Tuya Inc. Q3 FY2023 Earnings Call

Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to Tuya Inc.'s Third Quarter 2023 Earnings Conference Call. I'll now turn the call over to the first speaker today, Mr. Reg Chai, Investor Relations Director of Tuya. Please go ahead, sir.

Thank you. Hello, everyone. Welcome to our third quarter 2023 earnings call. Joining us today are Founder and CEO of Tuya, Mr. Jerry Wang, and our CFO Mr. Jessie Liu. The third quarter 2023 financial results and webcast of this 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 corresponding English translation. Thank you.

Hello everyone. Thank you for joining Tuya's 2023 Q3 earnings conference call. Total revenue for the third quarter of 2023 reached $61.1 million, marking a return to year-over-year growth since the industry and economic downturn at the end of 2021. Revenue grew an impressive 35.7% year-over-year, or approximately 14% when adjusting for exchange rate fluctuations. We again achieved a record overall gross margin of 46.7% for the second consecutive quarter. Our strong focus on cost reduction and operating efficiency improvements resulted in a 26.2% year-over-year decline in our non-GAAP total operating expenses in Q3. More importantly, our non-GAAP net profit soared to $10.1 million, an increase of almost 5.7 times sequentially, representing a net profit margin of $0.165 cents. Net cash flow from operations improved both year-over-year and sequentially with net inflows of about $16.1 million. Our net cash position at the quarter's close was a strong $961 million underpinning our long-term strategic development. Overall, the third quarter saw robust improvements across all key financial metrics, signaling a positive turning point as we navigate out of the industry's cyclical downturn. Despite persistent challenges such as fluctuating exchange rates and subdued consumer spending, our impressive performance in Q3 underscores our readiness for the post-destocking cycle and a broader recovery in the IT sector. As we look ahead, we are committed to expanding our quality customer base, enhancing production, and venturing into new markets beyond consumer electronics. Let me now show you more details about developments since the start of the third quarter. In terms of our customer base and competitive positioning, our IoT PaaS unit has weathered nearly two years of industry downturn. During this challenging period, several competitors, particularly IoT divisions of large enterprises, struggled due to limited competitiveness of their products and uncertain investment returns. This shift opened opportunities for Tuya, as we feel that we now have a greater global influence and competitiveness compared to two years ago to attract more leading brands seeking efficiency, improved margins, and cost-effectiveness in third-party IoT platforms. We forged new collaborations with top-tier customers, such as Haier in the overseas home appliance business and Bosch for smart door lock solutions. Meanwhile, we have won and served customers worldwide through differentiated strategies and innovative products. This approach solidifies our competitive standing globally and enables us to effectively cater to unique market demands. The integrated hardware and software solution product strategies we initiated this year are already yielding strategic new customers and scalable revenue growth, particularly in Europe, America, and Japan. We're actively participating in the broader macro technology landscape, and our focus on product development positions us at the forefront of global application commercialization. In emerging markets like Saudi Arabia, our ability to provide cost-effective, customized solutions led to breakthroughs with two major operators. In Africa, our outdoor software and hardware integrated solutions, tailored to unique electricity pricing challenges, resulted in an order from a renowned supermarket chain with 200 stores in South Africa. Importantly, our initial success in Africa can be replicated across the region. Furthermore, in South America, Tuya developed a platform that successfully replicates our Chinese OEM model to support local manufacturing in Brazil. We are optimistic about the e-commerce channel as a significant market for practical consumer electronics devices like smart electricals, handsets, and outdoor products, helping these lightweight categories achieve rapid promotion, distribution, and end-user aggregation. Over the past two years, we have consistently supported potential Chinese e-commerce brands in growing into leading brands. For instance, several Tuya customers are now prominent in Amazon's top 10 for smart sockets, outdoor sockets, and Bluetooth mini locks. We are unwavering in our commitment to product focus, innovation, and continual improvement. In the third quarter, after 18 months of development, our latest sweeping vacuum solution reached mass production. Our low power audio-video solution for smart door