GigaCloud Technology Inc. (GCT) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to GigaCloud Technologies Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] 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.

Thank you, Operator, and thank you, everyone, for joining us on the call today. 2023 and the fourth quarter, in particular, have embarked a significant inflection point for GigaCloud, 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 retail model. On the top line, we saw revenue increase to $244.7 million for the quarter, up approximately 95% period-over-period. And for the full year, revenue increased to $703.8 million, an increase of approximately 44% from 2022. While these are certainly impressive results, especially keeping in mind that the Noble House 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 of Noble House, we have taken strategic actions to further optimize this business. This includes streamlining Noble House's operation by divesting its direct-consumer online retail, Drayage and the manufacturing division. Additionally, we have outsourced management of the return item. These decisions serve two key objectives. 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 market's neutrality and are committed to provide streamlined service to our buyers and sellers of the marketplace. Before passing it over to Iman to discuss our operational highlights, I want to remind everyone that you will see our first 10-K filed within the month. This year will represent our first year as S-1 Filer. We believe this is an important step to gain broader access to the international capital markets and are pleased to have completed this transition in a timely fashion. Going forward, GigaCloud 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-K, as you would from any domestic Nasdaq-listed company. With that, I would like to turn the call over to Iman.

Thank you, Larry, and thanks again to everyone for joining us. Our mission here at GigaCloud is to revolutionize the way suppliers and resellers manage big and bulky items. Our B2B marketplace streamlines the entire process, offering a seamless end-to-end experience, and the 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 have also already onboarded some Noble House customers onto our B2B marketplaces' 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 2024 and profitability within 6 quarters. Clearly, we've made tremendous progress in our integration and execution plan we laid out for these acquisitions, which pushed GigaCloud further into a full-service, end-to-end B2B solution provider in the big and bulky landscape. 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 B2B 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 as the business model on the GigaCloud 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 GigaCloud 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&D, primarily our in-house team of approximately 300 employees contributing to our R&D functions, including development of our proprietary cloud warehousing, collection of data and analytics, and the design, development and the testing of our GigaCloud Marketplace. I also wanted to mention our addition of three new global 3P sellers with product origins in Mexico, Colombia and Turkey, which we announced in February. We are committed to continuously expanding our supplier network. 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 December 31, 2023. Our GigaCloud Marketplace GMV grew approximately 53% year-over-year to $794.4 million in the TTM period. On the seller side, the platform saw an approximately 46% increase in active 3P sellers, which ended at 815 for the quarter. As I've mentioned in the past, we see the expansion of our 3P ecosystem as a crucial aspect of our platform expansion and achieving scale in our supplier-fulfilled retailing model. While we continue to devote a significant amount of time and resources into quickly vetting and onboarding new 3P 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 3P seller marketplace GMV increased dramatically in the quarter, increasing approximately 65% year-over-year to $426.3 million in the TTM period. Overall, this accounted 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 3P growth rate continuing to drive a larger, more productive marketplace. On the buyer side, we saw active buyers increase to over 5,000 in the 12 months prior period, an increase of approximately 21% from the year prior with average spend per active buyer accelerating 27% to approximately $159,000. 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 GigaCloud 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. In terms of business impact, we have direct insurance coverage for our 1P inventory involved in the incident. While we believe the factor is still developing, we have 3 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 GigaCloud family, including those who recently joined from the Noble House and Wondersign. From all over the world, our financial results were incredibly strong, including revenue for the quarter up approximately 95%. And we are making excellent progress on the integration of Noble House and Wondersign with selective Noble House SKUs to be available in 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 100%, ending the year with 8.2 million square feet of inventory space across 33 warehouses globally. We are seeing tremendous gain in our operational KPIs, with our active buyers spend increasing over 20 -- 27%, and the buyer base increasing over 20%. And with that, I would like to turn the call over to David for a more detailed review of our financials. David?

