Good day, and thank you for standing by. Welcome to the Tuya Inc. Second Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please be advised, today's conference is being recorded. I would now like to turn the call over to your first speaker for today, Mr. Reg Chai, Investor Relations Director of Tuya. Please go ahead, sir.

Okay, thank you. Hello, everyone. Welcome to our second quarter 2024 earnings call. Joining us today are Founder and CEO of Tuya, Ms. Jerry Wang, our current CFO, Ms. Jessie Liu, and our Co-Founder and incoming CFO, Alex Yang. The second quarter 2024 financial results and webcasts of this conference call are available at ir.tuya.com. A replay of this call will also be available on our IR 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, Ms. Jerry Wang. Jerry will deliver his remarks in Chinese, which will be followed by a corresponding English translation.

Hello, everyone. Thank you for joining Tuya's 2024 Second Quarter Earnings Conference Call. The second quarter of 2024 was another milestone for Tuya, with our revenue continuing to meet expectations and achieving a robust year-over-year growth of approximately 29%. Our [indiscernible] segments maintained its strong gross margins, further reflecting our value proposition and the product advantages. Moreover, we achieved our first quarterly non-GAAP operational profit in the company's history, with an operational profit margin of around 10%. This is an extremely encouraging profit level that not only validates the financial viability of Tuya's business model, but also highlights our strong operational leverage and our valuable commitment to fulfilling our promises. With this, we have sequentially accomplished our short-term operational targets, and moving forward we will continue to focus on long-term revenue growth and enhancing profit margins. Today, on the occasion of this milestone, I primarily want to discuss with everyone several major stats concerning the company's fundamentals and long-term development. Firstly, as the leading global cloud platform service provider, Tuya is at the new starting point in the smart technology and industrial landscape. This new beginning includes a better competitive environment and the [indiscernible] of the smart consumer electronics and business scenarios. In the second quarter, our IoT PaaS business experienced year-over-year growth of approximately 32%, partly due to the industrial recovery and bring new potential [indiscernible] Asia as taking the robust extra data demand for household appliance and other consumer electronics during the quarter. More importantly, Tuya's ability to acquire new clients and advance with the existing customers was amplified by a more favorable competitive landscape. For example, in Europe Tuya collaborated with France's leading energy integration firm, AI technology leveraging our cutting-edge advantages in AI-driven energy-saving technology to basically explore the energy-saving market which benefit from substantial policies…

Thank you, Jerry, for sharing the company's growth strategies and the long-term development philosophy. And also, thanks for your kind words. Now I will discuss our financial results and provide more detail on the numbers that was covered by Jerry. Please note that all figures are in U.S. dollars and all comparisons are on a year-over-year basis, unless otherwise stated. In the second quarter of 2024, our total revenue reached $73.3 million, up 28.6% year-over-year. Excluding the adverse impact of exchange rates between the U.S. dollar and RMB, our year-over-year growth would have been 31%. Most importantly, we achieved non-GAAP operational profitability for the first time this quarter with a solid profit margin of 10%. This core financial figures demonstrate that Tuya's strategies and efforts are yielding positive results. As Jerry mentioned, we are encouraged by the fact that Tuya is in a stronger financial and operational position. Our IoT PaaS revenue in the second quarter was $54.3 million, representing a year-over-year growth of 32%. Regarding product categories, we saw robust demand growth across all product categories with home appliances experiencing the highest year-over-year growth of about 65% due to our efforts on delivering high-value products to our customers. And the lighting and electrical achieved an approximately 30% of year-over-year growth due to the normalization of downstream inventory compared to the same period last year. From a regional revenue demand perspective, Europe continues to be our largest market, accounting for about 1/3 of the total revenue demand. The Asia Pacific region and Latin America have seen a continuously accelerated demand growth with contributions rising clearly compared to last year. The Asia Pacific region accounted for around 1/3 of the total revenue demand, while Latin America's demand contribution increased to nearly 10% -- nearly 10% to 15% in the second quarter.…

Hello, everyone. I'm excited to engage in many discussions with you in the future.

With that, operator, we are ready to take questions. Thank you.

[Operator Instructions]. And our first question is going to come from the line of Yang Liu with Morgan Stanley. Your line is open. Please go ahead.

Let me translate my question. My question is about the future demand outlook given we'll be facing a very high base starting from second half last year, what will be the expected top line growth? And whether the almost 30% growth in the first half can be sustained in second half? Thank you.

Yes. Thanks for the question. This is Alex. So, I'd like to address this question from both external and to a specific perspective. As a company embedded within its industry and this current level, Tuya's strategy is to seize right opportunities and take actions that align with our capabilities and vision. Thus, so the macroeconomy environment is crucial as it has been demonstrated over the past 3 years. However, what's even more critical is how the company position itself to capitalize on opportunity and expand revenue in the face of competition and market dynamics. So externally, we observed that after a recovery in the first half of this year, the macroeconomic environment has stabilized. You might have closely followed China export data for the first half and second quarter, which serve as a significant indicator of global demand within the global supply chain. For example, driven by factors like inventory replenishment in Europe and the U.S., a new demand from emerging markets like Southeast Asia. The number of household appliances export from China grew by approximately 25% year-on-year in the first half of this year. According to Chinese customer data, so this is a robust result. Of course, smart devices extend beyond just home appliances. And we've seen similar trends in other categories, such as strong recovery and growth in smart lighting in the first half with consumer security products also performing solidly. Additionally, in observable market, we've noted that some downstream companies in non-smart sectors of consumer electronics have also shown quite huge performance. With their market positioning and value chain stages being similar to this to our customers in consumer electronics sectors. Of course, you might have noticed by July data, although household appliances export in July still achieved a year-on-year growth of 16% in value and 23%…

And our next question is going to come from the line of Timothy Zhao with Goldman Sachs. Your line is open. Please go ahead.

