TUYA - Tuya Progresses To Earnings Breakeven On Cost Cutting

2023-07-06 18:46:48 ET

Summary

• Tuya Inc. provides a platform-as-a-service for Internet of Things companies in China and overseas.
• The firm has experienced top line revenue decline as customers have entered a destocking period due to soft consumer demand.
• While management is making progress toward earnings breakeven due to cost cutting, until it can reignite revenue growth, I'm Neutral [Hold] on Tuya Inc.

A Quick Take On Tuya

Tuya Inc. ( TUYA ) provides cloud-based infrastructure in China for Internet of Things services and applications.

I previously wrote about Tuya with a Hold outlook.

Top line revenue continues to drop as customers reduce orders amid ongoing destocking.

Until the firm can reignite growth and make further progress toward earnings breakeven, I’m Neutral [Hold] on Tuya Inc. stock.

Tuya’s Overview

Hangzhou, China-based Tuya Inc. was founded to develop a Platform-as-a-Service [PaaS] cloud offering to enable developers to build and host their Internet of Things [IoT] applications.

Management is headed by founder and CEO Xueji Wang, who was previously a senior director at Alibaba (BABA) and was responsible for launching a number of initiatives at Alipay.

The company’s primary offerings include:

• Internet of Things Platform as a Service [PaaS]

• Industry Vertical Software Solutions

• Cloud-based Services

The firm pursues customer relationships with businesses and OEMs primarily in the consumer IoT industry.

However, management seeks to expand its efforts into the Industrial and Agriculture sectors.

Tuya’s Market & Competition

According to a 2023 market research report by The Business Research Company, the global market for IoT managed services was valued at an estimated $189 billion in 2022 and is expected to reach $401 billion in value by 2027.

This represents a forecast CAGR of 16.9% from 2023 to 2027.

The main drivers for this expected growth are an increasing adoption of IoT technologies across a wide range of industry verticals, including automotive, manufacturing and healthcare.

Also, a shift to manufacturing 'Industry 4.0' is placing an emphasis on complementing and augmenting human labor with robotics to reduce accidents and increase efficiencies.

Major competitive or other industry participants include:

• Amazon AWS

• Alibaba Cloud

• IBM

• Microsoft

• Google

• Infosys

• Tieto Corporation

• Wipro

• Honeywell International

• Numerous others

Tuya’s Recent Financial Trends

• Total revenue by quarter has fallen; Operating losses by quarter have been reduced somewhat in recent quarters.

• Gross profit margin by quarter has trended higher; Selling, G&A expenses as a percentage of total revenue by quarter have also been moving higher recently.

• Earnings per share (Diluted) have made reasonable progress toward breakeven.

(All data in the above charts is GAAP.)

In the past 12 months, TUYA’s stock price has fallen 27.8% vs. that of the iShares Expanded Technology-Software ETF’s ( IGV ) rise of 20.9%, as the chart indicates below.

For the balance sheet , the firm ended the quarter with $937.5 million in cash, equivalents and short-term investments and debt.

Over the trailing twelve months, free cash used was $32.9 million, during which capital expenditures were a paltry $0.7 million. The company paid $69.0 million in stock-based compensation ("SBC") in the last four quarters, the highest trailing twelve-month figure in the past eleven quarters.

Valuation And Other Metrics For Tuya

Below is a table of relevant capitalization and valuation figures for the company.

(Source - Seeking Alpha.)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

TUYA’s most recent Rule of 40 calculation was negative (10.40%) as of Q1 2023’s results, so the firm has improved only slightly sequentially and still remains heavily negative, per the table below.

(Source - Seeking Alpha.)

Commentary On Tuya

In its last earnings call ( Source - Seeking Alpha ), covering Q1 2023’s results , management highlighted several reasons for the revenue decline, including reduced consumer spending, inventory destocking and negative foreign exchange fluctuations.

Against the background, management noted reduced inflation in the U.S. and Europe, which it believes will lead to increased consumer confidence.

Management didn’t disclose any company or customer retention rate metrics.

Total revenue for Q1 2023 fell 14.1% year-over-year, while gross profit margin increased by 3.0%.

Selling, G&A expenses as a percentage of revenue dropped 3.2%, a positive signal indicating increasing efficiency in generating revenue, and operating losses were reduced by nearly 42% from the same quarter last year.

The company's financial position is very strong, with high liquidity, no debt and a manageable amount of free cash burn.

TUYA’s Rule of 40 performance has been highly negative with only a slight sequential improvement.

Looking ahead, management hopes for a stabilization of demand in the second half of the year but said their customers are still ‘cautious about placing orders, though they exhibit optimism for high-value, strong demand products in areas such as energy-related -- renewable energy-related home products, home appliance, consumer safety-related products and outdoor products. There's considerable variation among different device categories, customers and regions.’

From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below.

I’m most interested in the frequency of potentially negative terms, so management or analyst questions cited "Uncertain" two times, "Challeng[es][ing]" nine times, "Macro" two times, and "Drop" once.

The negative terms refer to the generally challenging market conditions its customers are facing which have been flowing through Tuya.

Analysts questioned company leadership about its investment priorities going forward.

Leadership is responding to market signals for additional demand in the areas of energy saving and consumer safety products, especially in the Europe region, so it plans to increase investment in these areas which it considers higher-value opportunities.

While Tuya has made progress toward earnings breakeven, management remains cautious about its ability to achieve revenue stabilization in the near term.

Until the firm can reignite growth and make further progress toward earnings breakeven, I’m Neutral on TUYA.

For further details see: