Tuya Inc. Q3 FY2025 Earnings Call

Good morning, and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Tuya Inc.'s Third Quarter 2025 Earnings Conference Call. Please be informed that today's conference is being recorded. I'll now turn the call over to your first speaker today, Ms. Regina Wang, Investor Relations Senior Manager of Tuya. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to Tuya's Third Quarter 2025 Earnings Conference Call. Joining us today are Founder and CEO of Tuya, Mr. Jerry Wang; and our Co-Founder and CFO, Mr. Alex Yang. The third quarter 2025 financial results and website of today's conference call are available on our IR website at ir.tuya.com, and a replay will be posted shortly after we conclude. Before we continue, please note that our safe harbor statement in the earnings press release applies to today's call as we may make forward-looking statements. With that, let me now turn the call over to our Founder and CEO, Mr. Jerry Wang. Jerry will deliver his remarks in Chinese, which will be followed by a corresponding English translation. Jerry, please.

Hello, everyone. Thank you for joining Tuya's earnings call for the third quarter of 2025. In the third quarter, the external environment remains volatile, continuing the trend seen since the beginning of the year. The global consumer electronics industry experienced an uneven recovery with customer demand becoming more cautious amid ongoing macro uncertainties. Additionally, the high base from the same period last year created added pressure on year-over-year growth. Against this backdrop, our total revenue for the quarter reached approximately USD 82.5 million, marking our ninth consecutive quarter of year-over-year growth and highlighting the strength of Tuya's business model. Gross margin remained above 48%. This result further reflects the resilience of our business structure and the steady improvements we have made in product mix and operating efficiency over recent quarters. In terms of profitability, supported by an improved gross margin profile, greater expense efficiency, and sustained scale leverage, our non-GAAP net margin reached 24.4%, while GAAP net margin was 18.2%. Notably, GAAP net margin expanded by more than 23.6 percentage points year-over-year. Overall, while maintaining key investments in business development, we have continued to optimize our expense structure, allowing incremental revenue and gross profit to translate more effectively into operating profit. At the same time, on the strategic execution front, we continue to fully embrace AI and deepen its integration across our ecosystem. As of the end of Q3, smart devices equipped with AI capabilities account for 93.99% of total shipments, an increase from the previous quarter, demonstrating that AI is swiftly becoming the default configuration for smart devices. On the user side, AI adoption is also scaling quickly. AI has clearly moved beyond single category features like AI voice to a broader spectrum of product categories. Tuya's AI agent service now handles 135 million daily interactions for global users, supporting diverse scenarios such as AI node, AI translate, AI health, AI energy, AI pet care, AI play, AI gaming, AI security, and AI robotics. AI continues to penetrate a broader range of daily devices and lab scenarios, laying the foundation for large-scale product innovation and long-term value creation. During the quarter, we also began global beta testing of our new AI agent app with Tuya ecosystem users. Aligned with our Smart Life smart living mission, we are currently developing a universal AI life assistance for global users, which is scheduled for official release at the CES show in the United States in just over a month. Now let me turn the call over to our Co-Founder and CFO, Alex Yang, who will share more details about our financial performance and business progress.

