GigaCloud Technology Inc

Thank you all for standing by. Welcome to GigaCloud Technology's second quarter 2024 earnings conference call. During today's call, all participants will be in listen only mode. Joining us today from GigaCloud Technology are the company's founder, chairman and CEO, Larry Wu, its president, Dr. Iman Shrock, and its chief financial officer, David Lau. Iman will give a performance and operational overview, and David will share the financial results. After that, there will be a question and answer session. As a reminder, this conference call contains statements about future events and expectations that are forward-looking in nature, and actual results may differ materially. Additionally, today's call and webcast will include non-GAAP financial measures within the meaning of SEC Regulation G. When required, reconciliation of all non-GAAP financial measures to the most direct comparable financial measures calculated and presented in accordance with GAAP can be found in today's press release, as well as on the company's website. With that, I would like to turn the call over to Larry for opening remarks. Please go ahead.

Thank you, operator, and welcome everyone to today's call. This quarter markets a significant milestone for our company as we achieve the record revenue growth for the sixth consecutive quarter. Additionally, despite the industry-wide challenge, including 7% -over-year decline in retail furniture sales in the first half of the 2024 in the United States, and the elevated ocean shipping costs, our adjusted EBITDA increased substantially. These results underscore the strong demand for our marketplace and its ability to streamline the efficiency of the wholesale global supply chain, and while we connect the buyer and sellers of large non-standard items seamlessly around the globe. Our acquisition of the Nova House and WonderSign and the launch of our first industry-first bass or branding the service are already contributing to our success. In the second quarter, we successfully introduced Nova House-related SKUs to our marketplace which contributed approximately $57 million in GMV. The first half of this year has been extremely productive, and we are driving continued progress, sustainable and profitable growth as a leader and the disruptor of the e-commerce technology solution. We were honored to be added to the Russell 2000 index through their recent reconstitution. Now I will turn the call over to Imang to provide more color and our operational highlights.

Thanks, Larry. I'd like to add my welcome to those joining us today. We are happy to share that for the first time in our history, our GigaCloud marketplace GMV reached and surpassed $1 billion in the 12-months and the June 30th. Let's dig into that. For the trailing 12 months as of June 30, GigaCloud marketplace GMV increased by over 80%, eclipsing our first quarter growth by approximately 17 percentage points. This momentum was driven by a remarkable increase in our buyer and seller base. We welcomed 265 new sellers and 2,906 new buyers on a net basis, expanding our 3P seller community by nearly 40% to a total of 930, and our buyer base by a record-breaking 67% year over year to 7,257 at the end of the second quarter. Furthermore, average buyer spending climbed .3% to more than $151,000, demonstrating the increasing engagement of our marketplace participants and the additional value our platform provides. By all metrics, our marketplace is thriving, and we see many opportunities to continue this trajectory. Our average buyer spend as a whole decreased slightly compared to Q1 due to the uptick in recent growth as we have observed a significant influx of over 900 buyers to our marketplace in the last quarter, whom we typically expect to start at lower initial trading volume. Average spend per buyer for participants that joined us prior to Q2 have continued to increase on a sequential basis. GMV and our 3P marketplace grew 76% from a year ago and totaled approximately $572 million for the trailing 12 months and the June 30, 2024. 3P sellers accounted for .1% of our total marketplace GMV for the same period. Combined with our one-piece strategy, we have the pieces in place to continue growing the GigaCloud marketplace while further improving efficiency and value for all participants. As I mentioned last quarter, our growth resulted from GigaCloud's highly robust technology suite that transforms and facilitates the way suppliers and retailers of large parcel and non-standard items connect and transact. Now I'd like to give you a progress update on our BAS offering, which was officially launched in the second quarter with our ecosystem brand Christopher Knight Home. We built this unique solution to provide furniture suppliers with a streamlined and efficient way to build their brands, which has been a long-standing challenge throughout the industry. We have observed significant enthusiasm and interest in our BAS program since we announced it. We have successfully launched the initial pilot phase with a carefully selected group of eight marketplace sellers. The overall level of additional strong interest from both existing and new sellers has far exceeded our expectations. This early momentum reinforces our belief that BAS will be a powerful tool in strengthening and expanding our service offerings, empowering marketplace participants with a diverse toolbox to drive growth and success. Last quarter, we discussed addressing accelerating demand through the expansion of our fulfillment footprint. Our global fulfillment network has 42 prime locations in five countries, comprising of more than 10 million square feet of fulfillment space. We are driving efficiencies in transactions among marketplace participants, and our established fulfillment centers across the US are averaging over 90% utilization rate. And we are actively seeking additional space to accommodate continued rapid growth. Our integrations of Noble House and WonderSign are moving forward nicely and as planned. In the second quarter, we introduced Noble House related SKUs to our marketplace, which contributed approximately $57 million at GMV in the three months ended June 30, 2024. Currently, only 5% of the SKUs are accessible to our external buyers, with the majority remaining with the original Noble House channels. Moving forward, we plan on gradually opening up these SKUs to external participants. As communicated previously, we expect to achieve break even with Noble House later this year, with anticipated profitability in the first half of 2025. We are extremely bullish on our marketplace and the opportunities ahead. GigaCloud disrupted the B2B online marketplace with a unique business model that connects buyers and sellers of large parts of merchandise to efficiently grow their own businesses in a cost effective way. Now, I will turn the call over to David for a more detailed review of our financial results. David.

