Tuya Inc. Q2 FY2024 Earnings Call

Okay, thank you. Hello, everyone. Welcome to our second quarter 2024 earnings call. Joining us today are Founder and CEO of Tuya, Ms. Jerry Wang, our current CFO, Ms. Jessie Liu, and our Co-Founder and incoming CFO, Alex Yang. The second quarter 2024 financial results and webcasts of this conference call are available at ir.tuya.com. A replay of this call will also be available on our IR 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, Ms. Jerry Wang. Jerry will deliver his remarks in Chinese, which will be followed by a corresponding English translation.

Hello, everyone. Thank you for joining Tuya's 2024 Second Quarter Earnings Conference Call. The second quarter of 2024 was another milestone for Tuya, with our revenue continuing to meet expectations and achieving a robust year-over-year growth of approximately 29%. Our core segments maintained their strong gross margins, further reflecting our unique value proposition and product advantages. Moreover, we achieved our first quarterly non-GAAP operational profit in the company's history, with an operational profit margin of around 10%. This is an extremely encouraging profit level that not only validates the financial viability of Tuya's business model but also highlights our strong operational leverage and our commitment to fulfilling our promises. Moving forward, we will continue to focus on long-term revenue growth and enhancing profit margins. Today, I primarily want to discuss several major statistics concerning the company's fundamentals and long-term development. Firstly, as the leading global cloud platform service provider, Tuya is at a new starting point in the smart technology and industrial landscape. This new beginning includes a better competitive environment and the emergence of smart consumer electronics and business scenarios. In the second quarter, our IoT PaaS business experienced year-over-year growth of approximately 32%, partly due to industrial recovery and new potential in Asia taking advantage of the robust data demand for household appliances and other consumer electronics during the quarter. Our ability to acquire new clients and advance with existing customers was amplified by a more favorable competitive landscape. For example, in Europe, Tuya collaborated with France's leading energy integration firm, leveraging our cutting-edge advantages in AI-driven energy-saving technology to explore the energy-saving market, benefiting from substantial policies and subsidies, and addressing basic needs in people's lives. We aim to set industry benchmarks and jointly promote the implementation of sustainable smart solutions. In Latin America, we saw strong demand for smart transformation and focused on opportunities for ISP collaborations in the past sector, servicing operator clients with Cube and smart device solutions, and exploring smart street lighting projects in the software domain. Based on our extensive cooperation experience with leading telecom operators, we began replicating benchmark projects with leading service provider clients in countries like Central America, Colombia, and Chile. In terms of consumer electronics brands, a 6-year-old Brazilian smartphone brand emerged as one of the largest smartphone brands in Brazil, doubling its growth year-over-year. Our efforts in Latin America are directly reflected in the increased revenue share from this region. In Asia Pacific, our operator customer base continued to expand with two additional operators deploying Cube in the second quarter, including one of the largest telecom operators in Vietnam and another previously existing customer now using Tuya's public cloud. The development of Cube will help accelerate their smart business and open up opportunities in smart home solutions and industrial solutions with Tuya. This collaboration, in addition to recognizing Tuya's technology and product capabilities as the basis for their initial partnerships, also includes shifts from other platforms to Tuya, demonstrating that companies are considering both efficiency and quality in their investments under the strong demand for smart solutions in scenarios where there are limited choices for partners. With such comprehensive technical service capabilities, Tuya has a significant competitive advantage in customer acquisition. Second, as a software technology company with over 80% of its revenue derived from various international regions, Tuya remains committed to delivering the best smart technology to global customers and consumers through different product models, ensuring they receive the best smart experience, particularly through the integration of GenAI technology and the iteration and development of various new products. Smart solutions, which we developed by combining GenAI, embedded operating systems and cloud software capabilities, since we formulated the product strategy for smart solutions in 2023, have experienced approximately 44% year-over-year growth this quarter while maintaining a gross margin of nearly 27%. We believe this gross margin level highlights the value of Tuya's software and products, as it is comparable to or even exceeds the overall business gross margin of some leading brands that design, produce, and sell their products. Our past products and smart solutions complement each other, meeting the personalized needs of different types of customers and providing Tuya with more substantial revenue. This is a highly efficient business model for Tuya because it helps customers expand their product categories, accelerating their go-to-market process and gaining a competitive edge. At this stage of smartification, a rich product metrics and smart product ecosystem are essential for every living customer's business. In this regard, Tuya has a significant capability advantage, and the smart solutions will help us better serve customers and enhance customer loyalty. The core of smart solutions lies in generating revenue through products with more high-value software capabilities and obtaining correspondingly larger gross profit amounts. At present, most of our new customer collaborations focus on smart solutions for devices. For example, in the second quarter, we expanded our cooperation with fixed European brand customers with smart solution orders exceeding 500,000 units, which is approximately $5 million. We also secured orders from temperature control valves, gateways, and other devices from Germany's leading retail chain, totaling $1 million. Additionally, we signed a multimillion-dollar annual smart solution contract with a Dutch company at Tuya's global developer conference, maintaining our deep cultivation of the European commercial lighting market, among others. Since the second quarter, we have continued to invest in devices and edge AI, significantly enhancing the smart product experience through GenAI. We aim to provide customers with better product competitiveness and users with more valuable smart experiences and features. We believe that the sense of intelligence should drive innovation of user experience through AI, cloud, and other technologies, generally promoting the increase in penetration rates. I will provide two product examples. The first one is the smart light street product we have already showcased to the market. Generative AI will understand consumers' personalized emotional needs in different scenarios and control the device to present corresponding colors. The other is a pet camera enhanced with GenAI capability, which can intelligently capture interesting moments of pets and automatically generate cinematic videos with suitable background music, surprising users when they open the app. We see that customers are very eager for such products with differentiated competitiveness. We are also introducing GenAI capabilities into smart scenarios, helping users conceptualize their desired smart scenarios through a thing called connotations, significantly lowering usage difficulty and barriers, and promoting the use and authorization of smart technology. Additionally, continuing to build the developer platform through GenAI and improving the developer's efficiency and experience is part of our platform competitiveness. In the second half of 2024, we will successively launch more new products related to GenAI for our customers and developers. Finally, Tuya's operating margin and financial leverage structure in the second quarter have fully validated the unique value of Tuya's business model. Moving forward, based on our existing experience and foundation, we'll continue to strive for further financial improvements and share Tuya's long-term value with those who support us on our journey: our partners, shareholders, and employees. This special cash dividend in Tuya's first distribution totals approximately $33 million, an amount roughly equivalent to our non-GAAP net profit for the first half of 2024. The non-GAAP metric, simply put, reflects the results of the company's direct business decisions at the operational level, excluding other factors unrelated to the business model. Based on this, Tuya achieved non-GAAP operating profitability for the first time this quarter and a solid operating margin. Considering the company's abundant net cash and the fact that we have already had positive operating cash flow for five consecutive quarters from the second quarter of 2023 to this quarter, we believe that now is the optimum moment to provide long-term rewards to those who have supported Tuya and share in our success.

