Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to Tuya's Inc. Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be hosting a question-and-answer session after management's prepared remarks. 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.

Thank you. Hello, everyone. Welcome to our third quarter 2022 earnings call. Joining us today are Founder and CEO of Tuya, Mr. Jerry Wang; and our CFO, Ms. Jessie Liu. The third 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 a corresponding English translation.

Hello, everyone. Thank you for joining our third quarter 2022 earnings call. I will start today's call with an overview of our financial and operating performance. Our third quarter results reflect both the challenges we face and the opportunities we're focusing on. In the third quarter, global inflation continued to increase and remained elevated. By the end of September, the U.S. CPI reached 8.2%, while the Europe CPI hit a new record 10% in Europe. Meanwhile, the intensifying Russia-Ukraine war, geopolitical unrest, and the consequent regional turmoil created extensive impacts on the global energy and consumer sectors. As such, the overall business environment is still full of challenges and uncertainties. As you all know, the consumer discretionary sector is undergoing a severe inventory correction. Major online and offline retail channels, including Walmart, Best Buy, and Amazon are reducing their inventory to appropriate levels, especially in electronics and household products. As the year has progressed, many consumer electronics brands maintained their conservative approach towards their inventory management and procurement strategies in the first three quarters of the year in response to the uncertainties in the markets out. The contraction of the downstream... As part of our efforts to navigate the down cycle, we are actively channeling our resources, refine our customer base structure, invest into new promising product lines, and optimize operating costs and expenses. We believe these efforts will enable us to emerge with an improved customer base and a more efficient operational structure when the macro environment recovers. Third quarter total revenue was $45 million, among which our SaaS and others revenue grew by 60% year-over-year to $8.9 million. Our gross profit for the third quarter was $19.6 million and the overall gross margin was 43.6%, maintaining steady amid a challenging environment. Most importantly, we reduced our non-GAAP operating…

That concludes the remarks by Jerry. As I review our results, please note that all amounts are in U.S. dollars and all comparisons are on a year-over-year basis, unless otherwise stated. For the third quarter of 2022, total revenue was $45 million, down 47.4%. The decline was mainly driven by a 57.4% year-over-year decrease in our IoT PaaS revenue, which decreased to $30.9 million for the quarter. Please note that RMB weakened against dollar during Q3 from RMB 6.69 to RMB 7.1, which resulted in RMB revenue translating to $2.9 million less than it would have using the start of quarter exchange rate. Let's focus on the business. Among all the product lines of our IoT PaaS business, the consumer lighting sector experienced the most pressure as consumer demand softened. In response, our customers slowed orders as they were adjusting their inventories. As Jerry mentioned earlier, we believe that smart device developers overreacted to strong market conditions last year and overstocked their inventories. Consequently, almost all online and offline retail channels are now working through their excess inventory. This summer, brands and wholesalers experienced large order cancellation from retailers. Naturally, we closely monitor our customers' demand and overall environment through public macro and expert data, estimate sales volume of retail channels, economic trends, as well as shipments information directly from our customers. Breaking down the revenue contribution by product line in the third quarter, we achieved a more balanced revenue structure. Contributions were balanced between 20% to 30% for each consumer IoT PaaS category, which includes lighting and electricals, consumer security and sensors, appliances and others. The revenue contribution of non-consumer products such as industrial smoke detectors, circuit breakers, mining lighting, heat pumps, electrical chargers increased to nearly 3% of total IoT PaaS revenue. This is a result of the…

[Operator Instructions] The first question is from the line of Yang Liu with Morgan Stanley.

Okay. I will translate my question in English. My question is about the demand. Given the current relatively weak demand and based on Tuya's observation or discussion with value chain, what is the inventory level now for key customers? And based on current inventory digestion speed, when should we see the inventory fall to a comfortable level and customer restart to build their inventory or we see a demand turnaround at Tuya side?

