Earnings Call Transcript - TUYA Q4 2021

Operator, Operator

Good morning and good evening ladies and gentlemen. Thank you for standing by and welcome to Tuya Inc.'s Fourth 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. 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

Okay. Thank you. Hello everyone and welcome to our fourth quarter 2021 earnings call. Joining us today are Founder and CEO of Tuya, Mr. Jerry Wang; and our CFO, Ms. Jessie Liu. The fourth quarter 2021 financial results and webcast of this conference call are available at ir.tuya.com. A replay of this call will also be available on our website in a few hours. Before we continue, I will 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 the first only English translation.

Jerry Wang, CEO

Hello everyone. 2021 was a significant and crucial year for Tuya. In March, we completed our IPO and began trading on the New York Stock Exchange, achieving over $300 million in annual revenue for the first time, which marked an increase of about $0.68 year-over-year. We continue to utilize our leading technology and service offerings to drive the business growth of our customers. For instance, a well-known international brand with a 50-year history, which became our first brand customer in 2018, achieved annual deployments of Tuya IoT PaaS that exceeded over 10 million units with 52 IoT SKUs powered by Tuya. Our SaaS and other business segments experienced year-over-year growth exceeding 170% for four consecutive quarters. The total number of customers grew from approximately 5,000 in 2020 to about 8,400 in 2021. Notably, IoT PaaS premium customers contributing over $100,000 in revenue increased from 188 to 311, roughly 50% of which are Fortune 500 companies. The annual retention rate for premium customers remained above 99%, and the top 100 IoT PaaS brand customers also reached a retention rate of 99%. In 2021, we faced challenges in supply chain disruptions and high global inflation not seen in decades. Despite this, we expanded our gross profit margin from 34% in 2020 to 42% in 2021. Our gross profits rose 106% year-over-year, and Gartner recognized Tuya as a successful global IoT technology company in its research report published in 2021. Throughout the year, we organized flagship events, such as the Bluetooth Development Conference and the Cellular Communication Development Conference, which also showcased our outdoor travel IoT products. We maintained partnerships with global leaders like Google, Microsoft, and Amazon to foster rapid development in the IoT industry. Reflecting on 2021, I want to express my gratitude to our investors, employees, customers, partners, and everyone who supported us. Now, let’s discuss business developments in the fourth quarter. For the full year of 2021, our IoT PaaS business had a DBNER of 153%, a leading level in the cloud PaaS and SaaS sector. In the fourth quarter alone, our IoT PaaS business gained nearly 1,000 new customers, resulting in a total customer increase of 41% year-over-year. We are successfully attracting renowned, high-quality companies globally, turning them into IoT PaaS customers. One example is Trust, based in the Netherlands and known for being a leading consumer electronics accessories brand in Europe, along with a top Turkish home appliance brand and a well-known European home appliance company. In Asia, we supported COMMAX, a global smart home brand from South Korea, in developing visual doorbells and IoT sensing products. Other Asian clients acquired in 2021 include ACE, a leading robot vacuum cleaner brand in Korea, and several reputable companies in India with long histories in consumer electronics. In South America, we helped Coppel, a major department store chain in Mexico, build a smart home ecosystem, as well as support the largest telecom operator in Chile. Our service offerings have enabled regional leaders to develop IoT products like smart cameras and robot cleaners. In North America, we onboarded several new customers, including major brands in outdoor gear and home appliances. In China, we continued to acquire new customers, collaborating with established brands to enhance their product lines with smart technology. Our IoT PaaS settlements maintained solid growth across all regions globally. We are encouraged that the growth rate of our IoT business in emerging markets has significantly outpaced that of developed markets, aligning with our strategy for balanced global business development. The growing interest in IoT products in developed markets is matched by rapid adoption in emerging markets. We also expanded our categories and empowered new IoT products while striving to capture considerable market share in each category. We estimate we hold over 25% of global market share in outdoor lighting. Since 2017, our focus on home safety products has yielded about 15% market share, while our entry into home appliances has resulted in a 10% share in robot vacuum cleaners. We will continue to prioritize growth in outdoor categories in 2022. In our SaaS and other segments, we delivered strong performance in the fourth quarter, with revenue rising to 105% year-over-year. The monthly subscription revenue from value-added services for end customers tripled in 2021, reflecting strong demand. We expanded our customer base for SaaS solutions, partnering with major developers to integrate our IoT offerings into their products. We are proud of our achievements in our first year as a public company, particularly amid significant economic disruptions caused by the pandemic. Key operating metrics, such as the number of active customers and registered developers on our platform, showed substantial growth. As domestic revenue contributions continued to rise, our global business became increasingly balanced. While high global inflation may suppress consumer purchasing power, we are optimistic about improvements in supply chain logistics and signs of recovery among affected e-commerce customers. Our strategy involves leveraging private cloud solutions, cost-effective IoT options, and industry-specific SaaS to navigate macroeconomic challenges while enhancing organizational efficiency. Despite rapid growth over the past seven years, we still see significant untapped market potential with low IoT penetration rates. As we continue investing in research and development, we aspire to become a leading industry standard setter in the global IoT sector. Thank you for your attention. I will now turn the call over to Jessie, our CFO, to review the financial details.

