TUYA - Tuya Inc. (TUYA) Q3 2023 Earnings Call Transcript

2023-11-29 02:04:08 ET

Tuya, Inc. (TUYA)

Q3 2023 Earnings Conference Call

November 28, 2023, 07:30 PM ET

Company Participants

Reg Chai - IR Director

Jerry Wang - Founder and CEO

Jessie Liu - CFO

Conference Call Participants

Mingran Li - CICC

Yang Liu - Morgan Stanley

Timothy Zhao - Goldman Sachs

Presentation

Operator

Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to Tuya Inc.'s Third Quarter 2023 Earnings Conference Call.

I'll now turn the call over to the first speaker today, Mr. Reg Chai, Investor Relations Director of Tuya. Please go ahead, sir.

Reg Chai

Thank you. Hello, everyone. Welcome to our third quarter 2023 earnings call. Joining us today, are Founder and CEO of Tuya, Mr. Jerry Wang and our CFO Mr. Jessie Liu. The third quarter 2023 financial results and webcast of this conference called 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 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 corresponding English translation. Thank you.

Jerry Wang

Hello everyone. Thank you for joining the Tuya's 2023 Q3 earnings conference call. Total revenue for third quarter of 2023 reached $61.1 million, marking return to year-over-year gross since the industry and economic downturn at the end of 2021. Revenue grew an impressive 35.7% year-over-year, or approximately 14% when adjusting for exchange rate fluctuations.

We again achieved a record overall gross margin of 60 -- of 46.7% for the second consecutive quarter. Our firmly focus on cost reduction and operating efficiency improvements resulted in 26.2% year-over-year decline in our non-GAAP total operating expenses in Q3. More importantly, our non-GAAP net profit soared to $10.1 million, an increase of almost 5.7 times sequentially, representing a net profit margin of $0.165 cents.

Net cash flow from operations improved both year-over-year and sequential was the net inflows of about $16.1 million. Our net cash position at quarter's coders and was a strong $961 million underpinning our long-term strategic development.

Overall, the third quarter saw robust improvements across all key financial metrics, signaling the positive turning point as we navigate out of the industry's cyclical downturn. Despite persistent challenges to like fluctuating exchange rates and subdued consumers spending, our impressive performance in Q3 underscores our readiness for the post-destocking cycle and a broader recovery in the IT sector. As we look ahead, we are committed to expanding our quality customer base enhancing productions and venturing into new markets beyond consumer electronics.

Let me now show more detail about developments since the start of the third quarter. In terms of our customer base and competitive positioning, our IoT PaaS unit has weathered nearly two years of industry downturn. During this challenging period several competitors particularly IoT divisions of large enterprises exceeded the market due to limited competitiveness of their products and uncertain investment returns.

This shift the open opportunities for Tuya, as we feel that we now have that a global influence and competitiveness compared to two years ago to attract more leading brands seeking efficiency, improve the margins and cost effectiveness in third-party IoT platforms. We forged new collaborations with top tier customers, such as media, [indiscernible] oversea home appliance business, Haier and [indiscernible] for new annuity product IoT platform and Bosch for smart door lock solutions.

Meanwhile, we've won and served customers worldwide through differential strategies and innovative products. This approach solidifies our competitive standing globally and enabled us to effectively cater to unique market demands. The integrated hardware and software solution product strategies we initiated this year is already yielding strategic new customers and wins scalable revenue growth, for example, like Europe, America and Japan.

We're actively participating in the broader macro [ph] and with technology and the products as our focus are at the forefront of the global application commercialization matter, complementing all IoT ecosystem expanding our global influence in the IoT B2B service reach.

In emerging markets like Saudi Arabia our ability to provide cost effective customized solutions led to breakthroughs with two major operators. In Africa, our outdoor software and hardware integrated solutions tailored to unique electricity pricing challenges led to appeal the order from a renowned supermarket chain with our 200 stores in South Africa. Importantly, our initial success in Africa can be repeated across the region.

Furthermore, in South America, the Tuya developed a platform six successfully replicate our Chinese OEM model to support local manufacturing in Brazil. We live in thermostat and the water purifier factory is seeking our software solution for device management systems.

