Tuya Inc. Q2 FY2021 Earnings Call

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Tuya Inc Second Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. We will be hosting a question and answer session after management's prepared remarks. And I will now turn the call over to the first speaker today, Mr. Reg Chai, Investor Relations Associate Director of Tuya. Please go ahead, sir.

Okay. Thank you. Hello, everyone. Welcome to our second quarter 2021 earnings call. Joining us today are Founder and CEO of Tuya, Ms. Jerry Wang; and our CFO, Mr. Jessie Liu. You can refer to our second quarter of 2021 financial results on our website at ir.tuya.com. You can also access a replay of this call when it becomes available in a few hours on our IR website. Before we start, please note that this call may contain forward-looking statements made pursuant to the safe harbor provision for the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties and other factors not under the company's control, which may cause actual results, performance or achievements of the company to be materially different from the results, performance or expectations implied by these forward-looking statements. All forward-looking statements are expressly qualified in their entirety by cautionary statements, risk factors and details of the company's filings with the SEC. The company undertakes no duty to revise or update any forward-looking statements for selected events or content after the date of this conference call. I will now turn the call to the first speaker of today, Founder and CEO of Tuya, Mr. Jerry Wang.

Hello, everyone. Thank you for joining us for our second earnings call since going public earlier this year. I'm pleased to report that we are experiencing strong momentum throughout our entire business as we effectively implement our growth strategy, despite the macro challenges affecting the industry. Tuya achieved impressive results in the second quarter, with total revenues rising by 118% year-over-year to $84.7 million. Both our primary IoT PaaS and SaaS businesses recorded over 160% year-over-year growth, and our gross margin increased steadily quarter-over-quarter to 42.2%. During this quarter, the global chip shortage intensified. However, due to our highly scalable and valuable global IoT platform, the strong network effects of our business model, and the economies of scale we have established as an industry leader, we were able to continue offering comprehensive and cost-effective IoT services and innovative solutions, such as our alternative solution for IoT microcontrollers, to both existing and new customers. This allowed us to enhance their competitiveness, assist them in managing the chip shortage, and enable them to quickly enter the market and become leaders in IoT. Additionally, we took this opportunity to recruit talent and improve operational efficiency. Our operating margin, excluding share-based compensation costs, further improved year-over-year. Next, I would like to share updates on customer acquisition, product development, and our overall progress. As a leading global IoT platform focused on empowering enterprise customers with technology, our motivation lies in helping our customers succeed. For the trailing 12 months ended June 30, 2021, our dollar-based net expansion rate for the IoT PaaS business was 211%, surpassing industry benchmarks for the seventh consecutive quarter since we started monitoring this metric. The number of premium customers, defined as those generating over $100,000 in IoT PaaS revenue during the trailing 12-month period, increased to 285 as of June 30, 2021, up from 216 as of March 31, 2021. During this quarter, we added over 700 new IoT PaaS customers, which represents nearly 113% year-over-year growth. At the same time, the number of brands on our platform grew to over 3,300, up from approximately 3,000 at the end of the first quarter.

It's very exciting for us to see our customers from various industries all over the world flex their creativity in IoT product and market development. Empowered by the Tuya platform, these brands, channels, service providers and more are able to see their innovative ideas come alive in the form of smart devices and software services, setting advanced and diverse numbers of use cases and needs for various industries. For example, Group Europe, one of the top four tire brands in the world shows our IoT PaaS to empower their scooter products and features powered by the Tuya logo, or as we like to call it, the PBT model on its products to showcase the brand influence of our IoT path engaging ecosystem. In the wine industry, the most authoritative wine storage organization in the wine cellar industry joined our platform for the use of smart cold storage for wine. In the home furnishing industry, an international furniture group with thousands of offline stores and an online B2B platform developed height-adjustable tables and chairs on our platform. These products are the third pieces of furniture to be powered by Tuya. In addition, a world-renowned European beauty and personal care brand also chose Tuya’s platform to develop smart makeup dispensers and more. Finally, an overseas cleaning product business owned by a well-known public pharma plans group in China chose Tuya to be its first IoT platform provider.

We have observed many experienced retail channels striving to enhance customer product experiences through private label offerings powered by Tuya. Notable examples include JHC, one of Latin America's largest local online channels known for home appliances and furnishings, listed on the Hong Kong Stock Exchange with numerous stores in Hong Kong and Macau, along with a leading shopping app and e-commerce platform in Asia, and Miniso, a domestic fast fashion retail brand from China. In the second quarter, we utilized our IoT brand ecosystem and strong network effects to assist numerous customers in establishing new channels and gaining exposure through various global retail clients.

