Earnings Call Transcript - TUYA Q3 2021

Operator, Operator

Good morning and good evening ladies and gentlemen. Thank you for standing by and welcome to Tuya Inc.'s Third Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. We will be hosting a question-and-answer session after management's prepared remarks. And I will now turn the call over to the first speaker today, Mr. Reg Chai, Investor Relations Associate Director of Tuya. Please go ahead, sir.

Reg Chai, Investor Relations Associate Director

Thank you. Hello everyone. Welcome to our third quarter 2021 earnings call. Joining us today are Founder and CEO of Tuya, Mr. Jerry Wang; Co-Chairman and President of Tuya, Mr. Leo Chen; and our CFO, Ms. Jessie Liu. You can refer to our third quarter of 2021 financial results on our company's IR website at ir.tuya.com. You can also access a replay of this call when it becomes available in a few hours on our IR website. Before we start, please note that this call may contain forward-looking statements made pursuant to the Safe Harbor provision for the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties, and other factors not under the company's control, which may cause actual results, performance, or achievements of the company to be materially different from the results, performance, or expectations implied by these forward-looking statements. All forward-looking statements are expressly qualified in their entirety by cautionary statements, risk factors, and details of the company's filings with the SEC. The company undertakes no duty to revise or update any forward-looking statements for the selected events or circumstances after the date of this conference call. I will now turn the call to our first speaker today, Founder and CEO of Tuya, Mr. Jerry Wang.

Jerry Wang, CEO

Hello everyone and thank you for joining us on our third quarter of 2021 earnings conference call. The third quarter of 2021 presented challenges for the industry due to the global pandemic, resulting in fluctuating growth rates, Amazon store closures, shipping issues, and other global events. Nonetheless, we achieved approximately 45% year-over-year growth in total revenues, amounting to $85.6 million, which aligns with our expectations and guidance. Our SaaS and other business segments, primarily in B2B services, were less impacted by the systemic risks, seeing robust year-over-year growth exceeding 210%. Our overall gross margin remained stable, slightly increasing to 42.6% for the quarter. During this period, we leveraged our industry leadership to assist our key customer groups in staying competitive amid macroeconomic adversities like chip shortages and supply chain issues. Next, I'll update you on our quarterly progress in IoT PaaS, SaaS, and development. For the 12 months ending September 30, 2021, the dollar-based net expansion rate for our IoT PaaS business reached 179%, maintaining one of the leading industry rates for this metric for the eighth consecutive quarter. The number of premium customers, defined as those generating over $100,000 in IoT PaaS revenue in the last 12 months, increased to 306 from 289. In the third quarter alone, we welcomed over 1,000 new IoT PaaS customers, reflecting a 46% year-over-year growth in accounts. Additionally, the number of brands utilizing our platform grew to over 3,800 from 3,300 last quarter, with notable examples including a top weather station specialist in Europe and a leading Indian bottling company that has utilized Tuya for its products. We are also witnessing substantial growth in emerging categories. During this quarter, our initial delivery of IoT PaaS products to a well-known retail brand in electric and gardening tools surpassed 200,000 sets. Given the ongoing chip shortage, the scalability of the Tuya platform is crucial for us to continue expanding our IoT PaaS customer base. For regular product lines, such as electrical engineering and lighting, we assisted customers in upgrading their manufacturing processes to respond effectively to rising chip prices. Moving forward, our goal is to forge additional partnerships throughout the IoT ecosystem. We will strengthen our competitive edge in cross-device connectivity by continuing to innovate in our outdoor product lines and enhance our SDK capabilities. We also expanded our offerings into new outdoor product subcategories and developed new IoT device capabilities and application solutions, enabling users to create adaptable smart mobile applications. Our strategy for an open PaaS platform ensures that developers can design personalized and diverse products using these features. As a result, the number of SKUs empowered by Tuya reached approximately 500,000 by the end of the third quarter, up from 410,000, showcasing our ongoing diversification of the IoT hardware ecosystem. Now, I want to share progress in our SaaS and other segments. In the third quarter, our commercial SaaS maintained consistent growth. For instance, one of Russia's largest telecom operators announced a smart home strategy based on our ecosystem and placed orders for our flagship cloud services. Additionally, a major European insurance group acknowledged the importance of IoT-based risk predictions for future competitiveness, affirming the capabilities of our SaaS solutions. In China, our Tuya hotel SaaS was recognized in a notable smart hotel project, and our apartment SaaS offered integrated solutions for innovative housing projects. A major commercial lighting company in China adopted our SaaS to implement intelligent lighting solutions across various sectors. In terms of value-added services, we currently provide over 16 different services that enhance our customers’ IoT products, with our Tuya Mall gaining popularity for enabling quick and efficient e-commerce integration for brands. For updates on Tuya IoT developers, we've increased our registered developers to over 440,000, up from around 280,000 in the last quarter. The industry barriers created by our developer strategy have proved vital for breakthroughs in the Chinese IoT market, with several examples showcasing the practical applications of our platform. Overall, we remain committed to our strategic objectives, achieving rapid growth despite various macroeconomic challenges. As we provide value to our customers and society while enhancing our competitive position, we are optimistic about our long-term prospects. Finally, I want to share updates on new products launching in the fourth quarter, including our private cloud solutions and advanced IoT features. We offer global customers unified IoT standards to ensure seamless interconnectivity between devices developed on the Tuya platform. Our private cloud solution allows standard IoT business codes to be deployed on customers’ private cloud infrastructures. Following trials with leading enterprises, we are officially launching these solutions in the global market to meet diverse customer needs. Additionally, we have upgraded our IoT PaaS to deliver over 100 advanced features that customers can choose from during development. These enhancements aim to help customers improve their product competitiveness and adapt to market demands. This concludes my remarks for today. I will now turn the call over to Jessie, our CFO, to discuss the financial details.