We are optimistic about the ecommerce channel as a huge marketing for practical consumer electronics devices like smart electricals, handsets and outdoor products, helping these lightweight categories achieve rapid promotion, distribution and end user aggregation. Over the past two years, we have consistently supported potential Chinese e-commerce brands in growing into leading brands. For instance, several Tuya customers are now prominent in Amazon's top 10 in smart sockets, outdoor sockets and Bluetooth mini locks. We are unwavering in our commitment to product the focus, innovation and improvements essentially.

In the third quarter, after 18 months since our development, our latest sweeping vacuum solution reached mass production. Our low power audio-video solution for smart door locks benchmarked against industrial leaders also achieved the mass production, with the pro version of our home door lock products Q3 deployment volumes increasing by over 100% year-over-year. We have also enhanced our overseas central control product line such as the U.S. backed product matrix, and added industry capabilities for pre-installed market engineering solutions in China. Our smart central control [indiscernible] integrating local building intercom and clouding abilities innovatively bridge indoor and outdoor intelligence.

We're continuing to strengthen our traditionally strong categories like smart electrical, which will remain significant contributor to the IoT consumer electronics sector in the long-term. We're seeing downstream demand and recover for this market, like practical IoT devices. We're committed to helping customers seize opportunities for downflow. We released the [indiscernible] smart socket solutions to adjust the common issue of mixed band routers, significantly improving the network pairing success rate and experience Atri, a customer innovative solution has seen its brand sales explode now ranking in top 10 on Amazon's platform.

We're actively working to extend beyond the field of consumer electronics bringing Tuya's mature outreach capabilities to more specialized areas. In Q3, we further refined our green energy and outdoor transportation products. For green energy were released an integrated apps supporting the storage, charge and use of solar power, completing the energy management use case from energy monitoring to energy low link scheduling, global leading politic brands like Icon Solar and the DMEGC Hengdian Group have chosen Tuya's IoT task for the new energy storage business.

In HVAC integrated products, Tuya's industrial subsystems have basically achieved the full functionality for managing industry demands and will soon form a closed loop solution with the system [Indiscernible]. As for outdoor products, our 4G Cellular BCU central control product has landed on EVAC [ph] products.

Besides focusing on high quality, innovative and valuable products as our core competitiveness, we're meeting the emerging needs of large group private clouds with our Cube smart private cloud comprehensive solution. For example, we have made good progress in Southeast Asia with our Cube.

Lastly, let's talk about the continuous growth of Tuya's foundational developer platform ecosystem. In the third quarter we focused intently on the foundational pillars of Path 2.0. These pillars encompass full category interconnectivity, seamless interoperationability, rigorous security standards, independent and manageable development process and distinct product differentiation. Our efforts were channeled towards refining the developer experience, significantly enhancing both usability and operational efficiency. This strategic move has further empower developers, granting them greater independence from the need for direct support from Tuya.

In line with this, we have unified and the restructured our official website development platforms, iot.tuya.com, developer site development.tuya.com and developer documentation center. Additionally, we'll launch the brand new development [Indiscernible] platform. This platform acts as a dynamic hub offering extensive resources and collaborative spaces where developers can change ideas troubleshoots challenges and unleash their creative potential marking a significant milestones. The number of developer we just deal with we are sort through about 909,000 by quarter end reflecting an impressive year-over-year growth of approximately 40.5%.

We also emphasized the implication and empowerment of the developer platform in the commercial sector. This approach is designed to empower our brand clients, enabling them to crop and refine bespoke 2B solutions. A prime example of these strategies in action was at our developer conference this September, hosted at the [Indiscernible] in China. During this event, we signed a cooperation agreement with Alstom [ph]. We see advanced commercial functionalities of the Tuya IoT developer platform at our disposal, work collaboratively guiding Alstom in developing their own distinctive hardware and software integration. This Alstom-branded solution encompasses areas such as entire homes and real estate, hotels, rentals, commercial lightings and the building management around others.

In conclusion, I have shared with you today the concrete outcomes of our strategic initiatives in business and product development. These accomplishments are a testament to Tuya's dynamic response and the strategic recalibration in response to the challenges we have faced over the past two years. As we approach the final stage of inventory normalization, and win this [Indiscernible] the consumer electronics sector is definitely finding its footing, we're confident that our persistent efforts will yield a sustained positive results. These strategies are set to guide Tuya back to path of house gross, ensuring we are profitable and efficient. Going forward, we are focused on striking a balancing growth and profitability, thus ensuring we create enduring value with our customers, the wider industry, our shareholders and our dedicated employees.

That concludes my remarks. Next, I will hand over to our CFO, Jessie to introduce our financial data.

Jessie Liu

That concludes the remarks by Jerry. As I review our results and provide more colors on the numbers, please note that all amounts are in U.S. dollars, and all comparisons on a year-over-year basis unless otherwise stated.

In the third quarter of 2023, or our total revenue reached $61.1 million, up 35.7% year-over-year and continue to show a strong sequential improvement over the past four consecutive quarters. Similarly, during the quarter, we were seeing underdepreciation impact of RMB against the USD which adversely hits our total revenue by 7.3%.

Our IoT product revenue in the third quarter was $45.8 million a year-over-year increase of 48.1%. In terms of categories, in the third quarter the most impacted discretionary consumer electronics categories over the past two years smart lighting and electrical products constituted the main force of this year-over-year rebound with the segment revenue grow about 140% year-over-year. Small and the big home appliance grew by 50% year-over-year.

The third quarter of last year was the most severe time for downstream destocking and the growth of this quarter benefited greatly from the end of destocking cycle. Moreover, with execution of product focused enhancement strategies, our core product lines such as vacuum robots, breakers and homolocks, with technological steps have grown by approximately 100% or 180% year-over-year.

Regarding customers, our third quarter revenue primarily driven by the recovery in customer order size and improved customer revenue efficiency. Taking our main IoT part business as an example, our premium customers IoT parts revenue per customer in the third quarter increased by 56% year-over-year, and the same metric for ordinary customers also grew by about 49%. Overall, our platform and the product served over 3,000 customers in the third quarter with an average revenue per customer exceeding $20,000, setting a new historical high.

Our smart device distribution business, now maybe more actively called IoT smart device solutions achieved of revenue of $6.8 million in the third quarter, a year over year increase of 32.1%. With the continuous advancements and the implementation of the smart device solution strategy, we are now quite proficient in this business model and continue to generate robust, scalable revenue. For instance, the smartwatch solution alone secured about $3 million of orders in the form of finished devices in Japan since this Q3 to be delivered according to customer's demand schedule.

The smart tag locator solution also contributed significantly to orders and revenue in the [indiscernible]. Our SaaS and others business had a revenue of $8.5 million in the third quarter reflecting a 5% year-over-year decline, excluding the exchange rate impact. The segment's revenue in the third quarter was actually relatively stable, showing a slight increasing trend year-over-year. As a collection of Cube smart private crowd, value-added services, and the customized software and also various subsegments of SaaS they show different trends according to business strategy and execution. For example, the cloud storage value-added services contributed about $2.5 million in revenue in this quarter, maintaining a very robust and a continuous month-over-month growth. The acceptance and delivery of the Cube private cloud project generated over RMB5 million in revenue.

Customer development and some other new customer number based onetime value-added services decreased by about 15% to 20% year-over-year, under the execution of our customer focused strategy. We're focusing on expanding high quality customers. Going forward, we anticipate a gradual shift in SaaS and other business segments toward a more core business centric structure.

Regarding the overall revenue recovery in different regions, we have observed healthy growth in Europe, Southeast Asia and Latin America. Our blended gross margin in the third quarter was 46.7%, sustaining the historical high level for the second quarter. Each of the three business segments exhibited strong margin profiles. Notably, the gross margin of the smart device distribution segment in the third quarter reached 26.9%, a substantial increase from 12.9% in the same period last year, setting a new historical high. We believe that gross margin is the most direct reflection of the value of our smart device solution.

