GigaCloud Technology Q4 2023 Earnings Call Transcript

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March 18, 2024

There are 8 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to Giga Cloud Technologies fourth quarter and full year twenty twenty three earnings conference call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press 11 on your telephone.

Operator

You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Larry Wu, Founder and CEO. Please go ahead.

Speaker 1

Thank you, operator, and thank you everyone for joining us on the call today. 2023 and the fourth quarter in particular have marked a significant inflection point for GIGA Cloud, one which has changed the trajectory of the business and that we believe will change the way people think about the industry. We have jumped in order of magnitude in the scale of our business and the potential of our supplier fulfilled retailing model. On the top line, we saw revenue increase to $244,700,000 for the quarter, up approximately 95% period over period. And for the full year, revenue increased to $703,800,000 an increase of approximately 44% from 2022.

Speaker 1

While these are certainly impressive results, especially keeping in mind that the NOBLEHOUSE transaction did not close until November 1, we believe that we have still not seen the full power of our business synergy yet. In alignment with our integration with House, we have taken strategic actions to further optimize this business. This includes streamlining Noble House's operation by divesting its direct to consumer online retail, drayage and the manufacturing division. Additionally, we have outsourced management of return item. These decisions serve two key objectives.

Speaker 1

First, by sharpening our focus, we ensure our concentration resources are directed towards strengthening our B2B marketplace proposition. And secondly, we want to enhance our B2B markets neutrality and are committed to provide streamlined service to our buyers and sellers of the marketplace. Before passing it over to Yimon to discuss our operational highlights, I want to remind everyone that you will see our first ten ks filed within the month. This year will represent our first year as S-one filer. We believe this is an important step to gain broader access to the international capital market and are pleased to have a complete this transition in a timely fashion.

Speaker 1

Going forward, Giga Cloud will have the same reporting disclosure and filing obligation as other S form issuer. And you can expect the same cadence of a filing such as a 10 Q and 10 ks as you would from any domestic Nasdaq listed company. With that, I would like to turn the call over to Imam.

Speaker 2

Thank you, Larry, and thanks again to everyone for joining us. Our mission here at Giga Cloud is to revolutionize the way suppliers and resellers manage big and bulky items. Our b two b marketplace streamlines the entire process, offering a seamless end to end experience,

Speaker 3

and the

Speaker 2

successful integration of Noble House and Wondersign fuels this transformation. Through the integration of Noble House, we've expanded our sourcing origin to India and our operations into Canada with a warehouse in Milton, Ontario in what we believe will be a strategic move to open our marketplace to even more buyers. We've also already onboarded some no Noble House customers onto our b two b marketplace as buyers, and we'll continue to recruit both suppliers and new buyers from the existing Noble House base of business. Finally, the financial plan for Noble House remains on track with a minimal net loss in the fourth quarter, positioning us favorably to achieve our goal of breakeven by the end of twenty twenty four and profitability within six quarters. Clearly, we've made tremendous progress in our integration and execution plan we laid out for these acquisitions, which pushed Giga Cloud further into a full service end to end b to b solutions provider in the big and bulky landscape.

Speaker 2

Our Wondersign acquisition was a strategic entry into the brick and mortar space and has allowed us to begin work on the GIGA IQ package, which will facilitate the seamless integration between retail systems and our constantly expanding b to b digital catalog for a more customer friendly, streamlined, and optimized transaction process. The beauty of the Wondersign integration and the future rollout of the GIGA IQ package is the business model on the Giga Cloud side will remain similar, taking an order from the reseller and delivering through our supplier fulfilled retailing model directly to the end consumer. This model opens up opportunities for Giga Cloud Marketplace to onboard new retailers. The integration of Wondersign and the development of our Giga IQ package is a testament to our excellent technology and r and d, primarily our in house team of approximately 300 employees contributing to our r and d functions, including development of our proprietary cloud warehousing, collection of data and analytics, and the design, development, and the testing of our giga cloud marketplace. I also wanted to mention our addition of three new global three p sellers with product origins in Mexico, Colombia, and Turkey, which we announced in February.

Speaker 2

We are committed to continuously expanding our supplier network. This strategic this strategic approach diversifies our product portfolio and fosters supply chain redundancy, ensuring our buyers have uninterrupted access to products in a timely manner. Now let's walk through some operational highlights for the period ending 12/31/2023. Our Giga Cloud Marketplace GMV grew approximately 53% year over year to $794,400,000 in the TTM period. On the seller side, the platform saw an approximately 46 increase in active three p sellers, which ended at 815 for the quarter.

