GigaCloud Technology Q3 2023 Earnings Call Transcript

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December 5, 2023

There are 7 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Giga Cloud Technology Third Quarter twenty twenty three Earnings Call and Webcast. Joining us today from Giga Cloud Technology are the company's Founder, Chairman and CEO, Larry Wu the company's President, Doctor. Imran Troc and the company's Chief Financial Officer, David Lau. On today's call, Imran 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.

Operator

After that, we'll conduct a question and answer session. As a reminder, 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 GAAP can be found on today's press release as well as on the company's website.

Operator

Please note that today's conference is being recorded. I would now like to turn the conference over to your first speaker, Mr. Larry Wu, Chairman and CEO. Please go ahead, sir.

Speaker 1

Thank you, operator, and thank you, everyone, for joining with 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 Giga Cloud, and it won't be the same without it. Since we have spoken last, Giga Cloud 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 to strengthen our penetration into brick and mortar channels. Before turning to Yimon to discuss these two acquisition in details on a high level, we could not be more pleased with our results in the quarter, which featured approximately 40% year over year increase in our total revenue and an incredible 150 increase in our year over year adjusted EBITDA.

Speaker 1

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 our result of our unwavering commitment to ensuring the success of our Giga Cloud B2B marketplace participant. As Yimeng will speak to shortly, our acquisition of Noble House will provide additional scale, diversity of product, supply chain enhancement and market with the launch of our new GIGA IQ package. And with that, I would like to turn the call over to Iman Shrock, President for GIGA Cloud for a more detailed discussion on the quarter and our two additions. Iman?

Speaker 2

Thank you, Larry, and thanks again everyone for joining us. Our results this quarter speaks for itself by the appeal, the earning potentials of our supply fulfilled retailing model, a big testament to the commitment and execution of the entire Giga Cloud 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 Wandersign, in more detail. Let's start with Noble House, which closed on October 31 for a purchase price of $85,000,000 We acquired Wonder House through a bankruptcy process where we acquired substantially all assets in this transaction.

Speaker 2

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 Giga Cloud 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. Further, the acquisition expands our existing network of warehouses by 2,300,000 square feet, serving to enhance our fulfillment infrastructure and ensure timely, accurate deliveries as well as allowing Giga Cloud 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 that greatly expand the ability of our sellers to reach their target customers.

Speaker 2

Moving on, we'd like to delve deeper into the strategic acquisition of Wondersign concluded on November 16 for a total consideration of $10,000,000 in cash. Wondersign, a Tampa, Florida based innovator in cloud powered digital signage and electronic catalog management, is set to broaden Giga Cloud'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 Giga Cloud's diverse product offerings through our retail partners, outlets and stores. These purchases will be processed by the physical store with Giga Cloud facilitating the order fulfillment and drop shipping process, mirroring the efficiency of our B2B marketplace operation.

Speaker 2

The intent behind acquiring Wondersun is to transition the Giga Cloud 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 Giga Cloud's scale, volume and reach beyond our organic growth. These integrations aim to further accelerate our momentum, offering customers with more diverse ways to connect and transact, ultimately positioning us as a leader in global B2B landscape. Now let's walk through some of the organic operational highlights of the quarter. Our Giga Cloud Marketplace GMV grew approximately 41% year over year to $684,800,000 in the TTM period.

Speaker 2

On the seller side, the platform saw an approximate 43% year over year increase in active 3P sellers, which ended at seven forty one for the quarter. As I mentioned last quarter, we see 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 devout a significant amount of time and resources into quickly vetting and onboarding new third party sellers to our platform, we also expect to see the acquisition of Noble House to add a significant number of sellers. We continue to see our 3P Seller Marketplace GMV growth accelerated in the third quarter, increasing 67% year over year to 369,500,000 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, ultimately, we 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.