Jessie Liu, CFO

I will provide a closer look into our financial results. Before I begin, please note that all amounts are in U.S. dollars, and all comparisons are on a year-over-year basis unless otherwise stated. As mentioned earlier, we faced a number of industry-wide challenges in the fourth quarter. Nonetheless, we have achieved total revenue of $75 million in the quarter around 3% of our previous guidance range. Our IoT PaaS revenue for the quarter grew by 13.9% year-over-year to $62.1 million. For the full year of 2021, total revenue was $302.1 million, up 67.9% year-over-year, and IoT PaaS revenue was $261.4 million, up 72.3% year-over-year. We have 311 premium IoT PaaS customers for the trailing 12 months ended December 31, 2021, up 65.4% from 188 a year ago. During the quarter, premium customers accounted for approximately 87.3% of our IoT PaaS revenue. Our dollar-based net expansion rate for the IoT PaaS segment was 153% for the trailing 12 months ended December 31, 2021. This is a testament to our ability to expand our platform usage over time and grow revenue from existing customers. During 2021 among all the categories supported by our IoT PaaS solutions, home safety and sensor products, home appliances, products, and entertainment energy-saving products grow at a significantly faster pace than electrical and lighting products. In 2021, the electrical and lighting category products contributed to about half of IoT PaaS revenue. And the contribution of other categories continued to increase in the past few years, reflecting the success of our category expansion strategy. As for our customer base, we classify our top 200 brand customers into four groups. First, well-known multinational brands; second, regional brands with local influence in all continents and countries; third, self-owned brands have large regional retail channels and telecom operators; and the last one, China's cross-border ecommerce brands. In 2021, China's cross-border ecommerce brands accounted for about 30% of the sales of products powered by Tuya. During 2021, brands and business operators are increasingly recognizing the value of pre-packaged industry-specific solutions, which enables them to focus on their own key points of differentiation while not wasting resources, reinventing IoT industry standards. As a result, our revenue generated from SaaS and others more than tripled to $7.3 million in the fourth quarter and $18.6 million in the full year. At the end of 2021, our smart hotel and apartments cumulatively supported IoT upgrades of more than 14,000 hotel rooms in China, 9 times at the end of 2020 and the customer repurchase rate exceeded 85%. Our smart commercial lighting has supported nearly 300 commercial lighting projects in 12 countries and regions including China, Singapore, Germany and the Netherlands, United Kingdom, Canada, especially in office buildings, sports clubs, gas stations, shopping malls and a lot of other use cases. This project also includes more than 100 schools providing students with lighting for improved eye protection. Our community and real estate SaaS was adopted by more than 100 real estate community projects in 2021 to help real estate developers and property managers to manage their properties more efficiently. Our gross profit in the quarter increased by 34.1% to $32.4 million, while gross margin improved to 43.2% from 38.3%. IoT PaaS gross margin continued its increase to 42.5% from 14.1% a year ago, primarily due to our increased economics of scale and improved efficiency for IoT PaaS deployment achieved through effective R&D and expansion into higher margin IoT PaaS product lines. We believe our increased IoT PaaS gross margin is a testament to the strong value that we delivered to the industry chain. Now turning to our operating expenses, please note that we are presenting our operating expenses on a non-GAAP basis by excluding share-based compensation expense from our non-GAAP numbers to provide greater clarity on the change of our actual operating base expense so that you can review performance in