Tuya Inc. Q1 FY2024 Earnings Call

Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to Tuya Inc.'s First Quarter 2024 Earnings Conference Call. My name is Fayde and I will be coordinating your call today. I will now turn the call over to the first speaker today, Mr. Reg Chai, Investor Relations Director of Tuya. Please go ahead, sir.

Okay. Thank you. Hello, everyone. Welcome to our first quarter 2024 earnings call. Joining us today are Founder and CEO of Tuya, Mr. Jerry Wang, and our CFO, Ms. Jessie Liu. The first quarter 2024 financial results and the 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.

Hello, everyone. Thank you for joining our first quarter 2024 earnings conference call. This year marks the 10th anniversary of Tuya's founding, and we are proud to report significant milestones achieved in the first quarter. Our total revenue increased by approximately 30% compared to last year, and our blended gross margin reached about 47.8%, setting a new historical high. For the first time, we achieved non-GAAP profitability in this revenue-light period, which is typically impacted by the Chinese New Year. Since our initial public offering in March 2021, we have navigated numerous unprecedented macroeconomic challenges. Through proactive and ambitious strategic adjustments, we have driven significant quantitative transformations in our business. While achieving non-GAAP profitability, we continue building long-term competitive advantages and expanding our total addressable market. Over the past four years, we have significantly evolved from focusing solely on helping customers achieve device intelligence through our IoT PaaS business to offering spatial intelligence solutions in industries such as apartments, hotels, community parks, mobility, and energy. We now provide comprehensive smart solutions via a cloud platform that includes PaaS, SaaS, and smart devices, such as our smart Cube Cloud. This allows us to develop enterprise-level intelligence platforms for global leaders using Cube Cloud, greatly expanding our market potential. In the first quarter, we noticed a substantial recovery in our largest revenue segment, the PaaS business, which maintained a strong year-over-year growth trend. This growth can be attributed to two main factors: the recovery in overseas demand for consumer electronics and the steady increase in global demand for smart solutions. Additionally, our market share is growing as many major competitors exited the market during the industry downturn from 2022 to 2023. Leading brands are increasingly shifting from in-house IoT development to our platform. We continue to innovate through the development of new products, enabling our brand customers to swiftly launch new smart offerings. These factors collectively contribute to our growing market share. We have seen a new wave of developers and brand customers utilizing our cloud platform, including Chinese e-commerce companies expanding overseas, which now possess stronger R&D and branding capabilities than they did four or five years ago. Notably, well-known brands in North America, India, and Europe are steadily progressing under a more localization-focused service model. Our strong foundation of both new and existing customers helps us achieve a growth rate that exceeds the industry average. This year in the European market, we have responded to the French government's energy subsidy policy by securing orders for temperature control and energy-saving smart devices from our French clients. We have integrated our solutions with two government-designated green energy technology platforms, with initial orders valued at over $1 million. At the Frankfurt Lighting Fair in Germany, we showcased our innovative net-zero solutions, featuring cutting-edge hardware and software products that assist our partners in transitioning to a low-carbon future. In Latin America, we have partnered with a leading ISP channel in Brazil, whose downstream network reaches millions of households nationwide. In Southeast Asia, we continue to break new ground in the telecom operators sector through Cube Cloud technology and product innovation. In the first quarter, several telecom operator groups began deploying Cube private cloud solutions as part of comprehensive smart solution cooperation models. International markets account for about 83% of our total revenue, distributed across all major regions, driven by our innovative private cloud and smart solutions business model combined with a customer-focused approach. The Asia-Pacific region outside of China and Latin America are both experiencing rapid growth, with their combined revenue demand contributions increasing for the third consecutive year. This more balanced global business model has enhanced Tuya's operational resilience and adaptability compared to three years ago. We are now more adept at identifying and capturing new smart technology trends worldwide, allowing us to better serve our global customers and support Chinese manufacturing enterprises in their international expansion. Regarding product performance, our consumer security and sensor categories are growing much faster than the industry average, maintaining the strong momentum we established in 2023. The revenue contribution from Tuya smart small and large home appliances increased by about 75% year-over-year in the first quarter. Notably, smart appliances like air conditioners, thermostats, and temperature control valves, led by major industry brands, grew by more than 100%. The lighting category also experienced healthy year-over-year growth due to active inventory replenishment by customers. All categories within our PaaS portfolio entered a healthy growth trend in the first quarter of this year. As a technology-driven company, we fully embraced generative AI at the beginning of 2023. The rapid advancement of generative AI technology is laying the foundation for integrating large models into smart devices. Recently, Sam Altman commented on a podcast that new AI devices will emerge as AI models become more efficient and affordable, making interactions with AI more natural through voice. Utilizing our cloud platform technology and extensive smart hardware ecosystem, we are fully committed to researching generative AI. We aim to achieve significant advancements in AI device experiences and spatial intelligence use cases, rapidly evolving opportunities in device intelligence, spatial intelligence, and smart solutions. In terms of spatial intelligence, we are incorporating AI capabilities into the daily management of spatial use cases, allowing users to experience AI-driven functionalities, management, and environmental analysis along with synchronized solution recommendations. At our upcoming Global Developer Conference on May 29, we will introduce Tuya's AI large model, the spatial large language model. Drawing from our vast ecosystem of smart devices, this model, which includes a net-zero carbon strategy for energy-saving use cases, will generate optimal energy-saving and emission reduction strategies based on real-time spatial data. This will deliver leading AI technology value to our customers in the field of spatial intelligence. This quarter, our smart device distribution segment has officially been rebranded as the smart solutions segment after over a year of transformation. The smart solutions segment integrates generative AI, embedded operating systems, cloud software capabilities, and our strong global market reputation with robust control over the Chinese device supply chain to provide high-value integrated smart solutions to our customers. For example, incorporating generative AI-powered voice capabilities in devices like wearables, lighting and electrical units, and home appliances significantly enhances user interactions and efficiencies. In smart PaaS devices, generative AI can even create content that adds emotional value. As a global cloud developer platform, we are dedicated to embedding generative AI technology into our platform's core development processes, allowing developers to have advanced, convenient, and efficient experiences. They can enter the development process through simple conversational prompts, generate UI interfaces, or use AI to check logs and suggest solutions. In product operations, generative AI will help customers analyze product feature strengths and weaknesses based on user feedback, facilitating improvements, iterations, and innovations. As of the end of the first quarter, the number of registered developers on our platform has surpassed one million. Looking ahead to the remainder of 2024, we are confident in our competitive advantages, our position in the market, and the future of the smart technology sector.