Thanks, Man. I'll now walk through our second quarter numbers in more detail. Please note that all figures quoted have been rounded. Our second quarter results demonstrate strong execution against our growth strategy. Total revenue is more than doubled year over year to $311 million in Q2, an increase roughly of 24% on a sequential basis. This is a direct result of our ongoing efforts to expand our marketplace product and service offerings and of our ability to capture growing market opportunities. Diving deeper into the revenue specifically, service revenues from GigaCloud 3P grew more than 97% to 85 million, a direct reflection of enhanced engagement of our marketplace participants. Product revenues grew more than 105% to $225 million in Q2, we're pleased to report that our strategic investments from the previous year are yielding strong revenue returns. The impressive performance of the NovoHouse Outdoor Product Line contributed significantly to our second quarter sales, highlighting the effectiveness of our growth strategy. Furthermore, our fastest growing European markets continue to lead the way in product sales growth, achieving 139% year over year growth. Cost of revenues were $234 million for the second quarter compared with $113 million, while the absolute amount increased as a reflection of the investment we've made to support the soaring demand of our marketplace. The percentage to total revenues of 75% remained relatively stable for the second quarter compared to last year, demonstrating our ability to manage costs effectively and this rapid growth and changing environment. Gross profit for the second quarter increased approximately 90% to $76 million, gross margin percentage contracted slightly as we continue to build our fulfillment infrastructure with newly leased centers ramping up to full operational efficiencies. Additionally, increased delivery costs and temporary industry-wide ocean freight rates spiked in late April and May. However, we observed a moderation in rates during July and remain vigilant in monitoring this dynamic. Total operating expenses amount to $49 million for the second quarter compared with $17 million. Such expenses are associated with our ongoing infrastructure development required to meet growing demand of our B2B platform. Pricking this down further, selling and marketing expenses were $19 million compared with $10 million driven mainly by higher staffing-related costs, higher commissions and advertising costs and higher platforms service fees paid to certain third-party e-commerce websites. General and admin expenses totaled $26 million compared with $7 million last year. This increase primarily was due to the concentrated granting and investing of our share-based awards, higher staffing costs, including R&D efforts to accommodate expansion of our business, higher professional service fees and increase in rental expense related to fulfillment centers and also the set of expense required to bring our new fulfillment centers fully operational. A major component of our G&E expenses related to our people-centric approach. We believe our employees are our greatest asset and we strategically invest in their development and growth. To attract, retain and incentivize top talents, our compensation programs includes share-based awards, which have traditionally been granted in the second quarter of each fiscal year with the majority of grant investing immediately in the same quarter upon grant. Share-based awards expense total $13.9 million compared to $1.5 million last year as the company share price increased significantly year over year. The impact of these strategic investments and the industry-wide ocean shipping costs is reflected in our net income margin. We remain confident in our ability to deliver sustained profitability as our financial performance remains strong across key metrics. Our net income grew nearly 47% to $27 million. Adjusted EBITDA demonstrated robust growth, increasing approximately 72% to $43 million in the second quarter. Adjusted EBS for the quarter increased 69% to $1.03. We're strong in our cash positions and continue to generate strong positive cash flows with our effective cash manage strategy. At the end of June, our cash equivalents, restricted cash and investments position was $209 million. We have strategically allocated $10 million in capex during the second quarter, which primarily relates to facility preparation to enhance our global fulfillment capabilities. We remain debt-free with no outstanding borings and the liabilities on our balance sheet primarily related to our fulfillment center leases, which have increased considerably to support our substantial growth. I'll wrap things up with our outlook for the third quarter where we anticipate revenues will be in the range of $266 million to $282 million. Thank you all for joining us today, operator. We're ready for questions. Thank you.

Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. The first question comes from Ryan Myers from Lake Street Capital Markets. Please go ahead.

Hey guys, thank you for taking my question. First one for me, I just kind of want to unpack the second quarter revenue number. Obviously you guys came in well ahead of your expectations. Maybe just kind of walk us through, provide a little bit more detail on what you saw during the quarter, where ultimately you were able to report numbers that were better than what you originally expected.

Yeah, absolutely. Perhaps I'll take a stab and others please feel free to chime in. Like I said earlier, we're integrating the Noble House business and Noble House is very strong in the outdoor section. And we are able to increase that portion into our entire SKU portfolio. And we mentioned earlier that Noble House related SKUs were added into the B2B marketplace. And that amounts to roughly 57 million in GMB. And that's really kind of what kind of blew out the quarter for us.

