Tuya Inc. Q1 FY2022 Earnings Call

Thank you. Hello, everyone. Welcome to our first quarter 2022 earnings call. Joining us today are Founder and CEO of Tuya, Mr. Jerry Wang; and our CFO, Mr. Jessie Liu. This first quarter 2022 financial results and the webcast of the conference call are available at ir.tuya.com. A replay of this call will also be available on our website in a few hours. Before we continue, I refer you to our safe harbor statement in our earnings press release, which applies to this call as we will make forward-looking statements. With that, I will now turn the call to our Founder and CEO, Mr. Jerry Wang. Jerry will deliver his remarks in Chinese, which will be followed by a corresponding English translation.

Hello, everyone. First, I would like to report our first quarter performance in 2022. Our revenue reached $55.3 million in the first quarter, exceeding the high end of our previous guidance range. Revenue represented a year-over-year decrease of 2.7% compared to the same quarter in 2021, where we saw rapid growth across the industry. Our IoT PaaS business revenue decreased year-over-year to $41.8 million in the first quarter. Consumer discretionary spending was adversely impacted by high inflation and the Russian-Ukrainian conflict that started in the first quarter, further exacerbating global inflation. In this environment, we observed that IoT brands have become more conservative. On the other hand, our B2B-based SaaS and other segments maintained strong growth momentum for the fifth consecutive quarter, with revenue reaching $5.8 million, representing a year-over-year increase of 146.7%. This performance was driven by our consistent effort to offer targeted solutions to address the critical issues of our enterprise customers by leveraging our strong product functions and the Tuya device ecosystem. In addition, since our smart private cloud product, Cube Solution, was launched last November and officially released early this year, it has achieved significant breakthroughs with new customers in the first half of this year. On the customer front, as we continued to iterate our products and services, our total number of customers increased by 29% from the same period last year to approximately 3,900 in the first quarter. IoT PaaS premium customers with revenue contributions of more than $100,000 during the past 12 months increased from 216 as of March 2021 to 303 as of March 2022. Our ability to maintain a large-scale customer base enabled us to leverage our platforms, economies of scale, and improve the network effects between our business as well as our customers. Additionally, the diversity of customers helps reduce external risks in an increasingly uncertain macro environment. While some downstream brands are slowing down their sales and production plans, others are increasing their purchases. For example, the deployments of an established Canadian smart home brand with business across over 100 countries and regions reached millions in the first quarter, six times more than what they ordered in the same period last year. In terms of gross profit margin, in the first quarter, both our overall gross profit margin and IoT PaaS gross margin improved slightly year-over-year to 41.2% and 42.3%, respectively, remaining relatively steady compared to the same period last year and the previous quarter. Now let me share the specific progress of our business in the first quarter. During the past 12 months ending March 31, 2022, the dollar-based net expansion rate of our IoT PaaS business segment was 122%, remaining at the top of the cloud path and SaaS industry. We garnered nearly 500 new customers in our IoT PaaS business, growing our total number of IoT PaaS customers by 21% year-over-year. In Q1, we continued to attract and acquire reputable new companies globally as customers of our IoT PaaS business through our Tuya Plus Strategy. In Europe, for example, we officially started a partnership with a German supermarket giant that has been one of the Fortune Global 500 for many years. We collaborated with their self-operated brand in the lighting field. Another customer is Smartwares, a leading Dutch brand with products sold worldwide. This Dutch customer entirely shifted from its own IoT platform to the Tuya platform, which will enable them to achieve breakthroughs in all their product categories, starting from home appliances and sensors. In the Czech