Good morning, good evening ladies and gentlemen. Thank you for standing by and welcome to Tuya Inc’s Second Quarter 2023 Earnings Conference Call. [Operator Instructions] I’ll now turn the call over to the first speaker today, Mr. Reg Chai, Investor Relations Director of Tuya. Please go ahead, sir.

Okay. Good morning. Thank you. Hello, everyone. Welcome to our second quarter 2023 earnings call. Joining us today are Founder and CEO of Tuya, Mr. Jerry Wang; and our CFO, Ms. Jessie Liu. The second quarter 2023 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. Thank you for joining Tuya's Q2 2023 earnings conference call. The second quarter of 2023 marked a significant milestone for us. For the first time in our company's history, we have achieved a quarterly breakeven and recorded modest profit on non-GAAP basis of approximately $1.5 million, translating to a non-GAAP margin of around 2.7%. Moreover, we achieved a positive operational cash flow for the quarter, bringing in about $7.5 million. The moving to positive non-GAAP profitability and the expansion of positive operating cash flow, both marked a turning point in our overall day-to-day operations. This signifies our growing capacity to generate value and intentional responsibility for any enterprise and the business operations. Undoubtedly, this accomplishment attest to the dedication of our team and the strategic operational adjustments we have implemented over the last 2 years. Each member of our organization has played a crucial role in this milestone. Going forward, we remain firmly committed to focusing on further refining our operations, both structurally and functionally, seeking avenues to enhance efficiency and reduce costs. Our aim is to ensure consistent financial performance and progress towards achieving breaking even at the non-GAAP operating level. In the second quarter of 2023, our total revenue reached approximately $57 million, representing a sequential growth of around 20%. This marks the third consecutive quarter of sequential growth. Comparing year-over-year, there was an 8.9% decline in our total revenue. The factor in this was the currency fluctuation, particularly the weakening of the RMB against the U.S. dollar, which accounted for around 5.6 percentage points of the year-over-year decline. Excluding the impact of the currency fluctuations, our total revenue was close to flat year-over-year. It's worth noting that the resurgence in consumer demand has not yet reached its full potential and the cautious operating strategies adopted…

That concludes the remarks by Jerry. As I review our result, please note that all amounts are in U.S. dollars and all comparisons are on a year-over-year basis, unless otherwise stated. In the second quarter of 2023, our total revenue reached $57 million and our gross profit was $26.6 million. Both metrics have shown sequential improvements over the past 3 consecutive quarters. However, both metrics recorded a decline on a year-over-year basis. When we excluded the impact of the depreciation of the RMB against the USD, which now has an exchange rate surpassing 7.2, our revenue essentially remained stable compared to the same period last year, while our gross margin showed a 6% increase from the same period last year. Considering the currency rates, we anticipate facing ongoing challenges related to currency exchange in the third quarter. The global consumer electronics sector is grappling with the pervasive impact of heightened inflation. However, our forward thinking and strategic interventions have yielded encouraging results. By adopting a customer-focused strategy, our average revenue per customer increased sequentially. Additionally, we've reported a significant uptick in revenue and gross profit per employee basis and have noted a more equitable distribution in geography revenue contributions, fortifying our position against the market headwinds. Our blended gross margin for the second quarter expanded to 46.7% from 42.8%, achieving a historically high level since our inception. I'd like to emphasize the gross margin is pivotal for the long-term sustainable growth of the company, reflecting the value of our services and products bring to customers and securing our profitability. This margin is a testament to our value proposition, the efficiency of our operations and our balanced approach between profitability and growth. Let's break down. In the second quarter, our IoT PaaS gross margin increased to 44.2% from 42.5% in the…

[Operator Instructions] Additionally, when asking a question, please take your questions in Chinese first and immediately translate them into English for the convenience of everyone on the call. Our first question comes from Yang Liu of Morgan Stanley.

[Foreign Language] Let me translate my question. First, I congratulate for the non-GAAP breakeven this quarter. And the question is related with demand. In recent few months, we observed the export data in China is pretty weak. And I would like to ask based on Tuya's communication with downstream, for example, the OEM based in China, how about their customers' demand outlook and whether it was also impacted by the weak export number? And the second question is customer inventory. We are happy to see that management expects the second quarter year-on-year revenue growth to turn positive. Is it due to the inventory digestion of the customer side is close to the end and they're about to restock inventory?

