Tuya Inc. (TUYA) Q3 2024 Earnings Report, Transcript and Summary

Good morning, and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Tuya Inc. Third Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I'll now turn the call over to your first speaker today, Mr. Reg Chai, Investor Relations Director of Tuya. Please go ahead, Reg.

Okay. Thank you, Emma. Thank you. Hello, everyone. Welcome to our Third Quarter 2024 Earnings Call. Joining us today are Founder and CEO of Tuya, Mr. Jerry Wang; and our CFO, Ms. Alex Yang. The third quarter 2024 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 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. Now Jerry, please.

Hello, everyone. Thank you for joining Tuya's Third Quarter 2024 Earnings Call. In the third quarter, we achieved our performance goals by prioritizing practical strategies and focusing on execution, revenue growth accelerated to 34% year-over-year increase. We maintained high operating efficiency, thus achieving a non-GAAP operating margin of around 9%. Our substantial interest income added to the bottom line resulting in a non-GAAP net profit margin of around 25%. These results were underpinned by the effective execution of our business strategies, coupled with ongoing efficiency initiatives that tightly controlled budgets and expenses, sustaining operating leverage as we did in last quarter. Next, I will delve into some details on our business performance in the quarter. In the third quarter, all 3 of our business segments delivered solid revenue performance. IoT PaaS revenue increased by over 26% year-over-year, maintaining a steady recovery momentum. The Smart Solutions segment achieved over 100% year-over-year revenue growth. This was driven by strong market demand, particularly in the Home Appliance category, where we have consistently observed robust global demand throughout the year, aligning well with our product planning and market expectation. Our focus on energy-efficient products and solutions has significantly contributed to this revenue growth. Additionally, our close collaboration with key customers has enabled them to align their product planning and launches with market trends. Lastly, revenue from the SaaS and other segments grew by approximately 17% year-over-year with our core cloud software value-added services increasing by over 50% year-over-year. In the consumer market, it is imperative for businesses to build thoroughly, understand and capture the core needs of end users. We are dedicated to continuously launching innovative and competitive products, understanding our customers' business objectives and building even closer partnerships. At the recently concluded 2024 EFA in Berlin, we unveiled numerous new product capabilities. By leveraging cloud-based dynamic algorithms and generative AI, we aim to significantly enhance the user experience and value of smart products in terms of interaction, efficiency and functionality. Additionally, in line with our philosophy of cultivating and understanding the industry, we have iterated and expanded a wide range of solutions and product portfolios across various homes and commercial use cases. This encompasses home energy efficiency, comfortable living spaces, pet care, security and protection, sports and healthcare, entertainment and education, convenient mobility and more. Our global customer collaborations and expansion efforts progressed steadily in the third quarter. Our dollar-based net expansion rate, which measures growth among existing customers stood at 124%, a healthy and stable level. Our largest market, Europe, exhibited stable demand with smooth progressing partnerships with both new and existing clients. In other regions, we secured several key regional customers, including a leading private label brand in Canada, covering categories such as seasonal lighting and pet products, a top home appliance group in emerging markets like Brazil and well-known consumer safety brands in Chile. All of these are leveraging the Tuya platform for their strategic initiatives. Furthermore, in more mature markets, the Tuya platform remains the preferred choice for enterprises aiming to enhance operational efficiency or transitioning from traditional systems to third-party platforms. We believe this customer level developments amplify the value and capability of the Tuya platform and reflect the favorable competitive landscape in which we operate. We are also committed to building our developer community by striving to ensure that every developer interested in smart technology has access to the latest cutting-edge information. In the third quarter, we hosted two major developer conferences. The first with the inaugural European edition of the Tuya Global Developer Conference held at the Berlin Exhibition Center during the EFA event themed Smart by Nature, exploring the synergy of AI and sustainability. Partners such as AWS and Think, which is a well-known European e-commerce platform for comprehensive smart home solutions discussed innovative application of generative AI and the practical implementation of sustainabilities. These discussions garnered significant attention from developers. Vestel as one of Turkey's largest home appliance manufacturers also shared success case studies. At the end of September, during our global developed conference in Suzhou, industrial leaders such as Siemens and Haier Smart Home shared their visions of the future. They showcased how to leverage Tuya Cloud developed platform to build intelligent ecosystems, bringing green digital and smart home living experience to users. By the end of the third quarter, the number of registered developers on the Tuya platform further increased, reaching approximately 1.26 million. Moving forward, we will continue to gain insights into market demands, consistently empower developers and deliver more smart products that meet consumer expectations. In the industrial and specialized channel markets, we continue to make progress as planned by developing and replicating benchmark projects. For example, our business model for telecom operators this year involves leveraging our Cube Intelligent Private Cloud solution to initiate collaborations combined with the delivery of core smart device categories. This approach is aligning with our expectations and has begun to see continuous implementations. The development among our telecom operator customers base is advancing steadily. We have signed new agreements with two leading operators in Thailand and Vietnam and are receiving consistent reorders from smart devices from existing customers who have already deployed our solutions. Additionally, our home energy management system business has achieved substantial progress. We successfully secured a benchmark project with the Singapore Housing and Development Board. And over the next few quarters, we will officially enter the product implementation and delivery phase for this project. Overall, third quarter 2024 was the period of steady progress for Tuya as we executed our established growth strategies to deliver robust financial results. This commitment has also brought us shareholder level recognition. You may have seen yesterday's announcement over the weekend, 65 Equity Partners at an independently managed wholly owned investment platform of Temasek entered into an agreement with New Enterprise Associates, one of Tuya's key shareholder since our founding in 2014 to purchase approximately 13% of Tuya's total issued shares. This investment reflects their strong confidence in Tuya's vision and aligns closely with our international expansion strategy. The Asia Pacific region, particularly Southeast Asia, is a rapidly growing emerging market, presenting enormous opportunities for us. We remain committed to seizing growth opportunities in international markets, advancing global AIoT, smart devices and commercial and industrial applications and delivering value to our long-term shareholders. We are thrilled to welcome 65 Equity Partners, the investment platform of Temasek as a significant shareholder of Tuya. Lastly, we welcome our current Vice President of Financial, Claire Yan Zhang to the Board of Directors as an Executive Director. With her extensive experience in financial management and a Big 4 accounting firm, Ernst & Young, Claire will bring valuable expertise to the Board, aligning with Tuya's commitment to diversity. Now I will hand over to Alex to provide further financial details.