Speaker 2

As I've mentioned in the past, we see the expansion of our three p ecosystem as a crucial aspect of our platform exit expansion and achieving scale in our supplier fulfilled retailing model. While we continue to devote a significant amount of time and resources into quickly vetting and onboarding new three p sellers to our platform, we expect to see our acquisition and integration of Noble House continue to incrementally add a number of seller to this number. We see our three piece seller marketplace GMV increased dramatically in the quarter, increasing approximately 65% year over year to $426,300,000 in the TTM period. Overall, this account is for approximately 44, 54% of our total marketplace GMV in the same period. As I've 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 CP growth rate continuing to drive a larger, more productive marketplace.

Speaker 2

On the buyer side, we saw active buyers increase to over 5,000 in the twelve months prior period, an increase of approximately 21% from the year prior with average spend per active buyer accelerating 27 to approximately a hundred and $59,000. This further demonstrates that we've been successful in attracting the type of high quality seller we want on our platform. Finally, I wanted to briefly mention the incident in one of our Japanese warehouses. First and foremost, there were no injuries to Giga Cloud employees, contractors, or anyone else in the incident. The safety and the well-being of our people is paramount, and we are thankful for this outcome.

Speaker 2

In terms of business impact, we have direct insurance coverage for our one p inventory involved in the incident. While we believe the facts are still developing, we have three other warehouses in Japan, and we have a plan in place to minimize any disruption to business in the region. We believe this situation is well in hand. However, we will update the market as necessary should there be material change in status. Finally, I could not be more pleased with our results for the quarter and the year, And I am incredibly proud of our entire GIGA Cloud family, including those who recently joined from the Nobel House and Wunderstand from all over the world.

Speaker 2

Our financial results were incredibly strong, including revenue for the quarter up approximately 95%. We are making excellent progress on the integration of Noble House and Wunderstand, with selective Noble House SKUs to be available on our marketplace starting today. We completed our transition to S filer, giving investors additional visibility into business and a consistent filing cadence. We expanded our warehouse footprint by over a %, ending the year with 8,200,000 square feet of inventory space across 33 warehouses globally. We are seeing tremendous gain in our operational KPIs with our active buyer spend increasing over 20% 27% and the buyer base increasing over 20%.

Speaker 2

And with that, I would like to turn the call over to David for a more detailed review of our financials. David?

Speaker 3

Hey. Thanks, Iman. I'll now walk through our fourth quarter and full year numbers in more detail. Our total revenues for the fourth quarter were $244,700,000 which was an increase of 94.8% year over year and approximately 37.3% sequentially. On a full year basis, we generated $703,800,000 a 43.6% increase versus the year prior period.

Speaker 3

Breaking this down for just the fourth quarter, service revenue from Giga Cloud 3P saw a 92% year over year increase to 90 sorry, $69,300,000. Product revenue from Giga Cloud 1P saw a 50.9% year over year increase to $88,300,000 And product revenue from off platform e commerce saw a 179.7% year over year increase to $87,000,000 These increases correspond with a 53.3% year over year increase in total Giga Cloud Marketplace GMV, which ended the full year at $794,400,000 on a TTM basis. Our gross profit for the fourth quarter was $69,800,000 which was an increase of 161.4% year over year and resulted in gross margin of 28.5% versus 21.2% in the year prior period. On a full year basis, gross profit increased by 127% to $188,600,000 which resulted in a gross margin of 26.8% versus 17% in the year prior period. I also wanted to briefly touch upon ocean shipping rate fluctuation.

Speaker 3

The Red Sea incidents mostly affect routes from Asia into Europe, which is still a small part of our volume compared to The United States. We're already seeing the increased shipping rates from the most recent Red Sea incident starting to come down. We're currently in the process of negotiating an attractive fixed price contract for a sizable portion of our shipping volume to soften the effects of these incidents going forward. Our cost of revenue in the fourth quarter of twenty twenty three were $174,900,000, an increase of 76.8% from $98,900,000 in the fourth quarter of twenty twenty two on a full year basis. Cost of revenues in 2023 were $515,200,000 an increase of 26.6% from $4.00 $7,000,000 in 2022.

