Global-E Online Ltd. Q2 FY2022 Earnings Call

Greetings, and welcome to the Global-E Second Quarter 2022 Earnings Call. This call is being simultaneously webcast on the company's website in the Investors section under News & Events. For opening remarks and introductions, I'll now turn the call over to Erica Mannion at Sapphire Investor Relations. Please go ahead.

Thank you. And good day. With me today from Global-E are Nir Debbi, Co-Founder and President, and Ofer Koren - Chief Financial Officer. Nir will begin with a brief review of the business results for the second quarter ended June 30, 2022. Ofer will then review the financial results for the second quarter ended June 30, 2022, followed by the company's outlook for the third quarter and full year of 2022. We'll then open the call for questions. Certain statements we make today may constitute forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, Sections 21E of the Securities Exchange Act of 1934, and the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995 that relate to our current expectations and views of future events. These forward-looking statements are subject to risks, uncertainties and assumptions, some of which are beyond our control. In addition, these forward-looking statements reflect our current views with respect to future events and are not a guarantee of future performance. Actual outcomes may differ materially from information contained in the forward-looking statements as a result of a number of factors, including those set forth in the section titled Risk Factors in our prospectus filed with the SEC on September 13, 2021, and other documents filed with or furnished to the SEC. These statements reflect management's current expectations regarding future events and operating performance and speak only as of the date of this call. You should not put undue reliance on any forward looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance, and events and circumstances reflected in the forward-looking statements will be achieved or will occur. Except as required by applicable law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. Please refer to our press release dated August 16, 2022 for additional information. In addition, certain metrics will be discussed today are non-GAAP metrics. The presentation of this final financial information is not intended to be considered in isolation or as a substitute for or superior to financial information prepared and presented in accordance with GAAP. We use these non-GAAP financial measures for financial and operational decision making and as a means to evaluate period-to-period comparisons. We believe that these measures provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to key metrics used by management in its financial and operation operational decision making. For more information on the non-GAAP financial measures, please see the reconciliation tables provided in our press release dated August 16, 2022. Throughout this call, we provide a number of key performance indicators used by our management and often used by competitors in our industry. These and other key performance indicators are discussed in more detail in our press release dated August 16, 2022. I will turn the call over to Nir, Co-Founder and President.

