Good morning, and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Tuya Inc. Second Quarter 2022 Earnings Conference Call. [Operator Instructions] I will now turn the call over to the first speaker today, Mr. Reg Chai, Capital Market Associate Director of Tuya. Please go ahead, sir.

Okay. Thank you. Hello, everyone. Welcome to our second quarter 2022 earnings call. Joining us today are Founder and CEO of Tuya, Mr. Jerry Wang; and our CFO, Ms. Jessie Liu. The Second quarter 2022 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.

Hello, everyone, and thank you for joining us on our second quarter 2022 earnings call. This is also our first earnings call after our dual-primary listing in Hong Kong. In the second quarter, our total revenue was $62.5 million, in line with the midpoint of our previous guidance range. Sequentially, we grew our total revenue by 13.1%. However, on a year-over-year basis, we recorded a 26.1% revenue decline as we lapped a period of robust growth across the IoT industry in 2021. In particular, our IoT PaaS business revenue increased to $47.6 million, up 13.9% sequentially but down significantly year-over-year. During the second quarter, global inflation continued to rise while the Russian, Ukrainian conflict regional triggering the tsunami dramatically impacted the world economy. Although the latest CPI from the U.S. came in at 8.5% in July, lower than June and better than expected. The number itself was still high. High inflation impacts the economy, the industrial value chain and consumers' wallets, changing people's lifestyles and consumption habits. These changes have a long-term impact on the consumer discretionary sector. A recovery in consumer electronics will take an extended period. Meanwhile, we note that the downstream players in the IoT device industrial chain, including IoT device brands, OEMs and the distribution channels faced massive inventory pressure from supply mismatches, which are expected to take longer to fix. As a result, our IoT PaaS business, DBNER as of the end of the second quarter declined to 84%. However, our other core business, the 2B focused SaaS and other segments remained strong for the sixth consecutive quarter since we completed our public listing with revenue reaching $7.2 million, up 114.3% year-over-year. Our SaaS and other segment has sustained the year-over-year growth rate of over 110% for 10 consecutive quarters, despite the recent turbulence in…

Okay. That concludes the remarks by Jerry. Before I begin, please note that all amounts are in U.S. dollars and all comparisons are on a year-over-year basis, unless otherwise stated. As Jerry just mentioned, we continue to face a series of unprecedented challenges, specifically global inflation, COVID resurgence in Mainland China caused significant business disruption and inconvenience and the macroeconomic headwinds further exhibited downstream inventory backlog issues. Despite the challenges, we continue to focus on executing our efficiency improvement strategies towards our goal of prioritizing profitability and leverage our competitiveness to explore new long-term opportunities in the IoT industry. Now, I will provide a closer look into our financial results. For the second quarter of 2022, our total revenue was $62.5 million, within our previous guidance range and down 26.1% year-over-year. The decline was driven by a 38.1% year-over-year decrease in our IoT PaaS revenue, which was down to $47.6 million for the quarter. Based on our own estimate glean from downstream and the consumer discretionary industry sources, broad-based demand declined in a consistent trend with our revenue decline. Major markets, notably the U.S. and Europe slowed significantly, whereas China grew slightly versus last year. The smart consumer electronics sector is subject to fast-changing short-term demand, which is thus more susceptible to a slower economy versus other sectors, such as industrial, agriculture, automobile and new energy, in which companies, especially those with large scale or in the electrical vehicle sector are more resistant to short-term downside risk. We are actively exploring opportunities to enter a wider range of the stable industries by leveraging our competitiveness and existing technology and ecosystem advantages. Total gross margin and IoT PaaS gross margin for the quarter were stable at 42.8% and 42.5%, respectively, as we effectively implemented a series of business management and efficiency…

[Operator Instructions] We have our first question from Liu Yang from Morgan Stanley.

Let me translate my questions. It's all about the demand. The first question, what is the management outlook in terms of the demand inflection point based on the conversation with key customers and their inventory -- their business plan inventory level? And another related question is, given the overall demand currently is weak, is there any chance for Tuya to see a better demand helped by the market share gain?

Okay. So to address your question, first, we have not seen signs of a turning point of overseas demand for IoT device – consumer electronics devices yet. And we feel the turning point will only come when the inflation has significantly improved. And the inventory backlog is cleared at the retailer and the brand side. So let’s take an overall look at the global economy and the feedback from our customers. In the United States, for example, according to the latest, our brand customers’ feedback, consumer electronics retail quantity is currently down about 30% year-over-year at the retail side. The decline, combined with the retail channel and brand inventory backlog push the brands to a more conservative approach. So they place a few orders to OEMs. So it wasn’t surprising to see OEM purchase orders from brand by quantity shrink as much as 50%. In Europe, the European Central Bank raised interest rate by 50 basis points in late July to curb high inflation. This is Europe’s first rate hike since 2011, just as Europe struggles with record inflation triggered by COVID and the war and the rising food and energy prices. According to Eurostat, Europe’s annual inflation rate jumped to 8.9% in July, more than 4x the ECB’s inflation target of 2%. So we have seen Europe is experiencing a significant weakening demand of discretionary product, which include IoT consumer electronic devices. So basically, our European customers are giving similar feedback as U.S. customers. In China, one of the more representative figures of Chinese consumer spending is the number of smartphone shipments. Based on IDC report shipment in the Chinese smartphone market declined by around 15% year-over-year in the second quarter. Also based on numbers from the National Bureau of Stats, total retail sales of consumer goods nationwide fell…

Next question we have from [Technical Difficulty] CICC.