Okay, got it. That's helpful. And then kind of thinking about that as well as we think about the third quarter guidance, I mean, what would you need to maybe see to come in at the high end of that range or even third then that initially guided range? Is it more Noble House integration or is it just an improvement to the overall kind of GMB across the business? Just kind of help me think about that.

Yeah, I guess it's all the above. I think when we were projecting how Q3 is gonna look like for us, we incorporate what we think Noble House is gonna contribute to the quarter. And obviously the evolution and the growth and the expansion of the B2B, the organic marketplace. So I guess it's both organic and inorganic growth that we put into consideration when we projected our Q3 outlook.

Okay, got it. And then last question for me, I know freight rates have been a drag on the gross margins. Just kind of walk us through maybe how we should be thinking about gross margins for Q3 and Q4 as freight rates are completely changing for you guys.

Yeah, I think, well, I think if you look at the current freight rate, you'll see that it's actually gradually normalizing. It's still on the higher end. And we had a fixed rate contract that we mentioned in our last earnings call that is already in place and in execution. So I think there will be some compression to margin overall, but we don't expect that to be significant in magnitude.

Okay, got it. Thank you for taking my questions.

Absolutely, thank you.

Thank you. Once again, if you wish to ask a question, please press star one on your telephone. Your next question comes from Matt Coranda from Ross Capital. Please go ahead.

I guess, some noble house, you mentioned, I guess, 5% of the SKUs available to buyers in the marketplace, and that's generating already, I guess, 57 million in GMB. So how long until we see 100% of the SKUs available on the marketplace? And then, should we assume sort of a rateable revenue improvement once you make all of those SKUs available to the marketplace? So.

Iman, you wanna take that one?

Sure. Hi, Matt. So with noble house, the intention is to preserve the existing sales channel as of right now. So we're slowly and gradually utilizing the marketplace to open up the SKUs in a calculated way to the marketplace participants. And we have ongoing plans to do this on a regular basis. And you should see more of the top line kind of slowly contribute in that sense. Okay.

Okay. Maybe I'll ask you a minute, Larry. I think the idea we're having is we're trying to balance and utilizing the marketplace to help in the noble house product to generate incremental growth in their sales. But at the same time, we're also trying to prioritize our relationship with the major B2B channels that the noble house used to have a strong relationship with. So the idea is, I think probably we're going to make 20, 30% of the noble house product available on the marketplace. But we're trying to keep the majority of them with the major B2C partners we're having.

Okay.

All right. That's helpful. Thanks, Larry.

And then just, I guess inventory is building a little bit more quarter over quarter. And just wanted to hear sort of the drivers there. I would assume you're bringing in additional SKUs from noble house, but maybe just talk about what you're doing on the inventory front with noble house and the core business.

Yeah, this is Larry. I will take this one. I think we understand, although the turn of the noble house product is usually, because it's a little bit slower than the bigger product, but we still place a pretty sizable order to the whole supply chain of the noble house, because we understand just because of the bankruptcy, our vendors need those kinds of funding. And also the same time that we also try to provide the confidence to our channel partners. But we will gradually try to improve the turn of the noble house product, try to get those turn efficiency to be close to our traditional Giga products as closely, as possible. The other reason is usually when the ocean shipping price goes up because of the cost we're paying for an ocean product, although the quantity of the products keep the same, but usually because of the increase of ocean shipping, the dollar value could increase for that reason. That's also happened for the last time when the ocean shipping cost went up. And check our historical data to get the idea of that mechanism. Okay,

all right, got it. On the outlook, I guess maybe I'll ask it this way. One, why the sequential revenue decline in the third quarter relative to the second? I guess that breaks the trend that you guys have been on, the nice trend over the last couple of years. So maybe just speak to sort of why we see that declining sequentially. And then also maybe if you could, I'd love to hear you just break out service versus product expectations, just because product does seem to be becoming a little bit more important with noble house and you guys generating more revenue both on and off platform from noble house.

Yeah, I think the first thing is I need to point out the noble house business has a strong seasonality because they're strong with outdoor furniture. So the contribution for Q2 is a very significant from their legacy business. But definitely for that part is where we're seeing the Q3 sales number won't be as strong as Q2 for the noble house product. At the same time, I think everybody understand that the whole industry have been experiencing very strong headwinds for quite a while in the past, I think more than one year. So for the furniture industry as a whole that we're very cautious about managing our growth and also the resources that we're putting in. So that's the reason you're seeing the sequential growth where we're providing.

Okay, got it. Maybe last one really quickly just, if you could touch on the margin trajectory into the third quarter, maybe what the outlook may imply. David earlier you mentioned you don't expect as much of an impact from the recent ocean freight increase. Maybe can you just put a finer point on why not, this why things are a little bit different this time around?