Jessie Liu, CFO

Thank you, Jerry. Before I begin, please note that all amounts are in U.S. dollars and all comparisons on a year-over-year basis unless otherwise stated. We navigated a challenging quarter to deliver approximately $85.6 million in total revenue, approaching the higher end of the guidance range that we previously provided. Our IoT PaaS revenue reached $72.6 million achieving year-over-year growth of 37.4%. Compared with the first half of 2021, the relatively slow year-over-year growth for third quarter IoT PaaS revenue was mainly in the range of challenges Jerry mentioned earlier. Because we are in a sector of IoT that involves real physical devices, the majority of which are consumer-level devices, our short-term revenue may be impacted by the downstream fluctuations of the entire consumer electronics industry. We believe that looking at our performance for a longer period of time, such as the sum of the first three quarters of 2021 will provide a better picture of our actual condition and long-term growth. Total revenue for the first three quarters of 2021 was $227.1 million, up 94% year-over-year and IoT PaaS revenue was $199.3 million, up 105% year-over-year. We totaled 306 premier IoT PaaS customers for the trailing 12 months ended September 30, 2021, up 87.7% from 163 for the same period ended September 30, 2020. During the third quarter of 2021, premium customers accounted for approximately 89.2% of our IoT PaaS revenue. The number of IoT PaaS customers and new customers we served during each quarter grew sequentially this year. This expanding customer mix demonstrates a healthy customer structure and potential for future organic business growth. Our dollar-based net expansion rate for IoT PaaS segment was 179% for the trailing 12 months ended September 30, 2021, flat year-over-year. We have maintained 160% or higher, which is excellent performance for eight consecutive quarters since we began to track this metric. This reflects our ability to expand our platform usage over time and grow revenues from existing customers. Our revenue from SaaS and others increased to $5.6 million, representing 214.2% year-over-year growth. We saw increasing demand from service providers to provide various innovative software-enabled services for their customers by leveraging the combination of Tuya IoT SaaS and connected by Tuya devices. We also saw a strong need from brands and other players in the industry to largely boost their own smart devices and IoT business-related capabilities. Meanwhile, revenue from our non-core smart device distribution business increased by 66% to $7.4 million, primarily due to the increased demand from customers for specific smart devices directly sourced from OEMs by the customer. Our gross profit increased by 79.2% to $36.4 million, while gross margin improved to 42.6% from 34.4%. IoT PaaS gross margin continued to increase to 42.9% from 34.9% a year ago, which represents our strong value in the industry chain, primarily due to our increased economies of scale, improved efficiency for IoT PaaS deployment, achieved through effective R&D and expansion into higher margin IoT PaaS product lines. Now, turning to our operating expenses, please note that we are excluding share-based compensation expenses from our non-GAAP numbers to provide greater clarity on the trends of our actual operating base expenses so that you can review performance in the same way as our management. During the quarter, our non-GAAP total operating expenses were $69 million, up 120.8% year-over-year comprising of non-GAAP R&D expenses up 144.8% to $47.1 million. Non-GAAP sales and marketing expenses increased by 114.6% to $19.7 million. Non-GAAP G&A expenses increased by 124.6% to $6.7 million and other operating income net of $4.5 million compared to $0.1 million in the third quarter of 2020. The increase in non-GAAP total operating expenses was mainly due to the increase in employee-related costs. As of September 30, 2021, we had 3,700 employees, representing a year-over-year increase of around 80% and a slight quarter-over-quarter increase of 4%. The sufficient reserve of talent is part of our long-term sustainable development strategy. During the recruiting peak season in the second quarter, we strategically attracted a large number of new employees to join us and support our business growth, and most often new hires were onboarded and in place during the second quarter to the third quarter. Building the large pool of qualified talent has positioned us well to tackle the challenges posed by the current external economic environment and its current and future impact on workforce and long-term sustainable growth. Going forward, we expect to maintain a workforce size that is appropriate to our business scale and long-term growth strategy and will evaluate changes as necessary. We believe