In addition to acquiring new customers across different industries, we are also facilitating the introduction of new product categories. In the second quarter, the number of SKUs reached 410,000, an increase from 310,000 at the end of the first quarter. We further enhanced our PBT product line capabilities and are assisting customers in entering the market with unique opportunities. For our well-established lighting product line, we launched and supported a series of professional lighting products during the quarter that address various smart agricultural, commercial, and industrial use cases. For instance, in agricultural applications, we started offering various IoT plant lighting and cultivation management capabilities, which have significant potential for planting and cultivation in greenhouses. In our robotics product line, we upgraded the IoT capabilities required for robotic sweepers, enhanced app interaction and IoT transmission capabilities, and improved our development products and services across all product categories.

During the quarter, we made progress with home appliance brands, including those creating smart coffee machines, air fryers with smart recipe features, and food probes. Using our industry expertise, we enhanced compatibility and interfaces to help our customers produce items that compare favorably to top global kitchen appliance brands. We are consistently monitoring and responding swiftly to trends in the rapidly growing smart pet product sector, which has expanded since 2020. We launched innovative products such as smart pet pads with containers, among others. Additionally, we have maintained a quarterly release rate of more than five updates for existing pet toys and food dispensers.

Next, I would like to share some updates on our SaaS segment. In the second quarter, we launched our self-service equipment set. Our pilot projects include self-service co-working spaces and unmanned operations, which we are running in Beijing, Xiamen, and several other cities to test scalable commercial models. In the smart community SaaS segment, we completed upgrades and optimizations for the core modules of our products to address future community designs and management needs. This enabled us to achieve componentization of IoT capabilities for various themes across smart communities. During the quarter, several leading real estate groups in Mainland China and Hong Kong, including the Hong Kong-listed Land Group and Lejan Group, formed a partnership with us. Our extensive hardware ecosystem and the software capabilities of our IoT platform have led to partnerships with many of these real estate companies, resulting in leading hardware firms across different sectors collaborating with us on real estate community projects. This exemplifies the robust network effect of our business model. For our smart hotel and apartment SaaS solution, we continue to enhance the core features of our guestroom and public area solutions in the second quarter. At the same time, we began promoting the international version, signing several prominent hotel and apartment service providers abroad, setting the stage for future comprehensive marketing efforts. In the second quarter, the renewal rate for our office and apartment stock services remains around 90%, and we are dedicated to maintaining a similar renewal rate moving forward. Based on our strong IoT capability, our Smart Cast business components enhance our smart device ecosystem, evolving alongside our IoT PaaS offerings. By leveraging these synergies, our IoT business has experienced rapid growth and is positively demonstrating to the market how to meet the persistent demands of the IoT era. Next, let's discuss our IoT development platform. The unique design of our Tuya IoT platform allows for significant scalability. We are dedicated to separating our various operational features and use cases into individual components so that developers on our platform can mix and match them to address their specific and changing needs by extracting and recomposing these components. Each existing feature can be reused and expanded into new development areas, and we have plans for their integration into our PaaS solutions in the future. As a result, the number of our developers increased to over 380,000 at the end of the second quarter from 320,000 at the end of the first quarter. For instance, technology-driven residential service providers like Baker are utilizing the Tuya IoT development platform to explore innovative smart living experiences. Additionally, one of the leading marketing platform service providers for top kitchen appliance brands is creating various recipes on our platform. Another leader in the professional equipment management sector has joined our platform as a developer, focusing on designing and developing a smart professional equipment storage box and a complete suite of smart device management solutions. These key examples will enhance our understanding of each industry and help us improve our products, allowing us to make informed decisions about entering new PaaS solution segments at the right time to better support developers worldwide. Tuya has always prioritized data security and compliance, investing significantly in these areas. We have established a comprehensive guarantee system that addresses security, defense, privacy protection, and system audits. Furthermore, leading security assessment firms, audit organizations, and verification entities enhance our security and compliance capabilities through independent technical evaluations. In the second quarter, we successfully passed the assessment for our security certifications from the IOXT Alliance and became a member. The IOXT Alliance consists of over 200 leading companies in the industry, including operators, service providers, and compliance labs, all dedicated to promoting top security practices. Its Board features major companies such as Amazon, Google, and Honeywell. In the upcoming third quarter, we will initiate a new round of in-depth and more authoritative security testing with several independent third-party firms that have established reputations for professionalism in the industry worldwide. These firms will provide us with professional security assessment services and independent information security penetration tests. This will help us ensure that our platform consistently maintains the highest security standards and further verify the secure localization of data. Data security and product research and development are closely connected. To maintain our strategic focus in these areas, we continue to invest in our workforce. As of June 30, 2021, our staff grew to over 3,500 employees, up from 2,900 on March 31, 2021, with more than 70% of them in R&D, providing a strong foundation for our ongoing business growth. That concludes my sharing of the second quarter. I will now turn the call over to Jessie, our CFO, to review the financial details.

Thank you, Jerry. Before I begin, please note that all amounts are in U.S. dollars and all comparisons are on a year-over-year basis, unless otherwise stated. I'm pleased to report that our total revenue for the second quarter consensus, estimated by approximately 5%. The robust operational and financial growth we achieved in the second quarter was mainly driven by the solid growth of our IoT PaaS revenue, which increased 153.9% to $76.9 million. In particular, notable growth in business among both existing and new customers, combined with our rapid iteration of products and technologies led to our success during the quarter. We had about 230 brand customers that increased their IoT PaaS orders by more than 5 times the orders in the same period last year. As for our product, more and more of our IoT PaaS product categories are achieving meaningful growth and are being recognized by major leaders in the global IoT market. For example, deployment of mass agricultural products empowered by our IoT PaaS grew far more than tenfold, and deployment of energy-saving products grew over 8 times. We also saw strong growth in the deployment of new product lines we released in the first quarter, including outdoor and low-power consumption series. Our revenue from SaaS and others increased to $3.4 million, representing 175% year-over-year growth. We saw increasing demand from service providers to deliver better software-enabled services for smart things combined with Tuya SaaS and PBT devices. Meanwhile, revenue from our non-core business of smart device contribution decreased by 48.1% to $4.4 million, affected by customer purchase patterns and business demand. Our gross profit increased by 203.9% to $35.7 million, while gross margin improved to 42.2% from 30.3% the same period last year. IoT PaaS gross margin continued its increase to 42.2% from 32.7% a year ago, representing the tenth consecutive quarter of improvement, primarily due to our increased economies of scale, improved efficiency for IoT PaaS deployment achieved through effective R&D and expansion into higher-margin IoT PaaS product lines. We totaled premium IoT PaaS customers for the trailing 12 months ended June 30, 2021, up 114.3% from 133% for the same period ended June 30, 2020. Among this incremental premium customers, more than 50% were engaged in more than the big alliances, kitchen appliances, and the sensor business. During the second quarter of 2021, premium customers accounted for approximately 86.6% of our IoT PaaS revenues. Dollar-based net expansion rate for our IoT PaaS segment improved for the trailing 12 months ended June 30, 2021, up from 160% as of June 30, 2020. This marks the seventh consecutive quarter we have maintained 150% or higher ever since we began tracking this metric. This reflects our strong ability to expand our platform usage over time and grow revenues from existing customers. Now turning to our operating expenses. Please note that we are excluding share-based compensation from our non-GAAP numbers to provide greater clarity on the chance of our actual operating base expenses so that you can review performance in the same way as our management. During the quarter, non-GAAP R&D expenses increased by 153.2% to $39.7 million, primarily as a result of an increase in R&D personnel. As of June 30, 2021, the company had about 2,570 R&D employees, up approximately 120% year-over-year. As a percentage of total revenue, non-GAAP R&D expenses increased to 46.9% from 40.4% a year ago, primarily because of our well-executed talent acquisition strategy achieved a faster expansion in our R&D team relative to our revenue growth during the quarter. The second quarter is usually peak season for talent recruitment, and continued investment in R&D talent is critical to our growth strategy. Non-GAAP sales and marketing expenses increased by 146.6% to $17.9 million, mainly due to increases in employee-related costs and marketing spending. Our marketing spending during the quarter includes costs related to holding events like the Tuya Bluetooth Developer Conference, a summit which releases Tuya's all-in Bluetooth development capability roadmap to enable Bluetooth developers to get ahead of the game. It also includes costs for business development-related travel and meetings with customers as the world reopened to strengthen safe cooperation and well-tested relationships with our customers. As a percentage of total revenue, non-GAAP sales and marketing expenses increased to 21.1% from 18.7% a year ago. Non-GAAP G&A expenses increased by 111.7% to $5.7 million, mostly due to team expansion and increased costs related to being a public company. We have hired and will continue to hire more professional and experienced employees, consultants, and service providers to further improve our internal management. As a percentage of revenue, non-GAAP G&A expenses decreased to 6.8% from 7% a year ago. In the second quarter, our non-GAAP loss from operations was $26.5 million, while our non-GAAP net loss was $23.1 million. Our non-GAAP operating margin was negative 31.3%, an improvement of 4.4 percentage points from negative 35.7% in the same period of 2020. The non-GAAP net margin was negative 27.3%, improving by 6.3 percentage points from negative 33.6% in the same period of 2020. In the second quarter of 2021, we generated $5.8 million in net cash from operating activities, representing 6.9% of revenue. If we exclude a one-time cash inflow from our IPO depository bank related to our IPO, we used $7.2 million in net cash for operating activities in the second quarter, equating to negative 8.6% of our revenue, compared to $7.0 million in net cash yield or negative 18.1% of revenue in the second quarter of 2020. The improvement in net cash used in operating activities as a percentage of revenue and the narrowing of our operating and net margin was mainly due to the increase in our operating leverage as we achieved very strong growth while maintaining healthy margins, partially offset by the increase in expenses. Moving on to the balance sheet. As of June 30, 2021, our cash, cash equivalents, and short-term investments increased to $1,256.1 million from $179.8 million as of December 31, 2020, primarily due to the net proceeds obtained from our successful listing on the New York Stock Exchange and the proceeds received from the exercise of the over-allotment option by the underwriters in April this year. We believe this balance is sufficient to meet our current liquidity and working capital needs while further enabling us to strengthen our business. Now turning to outlook. For the third quarter of 2021, we expect total revenues to be in the range of $83 million to $86 million. This forecast reflects our current and preliminary views on the market and our operating conditions, which are subject to change. Also, our customers face a series of challenges, including Amazon's strict execution of seller policy, rising raw material prices, and shortage of semiconductor components. We continue to support our customers to tide over the near-term difficulties with the powerful capabilities of our IoT platform and innovations. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

