Earnings Call Transcript - TUYA Q2 2025

Operator, Operator

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Tuya Inc.'s Second Quarter 2025 Earnings Conference Call. As a reminder, we are recording today's call. If you have any objections, you may disconnect at any time. I will now like to turn the call over to Ms. Regina Wong, Investor Relations Senior Manager of Tuya. Regina, please go ahead.

Regina Wong, Investor Relations Senior Manager

Thank you, operator. Hello, everyone. Welcome to our second quarter 2025 earnings call. Joining us today are our Founder and the CEO of Tuya, Mr. Jerry Wang; our Co-Founder and CFO, Mr. Alex Yang. The second quarter 2025 financial results and webcast of the 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, Mr. Jerry Wang. Jerry will deliver his remarks in Chinese, which will be followed by a corresponding English translation. Jerry, please.

Jerry Wang, CEO

Hello, everyone. Thank you for joining Tuya's earnings call for the second quarter of 2025. Let me start with a brief overview of our performance. In the first half of 2025, Tuya generated revenues of approximately USD 155 million, which is about 15% year-over-year growth. Revenue in the second quarter reached around USD 80.1 million, showing an increase of 9.3% year-over-year. During this quarter, global trade uncertainties intensified, with U.S. tariff policies significantly disrupting the global discretionary consumer electronics industry. Consequently, downstream retail channel brands, importers, and exporters adjusted or postponed their operations and planning. However, Tuya has remained resilient, achieving positive outcomes in several key areas, including revenue growth, gross margin and profitability, as well as AI products and ecosystem development. In terms of profitability, we maintained a blended gross margin of approximately 48% for both the second quarter and the first half, with all three business segments achieving stable gross margins, both sequentially and year-over-year. On the operating profit front, despite the seasonal softness in the first half and external global challenges, we still attained a 10% non-GAAP operating margin and a 25% net margin. Notably, non-GAAP operating profit increased by about 127% year-over-year, which underscores the operating leverage inherent in Tuya's business model that remains robust even in a complicated environment. Opportunities and challenges arising from AI adoption and the global trading landscape are contributing to higher market penetration. We are also leveraging our developer platform to provide high value and next-generation AI experiences. By the end of the second quarter, the number of global developers on our platform reached over 1.51 million. We are committed to long-term strategic initiatives such as Tuya Open and our AI agent development platform to enhance our impact and create a business ecosystem that promotes Tuya and the industry’s long-term growth. Now let me turn the call over to our Co-Founder and CFO, Alex Yang, who will provide further details on our financial performance and business progress.

Alex Yang, CFO

Hello, everyone. This is Alex. I will now provide more details on our second quarter results. Please note that all figures are in U.S. dollars and all the comparisons are year-over-year based. Let's start with the financial performance. In the second quarter of 2025, Tuya delivered revenue of about USD 80 million, representing 9.3% year-over-year growth. By segment, PaaS leveraged its diversified product ecosystem to capture essential consumption demand in home appliances, delivering year-over-year growth of 7%. Smart solutions supported by focused hardware offerings and differentiated solutions tailored to various customer segments withstood macro pressures and achieved year-over-year growth of 16.7%. SaaS and others revenue was about USD 11 million, up 15.6% year-over-year, driven by the continued increase in recurring revenue, which exceeded 6% in Q2. From a regional perspective, leading long-term customers in Europe achieved double-digit growth in niche categories such as ambient lighting and home appliances, including air conditioners and air fryers. New customers, including top Turkish solar storage companies and medium HVAC manufacturers in Austria and other regions, also began collaborations on energy-saving production lines. In Asia Pacific, various rollouts progressed as expected. Several Southeast Asian telecom customers, starting with the Cube platform deployment, entered the large-scale delivery space, while smart home and real estate products in Singapore advanced into implementations, contributing meaningful revenue across both hardware and software in the now quarter and the future. In North America, our flagship AI solutions, the smart bird feeder, saw strong momentum and demand, reflecting consumers' sustained willingness to pay for emotional-driven experiences driven by AI. In China, AI toy solutions gained positive feedback in Q2 with plans to expand IP collaborations and target diversified audiences. Admittedly, even with shifting tariff policies introducing global trend uncertainty, stakeholders across the discretionary consumer electronics value chain have become proactive, significantly pursuing off-line retail systems overseas. Nevertheless, Tuya's diversified product ecosystem and software technology capabilities enabled us to take targeted approaches to withstand these pressures, demonstrating our structural resilience. On margins, Q2 blended gross margin was 48.4%. PaaS gross margin reached a historical height of 48.7%, while Smart Solutions and SaaS and others delivered gross margins of 22.5% and 72%, respectively. Considering that Tuya's gross margin reflects the outcome of a platform-based business model combined with a rich hardware ecosystem, Q2 margins align with our management expectations. Maintaining stable, robust margins is the foundation for achieving strong operating leverage. On the expenses side, we maintained disciplined execution. Since early 2024, after rightsizing our team, we have managed to meet operational needs, including upgrading AI capabilities, increasing investment in R&D, cloud and AI technology, building our developer community, and hosting creative events while keeping non-GAAP net operating expenses stable. Thus, we have remained around USD 30 million per quarter for six consecutive quarters. Additionally, in May, we achieved a significant victory in the first class action lawsuit initiated in 2022, successfully defending the rights of Tuya's stakeholders. This also marked the conclusion for the related expenses and eliminated future risk for potential losses. As a result, our operating leverage improved significantly, and we delivered nearly an 11% non-GAAP operating margin in Q2. On net profit, we achieved a 25.1% non-GAAP net margin and a 15.7% GAAP net margin, with the GAAP margin expanding over 11 percentage points. While interest rates contributed a solid part of the net margin increase, this was offset by a decline of over 50% in our accounting share-based compensation expenses, further unleashing accounting profitability. In terms of cash flow, we generated strong operating cash flow of over USD 18 million in Q2 and paid out our second cash dividend of about USD 37 million. The net cash balance stood just above USD 1 billion at the quarter end. Looking ahead, we will continue to explore ways to deploy excess capital to support our business. Next, let me share the quarter's updates on our AI developer ecosystem. So Tuya has always been at the forefront of AI hardware and application deployment, and we remain fully committed to advancing the AI ecosystem. Our goal is to continually lower the development threshold of AI devices and products and promote broader AI innovations and adoptions. First, let me highlight two data points. As of June 13, 2025, 93% of Tuya's shipped product categories were equipped with AI capabilities. Meanwhile, Tuya AI developer platform delivers AI agent services that support 150 million interactions per day globally across scenarios such as AI notes, AI translation, AI health, AI energy, AI pet care, AI trendy play, AI gaming, AI safety guard, and robotics. In light of this, we've also seen strong enthusiasm and rapid expansion across our developer ecosystem infrastructures. Over the past quarter, many AI developers activated Tuya Open cloud services and commercial AI. Developers collectively created 9,372 AI agents across categories, including toys, pets, appliances, electronic devices, and security. These numbers reflect the growing penetration of AI into households and industrial smart devices. The Tuya Open source community also gained strong traction across Discord, Reddit, WeChat Groups, and other platforms. Our global developer base surpasses 27,000 for AI stuff, with documentation reaching 55 countries and regions. Open source code contributions exceeded 2.3 million lines, and the core contributors are steadily emerging as the ecosystem scales. While driving developer engagement, we also emphasize co-creations within the ecosystem. Since Q2, we have partnered with ecosystem collaborators to host multiple hackathon events across online and offline channels, generating hundreds of macro AI devices prototypes with commercial potential. These events span universities, embedded engineering communities, macro spaces, incubators, cloud developer communities, and cultural or IP developer groups, continuing to pave the way to bring AI into millions of households worldwide. For example, in late July, we co-hosted a mega hackathon, AdventureX 2025, attracting over 800 young developers and makers globally over five days. Participants created a range of original projects through our teamwork and collaborations with feedback from developers and broad media coverage, reaching over 10 million people who watched this hackathon. More importantly, we are exploring pathways for maker projects to commercialization. For example, the community initiative OTA Robot project has entered commercialization, with distribution partners fueling its marketing and promotion. It is also driving the adoption of the Tuya T5 developer board across the developer ecosystem. Another category of AI patent products, which won an award in hackathon competition, attracted interest from a celebrity agency and the consumer market, drawing incubation attention from multiple commercial partners. In addition, our collaborations with the open development community are bringing AI hardware development into universities and engaging developer circles, enabling developers to practice IoT applications during their studies. Looking ahead, we'll continue our efforts in two directions. The first is to lower the threshold for AI developers, leveraging Tuya's AI developer platform, AI agent platform, and strategic AI coding tools to help more developers get started quickly with AI hardware development. Secondly, we will accelerate the commercialization of more AI hardware innovations through collaborations within the developer community. Co-creation mechanisms and ecosystem partners will bring excellent products to market and create commercial opportunities. To conclude, while facing macro challenges in Q2, the company has maintained strong profitability in the first half of this year and made solid progress in smart solutions, AI devices, and the developer ecosystem. Looking ahead, we remain focused on the long term, executing three major growth strategies to offset near-term macro challenges while strengthening our foundation for sustainable growth. The three major directions will be: first, we'll continue deepening relationships with core customers, meeting the different needs of both new and existing customers with differentiated approaches, providing tailored product solutions and technology to support them in maintaining competitiveness in their respective markets. Second, we'll boldly seize regional opportunities. In Europe, we'll focus on high-demand categories such as AI-driven energy saving and air conditioning. In Asia Pacific, we will promote smart integration of residential buildings and complexes through our integrated AIoT platform, combining hardware and software. In North America, we'll focus on consumer scenarios experiencing strong willingness to pay such as pet or ambient entertainment. In China, we will deepen partnerships with major companies, gradually building consumer awareness through e-commerce and pursuing industry penetration through realistic group channels. Third, we will accelerate AI innovation among developers, covering new AI-driven hardware applications as well as intelligence building on hardware, driving the industry-wide shift of smart products towards AI agent-enabled hardware. Finally, based on our current financial performance, our Board has approved a cash dividend totaling about USD 33 million. Regular dividend payments reflect Tuya's commitment to returning value to the capital market and our shareholders. They also underscore our enduring confidence in the company's industry perspective, product portfolio, competitive position, and long-term growth potential regardless of the market conditions on the macro side. Thank you all. Operator, I think that's all we'd like to present today. We can begin with the Q&A session.