Thank you, Erica, and welcome everyone. Unfortunately, Amir could not join the call today due to the passing of his father, and I would like to start by sending deepest condolences to Amir and his family on behalf of the entire Global-E team. Back in mid-May when we discussed our Q1 results and forward outlook, we mentioned the heightened uncertainty towards Q2, resulting from macro-induced factors and the war in Ukraine. However, today, I am happy to report to you that the initial signs of improvement we saw in early May turned out to be indeed the precursors to further improvement in the second half of the quarter. The Russian, Ukrainian and Belarusian markets, which in total represent less than 2% of our activity, remain closed for the time being, given the unfortunate continuation of the war in the region. However, activity in other regions in Europe moderately picked up back from May onwards, despite macro concerns. Coupled with our team's continued strong execution, this resulted in our strongest quarter ever. Quarterly GMV amounted to $534 million and quarterly revenues amounted to $87.3 million, both above the top of our outlook range. Furthermore, as Ofer will elaborate on later in the call, while there remain somewhat heightened uncertainty in the global macro environment, we are increasing our previously stated guidance for the remainder of the year to reflect the stronger performance in Q2 and the Borderfree acquisition. But first, going back to our Q2 results, we continue to experience fast growth. During the second quarter of the year, GMV grew 64% year-on-year and revenues grew 52% year-on-year. Our adjusted gross profitability continued to strongly improve, coming in at 41.8%. Our adjusted gross profit amounted to $36.5 million, growing at 77% year-on-year, again, outpacing our strong top line growth. This was a result of our growing efficiencies of scale, the realization of cost of goods sold synergies with Flow, and a more favorable mix of revenue. In terms of our operational expenses, we continue to reinvest in growing the business and building the infrastructure required to seize the huge market opportunity ahead. However, at the same time, and given the various macro headwinds we foresaw at the beginning of the year, we continue to exert strict cost control throughout the quarter to ensure our ability to continue delivering healthy and sustainable growth while remaining cash positive. In addition, we have been able to realize synergies from our recent acquisition of Flow Commerce faster than expected, thereby lowering the drag on our bottom line. These factors, coupled with our faster than planned topline growth, resulted in a very strong adjusted EBITDA of $11.1 million, well above our outlook range, representing an adjusted EBITDA margin of 12.7%. Switching gears, I would like to update you on some of the many positive developments in our business over the past quarter. On the merchant activity front, demand for our services continues to remain strong. As more and more brands worldwide put direct-to-consumer and cross-border sales at the forefront of their growth strategy. As such, during the quarter, we continued launching with many new brands and expanding our activity with existing ones. Q2 showcased the launches of many new brands on our platform, including leading fashion brands Rag & Bone and Zadig & Voltaire. The Spanish cosmetics brand Freshly Cosmetics, the official tennis merchandise store of Wimbledon, and the luxury watches brand Zenith, which is part of the LVMH group. We also continue to add celebrity brands and other fast-growing digitally native brands, such as Justin Bieber’s fashion brand Drew House, the highly successful training apparel brand NOBULL, and SKKN, another brand by Kim Kardashian, augmenting our successful partnership with Kim's clothing brand SKIMS. Furthermore, our entry into the APAC region continues to gain strong momentum with the launches of Triangl Swimwear out of Hong Kong, and Ryderwear, our first live Australian merchant, as well as the signing of our first-ever Japanese merchant. During Q2, we also expanded our activity with brands such as Adidas and Suunto, all of which added additional lanes to be operated by Global-E. Last but not least, I am proud to announce that during Q2 we went live with one of the world's most well-known and respected consumer brands, Disney, as part of the push to expand direct-to-consumer sales. Disney chose Global-E to power its cross-border sales across several markets in the APAC region, leveraging both our extensive capabilities and expertise, as well as our unique multi-local infrastructure. As before, we remain highly optimistic regarding our ability to continue growing this portfolio of brands, as our new bookings and forward-looking pipeline of brands is stronger than ever. On the strategic partnership front, we have continued to deepen our collaboration with our growing ecosystem of partners around the world, including, for example, our first and highly attended client event in Tokyo, Japan, held in partnership with our local partner, Trans Cosmos. Our partnership with Shopify continues to develop on track. On the direct solutions side, dozens of merchants of different sizes are already live on our new native integration into the Shopify platform and dozens more are in various stages of planning and integration. In addition, and as planned, during the quarter, we have already booked our first live order as part of the beta trials of the new white-label merchant of record solution on Shopify, built upon the Flow Commerce technology. Work on this innovative solution for SMBs continues full steam ahead toward a phased rollout later in the year. Corporate work on the full post-merger integration of Flow Commerce into Global-E is now all but complete. And as I have already mentioned, we have been able to realize many of the planned synergies earlier than expected. Our corporate development team is now focused primarily on the integration of Borderfree, which we acquired out of Pitney Bowes. This was our second acquisition that was closed at the beginning of Q3 with a talented team of software engineers and other professionals from Borderfree, all highly passionate about cross-border, now becoming part of the respective teams at Global-E around the globe. Besides the list of marquee U.S. brands that work with Borderfree and will now have access to Global-E's advanced localization platform, we expect the merger of Borderfree into Global-E to provide several key benefits and synergistic values. First, we expect it will enable us to expedite our planned expansion of both range and the quality of online marketing and demand generation services we provide to our merchants. Over the years, Borderfree has developed a set of unique capabilities and assets in the field of cross-border demand generation, which we expect to be able to offer to a much broader audience of merchants on our platform. Second, as part of this acquisition, we were also able to strike a strategic, mutually beneficial partnership with Pitney Bowes, providing us with access to some of Pitney's advanced logistical solutions, as well as providing Pitney's clients with access to Global-E's best-in-class cross-border enablement solution. And finally, some of the proprietary cross-border software components and architectural elements built by the highly skilled engineering team at Borderfree will be combined over the coming quarters into the Global-E codebase, yielding a best-of-breed set of services and considerably shortening the time to market of various elements which were on our technical roadmap. As Ofer will elaborate on later, we do expect the Borderfree acquisition to somewhat weigh on our margin during the next few quarters, given the differences in financial profile and efficiencies. But as with the Flow acquisition, we should be able to utilize both our scale and our expertise to gradually realize relevant synergies and potentially improve the financial margins over the coming quarters. There are many more exciting developments happening across the business. While we continue to leverage our position as the world's leading cross-border enabler to capture more of the immense and growing market opportunities that lie ahead of us and to help our fast-growing list of merchants realize their international sales potential. But in the interest of time, I will pause here and just say in summary that we are very pleased with our strong results in the second quarter of 2022 and remain very much on track, both strategically and financially, to achieve our 2022 and long-term goals. And with that, I will hand it over to Ofer, our CFO, to go over the financial results in more detail and provide some additional color regarding our outlook for Q3 and the full year of 2022.