locks, benchmarked against industry leaders, also achieved mass production, with the pro version of our home door lock products seeing deployment volumes increase by over 100% year-over-year. We have also enhanced our overseas central control product line such as the U.S. backed product matrix, and added industry capabilities for pre-installed market engineering solutions in China. Our smart central control systems integrating local building intercom and clouding abilities innovatively bridge indoor and outdoor intelligence. We continue to strengthen our traditionally strong categories like smart electrical, which will remain a significant contributor to the IoT consumer electronics sector in the long term. We're seeing downstream demand recover for this market, particularly in practical IoT devices. We're committed to helping customers seize emerging opportunities. We released smart socket solutions to address the common issue of mixed-band routers, significantly improving the network pairing success rate and user experience. A customer-focused innovative solution has seen brand sales explode, now ranking in the top 10 on Amazon's platform. We're actively working to extend beyond the field of consumer electronics, bringing Tuya's mature outreach capabilities to more specialized areas. In Q3, we further refined our green energy and outdoor transportation products. In green energy, we released integrated apps supporting the storage, charging, and use of solar power, completing the energy management use case from energy monitoring to energy scheduling. Global leading brands like Icon Solar and the DMEGC Hengdian Group have chosen Tuya's IoT technology for their new energy storage businesses. In HVAC integrated products, Tuya's industrial subsystems have essentially achieved full functionality for managing industry demands and will soon form a closed-loop solution. Regarding outdoor products, our 4G Cellular BCU central control product has been integrated into EVAC products. Aside from focusing on high-quality, innovative, and valuable products as our core competitiveness, we're meeting the emerging needs of large group private clouds with our Cube smart private cloud comprehensive solution. For example, we have made good progress in Southeast Asia with our Cube platform. Lastly, let's discuss the continuous growth of Tuya's foundational developer platform ecosystem. In the third quarter, we focused intently on the foundational pillars of Path 2.0, which include full category interconnectivity, seamless interoperability, rigorous security standards, independent and manageable development processes, and distinct product differentiation. Our efforts were directed toward refining the developer experience, significantly enhancing usability and operational efficiency. This strategic move has further empowered developers, granting them greater independence from the need for direct support from Tuya. In line with this, we have unified and restructured our official website development platforms and documentation centers. Additionally, we will launch a brand-new development platform, serving as a dynamic hub offering extensive resources, collaborative spaces, and innovative potential marking a significant milestone. The number of developers we now work with has increased to approximately 909,000 by quarter-end, reflecting an impressive year-over-year growth of about 40.5%. We also emphasized the implications and empowerment of the developer platform in the commercial sector. This approach is designed to empower our brand clients, helping them craft and refine bespoke business solutions. A prime example of these strategies at work was our developer conference this September, hosted in China. During this event, we signed a cooperation agreement with Alstom. We see the advanced commercial functionalities of the Tuya IoT developer platform at our disposal, working collaboratively to guide Alstom in developing their own distinctive hardware and software integration. This Alstom-branded solution encompasses areas such as entire homes, hotels, rentals, commercial lighting, and building management. In conclusion, I have shared with you today the concrete outcomes of our strategic initiatives in business and product development. These accomplishments are a testament to Tuya's dynamic response and strategic recalibration concerning the challenges we have faced over the past two years. As we approach the final stage of inventory normalization, we are confident that our persistent efforts will yield sustained positive results. These strategies are set to guide Tuya back to a path of healthy growth, ensuring we remain profitable and efficient. Going forward, we are focused on achieving a balance between growth and profitability, thus ensuring we create enduring value for our customers, the wider industry, our shareholders, and our dedicated employees. That concludes my remarks. Next, I will hand over to our CFO, Jessie, to introduce our financial data.