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 $244.7 million, which was an increase of 94.8% year-over-year and approximately 37.3% sequentially. On a full year basis, we generated $703.8 million, a 43.6% increase versus the year prior period. Breaking this down for just the fourth quarter. Service revenue from GigaCloud 3P saw a 92% year-over-year increase to 90 -- sorry, $69.3 million. Product revenue from GigaCloud 1P saw a 50.9% year-over-year increase to $88.3 million. And product revenue from off-platform ecommerce saw a 179.7% year-over-year increase to $87 million. These increases correspond with a 53.3% year-over-year increase in total GigaCloud Marketplace GMV, which ended the full year at $794.4 million on a TTM basis. Our gross profit for the fourth quarter was $69.8 million, 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 $188.6 million, which resulted in a gross margin of 26.8% versus 17% in the year prior period. I also wanted to briefly touch up on ocean shipping rate fluctuation. 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, and 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 2023 were $174.9 million, an increase of 76.8% from $98.9 million in the fourth quarter of '22. On a full year basis, cost of revenues in '23 were $515.2 million, an increase of 26.6% from $407 million in 2022. Our total operating expense for the fourth quarter were $32.7 million, which was an increase of 181.9% year-over-year from $11.6 million. On a full year basis, total operating expense were $78.6 million, which was an increase of 63.4% from $48.1 million in the year prior period. Bringing this down for just the fourth quarter. Selling and marketing expenses increased 122.2% year-over-year to $14 million. General and admin expense increased 235.9% year-over-year to $13.1 million. R&D costs were $2.3 million in the fourth quarter of '23, an increase of 64.3% from fourth quarter of 2022. The 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 GigaCloud 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. On the bottom line, our net income for the fourth quarter was $35.6 million, which was an increase of approximately 184.8% year-over-year from $12.5 million. 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 $94.1 million for the period ending December 31, '23, resulting in basic and diluted earnings per share of $2.31 and $2.30 versus net income of $24 million 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 '23 of $43.8 million, an increase of 188.2% year-over-year from $15.2 million. On a full year basis, we generated adjusted EBITDA of $108.3 (sic) [ 118.3 ] million, an increase of 183% compared to $41.8 million in the year prior period. Moving on to our balance sheet. We ended the fourth quarter with $183.3 million in cash on balance sheet, a net increase of approximately $40 million 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. 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 Q1 '24 and expect business to pick up in Q2 as new products are starting to roll in for the outdoor furniture season. I'd also like to highlight at the time of the IPO, we had several VIE in place across a number of jurisdictions. Today, I'm very pleased to announce that after a series of corporate 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. Finally, I want to briefly mention our financial outlook. We're currently expecting between $230 million to $240 million in revenue for the first quarter of 2024. Thank you all for joining. With that, I'd like to ask the operator to open the line for questions.

[Operator Instructions] Our first question comes from the line of Matt Koranda from ROTH MKM.

It's Mike Zabran on for Matt. Congrats on the quarter. Maybe just want to start with Noble House and the guide. How much exactly did Noble House contribute in the fourth quarter? I assume it was all in the Giga off-platform revenue, but I 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?

Sure. Mike, it's David here. So right now, we have roughly $30 million of contributions coming in from the Noble House. We won't be pertaining that out further. But this 10-K, you will see that we have a stand-alone financials of Noble House. In the quarter of 2023 Q4, 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.

Got it. Okay. That makes sense. And the 1Q guide calls for $235 million at the midpoint. Any sense for what Noble House will contribute in the guide? And any sense for service versus product revenue growth? Just trying to get to that $235 million and get a sense for growth in each category.

Yes, 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. But as I alluded earlier, I think the Noble House business stabilizing in Q1, and we're expecting the business to pick up in Q2. On the other hand, our organic business continue to scale and expand. And we've actually established a pretty good market position that you can see from our operational metrics. So all of these factors are some of the things that we consider when we lay out our Q1 revenue guidance.

Got it. Okay. But any sense for service versus product revenue growth? I 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?

Yes. I think what we're going to 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. So as you can see, we've always been that 70%, 30% split. You'll probably see a fair contribution coming in from product in Q1.

Okay. Got you. Makes sense. Last one for me. On the gross margins, what exactly is driving the product revenue gross margins higher? It seems like it's probably higher gross margin contribution from Noble House. But just any other inputs to call out that explain the 4Q strength in product gross margins.