Thank you, Nir, and good morning, everyone. This has been a record quarter on all fronts, as we continue to demonstrate fast growth and strong execution, coupled with cash generation amid the macro environment, which continues to be volatile. The demand for and acceptance of our direct-to-consumer cross-border offering by merchants continues to be very strong, with signings of new merchants continuing at a record pace. Our rapid growth continued in Q2 as we generated $534 million of GMV, an increase of 64% year-over-year. After experiencing weaker consumer demand through March and April in Central and Eastern Europe, and in some of the Western European markets impacted by the war in Ukraine and the macro environment, we have seen significant recovery through May and June. While the overall e-commerce market growth in the first half of 2022 has been softer, merchants are continuing to prioritize and accelerate the shift towards direct-to-consumer and the cross-border opportunity remains massive. In Q2, we generated total revenue of $87.3 million, up 52% year-over-year. Service fee revenue was $39.3 million, up 86%, and fulfillment services revenue was up 33% to $48 million. Service fee revenue continued to grow faster compared to fulfillment services revenue, driven by the growth of our multi-local offering, merchant revenue mix in the quarter, and the revenue mix of Flow, which is characterized by a higher share of services. From a geographical standpoint, U.S. outbound revenue continued to grow rapidly. In Q2, U.S. outbound revenue was up 104% year-over-year, driven by strong growth on the Global-E platform's U.S. outbound business alongside the high share of U.S. outbound on the Flow platform. In addition, our penetration efforts into new markets are starting to show initial positive results. While still relatively small in share, APAC and Middle East outbound revenue have grown 213% year-over-year. Our non-GAAP gross profit growth yet again outpaced top line growth. In Q2, non-GAAP gross profit was $36.5 million, up 77% year-over-year, representing a margin of 41.8% compared to 36% in the same period last year. As Nir mentioned, this was primarily driven by the higher share of service fee revenues, the realization of low cost of goods sold synergies, and our increased scale leverage. I would like to remind you that as of Q1, we are reporting adjusted gross profit, which adjusts the gross profit for amortization of acquired intangibles as is common post-acquisition. GAAP gross profit was $34.3 million. We expect Borderfree to weigh on our gross margin in the next 6 to 12 months until we can realize the available cost of goods sold synergies. Moving on to operational expenses. Throughout the quarter, we continued to invest in the development and enhancement of our platforms to broaden and deepen the Global-E enterprise platform capabilities and develop the new SMB offering on the Flow platform. R&D expense in Q2, excluding stock-based compensation, was $12.3 million or 14.1% of revenue compared to $5.5 million or 9.6% in the same period last year. Total R&D spend in Q2 was $17.6 million. The increase in R&D expense as a percentage of revenue is mainly driven by the consolidation of Flow. Alongside R&D, we continue to invest in sales and marketing, enabling us to generate a strong and diversified pipeline while maintaining efficiencies. Sales and marketing expense, excluding Shopify warrants related amortization expenses, amortization of acquired intangibles, and stock-based compensation, was $8 million or 9.2% of revenue compared to $4.3 million or 7.5% of revenue in the same period last year. Shopify warrants related amortization expense was $37.4 million. Total sales and marketing expenses for the quarter were $51 million. General and administrative expenses, excluding stock-based compensation and acquisition-related contingent consideration were $6.3 million or 7.2% of revenue compared to $3.3 million or 5.7% of revenue in the same period last year. As a reminder, the contingent consideration expense reflects the portion of the Flow transaction consideration that is held back for the founders, contingent upon a certain employment period and expensed over time. Total G&A spend in Q2 was $15.1 million. Adjusted EBITDA has increased significantly compared to the previous quarter, driven by higher-than-expected top line growth, faster-than-planned synergies realization with Flow, and additional focus on cost management discipline due to macro volatility. Adjusted EBITDA totaled $11.1 million, representing a 12.7% adjusted EBITDA margin increasing from $7.6 million in the same period last year. We have realized synergies that have driven significant improvement in Flow's adjusted EBITDA, and we now expect Flow to reach breakeven by the end of this year. Turning to the balance sheet and cash flow statements. We ended the quarter with $285 million in cash and cash equivalents, including short-term deposits and marketable securities. Net operating cash flow generated in Q2 was $31.9 million compared to a net operating cash flow of $6.9 million in the same quarter a year ago. Moving on to our financial outlook and guidance for the third quarter and full year 2022. We expect Q3 GMV to be in the range of $600 million to $614 million. At the midpoint of the range, this represents a growth rate of 72.4% versus Q3 of 2021. Of this, Borderfree is expected to contribute $50 million to $54 million of GMV. We expect Q3 revenue to be in the range of $99.5 million to $102.5 million. At the midpoint of the range, this represents a growth rate of 70.9% versus Q3 of 2021. Adjusted EBITDA is expected to be in the range of $8.5 million to $11.5 million. Please note that Borderfree's take rate in Q3 is expected to be similar to Global-E's take rate, while Borderfree's adjusted EBITDA is slightly negative. As Nir mentioned earlier, we are increasing our previously stated outlook for the remainder of the year to reflect the stronger performance in Q2 and the Borderfree acquisition. For the full year of 2022, we now anticipate GMV to be in the range of $2.45 billion to $2.55 billion, representing 72.5% annual growth at the midpoint of the range. Of this, Borderfree is expected to contribute $125 million to $135 million of GMV. Excluding Borderfree, we are raising our full year GMV guidance to $2.32 billion to $2.42 billion. Revenue for the full year is expected to be in the range of $406 million to $426 million, representing a growth rate of 69.6% at the midpoint of the range. We are also increasing our full year adjusted EBITDA guidance, which was previously at $38 million to $42 million. Now we expect it to be in the range of $41 million to $46 million, despite the slightly negative contribution from Borderfree. In conclusion, while macro headwinds continue, our execution remains strong on all fronts, as we continue to tap into the massive opportunity ahead of us. We will continue, along with our partners, to further enhance our offering to enable merchants to grow their direct-to-consumer cross-border businesses effectively and efficiently. We believe this will enable us to continue demonstrating fast top line growth while leveraging our scale to further improve efficiency. And with that, Nir and I are happy to take any of your questions.