Okay. Based on the information we have now, it's difficult to determine accurately when we can see the turning point in the downstream market demand. However, based on publicly available information from downstream customers or other sources, we can share some qualitative assessments for your reference. Please keep in mind that we cannot guarantee the accuracy and reliability of this market data. On the inventory front, while the market conditions are rapidly evolving, we estimate it will still take 8 to 12 months for the downstream OEMs, brands, wholesalers and the retailers to altogether work through their excess inventory and return to a healthy inventory position. What may be good news, however, is that, the end market sales of smart devices appear to have picked up slightly in the third quarter after experiencing continuous sequential declines of segment year-over-year growth since the beginning of the year. Therefore, as the slow but steady recovery trend continues into the fourth quarter, which is typically the peak sales season of the entire year, it will be a good sign for the industry as the market balances supply and demand balances under the current economic environment. We believe there is still substantial downstream demand for IoT device in the long-term. The problem is simply too much inventory in the retail channel brands, wholesalers, warehouse, and OEMs. As a result, the supply from upstream sales lags behind the downstream demand by several quarters. As such, if we assume first our brand customers worldwide sell the same number of end market IoT consumer electronics device in 2023 as they did in 2022 this year and the second assumption, the number of IoT PaaS we delivered next year is almost the same as this year. Then by Q4 2023, the downstream inventory level of PBT devices will…

The next question is from Mingran Li with CICC. [Technical Difficulty] It looks like Mr. Li dropped off. [Operator Instructions] The next question is from John Wang with Goldman Sachs.

Can you share some colors on your cost control measures? What will be your target headcount by the year end and next year? And any additional measures on the operation cost reduction? Can you share your target for profit breakeven?

Okay. Since the end of last year, we have been strategically optimizing our team structure as we planned to improve our efficiencies in customer services, R&D, internal workflow and expense control. In the first half of the year, we focused on trimming down our business and product lines that are fragmented or yet to be proven successful. We recalibrated our focus on large customers by reforming our customer acquisition and service systems. We also adjusted resource allocation of R&D projects at the top level. We established an evaluation system to assess the ROI of our -- every R&D project. We also set up framework of tourists for each business lines to continue improve their efficiencies. Our strategic focus since the third quarter has been implementing detailed adjustments in our core business and each product line. For example, each department will now analyze their workload in detail and gather team members from different functions to review the decision and ROI. We request each product line to breakeven in a few years. These initiatives will help us control our costs as needed. On the other hand, we perform various monthly and quarterly financial results for every product line to help us review and control expenses outside of R&D and customer support. Expenses such as T&E and marketing expenses are now under strict control. In fact, we reduced our marketing expenses by approximately 62% year-over-year in the third quarter, resulting in year-over-year expenses saving of over $2.5 million. Marketing activities are undoubtedly important, but in the current economic environment, we must evaluate what marketing activities are more effective. For example, some expenses saved from our marketing programs can be used for visiting our core customers, helping us keep -- maintain key relationships and developing business strategies. We have been actively refining our team…

The next question will be from the line of Mingran Li with CICC.

Let me translate myself quickly. Given the relative weakening demand for consumer electronics, we need to step further more growth drivers. Could you give us more details on the expanding progress besides consumer electronics like the commercial and industrial segments and the private cloud or anything else?

Yes. In addition to the traditional smart consumer electronics, we believe there are new use cases we can capture and expand into. For example, first, the voice control products in our IoT PaaS business. Take the central control screen as example. It combines voice capabilities, display control and other functions into one entrance level product. The product can cover all the intelligent interactions needs in any given space with a similar positioning as an app in a smartphone. The current market demand is quite strong for this product, mainly in commercial use cases such as hotels, commercial buildings, office, et cetera. Additionally, there's still demand for home use for this product. However, no brand has been able to deploy high-quality IoT software capabilities to integrate the relevant ecosystems. So our central control product line covers different industries and use cases, integrating third-party voice functions into our software capabilities to make the product more versatile. As such, we can provide developers with voice workstations to reduce configurations and development barrier. We also offer operational value-added services and other capabilities to enable customers to improve the stickiness of their products and boost their revenues. We have also developed a flagship version, a cost-effective version and a strategic portion for different type of customers. Geographically, we have different solutions under U.S. and European standards to meet the needs of various customer groups. As one of the products from our software and hardware enhancement strategy, the revenue we generated from the voice capability product line grew by over 110% year-over-year in the first three quarters of this year and over 140% year-over-year in the third quarter. The energy saving and power products in our PaaS business can serve a wide range of commercial and industrial use cases that align with today's environmental and sustainable…

There are no additional questions at this time. I will turn the call over to the management team for any closing remarks.

Thank you, again, for joining our call. 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. Have a great day.

That concludes today's call. Thank you for your participation. You may now disconnect your lines.