Thank you, Jerry, and hello, everyone. This is Alex. Now I will discuss our financial results and provide more details on the numbers that are covered by Jerry. Please note that all the figures are in U.S. dollars and all the comparisons are year-over-year unless stated otherwise. In the third quarter of this year, our total revenue reached USD 81.6 million, up to 33.6% year-over-year. Most importantly, our P&L continued the trends established in Q2. Each business segment maintained a solid gross margin, reflecting the value of our products. This led to attractive gross profit growth alongside revenue growth. At the same time, we executed our business operations and product strategies with streamlined and limited operation cost and expenses. As a result, we achieved a solid non-GAAP operating margin, expanding from the breakeven level of Q2. And our IoT PaaS revenue in the third quarter was $57.9 million, representing a year-over-year growth of 26.4%. Looking at the product categories, our focus on home appliances enabled impressive year-over-year growth of around 40%, while other categories remained stable. Geographically, our global revenue structure was well balanced. However, driven by increased energy saving orders, Europe's revenue contribution saw a slight uptick in this quarter. On the customer side, the scale of customers we served increased slightly compared to the same period last year, aligned with our focused strategy on customer expansion and service. As of the end of the Q3 2024, our dollar-based net expansion rate stood at a healthy 124%. We believe this demonstrates strong demand from our existing customer base for Tuya's products, providing a solid foundation for revenue growth and allowing us to confidently pursue new customers. Q3 gross margin was 46%, remaining at a stable and healthy level compared to the same period of 2023. Since overall gross margin reflects the structural mix of margins across our business segments, it is influenced by the revenue composition of each segment. Looking at the components, the gross margin for all three of our revenue segments remained constant with the previous level. The slight increase in PaaS gross margin and a slight decline in Smart Solutions gross margin were pre-eminently due to the product mix changes. We'll consider that as a regular one. So regarding operation activity and expenses, I will provide a detailed view on a non-GAAP basis, which excludes certain non-business related items to give a clear picture of our operation efficiency. We continue to present our operating expenses primarily on a non-GAAP basis. Before discussing non-GAAP operating expenses, I'd like to mention that in early September, following our Q2 operational profitability milestone, we adjusted the exercise prices of our options held by all the employees to the current value of our shares. We did this to thank our colleagues for their unwavering support as we navigated through cycles and reached new milestones. This onetime adjustment resulted in approximately USD 10 million in additional onetime equity incentive expenses, of which $9.5 million was recognized in this quarter's operating expenses, with the remainder to be amortized over the coming quarters. Turning to operating expenses. In Q3, our non-GAAP total operating expenses decreased by 5.9% to USD 30.1 million from $32 million a year ago. Following the near comparison of team structure adjustments in the second half of 2023, our non-GAAP expenses has since stabilized year-over-year. Sequentially, our operational expenses in this Q3 increased by approximately $2.3 million compared to Q2, primarily due to typical fluctuation in items on the expenses side and the income side, such as tax refunds. As revenue growth year-over-year, we'll adjust the budget according to as needed. Other non-personnel operating expenses such as marketing and travel has remained at a relatively balanced level. Overall, we remain committed to the efficient and focused business expansion to maximize and stabilize Tuya's profitability at this stage. This quarter, we achieved a non-GAAP operating margin of 9.1% and non-GAAP net margin of 24.7%. Net margin exceeded operation margin due to the contribution of interest income, which is substantial due to our large net cash balance. While fluctuations in operation expenses may cause slight profit margin variations, we are pleased with our current profit level and optimistic about the future improving operating leverage in the future. In terms of cash, Q3's operating cash flow was net inflow of $23.9 million, reflecting our strong cash leverage. Our net cash balance increased to $1,023.9 million, further strengthening Tuya's financial reserves and preparing us for future shareholder returns. This concludes my presentation on the company's financial performance. So with that, operator, Emma, we are now ready to take questions. Thank you.