Republic, EMOS, a local tools and hardware brand, also started a partnership with us and now has over 30 SKUs in the pipeline. In Asia, we enabled Korea's top three listed smart home brands, Kocom, to implement visual capabilities into installed bell products. We also launched joint efforts with one of Japan's leading furniture retailers to explore new business opportunities in home appliances. We are also in the process of helping India's well-known emerging consumer electronics brand boAt to expand into True Wireless Stereo (TWS) Bluetooth handsets and IoT consumer electronics products, including smart glasses in the future. Given the current macro environment, smart Bluetooth products will be the key strategic focus in 2022. In South Africa and other regions, notable new customers included Macroled, a leading brand in Argentina focusing on offline product distribution with over 1,000 partners covering the entire South American continent. Macroled became a strategic customer of Tuya's Star Volunteer program. In North America, a publicly listed company and market leader in the R&D and production of RVs, pickup trucks, and spare parts confirmed their partnership with us in the first quarter to build a smart RV ecosystem. We further expanded our customer base in North America with several leading brands across different sectors. This includes a leading audio and video solutions brand, a residential irrigation equipment brand, and a health and personal care brand, among others. The new customers span personal entertainment, outdoor environments, and more. Domestically, the resurgence of COVID in the second half of the first quarter substantially limited our business activities in China. However, our outdoor business line, which has been a key product category, still secured multiple customers with immense business potential. These customers included a leading eco information system developer and the indisputed leader in the portable and home energy storage industry. We also launched the 100 Days for 100 Brands plan to penetrate Chinese e-commerce brands before this year’s Spring Festival and successfully acquired over 100 target customers by the end of April. The addition of these new customers from all over the world further boosted our core customer base. The breadth and expertise of their products and services illustrate the strong competitiveness of our platform in the global smart market. The quality of our customer base will enable us to strengthen the core of our business during this downturn in smart consumer electronics. The foundation we have set fills us with hope and excitement for the opportunities that will arise when the industry eventually recovers. In the first quarter, we diversified our business and our IoT PaaS product categories are increasingly balanced. In terms of contribution, electric lighting accounted for about 40%, consumer IPC and sensors accounted for about 25%, household appliances, kitchen appliances, pets, and other small appliances accounted for about 20%, and other emerging categories accounted for more than 15%. Among them, the electrical and lighting categories, which constitute a significant portion of our revenue, have been predominantly affected by inflation, recording a year-over-year decrease. This decrease is mainly because consumer-grade electrical and lighting products are usually sold in large quantities and are price-sensitive products. Smart products typically sell for approximately three times the price of traditional products. As a result, consumers tend to shift their purchasing needs to conventional products, sacrificing smart functions or delaying their purchase of smart products to save money. This market shift was especially notable in Europe and America. In other categories, however, we observed that smart IPC and security sensor products, which have relatively high IoT penetration rates, are in strong demand. This demand is driven by the unique characteristics of consumer IPC and sensor products where IoT functions are necessary to maximize security. Meanwhile, household appliances that exhibit little price gap between IoT and traditional products maintained solid year-over-year growth momentum. Next, I will share some updates on our sales and other segments. This segment continued its robust performance in the first quarter with revenue increasing 147% year-over-year to $5.8 million. First, in commercial lighting, our premium