Hey, guys, good morning. Condolences to Amir. Sorry to hear about that. I wanted to ask a question on the recovery of some of your markets in early May that seem to have continued throughout the quarter. Wondering if you can talk about some of the trends that you guys have seen more recently or that you may be expecting in the back half of the year and maybe to tie that together with the guide. I assume that there are some incremental FX headwinds that you're having to absorb with the updated guidance as well. So maybe when we just think about the guidance ex Borderfree for the remainder of the year, how are you thinking about the puts and takes of macro FX versus some of the strength that you guys have seen more recently in the second quarter? Thanks.

Hi, Will. It’s Ofer. Thank you for the question. As we've communicated, this year has been quite volatile. After we've seen weaker March and April, we did see business pick up in May and June, partially due to the fact that we've seen some of the markets coming back, mainly in Central Eastern Europe and some of the European markets affected by the war in the macro environment. So not everything came back, but we did see things picking up. And then we have seen a lot of merchant activity, with existing merchants putting a lot of focus on direct-to-consumer, and we've seen a lot of new product launches and marketing activity during May and June. As we continuously communicate, we have a very strong pipeline. So we've seen merchants launching new activities with us. And all of that accumulated into strong May and June. When we looked at the guidance, on one hand, we incorporated the Q2 results, obviously, that's already history. On the other hand, we took into account that there is still high volatility in the market and some macro uncertainty. There may be some FX headwinds, but some of it has eased in the last few weeks, so it remains to be seen what will happen. That's what we baked into the updated guidance, which reflects the better-than-expected Q2 and the addition of Borderfree.

