, qualitatively, however you want to do it, just help folks kind of plug that into the model that you guys have in the core model which is already relatively profitable. How should we do that?

By the virtue of Noble House being where it was, the initial impact would be dilutive, of course, but as I said, our best effort is behind it. We have a lot of management bandwidth with team members working extremely hard to try to bring the operation to profitability as soon as possible. We will inform the investor community quarter-by-quarter, and you're going to get our best effort to try to turn things around in the quarters ahead.

Okay, last one for me. Just maybe could you speak to how we should think about what Noble does for your marketplace metrics that you report? Particularly curious about how it's going to impact active buyers and sellers, probably more buyers than sellers in the acquisition. But maybe if you could just speak to how we should think about those metrics on a go-forward basis. They've obviously been growing very nicely in the last couple of quarters. But how should we anticipate Noble will impact those key metrics in the fourth quarter and beyond?

Sure. Noble House is a very reputable B2B furniture distributor in the US, and they have an extensive collection of outdoor and indoor home furnishings across basically the full home segment that includes decor and accessories. From our standpoint, the GigaCloud Marketplace and our logistics network will help streamline and optimize the sales process, storage, and distribution of the product, making it the perfect acquisition candidate because it can benefit from our robust network and business strategy. Additionally, Noble House has extensive sales channels, which will give us a solid foothold and a massive revenue opportunity for our sellers to access, including Amazon and Target. Further to that, the Noble House acquisition not only provides us with the scale we need to attract new buyers and sellers, but it also expands our supplier base and gives us opportunities to enter into new furniture markets, particularly in India for sourcing, which we will emphasize going forward, and the Canadian market for B2B commerce, where they also have a presence.

Okay, I'll take the rest from offline. Thanks, guys.

Thank you.

Thank you. We are now going to proceed with our next question. And the questions come from the line of Rommel Dionisio from Aegis Capital. Please ask your question. Your line is open.

Good morning. Thanks for taking my question. Could you expand on the theme of the cross-selling synergies that you may have with Noble House taking your product line to Canada and their bringing that to some of your US customers? How do you think about the opportunities in 2024 and beyond? Thank you.

Thank you, Rommel. With regards to Noble House, we are trying to use the power of the marketplace. That includes all the synergies we discussed when it comes to logistics, distribution, and load balancing. The supplier-fulfilled retailing business model has been successful for us, as you can see in our numbers for three quarters of record profitability. We are trying to use those synergies to turn this operation around, and by default, a lot of SKU diversity will be available on our marketplace. The dynamic interaction between sellers and buyers is critical. The more diversity and newness you have on the marketplace, the more you can attract buyers by giving them more choices, something we've achieved through the Noble House acquisition. Moreover, we're talking about scale here. Noble House provides us the necessary scale to gain additional market share while also allowing us to tap into their supply chain, which has a substantial number of manufacturing and retail partners. This opens opportunities in new markets that we are looking to pursue, including sourcing in India and expanding into Canadian B2B commerce.

Yeah. Iman, if I can add, I think on the product side, there's a lot of complementary value we can extract from the Noble House acquisition. We're adding around 8,000 SKUs right off the bat. They are in a slightly more premium segment than we are. Their product quality is superb. So there are a lot of synergies we can extract by learning their know-how, product designs, and QC processes, which we can reflect in our own 1P business. Additionally, all the synergies that Iman mentioned can deliver significant value.

Great. Thanks very much. Congratulations on the acquisitions in the quarter.

You're welcome. Thank you very much.

Thank you. We will now move on to our next question. The questions come from the line of Jimmy J from KFN. Please go ahead with your question. Your line is open.

Hi, management. Can you hear me?

Yes.

Okay. Thank you for giving me the opportunities and congrats on the strong result. I have two questions. First, still about the Noble House deal. Although you talked about it in your remarks, can you give us more color on this deal, looking forward? What’s management’s action plan to integrate this company into our existing system? Thank you.

Iman, you want to take that one?

Sure. Obviously, after the acquisition, we've acted swiftly to identify redundancies in staffing and cost synergies that have both short-term and long-term effects on profitability for the combined entities. We're also looking to explore strategic options to restructure the legacy business segments that Noble House had engaged in, which included manufacturing, retail and direct-to-consumer components, to drive strategic growth and focus on the core function of the business. We're still executing these actions, but we strongly believe we're on the right track and headed in the right direction. We will continue to make progress in the coming quarters. Like I said, our plan is to turn things around within the next few quarters, and we'll be updating the investor community on a quarter-by-quarter basis.

Okay. Thank you. And the second one is, can you share some color on the Black Friday sales this year? Did you do any promotions for this event?

We haven't gone into the numbers that far ahead. But I saw in the news that Black Friday was very strong for online e-commerce partners, but that was a general metric not broken down by anybody in particular.

And maybe if I can add a little more color around that question. Obviously, when we're projecting and budgeting, we take into account how we performed in November, which includes the Black Friday sales. If I could steer you to look at our guidance, I think that's probably a good indication of how we think the quarter is going to look.

Thank you. We have no further questions at this time. I will now hand back to you for closing remarks.

Great. Thank you all for joining. If you have any questions, please feel free to write an email to our IR email address. We'll respond to you as soon as we can. We look forward to talking to you in our next earnings call, and happy holidays to everybody.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.

Thank you, and happy holidays, everybody.

Thank you.