Speaker 3

Our total operating expense for the fourth quarter were $32,700,000 which was an increase of 181.9% year over year from $11,600,000 On a full year basis, total operating expenses were $78,600,000 which was an increase of 63.4% from $48,100,000 in the year prior period. Breaking this down for just the fourth quarter, selling and marketing expenses increased 122.2% year over year to $14,000,000 General and admin expense increased 235.9% year over year to $13,100,000 R and D costs were $2,300,000 in the fourth quarter of twenty twenty three, an increase of 64.3 from fourth quarter of twenty twenty two. Increases were due to staff costs related to selling and marketing personnel, an increase in platform service fee for certain third party e commerce websites and system wide technological upgrades on Giga Cloud Marketplace. I also want to mention that we have not fully realized the cost synergies from Noble House at this time. We continue to expect realization of these synergies to occur throughout the year.

Speaker 3

On the bottom line, our net income for the fourth quarter was $35,600,000 which was an increase of approximately 184.8% year over year from $12,500,000 This resulted in basic and diluted earnings per share of $0.87 versus $0.31 in the year ago period. On a full year basis, net income was $94,100,000 for the period ending December 3123, resulting in basic and diluted earnings per share of $2.31 and $2.3 versus net income of $24 sorry, dollars 24,000,000 in the year prior period, which resulted in basic and diluted earnings per share of $0.60 This resulted in adjusted EBITDA for the fourth quarter of twenty three of $43,800,000 an increase of 188.2% year over year from $15,200,000 On a full year basis, we generated adjusted EBITDA of $108,300,000 an increase of 183% compared to $41,800,000 in the year prior period. Moving on to our balance sheet, we ended the fourth quarter with $183,300,000 in cash on balance sheet, a net increase of approximately $40,000,000 from the quarter ended December 31. I also want to mention that we currently have no outstanding borrowings and are debt free. We do have a large noncurrent liability that's related to our warehouse lease.

Speaker 3

As we mentioned in our investor deck, we provided favorable cash on delivery terms for several Noble House suppliers, which were facing financial difficulties in the first quarter. We expect to see an associated impact on our free cash flow for the first quarter resulting in less cash than usual flowing to our balance sheet. We anticipate the Noble House operation to start stabilizing in q one twenty four and expect business to pick up in q two as new products are starting to roll in for the outdoor furniture season. I also like to highlight at the time of the IPO, we have several VIE in place across a number of jurisdiction. Today, I'm very pleased to announce that after a series of corporate reorg reorganization, we have successfully converted these VIE into fully owned subsidiaries of the company, and we do not have any more VIEs in our corporate structure today.

Speaker 3

Finally, I want to briefly mention our financial outlook. We're currently expecting between $230,000,000 to $240,000,000 in revenue for the first quarter of twenty twenty four. Thank you all for joining. With that, I'd like to ask the operator to open the line for questions.

Operator

Thank you. Please standby while we compile the Q and A queue. Our first question comes from the line of Matt Koranda from ROTHMKM. Please go ahead. Your line is open.

Speaker 4

Hey, guys. It's Mike Dabrin on for Matt. Congrats on the quarter. Maybe just wanna start with Noble House and the guide. How much exactly did Noble House contribute in the fourth quarter?

Speaker 4

I assume it was all in the gig of off platform revenue, but just wanted to confirm there. And then was there any contribution in the fourth quarter to service revenue from onboarding Noble House suppliers to the marketplace?

Speaker 3

Sure. Hey, Mike. It's David here. So right now, we have roughly 30,000,000 of contributions coming in from the Noble House. We won't be breaking that out further, but this 10 k, you will see that we have a stand alone financials of Noble House.

Speaker 3

In the quarter of twenty twenty three q four, there isn't any service revenue being contributed from Noble House. And as you said earlier, the Noble House revenue is contributed from our off platform product revenue.

Speaker 4

Got it. Okay. That that makes sense. And the 1Q guide calls for 235,000,000 at the midpoint. Any sense for what Noble House will contribute in the guide, and any sense for service versus product revenue growth?

Speaker 4

Just trying to get to that 235,000,000, and get a sense for growth in in each category.

Speaker 3

Yeah. Mike, I don't think we'll be breaking out further because right now, the Noble House business is now being fully integrated to our group from a reporting standpoint.

Speaker 4

But as I alluded earlier, I

Speaker 3

think the Global House business is stabilizing in q one, and we're expecting the business to pick up in q two. On the other hand, our organic business continued to scale and expand, and, we've actually established a pretty good market position as you can see from our operational metrics. So all these factors, are some of the things that we consider when we lay out our q one revenue guidance.