Okay. About demand, to start with the conclusion. Over the past few months, we actually observed an ongoing improvement in inflation in Europe and the U.S. The total sellout of IoT products for all our brand customers during the first half of this year showed a modest year-over-year growth. So despite we do -- noticed a recent export number weakness in China, we hold a cautiously optimistic view towards the future demand for end consumer IoT electronic products. And first, from a macroeconomic perspective, there's been a notably easing inflation. As of July 2023, the inflation rate in the European Union has dropped to 5%, while the U.S. has saw a slight rebound to 3.2% in July following a decrease to 3% in June. Since picking in the mid to late last year, the decline has been pronounced especially in the first half of this year. However, both from the CPI figures and the core CPI indicators, most of you will suggest that the risk associated with inflation are not completely eliminated and the prices of some consumer goods remain high, requiring continuous observation by companies in this sector. In China, after a first half year resurgence in travel-related spending, retail sales of consumer goods in the middle of the year dropped to a lower single-digit year-over-year growth rate, but stabilized in July. Regionally speaking, our perception is that the overall trend is similar across the regions, but with differences in detail. For example, in the United States, even though the overall consumer electronics market was sluggish in Q2, there was still decent demand for home appliances followed by a relatively stable year-over-year growth for safety products and then improving situation for electrical products. In Europe, primary countries remained a good rebound in consumer spending with the strong demand for…

We now have our next question from Timothy Zhao of Goldman Sachs.

[Foreign Language] Congrats on the strong results. I have 2 questions. One is on the gross margin trend into the second half of this year as you already guided that the revenue will improve on a year-on-year basis? And secondly, it's regarding the generative AI topic, I do noted that I think you already launched certain product and share service strategies a few months ago. Could management share further color on your thoughts on how to meet the generative AI demand and how that will impact your business model.

Okay. Thanks for Timothy's question. First, let me address the question about gross margin. So beyond promising signals in revenue, we're particularly inspired by our gross margin. Since Q1 of 2019, our gross margin has consistently improved from initial 24% to almost 47% this quarter. Despite challenges like the pandemic, inflation and inventory issues, the several reasons contribute to the steady improvement of gross margin. Firstly, the proportion of high-margin products in IoT PaaS business has been increasing. Secondly, the overall high-margin SaaS sectors, the revenue contribution to the total revenue has been continuously grow, reaching to about 16% in 2023 and Q2. Lastly, the transformation of the business model of the smart device distribution business has made pretty big improvement to the gross margin. That segment, the gross margin improved from about 10% to now 23%. Looking forward, our expectation, we are likely to maintain a steady gross margin. We are now also focused on the growth of the company. We are looking for new directions of growth and with some new business try out initially, usually, we will make the gross margins more aggressive to attract new customers. So balance debt, we expect a steady gross margin for the near future. And then come to Timothy's second question about AI. In the midst of the AI boom during Q1 this year, we shared our insights and direction. We are optimistic about upgrades and efficiency that AI and AIGC can bring to IoT developers and end users. Our perspective remains consistent, and we are currently working on various AIGC-related projects. Firstly, a common approach in IoT industry is the utilization of AI in customer services. We are leveraging AI to empower Tuya's customer support, enabling more intelligent and flexible conversation with users, thereby providing more personalized and high-quality services.…

Our next question comes from Mingran Li of CICC.

[Foreign Language ] Let me translate myself. My first question is that what kind of projects in PaaS and which downstream scenario things that you are saying will be more resilient to support our full year growth on the relatively weak demand. And my second question is that we see this quarter is the first time that you achieved a breakeven profitability on non-GAAP net income faster than our expectation on. So could you please give us more color about the future trends of breakeven.

Okay. Thank you for the CICC's question. Let me first address the growth patterns of different categories. So the differences in our different categories business are quite noticeable. Our performance aligns well with the trends highlighted earlier for each region. However, between Tuya's and the final consumer, the business operations and the decisions of downstream companies also play a significant role. So this quarter, our performance was significantly hampered by the lighting sector, but most non-lighting sectors have already achieved a modest year-over-year growth. For example, the safety sensors sector, this quarter has almost leveled year-on-year. This can be attributed to the fact that during a volatile period, the fundamental demand for safety and protection remains stable. The home alliance sector has shown year-over-year growth since the first quarter of last year with an impressive growth exceeding 20% of the Q2 quarter. It's a very positive sign. Furthermore, we remain bullish on the renewable energy segment itself as well as the value generated from integrating renewables devices with other IoT home devices. While we're just starting, we believe we are among the global competitive enterprises when it comes to integrating home alliance IoT with new energy products. Our residential PV energy storage IoT solution displayed at AWE this year, not only manage traditional household electricity consumption, but also visualizes real-time energy flow from solar power generation, the energy storage batteries, distribution and consumptions to electrical vehicle charging. It can optimize energy usage strategies and assist homeowners in managing household energy efficiently in -- especially like Europe, Australia. In terms of SaaS and other segments and smart scenarios, we've discussed scenarios like cloud storage and intelligent business areas earlier. There are distinct differences in business models and products. For instance, software services addressing end-user rich demands have a more pronounced advantage.…

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

Okay. So thank you all again 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 earnings call. Have a good day.

This concludes today's call. Thank you for joining. You may now disconnect.