We will now take our first question from the line of Tom Tang from Morgan Stanley.

Congratulations on a very strong result for the quarter. So I have two questions. First one is on the outlook for the fourth quarter. So if we can share some more color on it and if we have seen any changes in the customer behavior after potential tariff increases in the U.S.? And the second question is on the GPM. So our smart solution is a quite sizable amount in terms of our total revenue now. So do we expect the GPM to stay stable over the next few quarters? Or if there's going to be some further changes due to the product mix change?

Yes, thank you for that. So for the question one, firstly, that we will mention that for Q3 for us will be a steady season, a steady growing season, which proves that our strategy on the business side and also the efficiency of our operations. So we’ll continue to do that. For Q4, right now, we see that positive season, but it’s only like 40 days past for Q4. Also we have a long vacation in China, so that influenced majority of the manufacturers. So I will not have the clear visibility of our entire Q4. But when we see that Q4, it’s also a stable and steady and regular season for us. We continue to chasing on that, so we are optimistic about what we can have in Q4, even without precise visibility. Speaking of the tariff issues for United States, what we see here is that it’s not the first time about the tariff. So that thing has already been going on for a couple of years. May be two things. The first one is that we see that in the past few years, so even the geopolitical situation, what we see here is that the customers already starting to relocate their supply chain. We’re already supplying that, which means that we’re not impacted directly, but the customers always need to trade, always need to source in and buying the products from wherever they need it in the world. We are just fulfilling that. That will be one thing. The second thing, what we see even that with relocation of the supply chains, still the world needs China so much. So no matter what, any significant amount of the Chinese component still shipping to the global supply chain. So that will be something, we just follow the flow. We just keep serving our customers and either locally or remotely to their suppliers in whichever countries they’re located. So I think that will be one thing. Demand is still steady because end users continue to use that. So they’ll purchase wherever they can to find the best cost point to locate their own supply chain. That’s for question one. For question two, you see that our three business segments, they actually in total different vertical. We have to follow different business and common senses in this industry. So for the Smart Solutions, it will be so deeply bounded with hardware, which means that I can never compare with a gross margin versus the software. It’s a totally different model. But we think that the Smart Solution is so valuable because we help the customer to provide differentiation and provide very competitive new cutting-edge products and experience to the market to continue to enable them to become the leader. So we’ll enlarge the portion of the Smart Solution for sure, and we really see the potential. So through that, the overall gross margin of the company will decrease gradually, but we consider that as a very healthy way because each of the segment is competitive. So we are more concerned about the segment, not the overall gross margin. And in the same time that the growth of each of the segments doesn’t require a significant increase on our expenses and costs, which means that we still maintain a very good leverage to grow our overall business. So even though the gross margin rate is declined a little bit in the long run, but in the same time, the total amount of the gross margins will be able to provide enough beneficial and profitability for the company. That’s it.