Hello, everyone. This is Alex. I will now provide more details on the third quarter's results. Please note that all the figures are in U.S. dollars and all the comparisons are year-over-year. We delivered total revenue of approximately USD 82.5 million in the third quarter, representing a 1.1% year-over-year increase. Despite a strong comparison base last year and continued caution in external demand, we achieved our ninth consecutive quarter of year-over-year growth, underscoring our resilience and stability in our business. With this total revenue, our PaaS business delivered strong results, generating USD 59.2 million, a 2.4% year-over-year increase, driven primarily by our strategic focus on customer demand and product optimization. In Q3, the number of PaaS premium customers reached 280, further strengthening our core customer base. In addition, fueled by growth in cloud software products revenue, the SaaS and other businesses showed consistent expansion, generating USD 11.5 million this quarter, a 15.4% increase year-over-year. This momentum was driven by a continued rise in installed devices and a high proportion of recurring revenues. Revenue from Smart Solutions reached USD 11.8 million during this quarter. We strategically scaled back lower efficiency projects and prioritized scalable high-value solutions such as AI energy management solutions and spatial AI solutions to further improve overall gross margin and cash recovery efficiency. From a regional perspective, in the China market, AI Toy continued to show healthy growth in the third quarter. More than 50 customers, including brands, channel partners, and solution providers, have launched products powered by Tuya. Key product capabilities also continue to advance, such as multimodal interactions, long-term memory, and emotion expressions with several connectivity versions coming soon as well. These improvements further strengthened the foundation of expanding into new product categories and regional markets. In the European market, demand for AI-powered solutions such as AI cloud storage and AI energy-saving solutions continues to rise. At the same time, we added several new industrial clients in the energy and HVAC sectors during this quarter. In Asia Pacific, the deployment of Cube, the privatized platforms for several Southeast Asian telecom operators, is scaling rapidly with additional cities entering the delivery phase. The Singapore HDB, Housing & Deployment Board of Singapore projects also progressed into implementation with the first batch of hardware and software solutions delivered and installed this quarter. In North America, AI-enabled products such as smart bird feeders continue to record healthy growth. The strong adoption validates the commercial potential of niche scenarios that integrate emotional values, frequent content interactions, and long-term subscription models, underscoring the structural growth opportunities for AI products in mature consumer markets. In summary, despite pressure in the global consumer environment, Tuya leveraged its diversified product portfolios and strong software capabilities to achieve structural growth. Those trends further strengthen our resilience against external macro volatilities and uncertainties. Moving to gross margin, our blended gross margin for Q3 in 2025 was 48.3%. Total gross profit reached approximately USD 39.8 million, representing a 6.1% year-over-year increase. This growth was primarily driven by concurrent improvements in both our revenue mix and cost structure. By segment, the PaaS gross margin rose to 48.8%, continuing an upward trend from the second quarter of 2025. SaaS and others maintained a strong gross margin of 70.8%, remaining above 70%. Smart Solutions posted a gross margin of 23.8%, slightly higher than last year's 23.5%. Overall, our Q3 performance is in line with our expectations and continues to reinforce the profitability foundation at this stage. On the expense side, we continued to maintain prudent and disciplined financial management. Even as both our scale and profitability expanded, total operating expenses declined to USD 36 million, down 34.1% year-over-year. GAAP operating margins improved significantly to 4.6%, and GAAP net margins increased by 23.6 percentage points year-over-year to 18.2%, while ensuring that R&D investment in key AI initiatives and platform development remain intact, and we continue to exercise strategic cost control to balance growth quantity and profitability. On the cash flow front, operating net cash flow continued to grow steadily this quarter, reaching USD 30 million, a 25.7% increase year-over-year. Our cash collection cycles remain stable, and cash flow quantity materially improved. At the end of Q3, our net cash balance stayed above USD 1 billion, giving us ample flexibility to balance shareholder returns, manage external uncertainties, and support long-term strategic investment. Next, I'd like to briefly highlight some recent progress in our AI capabilities and developer ecosystem, which serves as a crucial foundation for Tuya's long-term growth. At the end of Q3, Tuya's platform had 1.62 million registered developers, representing a 23% year-over-year increase. AI adoptions across smart devices also continue to accelerate. Commercial AI developers have collectively created more than 12,000 AI agents on the Tuya platform, covering a broad range of smart products categories, including toys and pet products, electronics, home appliances, IP cameras, and wearables. Meanwhile, we continue to deepen and strengthen our AI developer ecosystem, anchored by TuyaOS, TuyaOpen, and the T-Series AI Developer Board. On the open-source front, TuyaOpen has seen steady growth in both documentation and code engagement. Since the beginning of this year, the GitHub repository star count has increased by about 80%. To date, over 2.3 million lines of code have been contributed to open-source projects. Beyond the rise of the Tuya developer participation, the overall quality of the ecosystem is also improving significantly. In summary, despite the prevailing external uncertainties, we continue to demonstrate strong resilience and operational agility, achieving solid financial growth and impressive profitability while steadily advancing the AI plus IoT developer ecosystem across our core business segments. Thank you, all. Operator. We can begin the Q&A session right now.