That concludes the remarks by Jerry. As I review our results and provide more color on the numbers, please note that all amounts are in U.S. dollars, and all comparisons are on a year-over-year basis unless otherwise stated. In the third quarter of 2023, our total revenue reached $61.1 million, up 35.7% year-over-year, continuing to show strong sequential improvement over the past four consecutive quarters. During the quarter, we experienced depreciation impacts of the RMB against the USD, which adversely affected our total revenue by 7.3%. Our IoT product revenue in the third quarter was $45.8 million, a year-over-year increase of 48.1%. In terms of categories, in the third quarter, the most impacted discretionary consumer electronics categories over the past two years, including smart lighting and electrical products, constituted the main force behind this year-over-year rebound, with segment revenue growing by about 140% year-over-year. Smaller and larger home appliances grew by 50% year-over-year. The third quarter of last year was the most severe time for downstream destocking, and the growth of this quarter benefited greatly from the end of the destocking cycle. Moreover, with the execution of product-focused enhancement strategies, our core product lines, such as vacuum robots and locks, have seen technological improvements, growing by approximately 100% to 180% year-over-year. Regarding customers, our third quarter revenue was primarily driven by the recovery in customer order size and improved revenue efficiency. For example, our premium customers' IoT revenue per customer in Q3 increased by 56% year-over-year, and the same metric for ordinary customers also grew by about 49%. Overall, our platform and products served over 3,000 customers in the third quarter, with an average revenue per customer exceeding $20,000, setting a new historical high. Our smart device distribution business, now more actively referred to as IoT smart device solutions, achieved revenue of $6.8 million in the third quarter, reflecting a year-over-year increase of 32.1%. With the continuous advancements and implementation of the smart device solution strategy, we have become quite proficient in this business model, generating robust, scalable revenue. For instance, the smartwatch solution alone secured about $3 million in orders for finished devices in Japan since Q3, to be delivered according to customer demand schedules. The smart tag locator solution also contributed significantly to our orders and revenue in the quarter. Our SaaS and other business segments generated $8.5 million in revenue in the third quarter, reflecting a 5% year-over-year decline, excluding the impact of exchange rates. The segment's revenue in Q3 was relatively stable, showing a slight upward trend year-over-year. As a collection of Cube smart private cloud, value-added services, and various SaaS subsegments, they show different trends according to business strategy and execution. For example, cloud storage value-added services contributed about $2.5 million in revenue this quarter, maintaining robust and continuous month-over-month growth. The acceptance and delivery of the Cube private cloud project generated over RMB5 million in revenue. Customer development and some other new customer-based value-added services decreased by about 15% to 20% year-over-year, under the execution of our customer-focused strategy as we focus on expanding high-quality customers. Going forward, we anticipate a gradual shift in our SaaS and other business segments towards a more core business-centric structure. Regarding the overall revenue recovery in different regions, we have observed healthy growth in Europe, Southeast Asia, and Latin America. Our blended gross margin in the third quarter was 46.7%, sustaining the historical high level for the second quarter. Each of the three business segments exhibited strong margin profiles. Notably, the gross margin of the smart device distribution segment in the third quarter reached 26.9%, a substantial increase from 12.9% in the same period last year, setting a new historical high. We believe that gross margin is the most direct reflection of the value of our smart device solution. Moving on to our operating activities and related expenses, we present our operating expenses on a non-GAAP basis, excluding share-based compensation expenses and credit-related impairment loss from our GAAP numbers. We believe this provides better clarity on the trend of our operating expenses, aligning with how our management team evaluates performance. In the second quarter of 2023, our non-GAAP total operating expenses decreased by 26.2% to $32 million from $43.4 million in the same period last year. Our employee-related costs, excluding share-based compensation, declined by 28.9%, and costs related to offices and property leasing concurrently decreased by 13.9%. Collectively, these costs represented about 74% of the total of our non-GAAP operating expenses in Q3. Currently, our team size has been adjusted to a relatively stable state, just under 1,500 headcount. Marketing and promotion expenses decreased by 23.9% year-over-year. This disciplined approach to cost control in promotion expenses, coupled with a notable rebound in revenue, serves as a testament to the importance of operational efficiency. Also, travel-related expenses decreased 20.4% year-over-year. As revenue returns to growth, we're ready to invest in business opportunities as needed while maintaining a balance between investment and profitability. Additionally, in the third quarter, non-GAAP general and administrative expenses overall increased, mainly due to routine compliance-related professional service projects such as consulting and legal advisory fees. In the third quarter, we recorded about $13.1 million in financial income, mainly interest income. Our net cash, including cash, bank demand deposits, and short- and long-term investments, totaled $61 million. We believe these funds can adequately balance the company's short-term working capital needs and long-term development requirements. For example, we're evaluating feasible plans regarding our office buildings and land use rights to achieve long-term cost savings and support the company's operational needs. Finally, as a result of our consistent efforts over several quarters, the company's non-GAAP net income expanded significantly by 567% to $10 million in the third quarter, a substantial turnaround from a net loss of $15.3 million in the same period last year. Similarly, our net operating cash flow also showed the same trend, increasing by 114% to $60 million in the third quarter, a significant improvement from the cash outflow of $13.5 million in the same period last year. Overall, the comprehensively improved financial results indicate that the major strategic direction we set last year and this year has helped us achieve consistent improvement in quarterly financial results and also indicates that the company is on the right track. With that, operator, we're now ready to take questions. Thank you.