Moving on to our operating activities and related expenses. We are presenting our operating expenses on a non-GAAP basis by excluding share-based compensation expenses, and the credit related impairment loss from our GAAP numbers. We believe this provide a better clarity on the trend of our operating expenses aligning with how our management team reveals our performance.

In the second quarter of 2023, our non-GAAP total operating expenses decreased by 26.2% to $32 million from $43.4 million in the same period last year. Our employee related costs, excluding share-based compensation declined by 28.9% year-over-year interest rates and the costs are related to offices and the property leasing concurrently decreased by 13.9%. Collectively this cost represented about 74% of the total of our non-GAAP operating expenses in Q3. As of now, our team size has been adjusted to a relatively stable state as just under 1,500 headcount.

Marketing and promotion expenses decreased by 23.9% year-over-year. This disciplined approach to cost control of promotion expenses, coupled with a noteworthy rebounding revenue served as a testament to the importance of operating with efficiency.

Travel related expenses also decreased 20.4% year-over-year. As revenue returned to growth, we're ready to make investments in the business as needed to further pursue business opportunities. But the overarching premise is always to maintain a balance between business investment and the profitability edition.

Additionally, in the third quarter non-GAAP G&A related expenses overall increased, mainly due to routine compliance related professional services projects such as consulting fees legal advisory fees and such. In the third quarter we obtained about $13.1 million in financial income, mainly interest income. Our net cash including cash bank demand deposit as well as time deposit recorded a short term and long-term investments totaling $61 million. We believe these funds can well balance the company's short term business working capital needs and the long-term development requirements.

For example, were evaluating some feasible plans related to our own office buildings, and the land use rights with the objective of achieving long-term cost saving and supporting the company's long-term operational need.

Finally, as a result of our consistent efforts over several quarters, the company's non-GAAP net income expanded significantly by 567% to $10 million in the next -- third quarter a substantial turnaround from the net $15.3 million in the same period last year. Similarly, our net operating cash flow also showed the same trend increasing by 114% to $60 million in the third quarter, a huge improvement from the spend of $13.5 million in the same period last year. Overall, the comprehensively improved financial results not only means that the major strategic direction we set last year and this year has helped us achieve continuous improvement in quarterly financial results, but also indicates the company is on the road track.

With that, operator we're now ready to take questions. Thank you

Question-and-Answer Session

Operator

[Operator Instructions] We have our first questions from the Mingran Li from CACC. Please go ahead.

Mingran Li

Let me translate myself. Thank you, management for taking my questions. First off, congrats on your strong performance on. My query primarily concerns in my side and my questions are as follows. Firstly, is about the outlook for downstream demand in next year. And second is about the past -- in past which category showed the most growth potential and in our SaaS which downstream scenarios are comparatively more promising. My third questions is that what are the strategic trends and growth outlook across different global wages? Thank you.

Jessie Liu

Okay, thank you. Firstly, overall, we have found that IoT consumer electronics are highly sensitive to inflation. During the year of high inflation from last year to earlier this year, the growth trend in discretionary electronic consumption which including IoT devices slowed down significantly compared to 2021. Afterwards, although it reached a relatively stable new balance, as inflation slowed. It was suppressed again with a sharp rebound on inflation in like July, August and September this year. However, at present we observed the end purchase of consumer electronics as in monetarily positive direction, which is in line with our expectation for long term growth in IoT penetration.

From the perspective of end sales, specifically by region and categories, we observed the following. By categories since October, end sales in all categories have recovered to some extent, with household appliances, especially robotic vacuum cleaners, and security sensors performing very well. Electrical products also showed a good recovery trend. However, lighting devices is still in a pretty weak demand situation.

In terms of the region, we've we found out Southeast Asia, South America and also in Europe, the safety products are doing pretty well. And also, other categories are gradually recovering in a pretty healthy direction. In China, apart from home appliance and the robotic vacuum, other categories are relatively weak, but the trend is upward since Q4. The U.S. region showed overall actively weak performance, but electrical and security categories are showing good signs of recovery.

Overall, each region according to its economy, and the environment characteristics has different trends in end IoT electronics consumption, and we will continue to maintain communications with downstream customers to actively respond and seek opportunities according to different market situations.