That concludes the remarks by Jerry. As I discuss our financial results that provide more detail on the numbers that Jerry didn't cover, please note that all figures are in U.S. dollars and all comparisons are on a year-over-year basis unless otherwise stated. In the first quarter of 2024, our total revenue reached $61.7 million, up 29.9% year-over-year. We're surpassing the market consensus of around 15% year-over-year growth. This marked an encouraging start to the year. Excluding the adverse impact of exchange rates between the U.S. dollar and RMB, the year-over-year growth would be an even more impressive 35%. Our IoT PaaS revenue in the first quarter was $45.6 million, representing a year-over-year growth of 35.7%. This was driven by the normalization of downstream inventory compared to the same period last year and our commitment to delivering high-value products to our customers. Regarding product categories, we saw robust demand growth across all categories, with home appliances experiencing the highest year-over-year growth of over 75%. From a regional revenue demand perspective, Europe continues to be the largest market, accounting for just over one-third of the total revenue demand. The Asia-Pacific region and Latin America have seen accelerated demand growth, clearly rising compared to last year. Consequently, the Asia-Pacific region accounted for around one-third of the total revenue demand, while Latin America's demand contribution increased to more than 10%, just shy of 15% in the first quarter. On the customer front, we served approximately 3,000 customers in the first quarter of 2024, a slight increase from the same period last year with the number of IoT PaaS customers remaining stable year-over-year. The trends in the customer number reflect our focused customer acquisition strategy. We continue to be prudent in our customer service and acquisition efforts, focusing on a targeted, strategic, and efficient method. As a result, our per capita revenue and the per capita gross profit saw a significant year-over-year increase of about 60% to 70% this quarter. Additionally, our 12-month DBNER returned to 116% at the end of the quarter. The gross margin of IoT PaaS improved significantly year-over-year this quarter, driven by a higher proportion of higher margin products in our portfolio and, to a certain extent, due to the high pace of inventory write-downs from the same period last year. Our smart solutions segment represents an upgrade of our smart device distribution business. By integrating our generative AI and software capabilities along with our extensive familiarity with the consumer electronics supply chain, we are offering smart devices enriched with our proprietary software capabilities, especially those combined with generative AI to end-users. This segment recorded revenue of $7.5 million in Q1, an increase of approximately 37.3% year-over-year. This quarter, we continued to achieve strong results in outdoor, gateway, and central control device solutions with increasingly stable customer reorders. In addition to enhanced software capabilities, we saw the advantages of Tuya's ecosystem in the smart device solution business. Customers and users are willing to pay for products like smart central control and smartwatches powered by Tuya, which can easily control all their other powered-by-Tuya devices. The smart solutions segment achieved a gross margin of approximately 28.3%, an increase of 7.3 percentage points year-over-year, with some device solutions reaching gross margins of 30% to 40% and some even exceeding 50%. Additionally, we believe that the addition of AIGC capabilities will further enhance user experience and value. Our SaaS and other sectors recorded revenue of $8.6 million in the first quarter of 2024. Due to adjustments in the revenue structure, it was a stable quarter. Revenue related to customized technical services decreased in Q1 due to seasonal and business positioning factors, but the growth of high-value software value-added services, such as cloud storage, remained substantial. The overall gross margin of SaaS and others slightly decreased due to product mix and increased costs in some technical services projects, but it remains stable within our expectations. For operating activities and expenses, I will provide a detailed view on a non-GAAP basis, which excludes certain items for a clearer picture of our operational efficiency. We continue to present our operating expenses primarily on a non-GAAP basis, excluding share-based compensation expenses and credit-related impairment losses from our GAAP figures. In Q1 2024, our non-GAAP total operating expenses decreased by 16.6% to $30 million from $36 million a year ago, largely due to reduced employee-related costs as we now maintain a more streamlined team compared to the first quarter of last year. Since the start of this year, our workforce has remained relatively stable. Regarding sales and marketing activities, we increased our market and promotional budget as our revenue is on a stable growth trajectory. We will dynamically evaluate and potentially increase the budget this year to ensure effective investment in marketing and customer acquisition. This quarter, our general and administrative expenses decreased due to relatively low external professional service fees. Additionally, it is worth mentioning that MSCI recently upgraded our ESG rating to A, surpassing some industry giants. Therefore, we will continue to strengthen our efforts in ESG, data security compliance, and other related areas to become a more contributive company to our customers, industry, investors, and society. Overall, our non-GAAP operating loss in the first quarter of 2024 narrowed to only $600,000, nearly breakeven. Achieving such operational results in the traditionally low first quarter is very encouraging, indicating that our business and operational leverage are making significant progress under the right strategy. Regarding interest income and cash, we earned approximately $12.8 million in interest income in Q1, providing additional capital for our daily operations. This reflects our adept cash management, prioritizing the security of our principal. By the end of March 2024, our net cash position, which comprises cash and cash equivalents, bank time deposits, and U.S. treasury securities, totaled about $998.8 million, an increase of about $14.5 million compared to the end of 2023 despite payments for annual expenses such as employee bonuses in Q1. Looking ahead, we are committed to driving top-line growth, sustaining strong gross margins, and optimizing operating leverage. We believe our performance in the first quarter allows us to look forward to the future with more optimism.