Thank you, Jerry, for sharing the company's growth strategies and long-term development philosophy. And also, thanks for your kind words. Now I will discuss our financial results and provide more detail on the numbers discussed by Jerry. 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 second quarter of 2024, our total revenue reached $73.3 million, up 28.6% year-over-year. Excluding the adverse impact of exchange rates between the U.S. dollar and RMB, our year-over-year growth would have been 31%. Most importantly, we achieved non-GAAP operational profitability for the first time this quarter, with a solid profit margin of 10%. These core financial figures demonstrate that Tuya's strategies and efforts are yielding positive results. As Jerry mentioned, we are encouraged by the fact that Tuya is in a stronger financial and operational position. Our IoT PaaS revenue in the second quarter was $54.3 million, representing a year-over-year growth of 32%. Regarding product categories, we saw robust demand growth across all categories, with home appliances experiencing the highest year-over-year growth of about 65%, due to our efforts to deliver high-value products to our customers. Lighting and electrical achieved approximately 30% year-over-year growth due to the normalization of downstream inventory compared to the same period last year. From a regional revenue demand perspective, Europe continues to be our largest market, accounting for about one-third of total revenue demand. The Asia Pacific region and Latin America have seen continuously accelerated demand growth, with contributions clearly rising compared to last year. The Asia Pacific region accounted for around one-third of total revenue demand, while Latin America's contribution increased to nearly 10% to 15% in the second quarter. We are pleased to see that the revenue contribution structure is similar to Q1. On the customer front, we serve approximately 3,000 customers in the second quarter of 2024, a slight decrease from the same period last year. Overall, however, our key account customer strategy has built a larger top-tier customer pyramid, with increased customer efficiencies serving as the best evidence. In Q2, our per capita revenue and per capita gross profit continued to see significant year-over-year increases of about 53% and 57%, respectively. Additionally, our 12-month DBNER has sequentially rebounded for three quarters, returning to 127% at the end of this quarter. The growth margin of IoT PaaS was 47.6% this quarter, remaining at a stable and healthy level with an improvement of around 3 percentage points year-over-year. This improvement was driven by a higher proportion of high-margin products in our portfolio, such as smart kitchen and pet devices. Our smart solutions segment recorded revenue of $9.4 million in Q2, an increase of approximately 44.2% year-over-year. During the quarter, we achieved strong results in outdoor, central control, and energy-saving device solutions, such as smart temperature control devices. The transformation of the smart solutions business has served as an important tool for us to increase customer stickiness and meet their demand for competitiveness in device intelligence. Our SaaS and other sectors recorded revenue of $9.6 million in the second quarter of 2024. This was a stable quarter due to adjustments in revenue structuring. Revenue from high-value software value-added services, such as cloud storage and Cube smart private cloud solutions, remains substantial. The overall gross margin for SaaS and others was 71% in Q2, consistent with our expectations based on the mix of services. Regarding the operating activities and expenses, I will provide a detailed view on a non-GAAP basis, which excludes certain items to give a clearer picture of our operational efficiency. We continue to present our operating expenses mainly on a non-GAAP basis. In Q2 2024, our non-GAAP total operating expenses decreased by 15.6% to $27.8 million from $33 million a year ago, largely due to reduced employee-related costs in R&D, sales and marketing, and G&A expenses, as we maintain a more streamlined team compared to the second quarter of last year. These results were achieved not only through internal organization and team management optimization but also through our continuous effort to improve efficiency by embracing new technologies. Under our comprehensive strategy of embracing GenAI, we are applying GenAI to improve our internal development, operations, marketing, and logistics efficiencies. Our workforce is expected to remain stable this year. Regarding sales and marketing activities, we continue to adopt a strategy of appropriately increasing market activities in line with revenue growth and market activity needs. For example, in the second quarter, we received significant attention by hosting the global developer conference in Shenzhen at the end of May. One of our next major events will be participating in IFA in Berlin in early September, where we will showcase the new experiences GenAI can bring to the industry and developers. On the other hand, co-hosting exhibitions will help reduce our costs while assisting customers in increasing their industry influence. Driven by strong revenue growth, enhanced efficiency, stable gross margins, and excellent control over expenses and costs, the second quarter marked our first-ever non-GAAP operational profitability. We are confident in this achievement because Tuya's business model allows for profit growth at the top line without requiring significant additional expenses. As a result, this profit will largely translate into profit increments for the company. Our non-GAAP operating profit margin directly reached around 10% in the second quarter, achieving breakeven for the first time. This milestone also indicates that Tuya has entered a new phase of business operations, one that is self-sustaining. Additionally, we recorded approximately $12.5 million in interest income in the second quarter, providing additional capital for our daily operations. We continue to follow a consistent capital strategy, prioritizing the protection of our principles while maximizing fund supplements. Our non-GAAP net profit reached $20.8 million, setting a new quarterly record. Operating cash flow continued to exceed $10 million, and our net cash reached over $1 billion by the end of the second quarter. Overall, we are thrilled about the qualitative changes in our financial performance in the second quarter and believe that Tuya now has a solid financial and operational foundation, allowing us to reward our supporters with cash dividends. Looking ahead, we are committed to continue driving top-line growth, operational leverage, healthy cash flow, and shareholder returns.