Speaker 2

Moving on to the buyer side. We saw active buyers increase to 4,602 in the twelve months ended 09/30/2023, 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 seek to 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 Giga Cloud and subsequently a transformative one in the fourth quarter, which we saw Giga Cloud close two important acquisitions, Noble House and Wunderstand. We believe that these moves have provided Giga Cloud 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.

Speaker 2

As Larry mentioned, we posted our third consecutive quarter of record profit, resulting in year to date net income of $58,500,000 as of September 30. Organically, we are seeing promising growth across all KPIs with a rise of approximately 41% of total GMV from 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.

Speaker 3

Thanks, Man. Before we discuss our financials in 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 fourteen of this year. Our Board of Directors have authorized a share repurchase program under which the company may purchase up to $25,000,000 of its Class A ordinary shares in a twelve month period. I'm very pleased to share that for the launch of our share repurchase program through 09/30/2023, we have purchased approximately 215,000 Class A ordinary shares in the open market for a total price of approximately $1,600,000 With approximately $23,400,000 remaining on the share repurchase authorization, we'll continue to look to repurchase shares when valuation level warrants.

Speaker 3

Second, on our transition from a foreign private issuer or FPI to S filer status, where we will have the same reporting and disclosure obligation as domestic companies. We're pleased to report that we're on track to transition to an S filer on Jan one, twenty twenty four, which is when Giga Cloud 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 will this move will continue to build confidence in the Giga Cloud 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.

Speaker 3

As Larry mentioned, I'd like to reiterate that the numbers I'll be discussing are all organic Giga Cloud numbers as neither acquisitions mentioned had closed in the period ending 09/30/2023. Our total revenues for the third quarter were $178,200,000 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 GIGA Cloud 3P saw a 27.2% year over year increase to $51,500,000 Product revenue from Giga Cloud 1P saw a 38.1% year over year increase to 80,400,000.0 Product revenue from off platform e commerce saw a 58% year over year increase to $46,300,000 These increases correspond with 40.8% year over year gain in total market GMV, which ended the third quarter at $684,800,000 on a TTM basis. Our revenue growth is a testament of the continued adoption of our supplier fulfilled retailing business model. Moving on to our gross profit for the third quarter was $48,900,000 which was an increase of 117.3% year over year and resulted in gross margin of 27.4% versus 17.6% in the year prior period.

Speaker 3

These increases in gross margin were largely a result of the continued return to normalization of ocean shipping rates from the all time highs in the first six months of twenty twenty two. Our total operating expense for the third quarter were $17,200,000 which was a decrease of 6% year over year from $18,300,000 Working this down for the third quarter, selling and marketing expenses increased 61.8% year over year to $11,000,000 General and admin expenses decreased 496% year over year to $5,800,000 Research and development costs were $400,000 in the third quarter of twenty twenty three versus none in the third quarter of twenty twenty two. The increases were due to an increase in staff costs relating to selling and marketing personnel, an increase in platform services fee that we incurred to certain third party e commerce website and system wide technological upgrades on Giga Cloud Marketplace to support the company's growth. These were offset by the decrease in G and 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 $24,200,000 which was an increase of approximately 3,357.1 percent year over year from $700,000 This resulted in basic and diluted earnings of shares of $0.59 per share versus $01 per share a year ago.

Speaker 3

Our share based comp expense in the third quarter was $317,000 versus $8,900,000 in the year prior. As I mentioned in our previous call, we incurred a large one time SBC charge of $8,900,000 related to our IPO in third quarter twenty twenty two. SBC charges will be more evenly spaced going forward, and we do not expect to see a single quarter with such SBC charge in that magnitude in the future. This resulted in adjusted EBITDA for third quarter of twenty twenty three of 29,800,000.0 an increase of 150.4% year over year from $11,900,000 Moving on to our balance sheet. We ended the third quarter with $214,000,000 in cash, a net increase of approximately $70,500,000 from the third quarter sorry, from the quarter ended 12/31/2022, an increase of $32,500,000 for the quarter ended 06/30/2023.