Got it. That's helpful. And then maybe if I could follow up on just a question about how you're thinking about demand for cross-border e-com. Given all the commentary so far this earnings season about the return of cross-border travel, it seems like the expectation is that it will continue to be strong and recover nicely over the remainder of the year. How are you thinking about the interplay of people traveling cross-border more frequently and how that would impact the demand for online cross-border e-commerce?

Yeah. I think that when we provided our Q1 guidance, we already baked in some COVID relief as we assumed that people would go back to traveling in 2022. So this was included in the number, and we expected some moderation, though we believe that the longer-term trend that started, I would say, more than a decade ago continues, whereby e-commerce, especially cross-border e-commerce, is growing much faster than physical commerce. Global e-commerce is still growing positively on a global scale, even within the context of COVID relief. So we are quite optimistic about that. When we take it into our new bookings and look into merchant interest in direct-to-consumer, here, we see a substantial increase. This trend continues and is reflected in the growth we see in new bookings coming in with large brands and enterprises partnering with us to support the future rollout of global D2C.

Got it. Understood. Appreciate you taking my questions. Nice results this morning.

Thank you very much.

Thank you. Our next question comes from the line of Josh Beck with KeyBanc Capital Markets. Please proceed with your question.

Thank you, team, and my condolences as well. I wanted to ask about a broader trend that we've seen in e-commerce. I think the message from a lot of these companies this quarter has been somewhat of a normalization towards 2019 levels when we think of the pace of e-commerce penetration gains within the broader market? Obviously, you have new customers, which are certainly helping drive growth, new corridors as well. When you think about the broader macro trend across commercial verticals, how are you trying to contemplate that into the guidance? And also just thinking about algorithms into future years as well?

Josh, thank you for that. It's Ofer. I think that all the trends you mentioned are out there, and we have seen a softer e-commerce environment. The reopening is there, as Nir mentioned, and there are uncertainties regarding the macro environment. However, what differentiates us is the fact that the direct-to-consumer channel is in focus for merchants and is gaining share over other channels. So this channel is definitely growing at a nice pace. We believe that this is a secular trend that will stay with us for a long time, as merchants prioritize this channel for reasons like wanting a closer relationship with consumers, wanting valuable data, and enjoying better margins at the end of the day. This is what distinguishes direct-to-consumer cross-border from the general e-commerce market.

That's very helpful. Maybe just a follow-up on one of the Borderfree synergy questions. Could you help us maybe understand how easily applicable you see these capabilities across your merchant base? Is it something they've really been requesting? Also, anything you can share on the revenue model? I assume this gets bucketed under the services business, but would be curious to learn more there.

Hi, Josh, this is Nir. When we made the acquisition of Borderfree, we looked for certain synergies as well as capabilities that we bought. So one, you mentioned demand generation, which we started to develop based on demand from our merchants. As we have a much wider merchant base that has grown very fast with us and over time, they have become very local in many markets, they are looking for how to accelerate growth efficiently in a time when demand generation has become more problematic due to different privacy regulations. We believe we can take a more proactive approach. Borderfree has developed a unique asset related to demand generation that we believe we can build upon as a base to offer to all our broader merchant base and utilize that to fuel both our and their sales. We see high potential there. Another aspect we considered with this acquisition was a partnership with Pitney Bowes that allows us access to sophisticated logistical services in certain markets, especially Canada, which is a key market for U.S. brands. This collaboration also benefits Pitney Bowes' clients, giving them access to Global-E's advanced localization services. We believe that we will be able, as we did with Flow, to realize synergies coming from our expertise and scale while enjoying a better financial profile as well. Hopefully, that answers your question.