Our next question comes from the line of Timothy Zhao from Goldman Sachs.

I have two questions here. The first one is regarding the IoT PaaS business. Just wondering if you can give us any color on your outlook on the downstream demand for the IoT PaaS business and any demand difference across different vertical segments? And secondly, I'm pretty glad to see that we have anchor investors coming in this quarter and given that your margin is already quite stable and the company also has pretty ample cash resources. Just wondering if you can share some idea about the future shareholder return policies, that would be great.

Yes. Thank you for that. So for the IoT PaaS, for us, momentum, what we see here is that this year will be a rebounding year because majority of the consumer electronic players or companies in the world starting to working out from the – working out from the cycle of the inventory over inventory issues, starting from 2021, 2022. So it’s a rebounding year. And what we see the momentum among our customers is that they’re really starting to reinvest and kick off the multiple projects, I mean, among every customers for the IoT fields. So ready for future competitions and expansion. That would be one thing. So while you have more investment and the resources coming in in these verticals, pretty sure that they will continue to continue to grow for the customer side. And for Tuya side we continue to provide two drivers for the business. So first one if the product and on the pack side so we continue to expand to any type of the new use cases and scenarios and across our categories. But most importantly that we’re starting to deploy and we’re starting to provide some of the AI based services for the customers to help them to build some AI empowered devices or AI empowered use cases for the end users so that can be kind of the killer app of key differentiations and new features that we can see in the market. So that would be one. So we use the product to be the driver with the new innovation, new technology. And the second driver for Tuya is the customer expansion especially on the enterprise level. So for that part, as you can see that we’re starting to incubate our SaaS business around 3 years. So that type of the solution is more focused on the enterprise level. So other than the consumer companies – consumer-related companies, so the enterprise type of company or industrial solution providers are different type of the players in the market. So through that, we continue to have more and more customers in that field, including the telecom carriers, including the projects we just shared along with the Singapore HDB for the government public apartments, around 1.3 apartments in Singapore, et cetera. That kind of industrial players and enterprise level of the players will become a new growing forces and drivers for Tuya as well. So we continue to expand more and to come in deeper. So that will be the past growth. So we maintain the optimism on this field because we have a very steady customer base, as you can see, our DBNER and premium customer amounts. In the same time, we continue to cover wider with new fields on the enterprise solution level. So that would be one thing, question one. And on question two, so yes, for sure that for the past 10 years, since the beginning of Tuya, we always take the shareholders’ return as a high priority when we operate in the company. And in this Q2 will be the first time we issued a dividend. It’s a special dividend for the shareholders. Like I mentioned in last quarter, it’s not a regular one because we don’t hit the annual profitability yet. But we don’t want the shareholders to wait another 2 quarters. So we issued a special dividend. It’s a special one. So we will consider the dividend as a regular basis. So every year that more based on the non-GAAP profitabilities, we use as a benchmark to evaluate and how much we can return to the shareholders as a dividend.

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

So this is Ben from CICC Research, and I have 2 questions. And the first question is about the SaaS sector, whose revenue growth accelerated in Q3. So could you give us some color on the growth drivers and future outlook for the SaaS sector? And another question is regarding the artificial intelligence. Could you give us some updates on the Gen AI monetization and future plan? And if there are some revenue contribution guidance, that will be great.