Speaker 3

As Amon and Larry mentioned, subsequent to the quarter, we acquired Noble House for approximately $85,000,000 and Wunderstand for approximately $10,000,000 Both of these acquisitions were funded exclusively with cash off 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 $217,000,000 to $223,000,000 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.

Operator

Thank 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.

Speaker 4

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 $217,000,000 to $2.23 how much of that outlook is the organic services and products business? And how much is coming from the Noble House acquisition?

Speaker 4

Maybe also if you could speak to Wondersign and if that's contributing anything to your revenue outlook for the fourth quarter?

Speaker 3

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 $30,000,000 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.

Speaker 3

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 WunderSign, given kind of the size of WunderSign relative to our overall financial profile, we didn't account for any revenue guidance in the quarter.

Speaker 4

So the I guess that implies a core revenue outlook for the fourth quarter of $190,000,000 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.

Speaker 3

Sure. I think as you can see, you see in this quarter, third quarter, you see 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 enhance sellers' or suppliers' profitability. And for buyers, which is retailers and resellers, they're able to operate in a more asset light fashion, particularly in a challenging microeconomic environment, helps them streamline their operating costs.

Speaker 3

So this is a win win situation for all of our marketplace participants. And then 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. And once you start to onboard more users, you start to see more volume coming in, you start to see it gives you an edge in our overall logistics offering and makes our pricing more competitive. So once you start seeing volume and traction, kind of the three pieces will feed into each other and then the growth momentum will continue.

Speaker 3

And that's what we're expecting in the fourth quarter and beyond.

Speaker 4

Okay. I guess what I'm trying to get at is, it's like a north of a 50% year over year growth mark that you're guiding to for the fourth quarter. So 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?

Speaker 3

We don't really provide guidance to that level. But what I could say is, so right now, the split is 70% 1P, 30% are 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.

Speaker 4

Yes. 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, operating margins for Noble House in the fourth quarter, but also would like just a general commentary on how to think about profitability of that business as you plug it into your system?

Speaker 3

Yes. 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 right now is drawing all of our intention and energy to integrate the business. We're trying to realize the synergies through kind of revenue expansion opportunities and cost cutting initiatives. We have a number of levers to pull in the medium to long term to increase profitability.

Speaker 3

We're trying our utmost effort and our number one priority to integrate and recognize all the potential synergies in the next couple of quarters. I don't know if Larry or Iman, if you have anything more specific that we can share with Matt.

Speaker 2

No, I think that was a good response. And obviously, this acquisition is a substantial acquisition for the Gated Cloud team, and we're putting in our best effort behind it to create synergies and to take out redundancies. And the goal is to, within the next few quarters, to try to do our best to turn things around, and we'll update the investor community as to that progress.

Speaker 4

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 just directionally, qualitatively, however you want to do it, just help folks kind of plug that into the model that you guys have, the core model, which is already relatively profitable. How should we do that?

Speaker 2

By the virtue of Noble House being where it was, the initial impact would be dilutive, of course. But like I said, our best effort is behind it. We have a lot of management bandwidth, a lot of team members working really, really hard to try to bring the operation to profitability as soon as possible. And like I said, we're going to inform the community the investor community quarter by quarter, and we're going to get our best effort to try to turn things around within the next few quarters ahead.

Speaker 4

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 sort of 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.

Speaker 4

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?

Speaker 2

Sure. I mean, Noble House is a very reputable B2B furniture distributor in The U. S, and they have an extensive collection of outdoor and indoor home furnishings across basically the full home segment. That includes decor and accessories. So from our standpoint, the GIGACOB marketplace and our logistics network will help streamline and optimize the sales process, storage and distribution of the product, making the perfect acquisition candidate because it can benefit from our robust network and business strategy.