SaaS solutions were adopted by China Construction Development Corporation, which has ranked among the Fortune Global 500 for five consecutive years, for its street lighting project in Xiamen. Mexican industrial lighting brand, Dimas Lighting, leveraged our software capabilities to complete the construction of its intelligent platform for commercial lighting and implement several industrial lighting projects. Our top three lighting brands in the world also expanded our partnership into their sliding business in Korea. The customer utilized our commercial lighting SaaS solution to improve its smart lighting capabilities and will leverage smart lighting products developed on the Tuya platform. This is a prime example of how our SaaS and PaaS businesses complement each other within our ecosystem. Turning to the progress of our hotel and apartment subsector, we launched a strategic partnership with Alipay in China. Internationally, the leading hotel system integrator in Malaysia, Core System Technologies, is using Tuya's hotel SaaS solution to lead the first smart hotel in Malaysia. Additionally, the smart products arm of a well-renowned Fortune 500 group is cooperating with us to use our hotel rental SaaS and platform SDK capabilities for overseas hotel rental operations. As the pandemic is being brought under control in Q2, our hotel SaaS solution has received multiple orders from Europe and Southeast Asia. For value-added services, the strong momentum of our customer paid tariff services carried through into the first quarter with revenue broadening to over 100% year-over-year. The number of active devices with paid cloud storage service by the end of the first quarter of 2022 also doubled from the same time last year. Finally, let's talk about this year's core strategy, our smart private cloud product, Cube Solution. In the first half of 2022, we made substantial progress in our private cloud business. After thorough evaluation and licensing inspection, several leading customers in different countries have recognized our private cloud solution. For example, Telkom Indonesia, the largest telecom operator in Indonesia, covers over 55% of all Indonesian households with hundreds of millions of registered users and will use our Cube Solution to tap into the strong consumer spending power of its network to accelerate the development of its smart home appliance market in Indonesia. Our goal in such collaboration is to become its long-term partner in three ways: first, private cloud platform software development; second, powered by Tuya ecological smart devices interconnections; and finally, additional recurring value-added services for the end users. In China, a leading utility giant is establishing a long-term collaboration agreement with Tuya to build its own IoT intelligent platform in stages. Our Cube Solution will help customers complete their deployment of IoT private cloud platforms and enhance their IoT platform capabilities. Cube can also support customers with security software capabilities to help adjust energy consumption security issues for thousands of households. These qualities have helped us attract industry leaders from various sectors to adopt our Cube Solution. So far, we have received positive feedback from our customers who choose our products and trust us due to our innovation in technology covering cloud, edge, application, and the scale effect of integrated software and hardware products based on our deep cultivation in the smart technology field for over seven years. We are confident in our ability to capture the long-term opportunities in the market with strong demand for smart private cloud solutions. Overall, the first quarter was filled with challenges; economic and other disruptions that started in the second part of 2021 intensified in the first quarter, aided by the Ukraine war. Global inflation is running high and is not expected to improve in the second quarter. While we remain cognizant of these major challenges in our IoT PaaS business, we will explore additional growth drivers through our smart private cloud and smart industrial SaaS segment. In terms of profitability, this quarter we focused on optimizing our organizational structure and efficiency as we aim to better balance our business growth and timeline to profitability. We are also improving our management efficiency, which will sustain our long-term prospects. That concludes my remarks.