The first question comes from Yang Liu with Morgan Stanley. Please go ahead.

The first question is, could management provide more details on the MCU chipset replacement plan? Will it have a positive effect on the gross margin moving forward? The second question is about the impact of Amazon and other e-commerce stores. What effect does it have on Tuya's customers, and is it expected to be a short-term impact?

Okay. Thank you, Liu Yang. So for the first question, under our plan Tuya's major product categories are all eligible for the MCU chipset replacement plan. We started this early this year to help our customers to overcome the difficulties of semiconductor shortage. So at present, our clients in the small home appliances sector are benefiting from this planned mode. The majority of clients who have a need for this plan will likely choose this plan. We will introduce more chip replacement plans in the future. And our main mandate for chip manufacturers is to further design chips according to our requirements and the computing power needs. For example, we plan to replace those chips that currently cannot handle a certain degree of high-precision AC/DC digital to analog conversion and also multiplex motor-driven equipment. Part of our strategy is to help our customers to succeed. So professional chipset replacements are similar to the industry applications in terms of being more vertically focused, reducing customers' all-in cost, improving value proposition, and solving the problem of chip shortages. Our gross margin will remain similar. Although the cost of chips will increase slightly, our product price will also increase to pass this to the customer. So regarding the second question about the impact of Amazon's pending cross-border e-commerce stores, this was an unexpected event that happened in the last couple of months. The majority of our customers sell their IoT products through offline retail channels. We roughly estimate 80% of the power by Tuya IoT devices were sold through offline retail channels. So the limited number of e-commerce customers who were impacted by this unexpected event. Our e-commerce customers all have deep experiences in product development, supply chain, and e-commerce operation, and they are very resilient. For the limited number of e-commerce customers impacted, they are very actively responding to the changes. They are opening new stores in Amazon and also opening stores in other online platforms, setting up their independent e-commerce store, and also through our help, exploring offline retail channels. So this impacted Q3 results on a limited scale and was already reflected in our Q3 revenue guidance. From a seasonality perspective, July and August are usually the off-season for consumer electronics OEMs. The peak season runs from September to December for year-end holiday sales and also making up for the long vacation of the Chinese New Year. So we believe this impact on our impacted e-commerce customers will have a decent recovery in Q4, and this is a one-time event. We remain confident in our full year results.