Our first question comes from the line of Yang Liu from Morgan Stanley.

Let me translate my questions. I have two questions. The first one is regarding the first quarter top line growth, almost 30%, which is pretty strong. Combining that with a very solid export trend in China recently, I would like to ask management whether it's possible to raise the full-year revenue guidance or turn more optimistic about future growth. The second question is, after seeing the very strong operational performance and financial numbers, whether management can do more in terms of shareholder returns and what is the current plan?

Thanks, Yang Liu. It seems that everyone has noticed the excellent export performance in the first quarter. We've observed that Chinese concept stocks with large overseas segments have generally performed well. Indeed, Tuya's growth in the first quarter, particularly in our core PaaS business, has been quite robust. Over 80% of our revenue comes from overseas, making us a prime example of a cutting-edge technology company with a globalized business. Based on the data and disclosures, we see some common characteristics among strong macro factors driving exports in the first quarter. Firstly, we have seen almost cross-border overseas region demand pretty strong in Q1, especially the most dazzling growth from Asia-Pacific, which includes Southeast Asia, Australia, Japan, and Korea. This trend aligns closely with our business development and opportunities we have observed. For example, our revenue from Southeast Asia increased by approximately 70% year-over-year in the first quarter. This growth is partly due to Tuya's Cube smart private cloud products, which have established strong replicable benchmark projects in countries like Thailand through collaborations with leading telecom operators, real estate groups, and conglomerates, then expanding to other countries in Southeast Asia. On the other hand, the products empowered by Tuya's technology are also highly favored by end users in Southeast Asia. Our ongoing projects, which combine private cloud and smart solutions in Vietnam with multiple telecom operators, are excellent examples. Secondly, the export of home appliances and other electromechanical products such as lawnmowers and robotic vacuum cleaners performed very well. Consumer electronics, our main battleground, saw outstanding performance in our home appliance product line in the first quarter with a year-over-year growth of around 75%. This has been previously mentioned. Additionally, the outdoor and cleaning robot sectors also performed excellently in the first quarter, which are areas that Tuya has previously identified and invested in. Other categories besides home appliances also show impressive growth. For example, the lighting sector, previously impacted by inventory reduction, saw encouraging growth in Q1 as overseas customers replenished their inventories. China's supply chain and manufacturing have high efficiency and cost-effectiveness, allowing products exported worldwide to meet essential needs of various customers from different regions in terms of both price and quality. Tuya plays a role in this process by leveraging its unique cloud platform and software products to support manufacturers and global brands with technology capabilities, helping OEMs serve global brands and large groups. Therefore, as end-user demand starts to recover, driving a macroeconomic recovery, Tuya has already made adjustments in the past 2 years under adverse conditions, preparing in various aspects such as business, technology, product, operations, and internal organizations. Consequently, we are more optimistic about the full-year outlook now compared to the beginning of the year. Regarding shareholder returns, we first look at non-GAAP because it excludes items such as stock-based compensation that are unrelated to actual quarterly business performance and do not affect cash flow. As a company, our non-GAAP operating loss has essentially nearly broken even, and with a very healthy cash flow status and gross profit developing as expected, the management team is actively exploring ways to enhance shareholder return. We hope to bring executable actions to the shareholders in the near future. That's my answer to Yang's question.

Our next question comes from the line of Eunice Liu from Goldman Sachs.

This is Eunice from GS asking questions on behalf of our analyst Timothy Zhao. My question is on the 2024 outlook. How will the company balance the revenue growth and profitability this year?

Okay, thanks for the Goldman Sachs analyst’s question. Currently and also in the past year, for the future few years, to balance growth and profitability well is our key principle. We also feel that being a responsible company with long-term trajectory growth, this is the right principle. Given our product's ability to maintain the respective value proposition, we expect the PaaS smart solutions and SaaS and other segments to continue their overall chance of growth and profitability. Consequently, our overall gross margin will exhibit some structural fluctuations within a small range depending on the revenue proportion changed among the three segments over time. After a year of adjustment in 2023, we believe our team operations and R&D are all well aligned. This has been validated by the per capita productivity and customer efficiency data over the past three to four quarters. We are confident in maintaining this operational leverage, achieving customer acquisition and growth while staying efficient. For financial figures, our non-GAAP operating loss was approximately $600,000 in the seasonally low first quarter. Excluding stock-based compensation and some non-operational expenditures, our operating expenses will remain stable and controlled as revenue expenses. Therefore, from the perspective of the structure of the income statement, our non-GAAP operating loss will be positively impacted by increasing revenue and gross profit in the coming quarter. We expect to achieve quarterly non-GAAP operating breakeven soon in this year. Overall, we believe the IoT business still has a long way to grow, especially since generative AI will fundamentally increase the value of smart products, smart spaces, and smart businesses for the end users and customers. Given that the IoT penetration rate is still relatively low and Tuya's competitive position is very strong, many of the competitors have closed down their businesses in the past 2.5 years. Therefore, we believe we will see long-term growth for our business and we are confident in maintaining profitability while we continue to deliver long-term growth.

Our next question is from Kai Qian from CICC.