That concludes the remarks by 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. As Jerry just mentioned, we are facing a series of unprecedented challenges. Nonetheless, our total revenue in the first quarter exceeded our previous expected guidance range. Now I will provide a detailed overview of our financial results. For the first quarter of 2022, our total revenue was $55.3 million, down 2.5% year-over-year. The decline was driven by a 16.1% year-over-year decrease in our IoT PaaS revenue, which shrank to $41.8 million for the quarter, impacted by factors Jerry mentioned earlier. If we look at the ultimate demand contributions to our revenue globally, which represents our estimate based on various businesses' information regarding our customers, we did experience a slowdown in the U.S. and Europe, but we delivered growth in China, Latin America, Southeast Asia, and other Asian regions. Moving along to our customer base, we had 303 premium IoT PaaS customers for the trailing 12 months ended March 31, 2022, up 40.3% from 216 a year ago. During the quarter, premium customers accounted for approximately 85.6% of our IoT PaaS revenue, forming a solid customer foundation for our business. Our dollar-based net expansion rate for the IoT PaaS segment maintained a healthy level of 122% for the trailing 12 months ended March 31, 2022. Our DBNER demonstrates our ability to continue expanding our customers' usage of the Tuya platform over time and generating revenue growth from existing customers. On the other hand, as Jerry mentioned, we delivered satisfactory performance in acquiring new customers with exciting business potential. In the first quarter, we made decisive efforts in the Chinese market by launching the 100 Days for 100 Brands plan, through which we obtained over 100 brand customers in various segments within 100 days. Among these customers who agreed to work with us, about 40% were in small and large household appliances, kitchen appliances, and pet appliances; 40% were electrical and lighting-related brand customers; and the rest 20% were customers in emerging verticals including personal care, home decoration, home safety, outdoor, and other fields. We believe that our cooperation with these benchmark brands across different verticals will further complement us and enrich our business in the China market. Our overall gross margin and IoT PaaS gross margin for the quarter remained stable at 41.2% and 42.3%, respectively, as we effectively implemented a series of initiatives to improve our business management efficiency. Now turning to our operating fees. Please note that we present our operating expenses on a non-GAAP basis by excluding share-based compensation expenses from our GAAP numbers to provide greater clarity on the trends of our actual operating base expense. During the quarter, our non-GAAP total operating expenses were $60.6 million. Specifically, non-GAAP R&D expenses grew to $43.5 million. Non-GAAP sales and marketing expenses increased to $13.6 million. Non-GAAP G&A expenses increased to $6.2 million, and other operating income net was $2.6 million compared to $2.5 million a year ago. The increase in non-GAAP total operating expenses was mainly due to rising employee-related costs. For example, our average salaried R&D employee headcount increased by approximately 30% this quarter compared to a year ago. It is worth noting that we actively optimized our operational structure and reduced the average number of our R&D headcount by approximately 10% in the first quarter. As we continue these optimization efforts, our headcount is at an even lower level now. Our non-GAAP loss from operations was $37.8 million in the first quarter, representing 68.4% of total revenue, and our non-GAAP net loss was $37.3 million in the first quarter, representing 67.4% of total revenue. With increasing uncertainty in the macroeconomic environment, we are pivoting away from top-line growth towards balanced efficiency, profitability, and sustainability. As part of our efficiency-first strategy, we have refined our team structure and are also reducing office leases by toning down our office plans to align with our current growth trajectory. Additionally, we continue to implement measures that help boost employee efficiency. For instance, in our IoT PaaS and smart device distribution business, a small percentage of large orders contributes to the majority of revenue, while the rest are mainly smaller and scattered purchases. Since the costs associated with processing each order, regardless of size, are usually similar, our teams are bundling groups of smaller orders to reduce such costs. The positive impact of these optimization initiatives on our financial statements may not be immediately evident as it is offset by substantial one-off costs associated with these initiatives. Our refined cost and expense structure will enable us to allocate resources to what matters the most. In the first quarter, if we exclude one-off expenses related to compensation paid to employees due to team restructuring, rental penalties, and restoration costs, our non-GAAP operating margin and net margin would have increased by about 5%. Moving on to the balance sheet. As of March 31, 2022, our cash, cash equivalents, and short-term investments stood at $984.2 million. We believe this balance is sufficient to meet our current liquidity and working capital needs in the long run. Finally, turning to our share repurchase program, during the first quarter, we repurchased approximately 4.9 million ADSs from the open market for a total consideration of approximately $25 million pursuant to the share repurchase program, representing around 12.5% of the $200 million authorization announced. This demonstrates our strong confidence in the company's long-term growth prospects. Now, turning to the outlook for the second quarter of 2022, we expect total revenue to be in the range of $60 million to $65 million. As you can see in the market, the second quarter is filled with uncertainty, and the factors leading to the industry-wide challenges are yet to significantly improve. In terms of economy, last Friday, the CPI for the United States increased by 8.6%, hitting a new high, representing a very high level of inflation. Turning to geopolitics, the war between Russia and Ukraine continues. Regarding the COVID epidemic in China, April and May were the most challenging months, and inventory backlogs experienced across the supply chain have hindered players from placing orders upstream. These factors affected our sales, business activities, and the acceptance of products and services by our customers. In general, the second quarter of 2022 undoubtedly remains difficult. In response, we will remain cautious and continue to move forward by firmly implementing the aforementioned measures and strategies. This concludes our prepared remarks for today.