maintaining a healthy personnel structure is critical to an enterprise's business development operating efficiency. To continue to support and extend our ability to develop IoT solutions and to support our customer’s IoT growth, we must continue to invest in R&D, sales, marketing, and in G&A. As of September 30, 2021, our R&D personnel accounted for over 72% of total employees, which is generally consistent with previous periods. With the rapid growth in the company's business scale, the corresponding growth of R&D personnel provides long-term support for various business and product updates and iterations going forward. Likewise, the number of sales and marketing personnel need to match our growth in scale in order for us to deliver sufficient marketing capacity and carry out effective promotions. Meanwhile, G&A personnel also need to expand accordingly to ensure a high operating efficiency of the company as a whole. Our current personnel structure has been tried and proven throughout the rapid growth and expansion of our business and products over the past few years. As we have grown our personnel within each of these functions, our non-GAAP R&D, sales, marketing, and G&A expenses have also increased on a dollar basis. In addition to the employee-related factors, the increase in non-GAAP sales and marketing expenses in this quarter was mainly due to our participation in a series of worldwide marketing events such as the U.S. ISC West in July, and the Guangzhou International Lighting Exhibition in August. The increase in non-GAAP G&A expenses was mainly due to an increase in a series of professional services fees incurred due to being a public company such as audit fees, legal counsel fees, and HR services fees paid for establishing our talent reserve. During the quarter, our other operating income was $4.5 million, primarily due to the receipt of the software value-added tax refund. In the third quarter, our non-GAAP loss from operations was $32.5 million and our non-GAAP net loss was $31.2 million. Our non-GAAP operating margin was negative 38%, down 19.5 percentage points from negative 18.5% in the same period of 2020 and our non-GAAP net margin was negative 36.5%, down 19.1 percentage points from negative 17% in the same period of 2020. Net cash used in operating activities for the third quarter of 2021 was $46.1 million or 53.8% of total revenue compared to $2.2 million net cash used or 3.6% of revenue in the third quarter of 2020. The increase in net cash used was mainly due to the increase in employee-related expenses and working capital changes to support the ordinary cost of business. As compared with the net cash used in operating activities excluding one-off cash inflow from our IPO for the second quarter, the increasing cash outflow for this quarter was mainly due to the net increase in accounts receivable, after an offset by advance from customers, mainly as a result of the more favorable credit limits and payment terms that we offered to certain customers with good credit history to help them cope with adverse impacts of the challenging external environment this year and the decrease in accounts payables, primarily due to timely cash payment of our purchases just before the end of the quarter according to the payment terms stipulated in contracts. This was ordinary working capital changes that were well-controlled under our strict management of cash flow and credit risk. Moving on to the balance sheet, as of September 30th, 2021, our cash, cash equivalents, and short-term investments increased to $1,179.6 million. We believe this balance is sufficient to meet our current liquidity and working capital needs. Finally, turning to the share repurchase, during the quarter ended September 30, 2021, we repurchased approximately 2.8 million ADS from the open market for total consideration of approximately $28.6 million pursuant to the share repurchase program, representing around 14.3% of the $200 million authorization announced for the share repurchase program. The average repurchase price was over $10 per ADS. This shows our strong confidence in the company's long-term growth perspective. Now, turning to outlook. For the fourth quarter of 2021, we expect total revenue to be in the range of $72 million to $77 million. This forecast only reflects the company's preliminary view on our current market and operational conditions, which are subject to change due to various uncertainties, including, among other things, those related to changes in the global economy, inflation affecting the purchasing power of end users, supply chain constraints, disruption due to chip shortage, and the limited sea freight capacity and the recovery of customers impacted by selling policies online retailers. This concludes our prepared remarks for today. Operator, we are now ready to take questions. Thank you.