Hello, everyone. I'm excited to engage in many discussions with you in the future.

Operator instructions. And our first question is going to come from the line of Yang Liu with Morgan Stanley. Your line is open. Please go ahead.

Let me translate my question. My question is about the future demand outlook given we'll be facing a very high base starting from the second half last year. What will be the expected top-line growth, and whether the almost 30% growth in the first half can be sustained in the second half? Thank you.

Yes. Thanks for the question. This is Alex. I’d like to address this question from both an external and specific perspective. As a company embedded within its industry, Tuya's strategy is to seize the right opportunities and take actions that align with our capabilities and vision. Thus, the macroeconomic environment is crucial, as demonstrated over the past 3 years. However, what's even more critical is how the company positions itself to capitalize on opportunities and expand revenue amidst competition and market dynamics. Externally, we observed that after a recovery in the first half of this year, the macroeconomic environment has stabilized. You might have closely followed China’s export data for the first half and second quarter, which serves as a significant indicator of global demand within the global supply chain. For example, driven by factors like inventory replenishment in Europe and the U.S. and new demand from emerging markets like Southeast Asia, the number of household appliances exported from China grew by approximately 25% year-on-year in the first half of this year. This is a robust result. Of course, smart devices extend beyond just home appliances, and we've seen similar trends in other categories, including strong recovery and growth in smart lighting in the first half, with consumer security products also performing solidly. Additionally, we've noted that some downstream companies in non-smart sectors of consumer electronics have shown strong performance. With their market positioning and value chain stages being similar to our customers in the consumer electronics sector, the household appliances exported in July still achieved year-on-year growth of 16% in value and 23% in volume. However, there was a slight slowdown in momentum on a month-on-month basis, which is normal due to the seasonal and cyclical nature of consumer electronics with peak and off-peak seasons. Generally, Q3 is a relative off-season, while Q4 is a peak season due to preparations for Christmas and Black Friday. Taking all these factors into account, we believe the industry is in a positive state of development. The next key question is what Tuya will do and should do. In this context, Jerry's earlier presentation has outlined Tuya's strategy and focus areas clearly. Currently, Tuya operates a cubic model, comprehensively covering the intelligence needs of enterprises. So, the X-axis represents the diverse needs of customers. For some customers needing strong supply chain capability but lacking cloud and software intelligence, Tuya's past products fit into play. Others need complete end-to-end smart device and business capabilities, which is where Tuya's smart device solutions and Cube smart private cloud products meet those needs. The Y-axis reflects industry diversity, covering everything from single smart consumer electronics and retail products to a multi-category ecosystem of smart homes and commercial scenarios all supported by Tuya. The Z-axis represents geographical diversity; as global smart cloud platform service providers, our customers, developers, and ecosystem partners span the globe, providing a solid foundation for our overall business and performance. Looking at our business, our European business remains steady, but the growth rate in Latin America and Southeast Asia is quite impressive, contributing significantly to the 29% year-on-year revenue growth in the first half and 10% non-GAAP operating margin achieved in Q2. Looking forward to the second half of this year, it's well-known that due to the ordering pattern of the downstream smart consumer electronics industries, it will be challenging to provide an accurate year-on-year number today. However, considering all the above factors and competitive advantages, we remain optimistic about sustaining year-on-year growth in our core business in the second half of this year. Thank you.

And our next question is going to come from the line of Timothy Zhao with Goldman Sachs. Your line is open. Please go ahead.

I have two questions here. The first one is regarding the growth forecast for this year. The second one is related to the dividend outlook.