Speaker 4

Got it. Okay. But any sense for service versus product revenue growth? I know know we said we're integrating Noble House, but any way to think about, service, revenue growth versus product revenue growth for the first quarter?

Speaker 3

Yeah. I think what we're gonna see is you'll see a bigger contribution from the product given that, the direct contribution from the Noble House is directly, into our product revenue, as you can see, we've always been that 30% split. You'll probably see a bigger contribution coming in from product in q one.

Speaker 4

Okay. Gotcha. Makes sense. Thanks, Rod. Good.

Speaker 4

Last one for me. On gross margins, what exactly is driving the product revenue gross gross margins higher? Seems like it's probably a higher, gross margin contribution from Noble House, but just any other inputs to call out that explain the 4Q strength and product gross margins?

Speaker 3

Yeah. I think the Noble House, contribution is definitely there. I think another factor is, as you know, q four is a typical, peak season for retail sales. You know, with the Black Friday, the Cyber Mondays, we're able to generate a higher margin profile, throughout those, retail days. So that's kinda one of the reason why you see an improving gross margin overall.

Speaker 4

Got it. Okay. Very clear. Thanks, guys. That's all for me.

Operator

We'll now move on to our next question. Our next question comes from the line of Sophie Huang from CMBI. Congratulations

Speaker 5

on a strong quarter, and thank you for taking the question. I just have a follow-up question on the margin side. So how do you see the impact from freight fee trend recently? And how do you view the margin trend in the next few quarters? This is Daniel.

Speaker 5

That that's the first one.

Speaker 3

Hey, Sophie. Sorry. Can I confirm your question is about whether we're able to sustain our margin profile going forward? I just wanna make sure I understand the question correctly.

Speaker 5

Yes. Yes. Yes. The margin channeled.

Speaker 3

Yeah. So as I discussed earlier, I think q four was a a good year because of the typical, retail peak season. I think going forward, obviously, we're trying to maintain that, but, also, we're also facing some macro challenges, you know, things like softening of, the housing market, elevated shipping rates, which we discussed a little bit earlier that we're actually in the process of negotiating a fixed, price contract for some of our volume. So the management team is actually trying to steer the company through these challenges. We'll do our best to maintain the profile, but that's kind of the situation we're in right now.

Speaker 5

Okay. Very clear. The second question is about, global expansion strategy. So can you show us more color on the performance of different markets? I remember you said that your rating market has the highest, revenue growth, and you will also expand the Canada market after Noble House consolidation.

Speaker 5

So how do you view the opportunities and the revenue contribution from those non US markets in the long run?

Speaker 3

Yimon, you wanna take that one around our global expansion?

Speaker 2

Sure. So as far as the total addressable market in The US, we're looking at an industry within furniture, our biggest vertical of almost $65,000,000,000. And as you mentioned, Europe has been a tremendous market for us as far as growth. And you also saw that, you know, we have onboarded three new three p sellers from, you know, different regions, Turkey, Colombia, and Mexico. So what we're gonna continue to see is a global, evolution of the business, you know, as the giga cloud, marketplace is adopted in more and more marketplaces.

Speaker 2

While our primary market, you know, The United States would still be, you know, the growth driver going forward, European market will be right behind it.

Speaker 5

Okay. Thank you. Thank you. And the last one, can can you explain more about your R and D expenses? Because 3,900,000.0 R and D expenses seems pretty low for a company of your size.

Speaker 3

Yeah. Maybe I'll take this one. Actually, it's a very quick question, and, I'm very glad you brought it up. Yeah. We incurred close to, you know, $4,000,000 in R and D expense in 2023.

Speaker 3

And as Aman alluded earlier, we have over 300 team members dedicated to our R and D efforts, you know, which includes, you know, developing and testing of our platform, you know, collection of data and analytics, etcetera. Some of the R and D efforts are actually being accounted for in our cost. So therefore, our total cash or cost associated with r and d is actually far larger than the $4,000,000 that you see in our r and d expense in our p and l.

Speaker 5

Okay. Thank you. Very clear. Thank you.

Speaker 3

Thanks,

Operator

Sylvia. Thank you. We'll now move on to our next question. Our next question comes from Brian Kislinger from Alliance Global Partners. Please go ahead.

Operator

Your line is open.

Speaker 6

Great. Thanks so much for taking my questions. From an organic growth perspective, I may have missed it. Can you highlight the number of SKUs your platform had at the end of the year versus the end of twenty twenty two? And then I'm curious if you're seeing strengthening demand per SKU on average in the fourth quarter, maybe compared to last year or even the first half of the year.