Operator, Operator

Thank you. Your first question comes from the line of Lee with CICC. Your line is open.

Unidentified Analyst, Analyst

Thank you, management. Congratulations on the continued strong growth of the SaaS business. Could you provide more details on the development plans for the SaaS business? What areas are you prioritizing for expansion next, and will there be any adjustments to the organizational structure? My second question is about the domestic business. Can you share the latest scores and plans for that segment? Should we anticipate an increase in the proportion of domestic revenue moving forward?

Jessie Liu, CFO

Thank you. Yes, the overall SaaS and other segments are growing strongly, and we have seen significant demand for IoT upgrades in various business scenarios beyond residential applications. As our SaaS and industry developer products have matured, we are better equipped to meet the diverse needs of different business scenarios for IoT, offering operators efficient, energy-saving, safe, and user-friendly experiences. In the third quarter, we delivered SaaS and industry developer products to over 400 customers. Now, regarding the development plans for the segment, in the hotel and apartments SaaS space, we currently serve over 40,000 hotel and apartment rooms in China, connecting around 500,000 IoT consumer electronics devices in daily use. Most of the revenue in this segment comes from China. With enhancements to our software and a more robust ecosystem of connected IoT hardware for hotels and apartments, we expect significant future growth. Furthermore, as the COVID situation improves, we have seen an increase in SaaS requests from overseas customers. Moving forward, we intend to collaborate with our OEM and brand customers to expand into the overseas hotel and apartments segment. In the real estate and community SaaS area, we have achieved strong results this year and particularly in the third quarter. Several leading Chinese real estate developers and property management companies have purchased our SaaS products, including notable firms like New Hope Service. They have implemented our SaaS in various residential communities. For instance, a company that began collaborating with us last year is applying our real estate SaaS across six cities, including Wuhan. This initiative will further contribute to the growth of our IoT PaaS business, where a top consumer electronics brand will utilize Tuya’s IoT PaaS to enable device control through our SaaS, enhancing IoT experiences for real estate and property management firms. We also plan to secure more SaaS contracts with distinguished real estate and property management companies while partnering with various channels in different cities to deliver residential community SaaS directly to large existing residential areas. Our goal is to expand from residential communities to industrial parks, school campuses, logistics parks, and similar demands. The SaaS product for non-residential parks is currently in development, and we will continue to focus on the expansive market in China. Our commercial lighting SaaS has been one of our fastest-growing products this year, achieving popularity through its energy-saving group control features and appealing lighting experiences. Currently, over 1,000 classrooms in China have implemented our commercial lighting SaaS, benefiting tens of thousands of students. In the third quarter, we also initiated a flagship project with an advanced manufacturing factory in China that achieved significant energy savings through our lighting solutions. A national airbag inspection center in China has also adopted our commercial lighting SaaS. Internationally, approximately 15% of our commercial lighting SaaS revenue came from overseas markets, including a large sports club in the Netherlands that has equipped itself with our product. Our commercial lighting SaaS products are comprehensive, and our team is expanding into building SaaS, which integrates HVAC systems with our IoT Cloud Platform via industry Edge Gateways to enhance system intelligence and energy efficiency. Several recognized HVAC companies are expressing interest in partnering with us. The global demand for energy-saving and carbon reduction solutions represents a significant market opportunity for our commercial lighting and building SaaS. Additionally, our essential security and self-service SaaS products also have robust application scenarios, but time constraints prevent me from discussing them in detail. Lastly, regarding the industry cloud developer business, which shares similarities with SaaS, we are addressing IoT demands across various commercial scenarios beyond residential. We provide products like IoT Core and other software application layers developed by independent software vendors. This year, we've identified strong demand for IoT solutions in shared offices and retail environments. For example, our partner My Dream Class has implemented over 150 smart shared office areas in Beijing and Shenzhen using our IoT Core. Various industrial scenario operators, such as wastewater treatment companies, are partnering with us to connect wastewater treatment facilities to their IoT platforms with our technology. We believe there is significant potential for IoT upgrades, and we will continue to refine our industry cloud developer products to facilitate these advancements. In light of the similarities between the industry cloud developer business and SaaS, we have recently merged two teams for enhanced efficiency in both production and research. The extensive IoT hardware ecosystem we’ve built over the last seven years enables us to collaborate with numerous excellent OEMs and brands, positioning our IoT SaaS business to meet global customer needs for IoT devices and upgrades across various scenarios. Regarding the second question, I will pass it over to our President and Co-Chairman, Leo, for his insights.