I have two questions here. The first one is regarding the old [indiscernible] this year. Secondly after [indiscernible].

Okay. Thanks, Timothy. I think your first question is about our forward-looking operating profitability. And the second question is about our long-term view of cash dividend. So, I will take on the first question, and Alex will take our second question. So, achieving profitability is not something that can be decided one quarter and accomplished next. It is fundamentally about the business model and the strategic direction, followed by the collective execution efforts of the entire organization. Reaching non-GAAP operating breakeven this quarter is a significant milestone and achieving a 10% margin on our first attempt is something we considered to be a strong outcome. Moving forward, we will continue to balance growth with profitability with the next goal being to expand our scale of revenue so that the margin and profit figures become more meaningful. To this end, we have a solid foundation and experiences that we can share. First, Tuya's income statement has a rather clear financial logic. Thanks to our business model, our enterprise services developer community and the platform, we do not need to make significant incremental investments to acquire customers to generate revenue. So, this means that the additional gross profit generated will under effective cost control translate directly into profit a significant portion. Our overall gross margin is a structural result of the combined gross margins across our three major business segments, which themselves reflect market competition and product value. While there will be quarterly fluctuations, the margins remain stable overall. From a gross profit perspective, our gross profit has seen considerable and efficient growth over the past year, alongside the revenue and the current size of our team. This growth in gross profit is our source of profitability. Second, our cost control measures have seen -- have been evident to everyone. Since the end of 2021, we have consistently maintained a downward trend in expenses. With non-GAAP operating expenses remaining slightly over $30 million over the past several quarters. Admittedly, the return to revenue growth has given us the confidence to modestly increase market and sales investments as needed, but we will rigorously control costs overall, balancing the need for operating leverage and profitability and ensuring that every dollar is spent wisely. Overall, on the operational side, we hope and are willing to see non-GAAP quarterly operating margins maintaining a similar level to Q2. Regarding net profit and net profit margin due to the expectation of interest rate cuts and considering market volatility beyond Tuya control, we will strive to secure supplementary financial gains while ensuring capital protection. As for GAAP operating profit or loss and net profit, they may experience quarterly fluctuations due to some nonoperational factors such as share-based compensation expenses and the class action litigation cost [indiscernible]. However, we believe this doesn't affect the judgment of Tuya's fundamental business operations. And Alex will go for the dividend question.

Yes. So, the dividend is a topic of great interest to everyone. So, let me take the opportunity to expand the special dividend announced. So first of all, it's called special dividend because there is no legal definition of non-GAAP earnings. Under GAAP, so Tuya has not achieved the full year profitability due to relatively large non-cash share-based compensation expenses, which make it difficult to issue a final or annual dividend from a compliance or business standpoint. So however, the actual dividend amount of approximately $33 million corresponds to Tuya's non-GAAP net profit for the first half of this year. So, we base this decision on our current non-GAAP operating profit level, cash flow, net cash position and other relevant core financial indicators. Planning the dividend amount and timing based on all these considerations, including actual net profit. We believe that it is the right approach to prioritize performance first and then build a long-term and sustainable shareholder return model while ensuring the company can invest and grow according to its strategic needs.

Operator, go for next question.

And our next question is going to come from the line of Kai Qian with CICC. Your line is open. Please go ahead.

This is Ben from Capital Research. [ph] Congratulations for the strong quarter. My question is regarding the GenAI. As you mentioned, GenAI is an important strategy for Tuya. Could you further share some of your progress in GenAI such as key AI functions, typical customer case, customer feedback and your further AI investment budget as well and some color on the GenAI monetization progress would be great. Thank you.

Yes. Yes. So currently, we are actively developing several smart devices products based on GenAI technology, so which covers the categories such as smart watches, smart rings, AI headphones and smart speakers and AI glasses. So, each product aim to further integrate large model capability on top of their existing functions to provide a more personalized and intelligent user experience. So, for example, smart watches and rings will be able to generate more personalized AI reports to users, enhancing interactivity through AI watches faces or GPT voice assistance. So, AI headphones currency support transcription and somatization. And we plan to expand to the capability to include real-time transcription and translation in the future. So those categories components Tuya's smart ecosystem well, which is why they have gained popularity in emerging markets like APAC and Japan. So, the addition of GenAI capability will significantly enhance the competitiveness of Tuya's solutions, creating better customer engagement and user experience. So those products are currently under intensively development within ourselves, so with many projects expected to enter trial productions in the fourth quarter of this year. For example, we plan to launch smart speaker products with the GenAI capability, including a Chinese version in Q4, and gradually introduce this AI capability into our past offering for developers. So overall, revenue from AI smart devices and software products may begin to manifest to gradually starting next year. So, regarding the monetization of GenAI, we believe there are two relevant feasible approaches. So, the first is to integrate those capability into products for customers and developers to use as they see fit. This way, the products they create will inherently process GenAI capability which can be sold to downstream end users such as consumers who can subscribe to GenAI features through their smartphone on a pay per user basis. So, this is a classic SaaS model, so which has advantage of now imposing additional cost on our customers, thereby helping Tuya differentiate products, gain market shares. With a stable revenue generated through value terming payment at the end user level we have. The second approach is including GenAI capability as additional an appropriate price within our products, such as the PaaS or smart solution model. So, the benefit of it is allow us to precisely target the customers who have real competitive need and a strong desire to excel into the smart business. So, we will select the most suitable and business driving charge model for different category and scenarios. Thank you.

We've reached the end of the call, and I would now like to hand it back to the management team for any closing remarks.

Okay. Thank you, again, for joining us 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. Have a good day today. Thank you.

Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.