GigaCloud Technology Inc

Welcome to GigaCloud Technologies' second quarter 2025 earnings conference call. Joining us today from GigaCloud are the company's founder, Chief Executive Officer and Chairman Larry Wu, its President Iman Shrock, and its Chief Financial Officer Erica Wei. Larry will begin with some opening remarks, Iman will discuss the company's operational progress, and Erica will review financial results. After that, we will open the call to questions. As a reminder, this conference call contains statements about future events and expectations that afford looking in nature, and actual results may differ materially. Additionally, today's call will include the discussion of non-GAAP measures within the meaning of SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in the press release issued today by GigaCloud, as well as on the company's website. I would now like to turn the call over to Larry. Please go ahead, sir.

Thank you, Operator, and welcome everyone to our call today. Let me start by saying what eventful quarter we had between supply chain disruption from terrorist hikes, a challenging industry backdrop, and the continued execution of our SKU rationalization initiatives. We had a few curveballs. Yet despite it all, we delivered strong results. Revenue increased by 4% year over year, exceeding our own expectations. And more importantly, we drove a greater share of that growth into bottom line performance, which grew 28% year over year. A few highlights on the key events of this quarter before we dive into details. We started this quarter facing heightened tariffs on our key sourcing countries, including Vietnam, China, and Malaysia. With the rapid changes that followed shortly after the initial announcement, the unprecedented level of uncertainty quickly led to disruptions in the overall ecosystem. A number of our three key partners halted shipping for several weeks, adopting the wait and see approach. And we had to act quickly to ensure our own competitive sourcing. Despite this challenge, we saw marketplace GMB grow by 31% on a trading 12 month basis. Rather than a setback, I see this event as a proving ground for the marketplace and the supplier for food retailing or SFR model, one designed to bring agility and efficiency to global trade. As I said last quarter, but there is repeating, a marketplace powered by SFR model is an adaptive channel agnostic ecosystem purpose built to allow participants to pivot quickly by creating new paths forward when old ones become hindered. In today's environment, where efficiency and flexibility aren't just advantages, but necessities, our value proposition is critical. Momentum in Europe continued to build, with the GMB up 59% year over year to support that demand, we recently opened an additional fulfillment center in Germany, which quickly becoming a key part of our global network. We're also seeing growing interest from our three key suppliers looking to diversify beyond the US market, especially in light of a recent trade tariff. A clear sign that Europe is shaping up to become more than just a growth market. Looking internally, our skewed rationalization effort for the Nova House portfolio are advancing, as we continue to purposefully streamline our product portfolio by facing all the low margin skews by replacing them with high performing profit driving product offering. Iman will share more details on this shortly. As we have communicated before, we have been and always will be focused on the growth. Now I will turn the call over to Iman to provide an update on our key operational goals.

Thank you, Larry. Despite continued market uncertainty, our marketplace once again delivered impressive results. For the trailing 12 months ending June 30th, 2025, GMB increased over 31%, surpassing $1.4 billion, as both sellers and buyers of large parcel goods capitalize on the advantages of our flexible SFR model. Our active three piece seller base continues to expand, standing at $1,162, up about 25% from last year. GMB from this group rose roughly 32% year over year on a trailing 12 month basis to $758 million. Our active buyer base maintains strong momentum, surpassing $10,000 for the first time to almost $11,000, an increase of approximately 51% year over year. As we continue to welcome a growing number of new buyers to our platform, we see a slight dip in average spend since newcomers typically start small before scaling up their activity over time. Europe continues to be one of our strongest growth areas. GMB in the region grew 59% year over year in the second quarter. While our one piece sales there remain robust, we are particularly excited about a notable and recent surge in interest from the three piece seller partners to enter this market. Historically, three piece activity has been largely focused on the US domestic market. But just in the past couple of months, we have seen a meaningful shift with three piece sellers now actively seeking expansion into Europe and other international markets as means to diversify their channels and better navigate evolving trade dynamics. Our platform and infrastructure empower our partner to scale quickly and efficiently without the burden of heavy capital commitments while remaining agile in a rapidly evolving environment. We are honored to be the partner they trust to facilitate this expansion and proud to play a role in their growth journey. This expansion of three feet to Europe is yet another example of giga clouds proven playbook. We go first. We enter new markets first through one P validate scalability profitability and only then do we bring in three key partners. By taking the lead, we ensure our partners step into a proven framework for success without the time investment risk or the risk associated with trial and error. Europe is emerging not only as a growth region, but as a strategic pillar of our global expansion. To support these demands in July, we opened an additional fulfillment center in Germany, our sixth in the country, bringing our global footprint to approximately 11.2 million square feet. Germany is now a vital hub for fulfillment across Europe. With more sellers looking expand, looking to expand beyond the US, we are scaling thoughtfully. Over time, we see Europe as having the potential of becoming a business of comparable scale and significance to our domestic US operations in the years ahead. Turning our attention to recent skill rationalization efforts, as we shared in our previous earnings, the legacy noble house operations have now been fully integrated into giga cloud. With everyone working as one team, once operational processes have been successfully streamlined, we turned our attention to the product portfolio. When we first acquired noble house out of bankruptcy, we inherited a portfolio of over 8000 skews that had been stale for more than a year, posing a significant challenge to profitability. Since then, our team has worked diligently to develop new skews that align with today's market demands. I am proud to share that as of today, we have retired 3800 outdated skews, introduced approximately 1200 new ones and continue to carry around 3000 original skews with plans to expand further throughout the year. In addition to new product offerings, we have also gained significant efficiencies by embracing the marketplace with this portfolio and benefiting from the differentiating advantages brought to us by the SFR business model. The strengthened skew lineup coupled with lean execution enabled by our marketplace has significantly improved the margin profile of noble house portfolio, now just three points behind legacy giga cloud. We remain focused on disciplined execution and by next summer, we expect portfolios to settle into a more stable rhythm, shifting from a full overhaul to a balanced ongoing cadence of skew refreshes and retirements, as is typical for any healthy product portfolio. Now I'd like to turn things over to Erica for a discussion of our second quarter financial results.