Yeah, Matt, as I mentioned, we have a fixed rate contract that we signed with various shipping companies, which we never had, I guess two years ago when we saw ocean shipping rates surge. So this time we're different, we're hedged, we're protected. Obviously we're not hedged 100% of the volume, but because we have some of these fixed rate contracts we're better protected on any further surge in ocean shipping rates.

And any characterization of how far out we're hedged? I would assume these are annual sort of contracts, so maybe it works out through this year, but any company can provide folks around sort of timing duration of that hedge?

I'm not sure if I could disclose too much. I mean, obviously these are pretty sensitive contracts, but what I can say is we have a pretty sizable of our volume being hedged using these fixed price contracts.

Okay, got it. Yeah, I think several things that happened just because of the hedging mechanism. One is obviously that there's a good chance that we can see that our ocean shipping revenue, that the margin, there's a chance that we can see improvement because of the difference of spot rates and the contract rates is getting wider. So, but it's the same time that for our 1P business, the cost is kind of what we negatively impacted for the 1P cost, but at the same time, we will try to introduce new product and try to get the opportunity to do the pricing based on the updated or new ocean shipping costs. So that's the few things that will happen at the same time. So a little bit kind of complicated situation, but you try to sum up everything that we see probably moderate and kind of pressure of the margin, but because the hedging mechanism and the pricing, repricing opportunity and different direction that the 1P and 3P business margin will go, I think that's a reason that the David expect that the change won't be as crazy as we saw in the last time that the ocean shipping already went up.

Okay, helpful, Larry, thank you.

Thank you, once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Thomas Forte from Maxim Group, please go ahead.

Great, thanks, so congrats Larry and see you on the quarter. I have three questions, I'll go one at a time. For my first question, I wanted to ask the one I get asked most often by investors, what is enabling you to outperform the category by such a large margin? Your sales growth in the second quarter is more than 100% and the home category was down more than 10%. And then what gives you confidence you can continue to take market share in the future?

I think the key reason is we're introducing a new business model that obviously, it's proved to be a one that's providing better efficiency in the supply chain. I think that's the key reason that we don't do business in the way that most of companies do it. I think that's the most fundamental reason, but obviously that you see those kind of a difference in the efficiency from company to company. So the quality of management also, a contributor to those the difference. I think the major one is a business model. The minor one would be, I think the way we'll manage the company, I would say that.

Thanks Larry for that. On my second question, you noticed gross margin pressure from new warehouse additions. Historically, how has the optimization improved over time for new warehouses?

Maybe I can take a stab at this one.

Typically with a new leased facility, before it becomes fully operational, it takes approximately four to six months for us, as far as the racking and the whole process goes. And that includes like all this shelving, the forklift, the rental, staffing, and there's a ramp up period of four to six months, I would say.

Excellent. And then for my third and final question, can you give your current thoughts on strategic M&A, both from the opportunity standpoint and your strategy?

Yeah, this Larry, maybe I take this one. I think we'll be focusing on looking for opportunity that either can help grow the volume in the ecosystem or to help us to expand the reach of the new warehouse. Of our ecosystem, I think Noble House and Wondersign are two very good examples for that kind of idea. I think Noble House was the one that helped us to bring in a lot of new SKU that we were not strong with, especially outdoor. And Wondersign is a solution company that will help our customer to get the best out of it. And then we can get a better reach that they didn't have to before. I think that's two very good examples that we had with our M&A strategy.

Great, thank you, Larry.

Thank you.

Thank you. Your next question comes from Sean Liu from Panoramic Capital. Please go ahead.

Hi, Larry, you mentioned an increase in stock-based awards earlier. Can you talk a bit more on this? Seems like it's concentrated in Q2, but I want to just make sure I'm standing correctly. Are we expecting the same awards in the following quarters?

Usually, the majority of the stock-based compensation will happen in Q2 because most of those stock-based compensation is highly performance-based. So when we have access to all the data from the previous year, that will reward those contributors in the team based on that new performance data. That's the reason why that you're seeing majority of the stock-based concentration. A stock-based compensation that happened in Q2. So as David explained, I think the increase, most of them were caused by the increase of the stock price. Although the shares awarded didn't change too much, but actually because the stock price went up so much, so that's absolute number increase. And then another reason is, actually I didn't pay myself stock in the previous year because as a CEO, I just feel I should be responsible for the relatively, not really kind of very exciting result for the 2022. As a CEO, I think I should take that responsibility. So I didn't get any stock-based compensation for that year, but for 2023, I think we delivered pretty impressive financial results. So I also got compensated for the performance of what I did for 2023. I think these are the two major factors that impacted the stock-based compensation number you're seeing.

Thank

you, Larry.

Thank you. There are no further questions at this time. I'll now hand back to David for closing remarks.

Great. Thank you all for your continued support. We're excited about our recent growth and future prospects, and we look forward to speaking with you again next quarter. If you have any questions, please feel free to reach out to the team. Thank you all.

Thank you. That does conclude our call. Thank you for joining us for this conference for today. Thank you for participating. You may now disconnect.

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you. Thank you. Thank you. Thank you. Thank you. Thank you all for standing by. Welcome to GigaCloud Technology's second quarter 2024 earnings conference call. During today's call, all participants will be in listen only mode. Joining us today from GigaCloud Technology are the company's founder, chairman and CEO, Larry Wu, its president, Dr. Iman Shrock and its chief financial officer, David Lau. Iman will give a performance and operational overview and David will share the financial results. After that, there will be a question and answer session. As a reminder, this conference call contains statements about future events and expectations that are forward looking in nature and actual results may differ materially. Additionally, today's call and webcast will include non-GAAP financial measures within the meaning of SEC Regulation G. When required, reconciliation of all non-GAAP financial measures to the most direct comparable financial measures calculated and presented in accordance with GAAP can be found in today's press release as well as on the company's website. With that, I would like to turn the call over to Larry for opening remarks. Please go ahead.

Thank you operator and welcome everyone to today's call. This quarter markets a significant milestone for our company as we achieve the record revenue growth for the sixth consecutive quarter. Additionally, despite the industry-wide challenge including 7% year over year decline in retail furniture sales in the first half of the 20.4 in the United States and the elevated ocean shipping costs or adjusted EBITDA increased substantially. These results underscore the strong demand for our marketplace and its ability to streamline the efficiency of the wholesale global supply chain and while we connect the buyer and sellers of large non-standard items seamlessly around the globe. Our acquisition of the Nobel House and the Wunderstein and the launch of our first industry first BAS or branding the service are already contributing to our success. In the second quarter, we successfully introduced a noble house related as key use to our marketplace with contributed approximately $57 million in GMV. The first half of this year has been extremely productive and the we are driving continue the progress sustainable and the profitable growth as a leader and the disruptor of the e-commerce technology solution. We were honored to be added to the Russell 2000 index through their recent reconstitution. Now I will turn the call over to Iman to provide more color and our operational highlights.

Thanks, Larry. I'd like to add my welcome to those joining us today. We are happy to share that for the first time in our history, our giga cloud marketplace GMV reached and surpassed $1 billion in the 12 months ended June 30th. Let's dig into that. For the trailing 12 months as of June 30, giga cloud marketplace GMV increased by over 80%, eclipsing our first quarter growth by approximately 17 percentage points. This momentum was driven by remarkable increase in our buyer and seller base. We welcome 265 new sellers and 2,906 new buyers on a net basis, expanding our three piece seller community by nearly 40% to a total of 930. And our buyer base by a record breaking 67% year over year to 7,257 at the end of the second quarter. Furthermore, average buyer spending climbed .3% to more than $151,000, demonstrating the increasing engagement our marketplace participants and the additional value our platform provides. By all metrics, our marketplace is thriving and we see many opportunities to continue this trajectory. Our average buyer spend as a whole decreased slightly over compared to Q1 due to the uptick in recent growth as we have observed a significant influx of over 900 buyers to our marketplace in the last quarter, whom we typically expect to start at lower initial trading volume. Average spend per buyer for participants that joined us prior to Q2 have continued to increase on a sequential basis. GMV in our three P marketplace grew 76% from a year ago and totaled approximately $572 million for the trailing 12 months and the June 30, 2024. Three piece sellers accounted for .1% of our total marketplace GMV for the same period. Combined with our one piece strategy, we have the pieces in place to continue growing the GigaCloud marketplace while further improving efficiency and value for all participants. As I mentioned last quarter, our growth resulted from GigaCloud's highly robust technology suite that transforms and facilitates the way suppliers and retailers of large parcel and non-standard items connect and transact. Now I'd like to give you a progress update on our BAS offering, which was officially launched in the second quarter with our ecosystem brand, Christopher Knight Home. We built this unique solution to provide furniture suppliers with a streamlined and efficient way to build their brands, which has been a longstanding challenge throughout the industry. We have observed significant enthusiasm and interest in our BAS program since we announced it. We have successfully launched the initial pilot phase with a carefully selected group of eight marketplace sellers. The overall level of additional strong interest from both existing and new sellers has far exceeded our expectations. This early momentum reinforces our belief that BAS will be a powerful tool in strengthening and expanding our service offerings, empowering marketplace participants with a diverse toolbox to drive growth and success. Last quarter, we discussed addressing accelerating demand through the expansion of our fulfillment footprint. Our global fulfillment network has 42 prime locations in five countries, comprising of more than 10 million square feet of fulfillment space. We are driving efficiencies in transactions among marketplace participants, and our established fulfillment centers across the US are averaging over 90% utilization rates. And we are actively seeking additional space to accommodate continued rapid growth. Our integrations of Noble House and Wondersign are moving forward nicely and as planned. In the second quarter, we introduced Noble House related SKUs to our marketplace, which contributed approximately $57 million at GMV in the three months ended June 30, 2024. Currently, only 5% of the SKUs are accessible to our external buyers, with the majority remaining with the original Noble House channels. Moving forward, we plan on gradually opening up these SKUs to external participants. As communicated previously, we expect to achieve break even with Noble House later this year, with anticipated profitability in the first half of 2025. We are extremely bullish on our marketplace and the opportunities ahead. GigaCloud disrupted the B2B online marketplace with a unique business model that connects buyers and sellers of large parts of merchandise to efficiently grow their own businesses in a cost-effective way. Now, I will turn the call over to David for a more detailed review of our financial results. David.