the same way as our management. During the quarter our non-GAAP total operating expenses were $6.3 million, non-GAAP R&D expenses grew to $42.1 million, non-GAAP sales and marketing expenses increased to $16.8 million, non-GAAP G&A expenses increased to $9.1 million and other operating income net was $1.7 million compared to $0.7 million a year ago. The increase in the non-GAAP total operating expenses was mainly due to the increase in employee-related costs. Our research and development employee headcount, for example, increased by 56% year-over-year by the end of 2021. We are committed to building a sufficient reserve of talents, which we believe is an integral part of our efforts to navigate external challenges and ensure sustained long-term growth. We're also executing a series of initiatives to optimize our organizational structure and streamline our operating procedures in order to ensure our operating efficiency. As such, we're constantly evaluating our personnel structure to maintain a workforce size that is appropriate to our business scale in the long-term growth strategy. Our non-GAAP loss from operations was $33.9 million in the first quarter and $117.5 million in the full year. Our non-GAAP net loss was $31.2 million in the first quarter and $109.3 million in the full year. Net cash used in operating activities in the fourth quarter of 2021 was $53.2 million, or 71% of total revenue compared to $9 million net cash use of 14.3% of revenue in the same period of last year. The increase was mainly a result of higher employee-related expenses and a change in our working capital. Moving on to the balance sheet as of December 31, 2021, our cash, cash equivalents and short-term investment increased to $1.07 billion. We believe this balance is sufficient to meet our current liquidity and working capital needs. Finally, turning to the share repurchase during the fourth quarter we repurchased approximately 4.3 million ADS from the open market for total consideration of approximately $25.1 million spent to the share repurchase program representing around 12.5% of 200 million authorized announced pursuant to the share repurchase program. This shows our strong confidence in the company's long-term growth prospects. Now turning to the outlook for the first quarter of 2022, we expect total revenue to be in the range of $50 million to $57 million. As you can see, this is a rather large range considering that we are two weeks from the end of the quarter and certainly wider than the ranges we have given in previous earnings reports. So let me explain. Historically the majority of our revenue for the first quarter of the year was recognized in March due to the Chinese New Year holidays. As of today, we have a good visibility on demand. And there's a substantial volume of our product to be delivered in the coming two weeks and of March. While the sudden severe COVID outbreak in China is causing uncertainty on revenue recognition because we can't recognize revenue until our products are delivered and confirmed received by our customers. This is currently a challenge as the number of cities including Shenzhen, Shanghai, and Hangzhou are implementing preventive measures while people remain staying at home, of course, business activities, we may experience practical logistical difficulties. Depending on how things unfold in the next couple of weeks, we could have a substantial delivery in some stage of delay. Having said that, we fully expect orders placed and paid, which will eventually make it to our customer and be recognized either in Q1 or Q2. Nonetheless, we are very cautious at this moment. That's why we have provided our outlook in a relatively wider range. We plan to provide an updated guidance on our total revenue for the first quarter of 2022 around the end of March, when we have more clarity regarding the severity of the above-mentioned logistics challenges. So this concludes our prepared remarks for today.

Operator, Operator

Thank you. Your first question comes from the line of Yang Liu from Morgan Stanley. You may proceed.