Yes. I think the Noble House contribution is definitely there. I think another factor is, as you know, Q4 is a typical peak season for retail sales, with the Black Friday, the Cyber Mondays, we're able to generate a higher margin profile throughout those retail days. So that's kind of one of the reason why you see an improving gross margin overall.

Our next question comes from the line of Sophie Huang from CMBI.

Congratulations for another strong quarter. I just have a follow-up question on the margin side. So how do you see the impact from the freight fee change recently? And how do you view the margin trending in the next few quarters? If this is [ down ]? that's the first one.

So sorry. Can I confirm your question is about whether we're able to sustain our margin profile going forward? I just want to make sure I understand the question correctly.

Yes, yes, yes. The margin trend.

Yes. So as I discussed earlier, I think Q4 was 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. 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.

Okay. Very clear. The second question is about your global expansion strategy. So can you share us more color on the performance of different markets? I remember you said that your [ original ] market has the highest revenue growth, and you also expand the Canada market after Noble House consolidation. So how do you view the opportunities in the revenue contribution from those non-U.S. markets in the long run?

Iman, you want to take that one around our global expansion?

Sure. So as far as the total addressable market in the U.S., we're looking at an industry -- within furniture, our biggest vertical of almost $65 billion. And as you mentioned, Europe has been a tremendous market for us as far as growth. And you also saw that we have onboarded 3 new 3P sellers from different regions, Turkey, Colombia and Mexico. So what we're going to continue to see is a global evolution of the business as the GigaCloud Marketplace is adopted in more and more marketplaces. While our primary market, the United States, would still be the growth driver, going forward, the urban market will be right behind it.

Okay. And the last one, can you explain more about your R&D expenses because $3.9 million on the expenses is pretty low for a company this size.

Yes. Maybe I'll take this one. Actually, it's a very quick question, and I'm very glad you brought it up. Yes, we incurred close to $4 million in R&D expense in 2023. And as Iman alluded earlier, we have over 300 team members dedicated to our R&D efforts, which includes developing and testing of our platform, collection of data and analytics, et cetera. Some of the R&D efforts are actually being accounted for in our cost. So therefore, our total cash or costs associated with R&D is actually far larger than the $4 million that you see in our R&D expense, in our P&L.

Our next question comes from Brian Kinstlinger from Alliance Global Partners.

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 2022? 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.

Yes, 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.

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?

Iman, you want to do that? Or...

I'll be more than happy to, David. Brian, so obviously, when it comes to home furnishings, 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 far as the SKU density and the performance, we don't really make that information available. But by default, some of the best metrics to look at is the growth and the 3P 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.

Got it. And a little bit more forward-looking, if you can. You've done great at growing the SKU count. I know you've made acquisitions that will drive an increase. But again, from an organic basis, can you continue to rapidly grow the number of SKUs?

Yes. We're pretty 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 kind of keep growing the SKU number.

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 and again in 2024. Can you talk about maybe what those -- can you quantify those synergies?

Yes. I guess it's kind of 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 Q4. Q1 is starting to stabilize. We've got new products coming in for the outdoor furnishing season. So Q2, we expect there's going to 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.

Great. Congrats on a great 2023.

Our next question comes from the line of Rommel Dionisio from Aegis Capital.

I wonder if I could just inquire about the new 3P business from Colombia and Mexico. Could you just maybe describe in 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, sales force? 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?

Rommel, as far as the new sellers, as GigaCloud is getting more known and known in the global arena as a better way to make trades into the market, I think organically, we're going to 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, like as far as recruitment of sellers, the existing infrastructure can support the expansion with the outreach and if the need be, we can definitely expand into the region. But those countries that you mentioned are new to the marketplace, that kind of speaks volume to the true reach of GigaCloud business model globally as a better way of doing big and bulky. Because in reality, we kind of transformed the industry into making it more seamless end-to-end, a better way of trading 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.

There are no further questions at this time. So I'll hand the call back to David Lau for closing remarks.

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

This concludes today's conference call. Thank you for participating. You may now disconnect.