The next question comes from the line of Emerson Chan with Bank of America Securities. Please go ahead.

My question is about our revenue mix by product category and region in the second quarter. Thank you.

Sure. Thanks, Emerson. In terms of the revenue by region, our second quarter is not very different from the previous quarters we disclosed. North America contributes to about 30%. Europe contributes to about one-third. The remaining of the world, including China and other places, contribute to the rest. We see all the regions showing strong growth and demand for IoT devices and also IoT SaaS services. Some regions show very surprisingly strong need. For example, in Q2, in Latin America, we see a big market opportunity. The revenue contribution from Mexico increased 4 times in Q2 this year. We also saw very strong growth in Britain, Germany, and the Netherlands. So we will continue our regional diversification and continue to grow revenue globally. In terms of the product mix, the revenue contribution from lighting and electrical products was close to 60% last quarter. In Q2 it dropped a little bit to around 56% to 57%, and the revenue contribution from appliances, which includes big and small appliances, contributed over 15%, increasing significantly. We saw very strong growth from appliance products, for example, pet products and robot vacuums, which contributed to continuous revenue growth. The contribution from sensors and security products contributed to about 15% of the total IoT PaaS revenue. For the SaaS product, usually the new products we are facing, including outdoor, energy-related products, entertainment products, and agricultural products, all contribute to the segment we call others or new segments that also contribute to close to 15%. So in the past few years, we do see a great trend in the revenue contribution from lighting and electronic products continuing to drop, while seeing very strong growth from appliances, sensors, security products, and other new segments.

The next question comes from Kai Qian with CICC. Please go ahead.

I have three questions. The first one is, which categories of the SaaS business are growing faster and which new categories have the potential to break out? The second question is, what are the characteristics of the large customers with high repatriation proceeds on our platform? The third question is, could you provide more details about the SaaS business?

Okay. Thank you, Qian Kai. For the first question, in the relatively large-scale product categories, the growth rate for appliances and sensor security products grew very fast; they each grew more than 3 times in the second quarter. In the new small care categories, the growth rate of entertainment grew more than 4 times, sports and fitness exceeded 6 times, energy conservation categories exceeded 8 times, and the smart agricultural categories grew 10 times. We do see very strong growth opportunities for those categories, and we'll continue that growth by supporting our customers to invest in more such creative IoT devices. There's potential for hot products in each of the major categories, really depending on the region, timing, and the circumstances. After evaluating the macro environment, we are optimistic about the growth of the following categories. First, we will continue to support the outdoor and variable products with broader application scenarios. Digital products also show very big potential, such as fast-tracking products. High-end appliances, including robot vacuums, have been very popular and still have plenty of room for market expansion, and entertainment products are also in demand. For the second question on our platform, we do see continuous strong growth of our premium customers. There are customers that grow into premium customers each quarter. The characteristics we observe from those customers with high growth potential and repurchasing patterns include a strong belief in and passion for IoT, a clear understanding of smart products and smart business, and a solid strategy for growing their IoT business. They also possess strong channel resources and understand how to do consumer traffic operations. For the last question about our SaaS business, yes, we have continued strong growth momentum of our SaaS business in Q2 this year. For example, in the smart community SaaS business, we have developed business contracts with a few Hong Kong-listed companies. One example is the leading group. For the hotel business, we established cooperation with Sunmei Group, a top-tier hotel chain covering over 300 cities in China with 15 hotel brands. Also, Chengfang Hong, the largest provider of comprehensive services for long-term apartment rentals in China, covering 53 cities and managing 6 million apartment rentals. In terms of our commercial SaaS business, our team completed a high-end CT nursing home project in Singapore, and also has a cooperation with Ximalaya, which opened 800 stores in China this year. In each store, they will take our commercial lighting SaaS. We expect our SaaS business will continue to show strong momentum in the second half of the year. With COVID getting better and more countries opening up, we are taking SaaS market share overseas in the second half of the year.

As there are no further questions at this time, I would like to hand back the conference to our management for closing remarks.

Okay. Thank you again for joining our call. If you have any further questions, please feel free to contact us or request through our IR website. We look forward to speaking with everyone in our next earnings call. Have a good night.