Leo Chen, Co-Chairman and President

We initially launched our IoT business internationally and began operations in China during the first half of 2019. Over the past three years, we have made significant progress. Currently, our business distribution globally is becoming more balanced, and we intend to further increase our presence in China. We are actively collaborating with various brands, and devices powered by Tuya are widely available across many distribution channels, including all major e-commerce platforms in China. We also partner with channels in the home improvement sector and telecommunications providers to sell smart devices powered by Tuya. Additionally, our SaaS and industry cloud developer segments have found a niche in China, leveraging Tuya IoT SaaS or IoT Core along with a wide array of Tuya-enabled products. Many of the operators in these markets are notable companies with substantial bargaining power, which allows them to demand top brands to adopt Tuya IoT PaaS. This outcome is advantageous for us, as it enhances our ability to acquire customers effectively. We will maintain our focus on business prospects in China and continually work to increase the share of our revenue that comes from this market. Thank you.

Operator, Operator

Thank you. Your next question comes from the line of Yang Liu with Morgan Stanley. Your line is open.

Yang Liu, Analyst

I will translate. The first question is about the financial contribution from the newly released IoT PaaS on private cloud. Is it a replacement for the existing IoT PaaS addressable market or does it represent a completely new addressable market for Tuya? The second question is, as the year ends, when Tuya talks with premium or major customers about the next year's demand, what is your outlook? Could you share details about their shipment or demand plans? Thank you.

Leo Chen, Co-Chairman and President

Let me address the first question. Our private PaaS is still in the early stages of development, but we are seeing considerable interest from large accounts, including significant telecom operators, major retail channels, and well-known brands. Many of these companies are currently in initial discussions with us, including a leading global brand in electric power tools and several large telecom operators in South and Southeast Asia. There will be costs associated with private cloud deployment, maintenance, and IoT PaaS charges when the devices are deployed. As we are still developing this business, we will continue to enhance our products and pricing models. Thank you.

Jessie Liu, CFO

I just want to add one last point to this question. Our private cloud PaaS is in addition to our major product, the public cloud; this is not going to replace the existing market, this is to open a new market, because there are certain customers, especially some large customers, that have strong requirements to place all their data on their own private cloud, which the public cloud product cannot serve. So, we believe we offer a private cloud product that still enables all devices deployed on the private cloud to connect with other brands, which allows us to open a new market. For the next question, which Liu Yang asked, let me take it on. Usually, we communicate with our major customers about their plans for next year at the end of December. Currently, customers are closely observing the holiday season sales, shipping prices, and changes in raw material prices. They are generally now more cautious compared to the same time last year. Branded customers are concerned about the impact of high inflation on purchasing power, the chip shortage, shipping delays, and currently still high sea freight prices, which are all happening in parallel. So, generally speaking, it is currently a stage of weakness in global consumption. However, a relatively good situation is that from our communications with brands, they have exercised caution. Most brands' inventories are in a healthy condition. Although there are many uncertainties in the macro situation, major accounts have generally expressed interest in growth and are looking to continue to expand new product categories next year. This is also a major advantage for the Tuya IoT cloud platform. On our cloud platform, we are continually launching new product support capabilities, allowing reputable customers with channel advantages to easily expand their IoT products. For example, as the epidemic gradually eases, although IoT devices will embrace strong demand, many of our large accounts have expressed interest in working on outdoor IoT devices. So, we will continue to help customers expand by creating more valuable IoT devices.

Yang Liu, Analyst

Thank you, Jessie. Thank you, Leo.

Jessie Liu, CFO

Okay. So, please continue.

Operator, Operator

Thank you. This is the end of the Q&A session due to time constraints. I'd like to hand the conference back to our management for closing remarks.

Jessie Liu, CFO

Before we conclude the call, I want to clarify something. We saw news this morning stating that Tuya missed the market consensus regarding the loss. We want to clarify that we're reaching out to the news source for a correction, as they reported the non-GAAP loss aligned with the market consensus, which is $0.06 per share, compared to the GAAP loss. Our non-GAAP loss is also $0.06 per share, so it matches the market consensus. Thank you again for joining our call. If you have further questions, please reach out to us through our IR website. We look forward to speaking with everyone in our next earnings call. Have a great day.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.