Our first question comes from Goldman Sachs.

My question is that while we face challenging environments in the EU and U.S. markets, can management share some details on the progress of our China business? What type of demands are emerging in the China market, and what kinds of clients are we focusing on? Are we expecting more meaningful progress in the next couple of quarters? Are we anticipating a higher or lower margin in the China market in the near to medium term?

Let me take this question. The China market is vast, and the scale of each of our businesses is still small. Therefore, we're expanding several of our business units to grow rapidly and increase revenue contributions from China, including PaaS, SaaS, and Tuya Cube, our new strategic private cloud product. Regarding PaaS, we're aggressively developing clients in the electronic device brands, just as Jerry has discussed. For the SaaS business, since the end of 2019, we have launched our SaaS offerings in hotels, properties, communities, and commercial lighting in China. Each of these has gained top three market positions by now in China and continues to gain shares. For example, we formed a strategic partnership with Alipay in the hotel SaaS business in the first half of this year to build digital commercial ecosystems for thousands of hotels covered by the Tuya SaaS network. This PaaS partnership will enable us to quickly integrate business resources to provide 7-day, 24-hour customized quality and diversified digital services for guests, which will lead to revenue. Our commercial lighting SaaS has launched many energy-saving use cases in China this year and are widely recognized very positively, including implementations in gas stations, factories, communities, city center group lights, and large-scale parking lots. Our community SaaS has supported several cities in China to transition into smart residential communities this year. We are also very excited that we have seen breakthroughs with our Tuya Cube product in China. We announced it last November and signed contracts with a number of industry-leading players in China for this new strategic product, including leading telecom operators, utility companies, and auto groups, and a few other large enterprises are in the process of signing contracts. The private cloud clients have told us the reasons they selected us are primarily four: first, Tuya's IoT cloud connects hundreds of millions of devices on a global basis with an 8-year track record for safety and reliability; second, our technology system is comprehensive, providing full-service coverage; thirdly, our hardware ecosystem is unparalleled; and four, our deep focus in IoT. Therefore, we have a strong belief in the China market, which presents huge potential for IoT. The revenue contribution from the new strategic Tuya Cube product will start to reflect in Q3. In Q1 and Q2, we mainly signed up new customers and initiated the deployment of the private cloud, with revenue recognition starting in Q3. That answers your question. Thank you.

Our next question comes from Morgan Stanley.

I have two questions here. The first one is, could management update us on the negative impact from the lockdown in China? Has Tuya and its customers, especially the OEMs in the Yangtze River Delta, fully recovered after the reopening? If not, what is the current status and the forward recovery trajectory looking into the next few months? The second question is, could management update us on the overseas consumer electronic device-related demand outlook going into the second half? Assuming that management mentioned the CPI will continue to be high, what about volume and shipment growth or early indicators from your customers about second-half demand from overseas?

Thank you, Liu. Regarding the first question, we saw the most impact on our business activities in China between the end of March, April, and May—notably in customer acquisition efforts, which slowed significantly. Delivery of our SaaS solutions also faced delays, as customer satisfaction and paper confirmations were affected. The sales performance of our brand customers in China slowed during that period too. However, we see a recovery trend in June. It appears all cities are restarting their normal business, and consumption is recovering. We observed an overall trend in China improving positively. At the same time, since Europe and the U.S. are also facing inflation challenges, we have been focusing on cost control this year. We realigned our business to direct resources toward key segments and PaaS, which requires long-term investment. All specific market sizes are not too large; secondly, we refined our team structure to enhance organizational efficiency and focused on large contracts and large customers. We tiered our customers based on revenue contribution and potential, tiering our orders to adjust expenses for smaller orders which led to bundling smaller orders into larger ones, significantly improving efficiency. For the second question about overseas demand for customers, inflation has heightened due to the Russian-Ukraine war, impacting the consumer markets in Europe and the U.S. Consumers were forced to prioritize food and daily necessities, leading to weakened purchasing power. However, India, Latin America, Southeast Asia, and other regions seem to be in a comparatively better situation, with healthy growth trends for brands and markets in those regions. In terms of product categories, consumer electronics and lighting categories overseas have been impacted the most by inflation, as the price gap between IoT products and traditional counterparts is significant—particularly impacting the lighting and electrical product segments. Purchases in these categories tend to be in large quantities, magnifying the price gaps further. As a result, in lighting and electrical segments, consumers often prioritize traditional products over IoT products. However, we noticed less impact in categories like whole home consumer products, cameras, sensors, and home appliances. For the second half of the year, the recovery will largely depend on how effectively U.S. Treasury and European Central Bank control inflation. If inflation improves, we believe demand will rapidly recover from the end-user side. With activation of new devices, since April, we have recorded a better trend compared to Q4 and Q1. While Q1 saw slightly negative new device activation, in April, May, and June, the trend has shifted positively. We are continuously monitoring this trend, hoping it continues. Although inflation remains high, consumer reactions to inflation are picking up. Notably, our value-added services recorded an overall 200% year-over-year revenue growth in Q1. This performance indicates robust demand for high-value IoT services. Despite challenges, many of our brand customers are conservative in order placements to OEMs, though they remain optimistic towards the long-term trend of IoT.