I have two questions. My first question is regarding your IoT PaaS. In terms of the sectors, which sector do you think will achieve stronger growth or have more potential in the first half of 2024? My second question regarding AI is how can we think of the operational expenditure pressure in the short term while achieving your ambition in artificial intelligence?

Thanks for Kai's question. Regarding your first question about a more detailed kind of forward-looking about different products growth and different categories' growth in 2024, we observed that demand trends across major regions and categories all experienced pretty decent growth. For example, consumer safety and sensor products continue to be essential needs for end users in regions like Europe, North America, and also in developing regions like Latin America and Southeast Asia. Additionally, home appliances, including both small and large appliances, are in high demand. The recovery of especially home appliances is pretty strong across different regions. We also see strong demand for products like robotic vacuum cleaners and energy-related temperature control devices, which are policy-driven in Europe, where the French government is providing significant subsidies for families who install temperature control valves to manage heating energy consumption. Electrical products, including switches, have shown stable performance in many different regions. The lighting products, which contribute the largest quantity in home consumer electronics categories, have shown a rebound due to restocking efforts by the downstream. We believe downstream has seen that selling to end users will start to recover in the second half of the year. In terms of different regions in 2024 for their growth, there are slight differences in demand for different products. For example, Europe remains our largest revenue source. In the primary offline retail and brand-focused European market, we have gained traction by offering high-cost performance and a wide range of Tuya ecosystem products such as energy-saving kits composed of thermostats, walls, gateways, new cost-effective lighting solutions, central control screens, and pet appliances. Currently, the PaaS business in Europe is experiencing steady growth, and our smart solutions are also progressing very well in Europe. They welcome that we provide highly cost-efficient smart devices with a strong software value-added proposition. Southeast Asia, in comparison, is a newer, promising emerging market with rapid development. We target professional channels such as leading telecom operators covering 100 million households in Southeast Asia. Currently, more than half of the telecom operators in Southeast Asia are cooperating with Tuya. Using Tuya's Cube with SaaS and smart devices as a total solution has achieved great results. The demand for smart devices from brands or comprehensive smart business platforms from corporate groups is strong in this region. For instance, Singapore has significant comprehensive energy-saving needs requiring smart meters and controllable devices, as well as effective energy-saving software algorithms. Meanwhile, telecom operators demand an integrated smart platform to provide smart home use cameras and water purifiers with recurring cloud storage or water purifying services as their revenue source to 100 million families in Southeast Asia. The Latin American market is similar to a blend of Europe and South Asia. Product demand is akin to Europe, primarily driven by our PaaS-enabled devices with strong demand in the first quarter. Many system integrators and independent software vendors in Latin America also create demand from telecom operator models and comprehensive smart platform solutions. PaaS in Latin America is growing steadily, and we will focus on promoting our smart solution business. In terms of China, due to economic recovery, the growth in the Chinese market is relatively slower. However, we'll continue to see a few key opportunities, such as the expansion of multinational customers' businesses in China, including Philips projects and e-commerce customers targeting international markets and live-streaming channels selling selected high-quality products. Our main battleground for industry SaaS-based intelligence is still in the Chinese market. For example, our smart hotel business continued to grow steadily in China in the first quarter. The business in North America is currently stable. We have introduced smart solutions into retail channels directly and will continue to expand that efficiently in this segment. Overall, we are more optimistic about the Latin American and Southeast Asian markets and also believe the European market will maintain healthy growth. Regarding generative AI, we will have a large developer conference in Shenzhen next week on May 29, and we welcome all the analysts and investors to attend and can inform our IR team. On that day, we will thoroughly discuss our efforts in generative AI from three different perspectives to all our developers, customers, and partners. The first part is applying generative AI to smart devices through some more production that doesn’t require deep R&D investments. For example, connecting ChatGPT's global language capability to some devices that you can control with free verbal conversations will create interesting experiences and value for consumers. The second aspect of generative AI is that we are going to release our first spatial model, the net zero model, with more details to come at our developer conference. The third is that we have implemented generative AI capabilities in our IoT developer platform, enabling developers to navigate our platform to create differentiated products like smart devices or SaaS services much more effectively and quickly than before. We are excited about this. And again, we welcome everyone to join our developer conference in Shenzhen on May 29.

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

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 day.

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