Thanks, Timothy. I believe your first question is about our forward-looking operating profitability. The second question is about our long-term view of cash dividends. Achieving profitability is not something that can be decided in one quarter and accomplished in the next; it fundamentally relates to the business model and strategic direction, followed by the collective execution efforts of the entire organization. Reaching non-GAAP operating breakeven this quarter is a significant milestone, and achieving a 10% margin on our first attempt is considered a strong outcome. Moving forward, we will continue to balance growth with profitability, with our next goal being to expand our revenue scale so that margin and profit figures become more meaningful. To this end, we have a solid foundation and experiences that we can share. First, Tuya's income statement has a rather clear financial logic. Thanks to our business model, our enterprise services developer community, and the platform, we do not need to make significant incremental investments to acquire customers to generate revenue. This means additional gross profit generated will under effective cost control translate directly into profit. Our overall gross margin is a structural result of the combined gross margins across our three major business segments, which reflect market competition and product value. While there will be fluctuations quarterly, the margins remain stable overall. Our gross profit has seen considerable and efficient growth over the past year, alongside revenue and the current size of our team. This growth in gross profit has been our source of profitability. Our cost control measures have been evident. Since the end of 2021, we have consistently maintained a downward trend in expenses, with non-GAAP operating expenses remaining slightly over $30 million in the past several quarters. The return to revenue growth has given us confidence to modestly increase market and sales investments as needed, but we will rigorously control costs overall, balancing operating leverage and profitability.

Regarding dividends, I would like to discuss the special dividend announced. It is called a special dividend because there is no legal definition of non-GAAP earnings. Under GAAP, Tuya has not achieved full-year profitability due to relatively large non-cash share-based compensation expenses, making it challenging to issue a final or annual dividend. However, the actual dividend amount of approximately $33 million corresponds to Tuya's non-GAAP net profit for the first half of this year. We base this decision on our current non-GAAP operating profit level, cash flow, net cash position, and other relevant core financial indicators. Planning the dividend amount and timing is based on these considerations, prioritizing performance while ensuring the company can invest and grow according to its strategic needs.

And our next question is going to come from the line of Kai Qian with CICC. Your line is open. Please go ahead.

Congratulations on the strong quarter. My question is regarding GenAI. As you mentioned, GenAI is an important strategy for Tuya. Could you further share some of your progress in GenAI, such as key AI functions, typical customer cases, customer feedback, and your further AI investment budget? Some color on the GenAI monetization progress would be great. Thank you.

Currently, we are actively developing several smart device products based on GenAI technology, covering categories such as smart watches, smart rings, AI headphones, smart speakers, and AI glasses. Each product aims to integrate large model capabilities on top of their existing functions to provide a more personalized and intelligent user experience. For example, smart watches and rings will generate more personalized AI reports for users, enhancing interactivity through AI watch faces or GPT voice assistance. AI headphones currently support transcription, and we plan to expand to real-time transcription and translation capabilities in the future. These categories complement Tuya’s smart ecosystem well, which is why they have gained popularity in emerging markets like APAC and Japan. The addition of GenAI capability will significantly enhance the competitiveness of Tuya's solutions, creating better customer engagement and user experiences. These products are currently under intensive development within our teams, with many projects expected to enter trial production in the fourth quarter of this year. For example, we plan to launch smart speaker products with GenAI capability, including a Chinese version in Q4, and gradually introduce this AI capability into our past offerings for developers. Overall, we expect revenue from AI smart devices and software products to begin manifesting gradually starting next year. Regarding GenAI monetization, we see two relevant feasible approaches. The first is integrating capabilities into products for customers and developers to use, allowing the produced products to inherently process GenAI capabilities, and sold to end users who can subscribe to GenAI features on a pay-per-user basis. This classic SaaS model can differentiate our products while generating stable revenue at the end-user level. The second approach is including GenAI capabilities as additional or appropriate pricing within our products, such as PaaS or smart solutions, allowing us to target customers with real competitive needs and a strong desire to excel in smart business.

Thank you, again, for joining us today. 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 today. Thank you.

Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.