Speaker 3

Yeah. Brian, I think on the SKU point, I don't have the exact number in front of me. But if I recall, we have roughly 30,000 in SKUs as of the end of last year. And I think that number for 2022 is somewhere in the 20,000 range.

Speaker 6

Great. And then on the demand side, I think in the first half of the year, demand per SKU on average was down. Did that change in the fourth quarter? Are you starting to see strengthening demand on your SKUs?

Speaker 3

Yemen, you wanna do that? Or

Speaker 2

I'll be more than happy to, David. Hi, Brian. So, obviously, when it comes to home furnishings, you know, the entire industry is still experiencing a headwind with the cooling of the housing market and the softening of the consumer spending on the durable goods. But with our business model, we're really well positioned in a very slow growth market. And as as as far as, you know, the the the SKU density and the performance, we don't really make that information available.

Speaker 2

But by default, some of the best metrics to look at is the growth and the three p supplier base. And on the reverse side, the average spend per active buyer up 27, while the base of the buyers grew by 20% to over 5,000.

Speaker 6

Got it. Thank you. And a little bit more forward looking, if you can. You've done great at growing the SKU count. I know you made acquisitions that will drive an increase.

Speaker 6

But again, from an organic basis, can you continue to rapidly grow the number of SKUs?

Speaker 3

Yeah. What part?

Speaker 2

We're pretty

Speaker 3

confident on growing SKUs, both on the 1P side and now that we, acquired Noble House, which directly give us access to 8,000 of new SKUs from the Noble House business. So there are a lot of new ways for us to kinda keep growing that SKU number.

Speaker 6

Great. Lastly, maybe for David, can you quantify the cost synergies you realized from the recent acquisitions thus far? And then you talked about a big chunk of them will be realized then again in 2024. Can you talk about maybe what those can you quantify those synergies?

Speaker 3

Yeah. I guess it's kinda hard for me to quantify, what the synergies are from both a revenue or a cost savings standpoint at this point. But what we can see from the health of the business is that we basically incurred a minimal loss in q four. Q '1 is starting to stabilize. We got new products coming in for the outdoor furniture season.

Speaker 3

So q two, we expect there's gonna be a pickup from the business. So that's kind of the health of the business, but hard for me to actually quantify what those synergies are at this point in time.

Speaker 6

Great. Congrats on a great 02/2023.

Speaker 3

Thanks Ryan.

Operator

Thank you. We'll now move on to our next question. Our next question comes from the line of Rommel Dionisio from Aegis Capital. Please go ahead. Your line is open.

Speaker 7

Thank you. Good morning. I wonder if I could just inquire about the new 3P business from Colombia and Mexico. Could you just maybe describe a little more detail how the potential evolution there of that region of the world, which is you haven't talked about too much in the past. And also, are you going to require the building of infrastructure of Salesforce?

Speaker 7

I wonder if you could talk about how you see that potential market opportunity playing out here over the next few years and the long term opportunity there. Thank you.

Speaker 2

Thank you, Ramel. As far as the new sellers, as GIGA Cloud is getting more known and known in in the global arena, you know, as a better way to make trades into the market. I think, you know, organically, we're gonna see an interest coming from a lot of the global suppliers in the regions we do not currently operate in, into becoming members. In addition, you know, like, you know, as far as recruitment of sellers, you know, the existing, you know, infrastructure can support the expansion, you know, with the outreach. And if the need be, we can definitely expand into the region.

Speaker 2

But but those, you know, countries that you mentioned are new to the marketplace. That kinda speaks volume to the true reach of of of of Giga Cloud business model globally as a better way of doing big and bulky. Because in reality, we kinda transform the industry into making it more seamless end to end, you know, the better way of trading, you know, for big and bulky. So with that being said, I do expect the same trends to continue as we get to share our story with more and more manufacturers and distributors across the board to see them onboarding and adopting the business model.

Speaker 7

Okay. Thanks very much and congratulations on the quarter.

Speaker 2

Thank you, Ramel.

Operator

Thank you. We'll now move on to our next question. Please standby. There are no further questions at this time, so I'll hand the call back to David Lau for closing remarks.

Speaker 3

Thank you for your continued support in the business, and please feel free to contact us should you have any further questions. And we look forward to speaking with you all in our next earning announcement. Have a nice day. Thank you.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.

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