Operator, Operator

Our first question is from Yang Liu with Morgan Stanley.

Yang Liu, Analyst

Two questions from my side. The first one is regarding the growth outlook given the changing global trade environment in the second quarter and the third quarter. What is the management expectation of the business growth going into the third quarter or the rest of the year? Should we see some acceleration in top line or past shipment growth? The second question is regarding the FX impact. Could the management update us on what is the constant currency growth for the top line in the second quarter to help us understand the FX impact on the P&L?

Alex Yang, CFO

Yes. So I'll answer the first one first. For Q3 and the rest of this year, we see that the uncertainty on the tariff situation continues because till now, we still don't have a conclusion. We don't have the agreement between countries. Therefore, the rest of this year, we will see that the consumer electronic categories recovering right now is still under pressure. The first shipment for Q2 for those products affected by tariffs, and we will have to meet the product demand to sell, but the retail product is also impacted. We will have to closely monitor what's going to be the end demand as it reflects. Currently, major retailers in North America, the brands, importers, and manufacturers all have concerns about demand; we are starting to see risks of decline after retail prices are raised. For this year, we anticipate that the promotional seasons like Christmas, Black Friday, and back to school—new product planning and forecast buyers—indicate this concern. Instead of being too optimistic, some orders may shift from higher-value smart products to lower-value, entry-level ones. This trend is mirrored in Europe, which faces similar uncertainties. Stakeholders are being cautious, reviewing all the impact on end-users in the short term. Additionally, we face a complex supply chain. From core components to manufacturing to international logistics and retail, we have significant growth in the supply chains amidst this uncertainty. A typical example is in the offline retail and e-commerce sectors, where price impacts are becoming quite pronounced. For instance, some fast-growing robotic vacuum brands from China have seen their gross margins and profits decline significantly due to tariff and pricing impacts. Tuya recognizes that tariff impact exists, and last year, we did quite well under the energy-saving incentive program in France. However, that incentive policy is now trying to reduce slightly. Overall, we acknowledge that Q3 will still have pressure, but we expect it to improve in Q4.

Operator, Operator

Our next question will be from the line of Timothy Zhao with Goldman Sachs.

Timothy Zhao, Analyst

Great. Congrats on the very solid results. Also, two questions from my side. One is really on the competitive landscape in the AIoT PaaS segment. Just wondering how much you can see the competitive advantage when I think the whole industry is moving from traditional IoT to AIoT? And what are our ways to maintain that kind of competitive advantage globally? Secondly, regarding your shareholder return policy, it is very pleasing to see the dividend declaration announcement from this quarter. Just wondering if management can provide us more structural understandings of the shareholder return policy for the years ahead.