Yang Liu, Analyst

Let me translate my questions. The first question is about the IoT PaaS for multinational customers on a global brand after the Ukraine war and whether there are any meaningful changes expected for the full year output. The second question concerns the strong revenue growth of SaaS and other key products last year and into 2022. What should be the growth strategy here, and which sectors do we anticipate will show good growth potential in addition to hotels and commercial items? Lastly, what is the gross margin outlook in the current improving supply chain environment? Thank you.

Jessie Liu, CFO

Thank you, Liu Yang. Regarding the first question, we are monitoring inflation and economic conditions closely as they have a direct effect on consumer demand, which in turn affects us. Since the third quarter of last year, inflation has been rising, and we have observed a general pessimism in the market about economic growth in both Europe and the U.S. This inflationary environment is dampening consumption, particularly of non-essential consumer goods. Retail channels and brand owners have expressed a cautious outlook since last year, with sentiment continuing to decline and no signs of recovery yet. The ongoing geopolitical conflict, particularly the war between Russia and Ukraine, has exacerbated inflation, especially in Europe. We are gathering feedback from our downstream brand customers in Europe and the U.S. For instance, in Europe, sales of IoT lighting products have underperformed compared to traditional lighting products. During periods of high inflation, consumers often gravitate toward cheaper traditional options. Additionally, some brands are struggling to maintain profitability due to increased upstream costs and a spike in transportation costs from last summer, which is squeezing their margins. They are hesitant to raise retail prices because consumers are reluctant to spend more. As a consequence, even with low inventory levels, brands prefer to hold off on production until upstream costs decrease significantly. We believe that consumption will improve once inflation eases and the costs associated with upstream supply chains and logistics return to more normal levels. We have noticed that sales channels for some IoT products powered by Tuya, including Best Buy, are projecting negative revenue growth for 2022. Therefore, we are approaching 2022 with caution given the challenging macroeconomic environment. We will focus on IoT product categories that are not significantly more expensive than traditional options, such as home sensors, home appliances, entertainment products, and transportation items. We will also assist in reducing costs for some IoT products by implementing cost-effective Bluetooth Master Mode solutions. Our PaaS business is growing rapidly in China, and we aim to maintain this high growth in 2022 while also optimizing our operational efficiency to accelerate our breakeven timeline. Regarding the second question about SaaS, we are concentrating on developing our SaaS business in China. This focus has resulted in promising outcomes in 2021, and while we do generate revenue outside of China, our principal emphasis will remain in China for 2022. Our strategies for different SaaS segments are distinct, leveraging our robust hardware ecosystem and software expertise, and we anticipate that all SaaS segments will continue to demonstrate strong growth in 2022. For the Hotel SaaS segment, we have now covered over 2,000 hotels, confirming the market success of our SaaS offerings over the past two years. In 2022, our development strategy will revolve around three initiatives: first, expanding our coverage to enhance our competitive edge, influence, and profit margins to secure consistent revenue. We intend to create a comprehensive SaaS solution to increase our footprint in mid to long-term markets by broadening our sales channels in the hotel and apartment sectors. Second, we aim to target major clients, including well-known hotel chains and key accounts, providing them access to our IoT Core, Tuya Cube, and industry SaaS services while prioritizing our auto industry PaaS and related products. Third, we plan to boost software subscription revenue by developing a hotel solution that will enable us to generate additional subscription income as we add more hotel rooms. In the real estate and community SaaS segment, we made solid progress in 2021, achieving the highest revenue and growth among our three business lines. Our strengthened community and residential SaaS products have positioned us as the preferred IoT platform in China for top real estate and property management firms. Last year, over 150 real estate and community projects utilized our real estate community SaaS, covering more than 70,000 households. We currently have numerous large community projects underway, including several valued at over RMB 1 million. In 2022, we will focus on developing significant Chinese clients through partnerships with Citibank and expanding into new PaaS industry categories. We plan to align our products with the IoT foundation, PaaS, and real estate community SaaS, supporting various collaboration models like out-of-the-box solutions and integrated solutions. This approach will provide large customers with flexible product options based on their needs, helping them achieve their business objectives swiftly. Additionally, we seek to expand our applications into new use cases, develop online capabilities like online ordering, and create open frameworks that enable our real estate and SaaS community products to interact with third-party hardware. This will be a unique competitive advantage and a crucial factor in influencing customer purchasing decisions. As for the commercial lighting segment, we achieved our business goals in 2021 regarding product iteration, customer acquisition, landmark projects, and scaling up use cases. In 2021, we added over 180 Commercial Lighting SaaS customers and launched our first Smart Building SaaS project in the fourth quarter, based on our newly developed Smart Building SaaS and our Smart Commercial Lighting Solutions. For 2023, we are focusing on three major growth strategies in our Commercial Lighting SaaS segment: first, we will aim to penetrate large customer bases and foster partnerships with system integrators and independent software vendors to enhance our brand presence in commercial lighting. We will initiate more landmark projects and assist in developing value-added services, such as human-centric lighting and energy-saving solutions, while providing cloud services tailored to certain customers' private cloud requirements. Lastly, we aim to enhance our integrated hardware and software solutions to speed up deployment at scale. We firmly believe the IoT SaaS market has strong demand and long-term growth potential, and we plan to continue investing in this area. Regarding the third question about gross margin, our pricing for IoT PaaS has always been aligned with certain standards, including industry conditions, upstream and downstream operating environments, costs, and end product sales prices. Our pricing strategy emphasizes mutual benefits along the value chain and promotes our own growth. The expansion of our gross margin over the last few years has stemmed from several factors: R&D efforts that have allowed us to optimize and control costs, revenue generated from higher-margin segments, and the economies of scale we have achieved. Looking ahead to 2022, while we believe supply chain costs may stabilize, high inflation could create considerable sales pressure. Therefore, we plan to maintain stable pricing for IoT PaaS and continue enhancing our cost structure through R&D initiatives while increasing revenue from more complex, higher-margin products. The overall revenue contribution from our SaaS segments is expected to rise this year, which will help us build our gross profit margin. However, to address high inflation challenges, we will also promote the cost-effective Bluetooth Speaker products, even though these may come with lower gross margins relative to other IoT options. Overall, we expect our gross margin to remain flat or slightly improve compared to last year, and our goal remains to enhance our gross profit margin. Let's proceed to the next question.