Perfect, Nir and Ofer. Very helpful.

Thank you. Our next question comes from the line of Samad Samana with Jefferies. Please proceed with your question.

Hi, good morning. Thanks for taking my questions, and congrats on the strong results. Maybe first, just with the strong rebound that you've seen in demand, can you help us understand, Ofer, what you're thinking in terms of the net retention number for your existing customers? Like what's assumed in the revised guidance, especially the ex- Borderfree guidance for the year?

Hi, Samad. So as you know, we are not disclosing a number on a quarterly basis. However, as we communicated in the previous quarter, we believe that the MDR would be around our historical levels—not the numbers we have seen in 2021 and 2020, but something around the average of the previous years. This is what our plan is based upon, and so far, I think we've been on track to get there.

Great. And Nir, maybe one for you. Have you seen any change, either an acceleration or pull forward, or maybe a little more hesitance in terms of what customers are doing in go-live times or the length of sales cycles, just in either direction? Have you seen any change in merchant behavior that informs your outlook for the rest of the year?

Sure. To be honest, we've seen the other way around. We've seen much more interest coming in, primarily from larger brands that stayed on the fence earlier regarding going direct to consumer on a global scale. The recent example we just launched is with Disney, where we are going to support their merchandising store out of several markets in APAC during this phase. We have also seen many others doing the same. Our new bookings over the quarter are significantly higher than last year and are much greater than our record quarter in new bookings. This gives us confidence regarding our outlook for the rest of the year and beyond.

Definitely. Thanks again, and great to see the strong results.

Thank you.

Thank you. Our next question comes from the line of Koji Ikeda with Bank of America. Please proceed with your question.

Hey, everyone. Please give Amir my best regards. A couple of questions from me. So just kind of asking on the guidance. I know on the prior call, you really called out and in the prepared remarks today, you pointed out that Russia, Ukraine, Belarus, and Central and Eastern European softness was really kind of the premise of the guide down in the GMV last quarter. But it really sounds like Central and Eastern European has improved. So just curious, I really want to hammer down from a geographic perspective, are the assumptions kind of from the previous guide from a geographic impact perspective the same within the updated guidance today? Or are there any other regions to call out?

So thank you for the question. It's Ofer. I think regarding the geographical effect in the guidance, we have seen the markets that were directly impacted by the war, with some additional impact from macro conditions. Those have improved—not necessarily to 100%, but improved significantly during Q2. We expect them to continue at the same or similar pace throughout the year. Unfortunately, people get used to everything, including war. We saw a drop, then a nice comeback, not 100%. This is what we are taking into account in our guidance. Other than that, we have seen strengths and weaknesses in different geographies, but nothing out of the ordinary. I mean, there is always some dynamics during the year.

However, we need to take into account the high uncertainty in the macro environment. This is something we also factored into our guidance.

Got it. Got it. Thank you. And then just one follow-up from me. I wanted to ask a question about Disney. Clearly, a fantastic win with a global mega brand. I wondered if you could walk us through how this win with Disney came about. Was this a Disney Asia division win? Or maybe was this something more HQ-driven with Asia being the first target market with maybe more to come? Thanks, guys.

Yeah. Asia is indeed part of a larger approach with Phase I deployment into certain markets in APAC. Based on the success in those markets, we expect a rollout into additional geographies, not only within APAC. This discussion has been going for a while. As you can assume, Disney is a reputable brand, and the level of project management and requirements to go live was extensive. We believe that over time, as we did with many other merchants and retail groups, we will see a land and expand approach with Disney.

Got it. Thanks, guys. Thanks for taking the questions.

Thank you very much.

Thank you. Our next question comes from the line of James Faucette with Morgan Stanley. Please proceed with your question.

Thanks. This is Sandy Beatty on for James. I wanted to quickly follow up on APAC, obviously, a point of strength for you guys. Can you just talk about the demand drivers there, particularly from a merchant perspective just in terms of outbound? How you're thinking about the potential of the region. You have these larger brands that are potentially moving over. Obviously, more organic wins as well. Can you just provide a little bit more color there?