Thank you, Amon. And hello, everybody. A quick note before we dive in. All figures I cover today are rounded and unless otherwise noted, comparisons are against the same period last year. With that, let's take a look at this quarter's results. Total revenues grew 4% to 323 million as a result of increased market recognition and scale of our giga cloud marketplace. We will now break this down across our product and service revenue streams. Starting with product, total product revenue grew by approximately 5% year over year to 226 million, largely outpacing our expectations. Our main growth contributor this quarter was international momentum, once again led by Europe's impressive 59% year over year revenue growth. With this performance, Europe now represents roughly a quarter of our global revenue, underscoring its critical role in our diversified growth strategy. The strong growth seen in Europe was partially offset by an 11% decline in U.S. domestic product sales. Of this decline, approximately 5% was attributable to our proactive SKU rationalization efforts, and 6% was due to broader industry headwinds felt in the U.S. Notably, our outperformance was largely due to the legacy noble house portfolio. While we had initially modeled a larger year over year decline of revenue as we went through SKU rationalization, performance for this portfolio pleasantly surprised us and contributed a little under 25% to our global product sales. Product margin improved by 174 basis points sequentially to 29.2%. The main driver of this improvement was our recent efforts for the legacy noble house portfolio. Over the last 12 months, we have focused on introducing new products and SKUs that better align with customer demand while simultaneously benefiting from the efficiencies brought by the marketplace and our large network of suppliers. These efforts are now paying dividends, and we expect further benefits as we refine execution. Moving on to services. Service revenue grew modestly year over year at approximately 1%, reaching $97 million for the second quarter of 2025, driven by strong 3P GMV growth. Growth brought by overall volume increase was offset by lowered ocean freight revenue as we saw market spot rates decline compared to prior periods. And ocean shipping volume declined due to temporary disruptions in April and May, as many of our 3P suppliers halted shipments while waiting for policy clarity. Service margin came in at 11.4%, down sequentially by 4.5%, largely reflecting the impact of lowered ocean spot rates and lower warehousing utilization during the quarter, due to the temporary April and May supply chain disruptions discussed earlier. After the temporary slowdown in shipping demand driven by tariff related uncertainty, we have since seen volume largely return to their normal levels. On a company-wide basis, growth margin was .9% for the second quarter, a 50 basis point sequential expansion from the first quarter of 2025. Total operating expenses were 13% of total revenue, roughly in line with the first quarter, but substantially lower than 16% from prior year quarter. The year over year decrease was mainly a result of lower stock-based compensation in the current year. As you may recall, stock-based compensation is provided to most employees once a year and vests upon grant. As such, expense amount directly correlates with share price at the time of grant, which was lower than that of prior year. This year, we also adjusted our annual bonus structure by shifting from 100% stock-based bonus payments to a 50% stock and 50% cash bonus. This change was designed to reduce cell pressure from team members due to taxes, while still aligning incentives with company long-term performance. Net income grew to $35 million for the second quarter with net margin of 10.7%. We ended the second quarter with liquidity of nearly $300 million, which includes cash, cash equivalents, restricted cash, and short-term investments. To date, in 2025, we generated operating cash flows of $48 million, executed $46 million in share buybacks, and made net purchases of liquid investments consisting of Treasuries and deposits of approximately $20 million. And even with all that capital deployment, our liquidity position has remained largely steady compared to end of last year, which speaks to the strength of our cash generation and disciplined approach. We will be coming up on our three-year anniversary as a public company soon on August 18. I would like to take this as an opportunity to reflect on how we have deployed capital over the last three years. We received gross proceeds of $41 million from our IPO in 2022. Since then, we have executed $71 million in share buybacks and $87 million in strategic acquisitions to create value. We remain focused on this disciplined approach to support long-term growth strategies and returning shareholder value. Turning to our outlook for the third quarter, total revenue is expected to be between $295 million and $310 million. I would like to take a moment to discuss how recent tariff developments may impact the coming quarter. As we all know, April saw a short-lived but sharp spike in tariffs. While these tariffs have since stabilized, this resulted in cost increases for products procured during that period, which, as discussed last quarter, will largely cycle through our Q3 sales. As a result, we expect an around .5% gross margin headwind in the coming quarter. While we anticipate offsetting these cost pressures through targeted price increases, the supply chain will require some time to fully absorb and adjust to these changes. As a result, we may still see temporary near-term impact before normalization occurs. Thank you all for your time and attention today. With that, I will turn it over to the operator for Q&A.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Tom Forte with Maxim Group. Please go ahead.