Our next question comes from CICC.

As we newly launched private cloud different services, how should we expect in the mid to long run the revenue proportion as related to revenue? And do we see more from existing public cloud customers switching to private cloud solutions, or can we expand to new customer profiles? What is the marginal change to the gross margin and expenses?

Most of our private cloud services customers are new customers. We are promoting the Tuya Cube product not to our existing customer base, but to new industry players. Our acquisition efforts are progressing smoothly in both China and internationally. We have signed legal contracts with dozens of customers, all of whom are well-known large-scale industry leaders in both China and abroad. These customers include the largest telecom operators in Indonesia and China, and a couple of prominent utility groups in China are in discussions for contracts as well. We also have large automobile groups in China and Southeast Asia onboard. Additionally, we maintain a healthy pipeline for large-scale companies, including leading energy companies negotiating contracts, plus a major European retail group with thousands of retail stores across multiple European countries. This demonstrates our private cloud technologies can be applied across various industries, and we're very excited about the opportunities presented by the Tuya Cube product. For the last seven years, we have focused on the consumer electronics industry, which can be significantly affected by high inflation and economic cycles. In contrast, other industries such as the utility, auto, and telecom sectors are more sustainable and less impacted by economic cycles. Consequently, we believe our focus on the Tuya Cube Solution will not only open new growth avenues but also enhance the long-term sustainability of our business during economic downturns. We regard the Tuya Cube as one of our most important strategies for the next few years, expecting it to provide new growth support over the next three to five years. Given that this business is still in its early stages, we will need time to determine the best pricing and deployment strategy. Typically, our private cloud projects operate on a large scale owing to their commercial value and funding model. In addition to implementation and deployment in the launch stage, future business cooperation and revenue opportunities will arise in our IoT product ecosystem and SaaS capabilities for our large Tuya Cube customers in the long term. Our private cloud deployment processes are being standardized and packaged, meaning future customers can either have their in-house R&D team or hire third-party implementation teams to deploy our Cube products directly. It’s important to note that while private cloud customer-specific systems will exist, there will also be standardized products, providing fundamental infrastructure-like capabilities. This includes multiple communication methods, including Wi-Fi, ZigBee, Bluetooth, Cat 1, NB-IoT, and different industry networks to connect various IoT devices. Such capabilities ensure that industry leaders will not need to worry about foundational infrastructure investments. Secondly, we provide highly secure cloud structures compliant with the data security laws of various regions. This value proposition makes it easier for industry leaders to minimize investments in compliance. Last but not least, our private cloud structure can leverage the vast hardware ecosystem we’ve built over the last eight years. Our existing collaborations with numerous IoT device manufacturers allow for any new IoT device type to be connected to the Tuya Cube infrastructure within 30 days. We are thrilled about the new business opportunities arising from this expansion.

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 on our next earnings call. Have a good day. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect your lines. Thank you.