We have our first question from Mingran Li from CACC. Please go ahead.

Let me translate myself. Thank you, management for taking my questions. First off, congrats on your strong performance. My query primarily concerns my side, and my questions are as follows. Firstly, is about the outlook for downstream demand next year. Secondly, in the past, which category showed the most growth potential, and in our SaaS, which downstream scenarios are comparatively more promising? My third question is about the strategic trends and growth outlook across different global regions. Thank you.

Okay, thank you. Firstly, overall, we have found that IoT consumer electronics are highly sensitive to inflation. During the year of high inflation from last year to earlier this year, the growth trend in discretionary electronic consumption, including IoT devices, slowed down significantly compared to 2021. Afterwards, although it reached a relatively stable new balance as inflation slowed, it was suppressed again with a sharp rebound in inflation around July, August, and September this year. However, at present, we observed end purchases of consumer electronics moving in a positively monetary direction, which aligns with our expectations for long-term growth in IoT penetration. From the perspective of end sales, specifically by region and category, we observed the following: Since October, end sales in all categories have recovered somewhat, with household appliances, especially robotic vacuum cleaners and security sensors, performing very well. Electrical products also showed a good recovery trend. However, lighting devices are still in a relatively weak demand situation. In terms of region, we've found Southeast Asia, South America, and the safety products in Europe doing quite well. Other categories are gradually recovering in a healthy direction. In China, apart from home appliances and robotic vacuums, other categories are weaker, but the trend is upwards since Q4. The U.S. region has shown overall weak performance, but electrical and security categories are bouncing back. Overall, each region, according to their economy and environmental characteristics, has different trends in end IoT electronics consumption, and we will continue to maintain communication with downstream customers to actively respond and seek opportunities based on market situations. However, it should be noted that our IoT revenue is affected by both the destocking cycle and end sales. We observed that the year-over-year performance of end sales in some categories does not completely align with our shipments downstream. For example, the lighting category showed relatively weak end sales in Q3, primarily due to brands positioning their inventory, as last year's significant price differences between smart and non-smart lighting resulted in much inventory destocking. In terms of downstream inventory, the overall situation aligns with our expectations. Based on Tuya's IoT device shipments and end sales, we estimate that inventory held by downstream businesses, including OEMs, brands, and retail channels, has decreased from over a year at its peak to about four to five months now. We anticipate this will further reduce by year-end, returning to levels seen in 2019. Therefore, we feel the inventory destocking cycle is nearing its end, returning to a relatively normal state. Regarding the SaaS part, as we mentioned, the SaaS and other revenue include several different products. We have seen great growth potential in Cube, which we promoted as a private cloud IoT software for large corporations globally, enabling them to realize their IoT capabilities. This potential stems from Cube smart private cloud serving large conglomerates, allowing for revenue levels in millions of U.S. dollars when implemented within large corporates. Additionally, Cube's strategic position is not limited to one-time private cloud deployments, but rather is a long-term bridge for collaboration with large key accounts for Tuya. Once these large companies have set up their Cube cloud, they will begin connecting their IoT devices powered by Tuya to their own Cube systems. We are confident that after setting up the private IoT platform for these large corporates, we can unlock the value of Tuya's IoT capabilities and solutions, generating subsequent long-term IoT services revenues. In SaaS and other products, we are optimistic about hotel SaaS, commercial lighting SaaS, and various real estate SaaS products. The hotel industry, with its massive room demands and market segmentation, offers immense potential for non-luxury hotel brands seeking competitive differentiation. Smart hotel experiences, such as intelligent ordering, contactless check-in, and home management, provide significant competitive advantages, and the potential for expansion beyond lighting to include energy-saving management certainly has a huge market space. The real estate industry has been subdued in China in recent years, but looking abroad, leveraging our strong influence outside China, we have identified the demand for smart real estate and a comprehensive home IoT solution needed this year in Southeast Asia and Australia. We plan to start servicing these regional customers next year with Cube products combined with a full suite of IoT solutions and smart real estate solutions. We have been signing contracts with several large customers in Southeast Asia and Australia, including major distributor channels and real estate conglomerates. That answers your first question.