Great. One question and one follow-up. Congratulations on the quarter. Can you give a little more details on Noval House's performance in the June quarter and then where you stand on your skew rationalization efforts as we enter the second half of 2025 as it pertains to Noval House?

Thank you, Tom. So, I think we've made pretty good progress with the skew rationalization efforts overall. Like Iman talked about earlier, we've since introduced 1,200 new skews and also trimmed down the overall portfolio to kind of remove a lot of the older ones that weren't contributing positively. So, the results of these efforts combined with kind of working that in with the marketplace and leveraging the efficiencies have really, I think, performed quite well in Q2. And overall, I think our project is a little bit ahead of schedule and it's kind of meeting meaningful margins a little earlier than we expected during the peak season of outdoors in Q2. Moving ahead, the skew rationalization efforts will be continued and hopefully by next Q2, which is the coming, the next peak sale season for outdoors, is when we expect the portfolio to reach kind of a stabilized stage where there's just a normal, stable amount of skews being retired and introduced rather than an entire overhaul.

Thank you. From my follow-up, we're hearing from suppliers that with the dynamic tariff environment, sometimes you're seeing things, for example, go from China to Southeast Asia and then successfully capture a lower tariff rate but then face a higher build cost. So, as it pertains to where your items are sourced from, how should we think about not just the tariff impact inside and outside China but the relative sourcing costs?

So, I think the key here is really flexibility, especially during times where things seem to change quite rapidly. And even though things are a little calmer now, there still is a decent amount of uncertainty. This is kind of what we have always focused on and one of the things we do best is maintaining strong relationships with a very, very large network of suppliers and having a dynamic portfolio that allows us to react quickly based on what current policies are and where we need to be sourcing from.

Thank you for taking my questions.

Thank you, Tom.

Your next question comes from Matt Coranda with Roth Capital. Please go ahead.

Thanks. Just on the second quarter, I'm curious where the upside to your initial guidance came from. Maybe do you want to discuss how things progressed through the quarter and what surprised you to the upside that dropped a strong execution in the second quarter?

Yeah. Thank you, Matt. So, the big surprise for us was Noble House. Originally, when we gave Q1 guidance, we were modeling in a larger -over-year decline because of the skew rationalization. We might have been a little bit conservative in our estimate given this is the first outdoor seasons that we've had the opportunity to try out all of our new skews and the performance was a bit better than expected.

Okay. And then the tariff impact that you mentioned toward the end of the prepared remarks, 2.5%, I assume that's gross margin headwind. Is that unmitigated so that you have essentially levers at your disposal to pull to offset some of that .5% to .5% as bad as it will get? Maybe just talk a little bit about the mitigation efforts.

Yep, that's right. That's unmitigated. So, the strategy is to moving down the line, have targeted price increases on certain products where market allows. But naturally, this isn't something that I think the entirety of the supply chain just adjust to and digest overnight. It'll likely take a bit of time and we don't know if the levers will allow us to absorb the .5% estimated headwind right away 100%.

Okay, I'll leave it there. Thank you.

Thank you. There are no further questions at this time and that does conclude our conference for today. Thank you for participating. You may now disconnect.