Yang Liu, Analyst

Thank you.

Operator, Operator

Your next question comes from the line of Liping Zhao of CICC. Your line is open.

Liping Zhao, Analyst

Thank you, Jerry and Jessie, for answering my questions. I have two inquiries. The first pertains to how management assesses any impacts on the overall business. The second relates to business adjustments. Looking ahead to 2022, customer demand and supply chain pressures remain due to the macroeconomic environment. Have you made any adjustments to business operations to address these risks? Thank you.

Jerry Wang, CEO

Let me clarify the Matter first. It is an IoT protocol developed by combining the features of Home Kids, Open Threat, and Zigbee 3.0, focusing on smart homes and local interconnections. With multiple major companies collaborating on this open-source protocol, we expect to see faster adoption, which should enhance the currently low IoT penetration in home appliances. However, Matter faces five main challenges. First, it does not include cloud connection protocols. Second, it only enables narrowband data transmission. Third, it may encounter issues due to the fragmented nature of Zigbee's protocols. Fourth, it will face competition from other network protocols like BOE Mesh. Lastly, the chips meeting Matter's specifications tend to be more costly. Our comprehensive solutions effectively address fragmentation issues at all levels. By adopting a platform-based approach, we've unified our solutions across various systems, chips, network protocols, and IoT models to connect terminals to the cloud and applications. Our collaboration with Matter will surely enhance connections among different brands. Additionally, we will work to resolve the challenges posed by Matter's recommended protocols while also linking Matter with other protocols. These efforts will enhance the differentiation and overall capabilities of IoT products in the market. Tuya will be compatible with Matter protocols, just as we are with numerous other network protocols. An article in the Wall Street Journal on February 22nd highlighted Tuya as the only app demo showcased in the progress of Matter, demonstrating our significant presence in IoT PaaS and the synergies between Tuya and Matter.