Yes. We are at the initial stages of penetration into APAC, but we are very confident looking towards the future. The pipeline of new bookings has been increasingly strong over the quarters. I recently visited Tokyo, Japan for the event we had with our partner Trans Cosmos, and we've seen extensive interest from amazing Japanese brands looking to go D2C. We've seen tremendous success in building a pipeline in Australia, fueled by our partnership with Australian Post and the DHL team in Australia. We believe that over time, APAC will take a significant chunk of outbound sales mix. Today, we are much more balanced than we used to be years ago, with European outbound making up a large portion of our activities, and now U.S. taking a significant share as well. We assume that with the momentum we are seeing in APAC, the region will grow its share in the mix going forward.

Got it. Thank you. And then just one on gross margin; it looked particularly strong this quarter. Can you walk us through some of the upside drivers there just between multi-local mix shift, scale, etc? How you're thinking about trajectory on a longer-term basis, particularly as you integrate these new acquisitions?

Yes. I think you already mentioned the three drivers behind the strong gross margin this quarter, but let me add some color to that. One, we had a good mix in terms of service fees and fulfillment services, which obviously impacts gross margin. Two, and this is important, we have been able to realize cost of goods sold synergies with Flow faster than we originally anticipated. Towards the end of Q1 and the beginning of Q2, we already implemented some changes. We needed to wait and see that everything worked well, and we are seeing very good results on that front. We significantly improved Flow's gross margins over the last quarter. We continuously invest to gain efficiencies based on leveraging our scale. This is something we do on a continuous basis. These are the three main drivers behind the number. In terms of going forward, we expect Borderfree to weigh on our gross margin, as currently the gross margin of Borderfree is lower than ours. However, over the next 3 to 4 quarters, we can improve that as we did with Flow. Setting aside Borderfree, we expect the same dynamics; while we don't expect to achieve a 200 basis point improvement every quarter, over time, we do expect to gradually improve our gross margins.

Perfect. Thank you for taking my questions.

Thank you. Our next question comes from the line of Alex Sklar with Raymond James. Please proceed with your question.

So following up on some of the earlier answers and questions on the macro. What can you tell us in terms of the growth of merchants in your pipeline or demo activity or some other metrics that you're tracking to help put some quantification behind the pipeline strength commentary?

Sure. It's Nir. Thank you for the question. In terms of the growth in the pipeline, it starts with significant two-digit increases in demo bookings and goes throughout the funnel into the signings of new merchants. Year-over-year, we are at over 100% growth for the entire first half of 2022, and the momentum in Q2 is even higher than Q1. This substantial increase in new bookings supports our increased guidance for the second half of the year and aligns with our long-term goals.

No, that's great color. Nir, thank you. I guess maybe this goes hand in hand, but just following up on the Shopify partnership, the native integration launched earlier in the quarter. What can you tell us in terms of how that played out versus expectations once you had that native integration up and running?

We're very happy with the adoption, and we see tremendous acceptance from brands requesting to go into the native Shopify integration. We are very optimistic about how our partnership with Shopify is evolving and strengthening. The product and engineering teams, as well as the commercial team at Shopify, have been wonderful partners, and we are excited about how this collaboration has evolved. We expect to have, I would say, hundreds of new and existing merchants going live on this native integration next year. Some of these will come from our current classic integration, while others will be new, but we do expect this to scale up and improve our launch time on Shopify, enhancing both the merchant and customer experience.

Okay. Great. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Scott Berg with Needham & Company. Please proceed with your question.

Hi, everyone. Congrats on a great quarter and thanks for taking my questions here. I guess, Ofer, I wanted to start with your EBITDA guidance for the full year. You had a strong second quarter obviously, with the cost controls and the synergies that you mentioned. But I see that you did not carry through the second quarter outperformance into the second half. How should we think about your growth investments here? It looks like you're continuing to invest aggressively in the business. Is there anything new you've identified maybe in the last quarter or two that would be interesting to note regarding the opportunities out there? Thank you.