Alex Yang, CFO

Yes. Thank you, Timothy. So for the first question, we see that we are doing a lot to motivate developers from historical IoT applications to transition toward AI applications. We are offering a variety of different webinars, trainings, and events to gather innovative ideas from the developer side on how we can integrate AI into new user experiences. The data I shared earlier indicates that for the first half of this year, over 93% of the products built using the Tuya platform have already integrated AI capabilities. We are effectively penetrating our combined new AI feature set into the existing Tuya developer ecosystem and customer base. We will continue to do more, as we recognize that exciting opportunities are emerging through AI developments across categories. Regarding the second part about dividends or shareholder returns, as stated in the previous two quarters, we will consider the dividend as a regular policy to offer to our shareholders in addition to other options. The dividend will be based on the company's stable profitability, a solid business model, and healthy net operating cash flow.

Operator, Operator

Our next question comes from the line of Kai Xiao with CICC.

Kai Xiao, Analyst

Okay, and I have two questions as well. My first question is on your gross margin. With this quarter, your gross margin has steadily expanded, with margin, in particular, rising fast. My question is, what are the key drivers for the gross margin going forward? Specifically, how will AI-related revenue affect your overall gross margin mix? That's for the gross margin question. My second question is on the SaaS and smart device solutions. Could you share the primary growth engines for the two sectors? What is your outlook going forward?

Alex Yang, CFO

For the first one, the gross margins represent the competitiveness of the technology we provide and the value proposition in the industry. Currently, all customers evaluate our gross margin. As a public company, we continue to receive positive feedback on our offerings, whether on tech, services, or our ability to help them transition from legacy to smart device makers, and from device reselling to AI and software-based recurring models. We manage all three business models separately. For PaaS, we are satisfied with the gross margin range so far. For SaaS, a gross margin above 70% will be typical. We are seeing SaaS trends growing faster than PaaS because we're acquiring end users transitioning to SaaS offerings as premium recurring models. We're finding that these services have more stickiness. For solutions, we seek to maintain grow margins about 20% based on our higher value proposition. We're comfortable with our current position as we focus on scalability. The gross margins reflect our value propositions to customers. For the solutions, we are set to respond to the key customers and work within their top tiers. The solutions we offer have a differentiated offering and less brutal competition on commodities, as we do not participate in the commodity field.

Operator, Operator

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

Matt Ma, Analyst

I have two questions. The first one is also related to the U.S. tariffs. Are we observing a shift of China-based supply chains to overseas for our brand customers? If so, what other impacts on Tuya? Should we expect to see incremental costs, for example, in logistics modules? The second question is on margins. We are seeing that for Smart Solutions, the gross margin is 22.5% in the second quarter, which is relatively lower than previous quarters. Just wondering what is the reason behind that? And also, given our business model can enjoy very strong operating leverage, what kind of margin profile do you expect to see the company achieve over the next 3 to 5 years?

Alex Yang, CFO

Yes. So the first one is that, yes, after the tariff situation, everyone has been discussing the global supply chain shift. However, this topic has been ongoing since the first round of tariffs in 2018. We see that different product categories react uniquely to international tariffs. Categories that do not rely heavily on complex components have shown some manufacturers relocating to countries like Mexico, Vietnam, and Thailand. Yet, major air conditioning manufacturers continue to produce primarily in China due to reliance on specific components in their supply chains. The tariff situation presents a challenge, but the shift in supply chains has occurred for years. Tuya will adapt to customers' needs where they wish to produce their products. In the short term, finding stable locations for manufacturing is difficult for many producers. We think negotiations between nations will eventually yield results; thus, we anticipate a conclusion to negotiations within a few months. For the moment, the uncertainty surrounding tariffs creates challenges across many product categories that require careful consideration. Regarding gross margins, I mentioned earlier the margin segments of the PaaS, SaaS, and solutions divisions. Our gross margin has always depended on the competitive positioning within these various business models. In the second quarter, the gross margin for solutions dipped slightly due to our introduction of new solutions like AI toys, which may have lower margins initially but have good future scalability. We believe that solutions position us to add value through upcoming user demand while boosting overall margins and operating leverage employed in the business model.

Operator, Operator

Seeing no more questions in the queue. Let me turn the conference back over to Regina Wong for closing remarks.

Regina Wong, Investor Relations Senior Manager

Thank you, operator, and thank you all once again for joining us today. If you have any further questions, please feel free to contact the IR team of Tuya. Goodbye and see you next quarter.

Operator, Operator

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