Thank you for that. So for the SaaS, the key part is that we continue to identify the potential verticals that AIoT can help – can provide value to killing the pain point with a reasonable cost level. So I think that will be the key part. So we consider that as a PSF stage, which means that we keep evaluating the market and to identify and figure out the right solution that fits it. So for the SaaS side, right now, we really see several – very potential and scalable market direction there, including the hospitality. As I mentioned that like the recent project that we signed contract with HDB in Singapore, it’s a hospitality solution we provided and combined with energy management. And energy will be another one, so another sectors and outdoor will be another one, including logistics. So that will be the verticals we find potential to. And so we already have some standardized solution proven and worked with strategic customers as a pilot program. So for that part, I think the space and the ceilings will come better whether we’re looking forward to duplicate the use cases with a similar type of the strategic customers in new fields. So that would be one thing. That will be the key drivers for SaaS. And speaking of the AI, what we see is that, right now, we are working on providing 2 type of services through AI. So one is that we will integrate the AI capability along with the hardware. So we – and essentially, it becomes not a smart device, it becomes AI devices. So one of the typical use cases is the bird feeder. So it’s a bird house and comes along with a camera and comes along with a food container. So you put that in the backyard on the tree and then whenever one bird comes in and then you get a picture or you get a selfie of the bird. And come now combine that with AI algorithms that we prop with AWS called recognition. It’s an algorithm provided by AWS, where we integrate that into the application. And then – so the feeder not only takes photos about the bird, but also tells you what species it is, what’s the behavior of this bird. And then you’ll be able to easily either educate your children, right, okay, let’s try to learn the birds or you can show off any rare species coming to your house rather than your neighbors. So that will be one thing. So it has become a nature native AI device. Another direction is that – and we’re trying to provide some AI services on top of the device as a software-based level. So one thing is that when we combine GenAI with pet devices, so like the pet feeder in home, so the feeders can and visual your behaviors, the behaviors of your pet, maybe your cat or your dog and then automatically generate different type of video footage and come along with a 9, coming on with the background music. And then you understand, okay, my cat and dog are at home right now, they’re playing Game of Thrones, maybe game of [paw]. So that type of interesting footage is generated by AI. So we can – we’ll start trying to provide that type of services on the software levels. And so with the existing, what we call version 1 smart devices, we’ll be able to have some AI-based experience. So that will be the 2 directions we’re trying to pitch. And right now, it’s still in the pilot stage. So we still run some POCs, still run some pilot customers, but not provide them everywhere. And also, we consider very carefully about how we can business – monetize that coming on naturally with the business model. So by the end of this year or at the beginning – by the end of this year and beginning of 2025, and we’ll be able to show more use cases how we can turn AI into an application. And we believe that that will become one of the catalyst for Tuya and our overall IoT. And one of the key things uniqueness for Tuya is that right now, one of the largest challenges for AI is what type of applications, what type of features its commercial, and/or have the space to commercialize because it’s more like the – right now, it’s more like the trial tools, better to have, not must be. But tangible for Tuya is that we have the device, we help the customer to build the device. So naturally, the device itself, when it’s sold, you know that the end users are buying that for the future and especially when the AI device comes with a totally different pricing point than the regular smart device, you know that people are buying that for the AI. So since the beginning we have commercialized that. So I think that will be a special one. So we’ll try different types of use cases and demonstrations and then we can easily testify that among my customers what type of things I can commercialize and bring that into scale. That’s it.

Our next question comes from the line of John Roy from Water Tower Research.

Congratulations on a very strong quarter. If we could take a step back for a second, obviously, the revenue growth has been solid for the last couple of quarters and a lot of talk about enterprise. I was kind of wondering how long do you think this can continue? In other words, how much runway do you kind of see given the current markets you have?

I think that -- so talking about that, I would like to pull back a little bit about the vision where we started this company. And we believe that no matter if it's IoT or AI in the future, I mean, long run, maybe after 10 years, it will become a fundamental technology, like the Internet right now, everything is in the Internet connected. So -- and so when we're reviewing the penetration of IoT or with AI, it's extremely low. So right now, it will be low single-digit numbers. So if you have to ask me about the weather and how the business is going to move forward, I will say that in the next 10 years, maybe after 10 years, after 20 years, everything defaultly needs to be connected, needs to be smart and we can imagine that. So what we're doing is that we continue to enable those first movers in their vertical fields to turn them into IoT ready or into AIoT ready. I think that will be the key driver for us. So that's why we -- all the investment we're doing is that we can find the right use cases that make sense for their vertical, and we provide standardized easy-to-use toolkits for the developers and scale that. So I think that will be the key part.

Right. And as a follow-on to that, the investments you're making, do you feel like they're at a good level right now? Or do you feel like there's going to be a possible need to accelerate R&D in the coming years?

Yes. So in the past two years because we – we were facing a cycle back then. So we really adjust our strategies into a more aggressively invested and expansion strategy into a more reasonable and what we call micro management. And so for this one, what we’ve seen is we really stabilized our expenses and investment. So even inside the company, we continue to invest in some new use cases, but still at a very reasonable level. And so we’re looking forward to stabilize our profitability and our expenses.

[Operator Instructions] There are no additional questions at this time. I'll now hand back to the management team for any closing remarks.

Okay. Thank you again for joining our call today. 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 earnings call. So have a good day today. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.