Thanks, Aman. I'll now walk through our second quarter numbers in more detail. Please note that all figures quoted have been rounded. Our second quarter results demonstrate strong execution against our growth strategy. Total revenue is more than doubled year over year to $311 million in Q2, an increase roughly of 24% on a sequential basis. This is a direct result of our ongoing efforts to expand our marketplace product and service offerings and of our ability to capture growing market opportunities. Diving deeper into the revenue specifically, service revenues from GigaCloud 3P grew more than 97% to 85 million, a direct reflection of enhanced engagement of our marketplace participants. Product revenues grew more than 105% to $225 million in Q2. We're pleased to report that our strategic investments from the previous year are yielding strong revenue returns. The impressive performance of the NovoHouse Outdoor Product Line contributed significantly to our second quarter sales, highlighting the effectiveness of our growth strategy. Furthermore, our fastest growing European markets continue to lead the way in product sales growth, achieving 139% year over year growth. Cost of revenues were $234 million for the second quarter compared with $113 million, while the absolute amount increased as a reflection of the investment we've made to support the soaring demand of our marketplace. The percentage to total revenues of 75% remained relatively stable for the second quarter compared to last year, demonstrating our ability to manage costs effectively and this rapid growth and changing environment. Gross profit for the second quarter increased approximately 90% to $76 million. Gross margin percentage contracted slightly as we continue to build our fulfillment infrastructure with newly leased centers ramping up to full operational efficiencies. Additionally, increased delivery costs and temporary industry-wide ocean freight rates spiked in late April and May. However, we observed a moderation in rates during July and remain vigilant in monitoring this dynamic. Total operating expenses amount to $49 million for the second quarter compared with $17 million. Such expenses are associated with our ongoing infrastructure development required to meet growing demand of our B2B platform. Bricking this down further, selling and marketing expenses were $19 million compared with $10 million driven mainly by higher staffing-related costs, higher commissions and advertising costs in higher platforms to service fees paid to certain third-party e-commerce websites. General and admin expenses totaled $26 million compared with $7 million last year. This increase primarily was due to a concentrated granting and vesting of our shared base awards, higher staffing costs including R&D efforts to accommodate expansion of our business, higher professional service fees and increase in rental expense related to fulfillment centers and also the set of expense required to bring our new fulfillment centers fully operational. A major component of our G&E expenses related to our people-centric approach. We believe our employees are our greatest asset and we strategically invest in their development and growth To attract, retain and incentivize top talents, our compensation programs includes shared base awards, which have traditionally been granted in the second quarter of each fiscal year with a majority of grant investing immediately in the same quarter upon grant. Shared base awards expense total $13.9 million compared to $1.5 million last year as the company share price increased significantly year over year. The impact of these strategic investments and the industry-wide ocean shipping costs is reflected in our net income margin. We remain confident in our ability to deliver sustained profitability as our financial performance remains strong across key metrics. Our net income grew nearly 47% to $27 million. Adjusted EBITDA demonstrated robust growth, increasing approximately 72% to $43 million in the second quarter. Adjusted EBS for the quarter increased 69% to $1.03. We're strong in our cash positions and continue to generate strong positive cash flows with our effective cash manage strategy. At the end of June, our cash equivalence, restricted cash and investments position was $209 million. We have strategically allocated $10 million in capex during the second quarter, which primarily relates to facility preparation to enhance our global fulfillment capabilities. We remain debt-free with no outstanding borings and the liabilities on our balance sheet are primarily related to our fulfillment center leases, which have increased considerably to support our substantial growth. I'll wrap things up with our outlook for the third quarter where we anticipate revenues will be in the range of $266 million to $282 million. Thank you all for joining us today, operator. We're ready for questions. Thank you.

Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. The first question comes from Ryan Myers from Lake Street Capital Markets. Please go ahead.

Hey guys, thank you for taking my question. First one for me, I just kind of want to unpack the second quarter revenue number. Obviously you guys came in well ahead of your expectations. Maybe just kind of walk us through, provide a little bit more detail on what you saw during the quarter, where ultimately you were able to report numbers that were better than what you originally expected.

Yeah, absolutely. Perhaps I'll take a stab and others please feel free to chime in. Like I said earlier, we're integrating the Noble House business and Noble House is very strong in the outdoor section and we are able to increase that portion into our entire SKU portfolio. And we mentioned earlier that Noble House related SKUs were added into the B2B marketplace and that amounts to roughly 57 million in GMB. And that's really kind of what kind of blew out the quarter for us.

Okay, got it. That's helpful. And then kind of thinking about that as well as we think about the third quarter guidance, I mean, what would you need to maybe see to come in at the high end of that range or even third then that initially guided range? Is it more Noble House integration or is it just an improvement in the overall kind of GMB across the business? Just kind of help me think about that.

Yeah, I guess it's all the above. I think when we were projecting how Q3 is gonna look like for us, we incorporate what we think Noble House is gonna contribute to the quarter. And obviously the evolution and the growth and the expansion of the B2B, the organic marketplace. So I guess it's both organic and organic growth that we put into consideration when we projected our Q3 outlook.

Okay, got it. And then last question for me, I know freight rates have been a drag on the gross margins. Just kind of walk us through maybe how we should be thinking about gross margins for Q3 and Q4 as freight rates are constantly changing for you guys.

Yeah, I think, well, I think if you look at the current freight rate, you'll see that it's actually gradually normalizing. It's still on the higher end. And we had a fixed rate contract that we mentioned in our last earnings call that is already in place and in execution. So I think there will be some compression to margin overall, but we don't expect that to be significant in magnitude.

Okay, got it. Thank you for taking my questions.

Absolutely, thank you.

Thank you. Once again, if you wish to ask a question, please press star one on your telephone. Your next question comes from Matt Coranda from Ross Capital. Please go ahead.

I guess, some noble house, you mentioned, I guess, 5% of the SKUs available to buyers in the marketplace, and that's generating already, I guess, 57 million in GMB. So how long until we see 100% of the SKUs available on the marketplace? And then, should we assume a sort of a rateable revenue improvement once you make all of those SKUs available to the marketplace?

Iman, you wanna take that one?

Sure. Hi, Matt. So with noble house, the intention is to preserve the existing sales channel as of right now, so we're slowly and gradually utilizing the marketplace to open up the SKUs in a calculated way to the marketplace participants, and we have ongoing plans to do this on a regular basis, and you should see more of the top line kinda slowly contribute in that sense. Yeah. Okay.

Maybe I'll just come in there, Larry. I think the idea we're having is we're trying to balance and utilizing the marketplace to help the noble house product to generate incremental growth in their sales, but at the same time, we're also trying to prioritize our relationship with the major B2B channels that the noble house used to have a strong relationship with. So the idea is I think probably we're going to make 20, 30% of the noble house product available on the marketplace, but we're trying to keep the majority of them with the major B2C partners we're having.

Okay,

all right, that's helpful, thanks Larry.

And then just, I guess inventory is building a little bit more quarter over quarter, and just wanted to hear sort of the drivers there. I would assume you're bringing in additional SKUs from noble house, but maybe just talk about what you're doing on the inventory front with noble house and the core business.

Yeah, this is Larry. I will take this one. I think we understand although the turn of the noble house product, usually it's a little bit slower than the bigger product, but we still placed a pretty sizable order to the whole supply chain of the noble house because we understand just because of the bankruptcy, our vendors need those kind of funding, and also at the same time that we also try to provide the confidence to our channel partners. But we will gradually try to improve the turn of the noble house product, try to get those turn efficiency to be close to our traditional Giga products as closely as possible. The other reason is usually when the ocean shipping price goes up because of the cost we're paying for an ocean product, although the quantity of the products keep the same, really because of the increase of ocean shipping, the dollar value could increase for that reason. That's also happened for the last time when the ocean shipping cost went up. You can check our historical data to get the idea of that mechanism.

Okay,

all

right, got it. On the outlook, I guess maybe I'll ask it this way. One, why the sequential revenue decline in the third quarter relative to the second? I guess that breaks the trend that you guys have been on, the nice trend over the last couple of years. So maybe just speak to sort of why we see that declining sequentially, and then also maybe if you could, I'd love to hear you just break out service versus product expectations, just because product does seem to be becoming a little bit more important with Noble House and you guys generating more revenue both on and off platform from Noble House.

Yeah, I think the first thing is I need to point out the Noble House business has a strong seasonality because they're strong with outdoor furniture. So the contribution for Q2 is very significant from their legacy business, but definitely for that part is where we're seeing the Q3 sales number won't be as strong as Q2 for the Noble House product. At the same time, I think everybody understand that the whole industry have been experiencing very strong headwinds for quite a while in the past. I think more than one year. So for the furniture industry as a whole, that we're very cautious about managing our growth and also the resources that we're putting in so that that's the reason you're seeing the sequential growth we're providing.

Okay, got it. Maybe last one really quickly just if you could touch on the margin trajectory into the third quarter, maybe what the outlook may imply. I know David earlier you mentioned you don't expect as much of an impact from the recent ocean freight increase. Maybe can you just put a finer point on why not? This, why things are not going so well? Why are you not seeing any of those that are a little bit different this time around?