Let me translate it quickly. So in July, Tuya and Amazon launched the Matter solution and expected to complete some operating capital with other products. From a Matter perspective, do you see the [matter] salaries and how do you see the potential impact on the industry?

Okay. Thank you, [indiscernible], for the question. We can look at Matter from both a commercial and the technology development perspective. As an early adopter, Matter and also a key Board member of the Connectivity Standards Alliance, Tuya have officially launched to enabled solution this year. Matter is the connectivity protocol that connects local smart home common functionality. Simply put, using the Matter protocol, devices can be directly shared with the Apple HomeKit or connected to different brands of smart speakers such as Alexa and Google Assistant without having to be interfaced in the development process to achieve basic local interaction. This will be very convenient for developers of IoT products. We believe such technology progress will further promote IoT penetration rate for – especially for smart home devices. From a business and market perspective, there have been no significant technology or perception changes in the market over the past 2 years regarding connectivity protocols. Matter belongs to local general control, which cannot [indiscernible] the cloud control and exclusive special function with multiple device interaction. This experience differs greatly compared to the mature and mainstream Wi-Fi products nowadays. So it is estimated that after the release of the first [solution], it will take a period of time for adjustment and adoption to evaluate its actual performance. Some of those IoT products with very simple limited functions, they chose direct connection as the path to ship IoT. Both products will have increasingly rich IoT capabilities and personalized demand, but cloud service will still be a rigid demand. Overall, we will – Tuya will incorporate Matter into our technology system based on one-stop capabilities, including Wi-Fi threat and especially gateway and central controller, as well as our product level solutions across all categories. While adjusting the need for standard local connecti–ty features, our cloud-based IoT capabilities, software algorithm and app capabilities will help make devices within Matter protocol smart. In addition, our Matter solution will enable customers to achieve information transfer and OTA upgrades with smart device directly through the Tuya IoT PaaS without having to rebuild DCL servers. Overall, with the Matter as a complement [indiscernible] protocols in the IoT industry, we have participated in various tests of project measure and brought first-time installation to our customers. We believe our customers will make the best choice for their products and the business which we can totally support. So this is our answer to the Matter question. Operator, you can go to the next one.

Next question, we have John Wang from Goldman Banks.

We have been able to now [indiscernible] the macro pressure. What's your plans on headcount in the second half of this year and the cost control measures? And also maybe refresh road map and target for the margin this year?

Okay. Thank you, John. So in today’s report, we highlighted the impact of Q2 expenses on our non-GAAP operating margin and non-GAAP net margin. Our efficiency and optimization initiatives in Q2 positively impacted income statement and cash flow. Therefore, in the second half, we will use the same approach to manage our operations and driving expense control while exploring measures that can more efficiently support our operations, sales, product and R&D systems. Basically, our organizational structure and internal adjustments are centered on the strategy we adopt at the beginning of 2022 to first, the upgrade of product and research centered on Cube smart private cloud offer. Second, the expansion of business in China. Third, we formed Tuya Plus Triangle team structure to support our initiatives to focus and get more KA customers. We have different goals and strategies for each stage of development. We are also actively transforming and upgrading from a developed platform based on consumer electronic products to using the accumulative experiences and the technical advantages of IoT PaaS, platform that serves the industrial commercial and industrial fields are targeted to implement key customer strategies. In the early stage of team restructuring and scale up, we matched our personnel with precision based on general principles of suitability. After comprehensively evaluating factors such as business demand, stage of development and the demand characteristics, we assign teams and members with characteristics that provide targeted support and expansion. For example, with the private cloud, many customers need to combine many technical details with complex market needs. So we used our experienced sales manager, product manager and project manager together to systematically provide a service from the perspective presale solution and delivery breaking from the traditional conflict between personnel. We’re following the same approach to R&D. So more detailed efficiency measurement have…

Thank you. I will now hand you back to the management team for the closing remarks. Please go ahead.

Okay. So, thank you again for joining our call today. If you have any further questions, please feel free to contact us through our IR website. We look forward to speaking with everyone on our next earnings call. Have a good day.

Ladies and gentlemen, this concludes today's call. Thank you for joining, and you may now disconnect your lines.