Jessie Liu, CFO

Okay. So second question before I dive into specific strategies for 2022, I want to reiterate. Tuya always focuses on the fundamentals of the business that is first forming overwhelming competitive advantage. Second, gaining unrivaled market share. With a challenging macro-environment, our focus is to strengthen the core value proposition of products, improve customer satisfaction and enhance our operational efficiency. During a period of consolidation, the weak will be eliminated and the industry leader will gain more market share. So with $1 billion cash on hand, we are well positioned to weather the temporary storms and capitalize on strategic opportunities that are set to emerge. So come to 2022, first let me talk about our key strategies, our supply chain. So in 2021, we have accumulated extensive experiences in managing the supply chain crisis. We've got a close partnership with core upstream suppliers and earned their trust. This enabled us to secure the necessary production capacity ahead of time. Now in 2022, the supply chain crisis is easing, although there are still partial shortages. We have solutions in place as we already expanded and refined our list of suppliers in the second half of last year. Come to the revenue strategy in 2022, we have three main strategies to cope with the difficult environment. First, China, we are increasing the revenue contribution of China. Although China has also macro challenges, our IoT PaaS business in China is still in its early stage and has a big headroom for growth. So take last year for example, our domestic IoT PaaS business grow at a much faster pace than Europe and the U.S., and also more than 90% of our SaaS revenues come from China. So we will continue to invest in China's PaaS and SaaS business in 2022. Second is the Tuya Cube, the private cloud product. We launched our private cloud product, Tuya Cube last November. This product is designed for brands and enterprises that only adopt private clouds to leverage our IoT capabilities. Tuya Cube is capable of fulfilling customers' needs for local IoT deployment as it enables enterprises to quickly build their own private IoT platforms with differentiated services, high efficiency and stability, while keeping the data completely private. Through the hardware interconnected standards built by Tuya Cube, we can continuously access Tuya's extensive hardware product ecosystem. So Tuya Cube will mainly serve customers that have already developed their own in-house IoT platform or are planning to do so. We can also provide hybrid cloud and edge computing products. We have completed almost 10 private cloud edge computing hybrid cloud products so far. We have more contract projects waiting for delivery from telecom giants in China, Southeast Asia, as well as well-known domestic and overseas brands. In the IoT sectors, 30% of customers use third-party platforms like Tuya, while actually 70% of them develop their platforms in-house. So we believe that Tuya Cube will enable Tuya to penetrate that 70% in-house market. The third one is on the product lines of the PaaS products. We have gained market share over 10% in every major product category we have operated in. Jerry just talked in his script, the dominance of our products have formed a solid foundation for us to further expand our market share in every major category to a point that no one can challenge Tuya. This year we will focus more on household appliances, outdoor appliances, home safety and sensor products. Since the start of inflation last Q3, we have observed these categories have shown a much faster growth rate than lighting and electrical products. Even at the current level of inflation, we will implement cost-effective smart solutions to products that are more high, more price-sensitive. This improvement should enable us to deliver superior customer experiences at a lower cost to put our sales. So our unique ability to integrate software and hardware since our inception to help brand customers equip their products with IoT capability at lower costs. Facing an inflation crisis, we believe this will be a core value for enterprise customers. We are both in awe and wonder of 2022. We might be at the dawn of a global economic recession, but winter will eventually pass and spring should come. So we will be ready for the eventual opportunities. Thank you for the question.

Liping Zhao, Analyst

Thank you.

Jessie Liu, CFO

Okay, thank you again for our course. 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 earning call. Thank you.

Operator, Operator

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