Yeah, Matt, as I mentioned, we have a fixed rate contract that we signed with various shipping companies, which we never had, I guess two years ago when we saw ocean shipping rates surge. So this time we're different, we're hedge, we're protected. Obviously we're not hedge 100% of the volume, but because we have some of these fixed rate contracts, we're better protected on any further surge in ocean shipping rates.

And how far, any characterization of how far out we're hedged? I would assume these are annual sort of contracts, so maybe it works out through this year, but any comfort you can provide folks around sort of timing, duration of that hedge?

I'm not sure if I could disclose too much. I mean, obviously these are pretty sensitive contracts, but what I can say is we have a pretty sizable of our volume being hedged using these fixed price contracts.

Okay, got it. Yeah, I think several things happened just because of the hedging mechanism. One is obviously that there's a good chance that we can see that the ocean shipping revenue, that the margin, there's a chance that we can see improvement because of the difference of spot rates and contract rates is getting wider. So, but it's the same time that for our one P business, the cost is kind of what we negatively impacted for the one P cost, but at the same time, we will try to introduce new product and try to get the opportunity to do the pricing based on the updated or new ocean shipping costs. That's the few things that will happen at the same time. So a little bit kind of complicated situation, but you try to sum up everything that we see, probably moderate and kind of pressure of the margin, but because the hedging mechanism and the repricing opportunity and different direction that the one P and three P business margin will go, I think that's a reason that they expect that the change won't be as crazy as we saw in the last time that the ocean shipping rate went up.

Okay, helpful Larry, thank you.

Thank you, once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Thomas Forte from Maxim Group, please go ahead.

Great, thanks, so congrats Larry and team on the quarter. I have three questions, I'll go one at a time. For my first question, I wanted to ask the one I get asked most often by investors, what is enabling you to outperform the category by such a large margin? Your sales growth in the second quarter is more than 100% and the home category was down more than 10%. And then what gives you confidence you can continue to take market share in the future?

I think the key reason is we're introducing a new business model that obviously proved to be a one that's providing better efficiency in the supply chain. I think that's the key reason that we don't do business in the way that most of companies doing it. I think that's the most fundamental reason, but obviously that you see those kind of a difference in the efficiency from company to company. So the quality of management also a contributor to those difference. I think the major one is a business model, the minor one would be, I think the way we'll manage the company, I would say that.

Thanks Larry for that. On my second question, you noticed gross margin pressure from new warehouse additions. Historically how has the optimization improved over time for new warehouses?

Maybe I can take a stab at this one.

Typically with a new leased facility, before it becomes fully operational, it takes approximately four to six months for us, as far as the racking and the whole process goes. That includes all this shelving, the forklifts, the rental, staffing, and there's a ramp up period of four to six months, I would say.

Excellent, and then for my third and final question, can you give your current thoughts on strategic M&A, both from the opportunity standpoint and your strategy?

Yeah, Larry, maybe I take this one. I think we'll be focusing on looking for opportunity that either can help grow the volume in the ecosystem or to help us to expand the reach of our ecosystem. I think Noble House and Wondersign are two very good examples for that kind of idea. I think Noble House was the one that helped us to bring in a lot of new SKU that we were not strong with, especially outdoor, and Wondersign is a solution company that will help our customer to get a better reach that they didn't have to before. I think that's two very good examples that we had with our M&A strategy.

Great, thank you, Larry.

Thank you.

Thank you, your next question comes from Sean Liu from Panoramic Capital, please go ahead.

Hi, Larry, you mentioned an increase in stock-based awards earlier. Can you talk a bit more on this? Seems like it's concentrated in Q2, but I just want to make sure I'm standing correctly. Are we expecting the same awards in F1, F2, F3, F4, the following quarters?

Usually, the majority of the stock-based compensation will happen in Q2 because most of those stock compensation is highly performance-based. So when we have access to all the data from the previous year, that we will reward those contributors in the team based on that new performance data. That's the reason why that the URC majority of the stock-based concentration, a stock-based compensation that happened kind of a concentrate in Q2. So as David explained, that I think the increase is, most of them were caused by the increase of the stock price, although the shares awarded didn't change too much, but actually because the stock price went up so much, so that's absolute number increase. And then another reason is, actually I didn't pay myself stock in the previous year because as a CEO, I just feel I should be responsible for the relatively, not really kind of very exciting result for the 2022. As a CEO, I think I should take that responsibility. So I didn't get any stock-based compensation for that year, but for 2023, I think we delivered pretty impressive financial results. So I also got compensated for the performance I did for 2023. I think these are the two major factors to the impact of the stock-based compensation number you're seeing.

Thank

you, Larry.

Thank you. There are no further questions at this time. I'll now hand back to David for closing remarks.

Thank you. Thank you all for your continued support. We're excited about our recent growth and future prospects, and we look forward to speaking with you again next quarter. If you have any questions, please feel free to reach out to the team. Thank you all.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.