Speaker 2

Additionally, like Noble House has extensive sales channels, which will give us a solid foothold and a massive revenue opportunity for our sellers to access. Listed a few like Amazon and Target. And further to that, the Noble House acquisition not only provides us with scale we need to attract new buyers and sellers, but also it helps us expand our supplier base and give us opportunities to enter into new furniture markets. For us, that is India for sourcing, which is going to be a big emphasis going forward in attracting sellers, and obviously, the Canadian market for B2B commerce as they have a presence in that market as well.

Operator

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 opened.

Speaker 5

Good morning. Thanks for taking my question. Could I wonder, you touched on it a little bit just now, but could you just expand the theme of the cross selling synergies that you may have with Noble House taking your product line to Canada and theirs bringing that to some of your U. S. Customers and how you guys think about the opportunities there in 'twenty four and beyond?

Speaker 2

You, Ramel. So basically, with regards to Noble House, we are trying to use the power of the marketplace. That includes all the synergies that I discussed when it comes to logistics, the distribution, the load balancing. But above that, the powerful ways of the supplier fulfilled retailing business model that has been successful for us, as you guys see in the numbers that are provided to you as far as the performance with three quarters of record profitability in its back, we're trying to use those synergies to turn this operation around. And by default, like a lot of skewed diversity will be available.

Speaker 2

On a marketplace, there is dynamic interaction between sellers and buyers. So the more diversity and newness that you have on the marketplace, it allows you to attract more buyers by the means of giving them more choices, and that's something that we achieved through the Noble House acquisition. Further to that, we're talking about scale here. Noble House will give us the needed scale to basically gain additional market share while also giving us the chance to tap into their supply chain, which is pretty substantial as far as the number of manufacturing partners that they had, the retail partners that they had and the two new markets that I mentioned, India for sourcing and then also Canadian B2B commerce. Commerce.

Speaker 3

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

Speaker 3

So and then on top of all the synergies that Imogen alluded, just want to make sure that the product value is being delivered and shared with you all.

Speaker 5

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

Speaker 3

You're welcome. Thank you very much.

Operator

Thank you. We are now going to proceed with our next question. And the questions come from the line of Jamie Jay from KFN. Please ask your question. Your line is open.

Speaker 6

Management. Can you hear me right?

Speaker 2

Yes. Okay.

Speaker 6

Thank you for giving me the opportunities and congrats on the strong results. I got two questions. So first, still about Noble House deal. Although you talk about it in the pre mark, can you give us like more color on this deal like looking forward, what management's action plan to integrate this company into our existing system? You.

Speaker 3

Iman, you want to take that one?

Speaker 2

Sure. Obviously, after the acquisition, we've acted swiftly to identify redundancies in staffing and cost synergies that are both having short term and long term effects on the profitability for the combined entities. At the same time, we're always looking to explore for strategic options to restructure the legacy business segments that NOBLEHUSD had dabbled in, which included manufacturing, retail and a B2C component to drive the strategic growth and focus on the core function of the business. Obviously, we're still in the midst of executing on these particular actions, but we strongly believe that we're on the right track and headed in the right direction, and we're going to continue to make progress in the coming quarters. And like I said, with our plan being to turn things around within the next few quarters, we'll be bringing more updates to the investor community on a quarter by quarter basis.

Speaker 6

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

Speaker 2

Well, obviously, we haven't even gone into the numbers that far ahead. But I can share with you, 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.

Speaker 6

Okay. Thank you. Thanks.

Speaker 3

And maybe if I can add a little bit more color around that question. Obviously, when we're projecting and budgeting what our Q4 guidance looks looks like, we'll take into account of what we think, how we performed in November, which is obviously the Black Friday sale. So if I could kind of steer you to look at our guidance, I think that's probably a pretty good indication of where we think our quarter is going to look like.

Operator

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

Speaker 3

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

Operator

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

Speaker 2

Thank you, and happy holidays, everybody.

Speaker 4

Thank you.

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GigaCloud Technology Q3 2023
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