Yes. I think that the main factor we should consider in this discussion is Borderfree. Borderfree's adjusted EBITDA is negative—it's not a large number, but still has a negative impact on the overall result, and this is baked into the guidance. On top of that, as you mentioned, we were controlling costs in Q1 and Q2. We have some flexibility in our model. We updated our guidance, but we didn't change the adjusted EBITDA number for the year. After Q2, which was better than expected, we are still controlling costs, but we are also investing to support this year's growth and future growth. Those would be, I think, the main points impacting our adjusted EBITDA guidance.

Great. Helpful. And then from a follow-up perspective, Nir, I know you've discussed a lot about Flow Commerce and Borderfree here today. But as you think about the Borderfree benefits that you listed before, especially some of the services from Pitney Bowes, are those benefits starting to impact your sales cycles for your core Global-E customers? Or are those expected to realize maybe in the next year?

Yeah. Thank you for the question. I assume we will see most of the benefits only next year as it requires technical integration and setup. We are in the process of building both processes and the tech side of the integration. Following that, I expect it to benefit both winning new clients with additional service capabilities and to offer additional services to our current client base, thus improving customer service to their consumers in different areas. Most of this will materialize, I assume, in early Q1 or Q2, 2023.

Congrats on a strong quarter again. Thanks for taking my questions.

Appreciate it. Thank you.

Thank you. Our next question comes from the line of Brent Bracelin with Piper Sandler. Please proceed with your question.

Hello. This is Clarke on for Brent. First question is, over the course of the past eight months of 2022, could you tell me about what you've seen in the different segments or product categories within GMV, whether that was luxury or fashion or cosmetics? Are there any segments or product categories that you've seen more stabilization or improvement sequentially in Q2 from Q1?

Thank you for the question. Generally speaking, we have seen similar trends within the different segments. However, if I can point out some differences, we have seen a slight decrease in sporting goods and sporting wear, I think it relates to people going back to work. That's one observation. A second observation is that we have seen digital native brands and newer brands growing a bit faster than others. Those are the two main observations.

All right. Great. And then second, a lot of questions on the Borderfree capabilities being applied to the Global-E platform. But I wanted to ask about the inverse; wondering if you could talk about what you're most excited about or where you see the most opportunity in terms of offering Global-E capabilities to the Borderfree customer base?

Sure. It’s Nir speaking. Given that Global-E is almost more than ten times the size of Borderfree, we have much more data and know-how to optimize the merchant proposition, as well as additional capabilities that were not required at the size of Borderfree. Once we can bring those into the Borderfree client base, I would expect to see a positive impact on conversion rates, turning international traffic into more sales than we had in the past. We have already started this journey, analyzing where we can implement quick changes alongside Borderfree engineers and account management teams. Over time, we aim to provide much more to the brand. We are very excited about that.

Thank you very much.

Thank you.

Thank you. Ladies and gentlemen, our final question comes from the line of Pat Walravens with JMP Securities. Please proceed with your question.

Great. Thank you. Let me add my thoughts and prayers for Amir and his family. So Nir, with Borderfree being more focused on M&A, if so, what kinds of things are out there that would be interesting? Also, let me just add on that: are you finding some of the smaller companies that might have interesting technologies running out of cash and are more available than they used to be?

Thank you, Pat. I would start with the latter. We see more interest from companies that are either running out of cash or don't see a very bright horizon ahead of them. They have been reaching out to us directly or through third parties, looking if we're interested in additional transactions. So yes, there is interest. However, from the Global-E side, we are currently focusing on realizing the potential out of the Flow Commerce acquisition, especially the build of the white-label solution into Shopify. We have a lot on our hands realizing the benefits from the Borderfree acquisition. But we are looking ahead and might consider some tactical acquisitions—not on a large scale—if we see that we can complement additional capabilities in areas of interest. We spoke about demand generation earlier, but if we can see something that aligns with Global-E's objectives, we might consider acquiring it instead of investing to build it ourselves.

Great, thank you. And congratulations on such a great quarter, guys.

Thank you.

Thanks, Pat.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Debbi for any final comments.

Thank you. On behalf of Ofer, myself, and the entire Global-E team, I would like to thank you all for joining today and for your ongoing support as we continue on our exciting and ambitious journey with yet another great quarter. We very much look forward to seeing you again on our future earnings calls. Goodbye and take care.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.