However, it should be noted that our IoT part revenue is affected by both the destocking cycle and end sales. We observed that the year-over-year performance of end sales in some categories, does not completely align with our shipment downstream. For example, the lighting categories showed relatively weak end sales in Q3, basically from our brands to consumers, but our shipments achieved a significant year-over-year growth in Q3 in terms of IoT parts. This is mainly due to the downstream repositioning their lighting inventory, lighting products, due to the large price difference between smart and -- smart and non-smart watches were the most affected categories in terms of inventory destocking Q3 last year.

In terms of the downstream inventory, the overall situation is in line with our expectations, combining Tuya's IoT part shipments, and end sales in the same way as we previously -- the end of sales in the same way as we previously did, we estimate that inventory held by downstream business, which include OEMs brands and retail channels, has decreased from over a year at its peak time to about four to five months now. And we're further reduced by the end of this year, returning to a level of 2019. Therefore, we feel that inventory destocking cycle is nearing its end and returning to a relatively normal state.

In terms of the SaaS part. As we mentioned, the SaaS and others revenue have including several different products. We have seen great growth potential in Cube, which we promoted this new product. It's a private cloud IoT software we prepared for large groups globally for those companies to realize their own IoT capabilities. This potential stems partly from Cube smart private cloud, serving those large conglomerates allow its rich revenue levels in millions of U.S. dollar when implemented to those large corporates. Additionally, Cube's strategic position is not only limited to just one time private cloud deployment, but in the long term Cube is the tour and the bridge for establishing a long-term cooperation relationships with large key accounts for Tuya. And once those large corporates installed the Cube cloud for themselves, they will start to connect the IoT devices which are powered by Tuya to their own Cube. So we're confident that after the private IoT platform is built for those large corporates, we can unleash the value of Tuya's IoT capabilities and the solutions generating subsequent long-term IoT services related revenues.

In SaaS and others products, we're also optimistic about the hotel SaaS , commercial lighting SaaS and much real estate warehouse SaaS products. The hotel industry with its massive room demands and the market segmentation offers immerse potential for what a number of non-luxury hotel brands taking competitive differentiation. Smart hotel experiences, such as intelligent ordering, contactless check-in and home management, significant competitive advantages, commercializing scheming expensive colliding needs and the potential for expansion beyond lighting to include energy saving conservation and management undoubtedly has a huge market space.

The real estate industry has been subdued in China in recent years. But looking abroad, leveraging our strong influence influential outside of China, we have identified the demand for smart real estate and a full home IoT solution needed this year in Southeast Asia and Australia markets. And we plan to start serving these regional customers next year with Cube products combined with full suite of IoT solution and smart real estate Solutions. And we have been signing contracts with several large customers in Southeast Asia and Australia, including some very large distributor channel and the real estate conglomerate companies in those regions.

So this is my question -- answers first question. Operator, you can move to next question.

Operator

Thank you. [Operator Instructions] we have our next question from Liu Yang from Morgan Stanley. Please go ahead

Yang Liu

Let me translate my question to English. The first one is regarding the geographic breakdown. I would like to ask management to provide more color on the contribution -- geographic contribution to Tuya -- actually like Southeast Asia, China, U.S. and Latin America, Europe area. The second question is regarding the IoT SaaS business, because this quarter Tuya strategically give up some of the non-core SaaS and other business. I would just like to confirm whether the projects have come to an end, or there is still ongoing impact in fourth quarter. Thank you.

Jessie Liu

Okay, thank you, Yang. Yeah, I'm happy to answer about regional revenue contribution question. And before that, I want to give a background, when we talk about the regional revenue contribution, we actually company do a lot analysis to go to the fundamental revenue contribution, for example, a European brands using Tuya's IoT parts, to realize their IoT devices, and then sell in Europe region will consider its ultimate revenue from Europe. But from a financial statement, because all the brands they provide orders, usually to a China OEMs and China OEMs keep orders to us.

So from a financial statement, it will be a revenue from a China, OEM customers, but ultimately from Europe. So right now, when we're talking about the revenue contribution from region we're talking about the ultimate revenue is from which region. So this is analysis done by a company, it's not 100% accurate, but it's largely reflect the trend.