Thank you. We have our next question from Liu Yang from Morgan Stanley. Please go ahead.

Let me translate my question to English. My first question is about the geographic breakdown. I would like to ask management to provide more detail on the geographic contributions to Tuya, specifically in Southeast Asia, China, the U.S., and the Latin America and Europe regions. My second question pertains to the IoT SaaS business. I noticed that this quarter Tuya strategically phased out some non-core SaaS and other businesses. I would like to confirm whether those projects have concluded or if there is still an ongoing impact in the fourth quarter. Thank you.

Okay, thank you, Yang. Yes, I'm happy to answer about regional revenue contribution. Before that, I want to provide some context: when we discuss regional revenue contribution, we conduct analysis to determine the fundamental revenue contribution. For example, if a European brand uses Tuya's IoT parts to create their devices, and sells them in Europe, we consider the revenue to ultimately come from Europe. However, from a financial statement perspective, since these brands typically place orders through China OEMs, our revenue appears to come from those OEMs. Right now, when we talk about revenue contribution by region, we refer to the ultimate revenue source. Based on our analysis, in Q3, Europe became our largest revenue contribution region at around 30%. China and the United States each contribute just under 20%, closely aligned. The Southeast Asia and Australia region, which excludes China, has grown well in Q3 and now makes up around 15% of revenue contribution. Additionally, Latin America has demonstrated good trends over the last few years and now contributes just over 10%. This balanced contribution across regions will allow us to continue using our technology to serve clients across all regions and ensure that both corporations and consumers enjoy the benefits of IoT technology. Regarding your second question, the major transition in the SaaS businesses over the past period has led to certain revenue reductions related to one-time customer needs. For instance, OEM App services usually involve new brands requiring a one-time fee for custom services, which have been decreasing. This trend may continue for one or two more quarters before stabilizing. In terms of customized software revenue, we're seeing this stabilize, with a focus on high-value, recurring software revenue opportunities, such as cloud storage and SaaS, while also encouraging developers to pursue one-time customization tasks for brands or conglomerate customers. This means our one-time revenue from custom software is also decreasing, but we hope for healthy growth in the ongoing SaaS transition.

Thank you. We have our next question from Timothy Zhao from Goldman Sachs. Please go ahead.

Let me translate myself. How does management see the competitive landscape in the IoT industry and Tuya's competitive advantage? And also, what's the company's plan for the use of capital? Thank you.

Okay, thank you. We believe the IoT market is filled with significant future potential. We have been continuously learning from our environment and improving our business model. We believe Tuya occupies a unique position in the IoT industry. Our advantages in the developer and open ecosystem are primarily evident in several areas. We broadly and inclusively support various device types and protocols, cloud access models, and OEM app development, offering developers and partners zero technical barriers, making it user-friendly for customers and developers alike. Tuya's position as a neutral technology provider supports customers and brands in establishing their own IoT businesses and integrating into our vast ecosystem for interoperable user experiences. This comprehensiveness and compatibility allows Tuya to serve 95% of the global market for independent, commercial, and brand customers. We tailor our capabilities to customer needs with a variety of products that generate long-term revenue, which is our main product strategy. This approach is not limited to any specific model or product but prioritizes our platform ecosystem and customer service strategy over revenue model constraints. This enables us to cover a broader range of global customers with more diverse developer products, making them more user-friendly and open. We believe this positioning and value have been critical to our success in the industry for almost nine years. Regarding our use of capital, we maintain a rigorous approach to managing our funds and budgets, striving to preserve cash through safe, highly liquid fixed deposits or other monetary instruments to meet our operational needs and long-term plans. We remain vigilant for suitable merger and acquisition opportunities while also being open to invest in necessary fixed assets for long-term operations. That's my answer to Goldman Sachs' question.

Thank you. There are no additional questions at this time, and I will now hand it back to the management team for any closing remarks.

Okay, thank you again to everyone for joining our call. If you have 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 day.