Our first question comes from Yang Liu from Morgan Stanley.

I have one question regarding the business outlook. With more and more trade deals settling down in the international trade market, what is the business outlook going into the fourth quarter this year, which is the peak season? And also, what is your early look for customer demand going into 2026?

Thanks, Liu. I'd like to share three points. The first one is that this year, we still see softened demand on the growth side due to the uncertainties in the global macroeconomic situation. For Q4, we expect that the regular promotion season will be softer compared to last year. We will keep a close eye on this as we have stable turns across multiple countries to see whether the demand will return steadily in December. So that will be the short term perspective. For 2026, as Jerry shared earlier, all those AI features and smart product portfolios are becoming an inevitable trend for the entire sector. More and more consumers are starting to familiarize themselves with these types of products, becoming new users. Major brands and players in the industry are starting to enter these sectors and incorporate them into their growth strategies. Therefore, we have a very positive outlook about growth in 2026. The third point is looking at all the technological improvements in the past decade; we see AI as a booster that will elevate the IoT experience to the next level. Traditionally, the smart home experience focused mostly on connectivity, automation, and control. However, with the introduction of AI capabilities, the user experience is expected to become more intuitive, easier to use, and smarter. This is why we've decided to provide a new AI assistant for life that connects various home scenarios, enabling more people to enjoy the experience of using smart devices. This will lower the bar for entry users. Combining these factors, while we may see some uncertainties and pressures this year, the trend towards AI products is becoming more prevalent and accepted among major brands. We aim to make smart devices accessible to a broader audience. Overall, I think the long-term outlook is very positive, with a constant improvement in the short term.

Our next question comes from the line of Timothy Zhao from Goldman Sachs.

Congrats on the solid results. I have two questions here. One is regarding the AI home agent that you just mentioned. Just wondering if you can share more details on the specifications and use cases of these AI agents that you are going to officially release at CES next month? Also, how do you envision the impact of this new product on Tuya's overall business? Secondly, what is the impact of AI overall on your PaaS, SaaS, and smart solution business? For example, could you break down the segment growth in terms of volume and pricing this quarter? Has AI brought any positive impact on the overall pricing of your products and services as well as on the gross profit margin?

Thank you, Timothy. The first question relates to how we define this as an AI assistant. It is larger than just an agent. We believe that when we consider home scenarios, it becomes clear that there are multiple tasks people wish to have assistance with at home. This AI assistant comes with several agents that can help address those needs. In addition, we consider two key value propositions. The first is that, with the advent of generative AI applications, including GPT and others, we recognize that AI can assist in managing many tasks on the software side. However, there hasn't been an assistant that focuses on the home environment specifically. The agents will be adapted to these home scenarios to enhance quality of life and ease of use. The second key differentiation of this assistant is its ability to interact with physical scenarios through hundreds of millions of Tuya-powered devices. Essentially, we are trying to bring a science fiction experience to reality, similar to JARVIS from Iron Man's house, which many admire but do not yet have in their homes. This is our vision for the user's experience. For ordinary users, we acknowledge that smart devices can still be complicated to use, though they have become much simpler compared to ten years ago. Users shouldn't need to learn an app to operate their smart home; they just need to communicate their needs verbally, similar to how one would instruct a housekeeper or servant. This initiative aims to reduce barriers for new users. As for the second part of your question concerning AI, we believe that 2023 marks the beginning of AI devices. We are excited to see that our education efforts to the market, developers, and customers are starting to yield feedback. As we mentioned earlier, over 93% of the products we shipped this year have AI capabilities. This indicates that our customers and developers are actively trying to integrate various AI features into their devices, including existing ones. This is typical for any new technology adoption cycle. We have a platform that allows for a large-scale testing ground. Moreover, we are offering seamless AI integration across our three business models, including PaaS, solution, and SaaS. This means that from a procurement perspective, customers do not have to learn a different purchasing process for Tuya compared to traditional offerings; instead, it's integrated as a feature set. This will stimulate new demand and potentially speed up AI adoption across the market. We expect positive impacts on gross profit margins soon, but at present, we are focused on promoting and nurturing the market rather than aggressively pursuing profitability in this niche area. This is our overall outlook, Timothy.