So based on our calculation analysis, in Q3, Europe has becoming the largest revenue contribution region, it's around 30%. And China and the United States each contribute to just less than 20%, close to 20%. And the Southeast Asia, and also Australia, we call this region that basically exclude China, the Asia-Pacific, exclude China region, has grown pretty well in Q3 and has grown to around 15% revenue contribution. And also, the entire Latin America has shown a pretty good trends in the last few years. So Latin America now contribute to the revenue just more than 10%. So that's the overall region contribution.

And we think this is a relatively balanced the contribution and we will continue to use our technology to serve the clients from all the regions and to have the corporates and the consumers enjoy the value from the IoT technology.

In terms of the second question. The major transition in the SaaS businesses in the past, we have certain revenue related to one time, customers need. For example, OEM App, usually new brands, a huge percentage of new brands, they would like to pay a one time fee for OEM App Services. And also there's a customized software revenue from brand customers. So in the last two years, we have been focusing on to -- first is to focus on high quality customer rather than a huge numbers of new customers. So this one time, new customer related, OEM App revenue decrease. And this will maybe continue one or two more quarters, then we'll be stable.

And in terms of the customization software, revenue, and we feel recurring software revenue, for example, like the cloud storage, and SaaS revenue, more high value, software revenue, we want it and also we want more developers to do the one time customization work for brands, for conglomerates customers. So we also have introducing those one time revenue opportunities to developers. So that's why one time revenue, customized software income also decreasing. And this is pretty much stabilized by now. And going forward, we believe when the transition of SaaS and others business stabilized, it will still continue a healthy growth. So that's my answer to Yang's question.

Operator

Thank you.

Thank you. We have our next question from Timothy Zhao from Goldman Sachs, please go ahead.

Timothy Zhao

Let me translate myself. How does management see the competitive landscape in IoT industry and Tuya's competitive advantage? And also, the second question is, what's the company's planning using of capital? Thank you.

Jessie Liu

Okay, thank you. We believe IoT market is locked with extensive future potentials. So we have been keep learning from the environment and improving our business model. And we believe Tuya occupy unique position in IoT industry. And our advantages in the developer and open ecosystem are primarily reflected the following perspectives. We broadly and inclusively support various devices types and protocols, cloud access models and OEM App developments, offering this to developers, customers and part partners with zero technical barriers for them, make it very user friendly open for our customers and developers.

So Tuya position as a neutral technology provider, supports customer and brands, in establishing their own IoT business and adjoining our huge ecosystems for inter operation user experiences. This comprehensiveness and the compatibilities allowed Tuya to serve 95% of the global markets of independent, commercial and brand customers.

We also tailor our own capabilities to customer needs with a variety of products, generating long term revenue, which -- this is our main product strategy. This approach is not confined to the OS-based model of cloud license module in IoT parts products, or key categories, IoT device solutions, nor is it limited to purely cloud the development the capabilities for SaaS development or private cloud deployments. Tuya prioritize its platform ecosystem and a customer service strategy over range of constraints of revenue model, a month of performance matrix. This allows us to cover a broad, broader range of global customer with more diverse developer products, making the hassle more user friendly and open.

So we believe this has been our key positioning and the values in terms of our accumulation in this industry for almost nine years.

And regarding the second question of for the use of capital. In terms of capital usage, we maintain a rigorous approach in our operations, managing our funds and budgets, strictly and striving to preserve cash through safe highly liquid fixed deposits or other money -- monetary Fund instruments, meeting the needs of daily operations and the long term plan. Regarding capital expenditures we're cautiously watched for suitable merger acquisition opportunities. Additionally, we might like other companies invest in necessary fixed assets for long term operations. So that's my questions, that's my answers for Goldman Sachs question. Operator you can move to next question.

Operator

Thank you. There are no additional questions at this time. And I will now hand back to the management team for any closing remarks.

Jessie Liu

Okay, thank you again, all for joining our call. If you have 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 calls. Have a good day.

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Tuya, Inc. (TUYA) Q3 2023 Earnings Call Transcript