Our next question comes from the line of Mingran Li from CICC.

Congratulations on the solid results. I have two questions from my side. First, following the adjustment of recent global tariff policy, could management share more information on the downstream order recovery progress in your overseas market, especially in North America? My second question is about the latest developments on AI technology, particularly regarding commercialization.

Yes. Regarding the first question, a couple of weeks ago, we finalized a temporary one-year agreement between China and the U.S., which means that importers now have stable cost levels at a specific time. This certainty is positive, as the promotions for this year are already set. The new terms will impact the demand for next year. We expect to receive more insights regarding this as we head toward significant promotional events starting this week, including Black Friday. We will gather feedback in December regarding sales performance and order reestablishment for the next year. As for AI technology, I've addressed parts of this in response to Timothy's earlier questions. Currently, we are offering AI features across almost all product categories. We have generic AI capabilities that can be implemented into any product, as well as differentiated vertical AI features for specific types of products. All these offerings are seamlessly integrated into our existing three service structures: PaaS, solution, and SaaS. We're pleased to report breakthroughs in new sectors, such as toys, which we discussed last quarter. The IoT sector has never been able to penetrate this market before, but due to AI, new opportunities have emerged. In Q3 alone, numerous key players in the toy industry began to profit alongside us. We have successfully conducted tests with customers and have received positive feedback from end users. Many customers have initiated trial sales, and we are optimistic about continued improvements, leading to renewed orders and promotional efforts across their sales channels. Therefore, we view AI as a key door opener for additional opportunities.

Our next question comes from the line of Matt Ma from Jefferies.

So I just have one question regarding smart solutions. The smart solutions revenue declined by around 14% in the third quarter. I am curious about the reasons behind this. Could management provide any growth outlook for that segment in 2026, along with thoughts on product category expansion?

Yes. For the smart solutions segment, we anticipate a better year in 2026 compared to 2025, as we expect fewer macroeconomic disturbances globally. As I mentioned, customers in many vertical sectors now perceive AI features and AIoT features as more standard for their projects. Consequently, we will likely capture a larger market share as these features become more prevalent in new projects. Therefore, we expect sector-wide penetration to continue to grow steadily. It may just be a matter of identifying when the tipping point will arrive. We remain closely monitoring the market and will be able to provide more updates in the second half of December as customers finalize their plans for 2026. Regarding product category expansion for smart solutions, we are taking a cautious approach, focusing on strategically high-value categories where AI can make a substantial difference. Our solutions often cater to customers' flagship models, so we are specifically targeting video capabilities, multimodality features, comprehensive interactions on touch panels, and energy-focused gateways for specific scenarios. Although we are not expanding into new categories aggressively, we will keep an eye out for scalable opportunities in the mid-term.

There are no further questions at this time. I'll now hand the conference back to the management team for closing remarks.

Thank you, operator, and thank you all for participating in today's call and for your support. If you have any further questions, please feel free to reach out to our IR team. We look forward to speaking with you at our upcoming investor event. Thank you, everyone, and have a great day.

Thank you for your participation in today's conference. This concludes the program. You may now disconnect your lines. Portions of this transcript were spoken by an interpreter present on the live call.