Earnings Labs

Tuya Inc. (TUYA)

Q3 2024 Earnings Call· Tue, Nov 19, 2024

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Transcript

Operator

Operator

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.

Reg Chai

Analyst

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.

Jerry Wang

Analyst

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…

Alex Yang

Analyst

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…

Operator

Operator

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

Tom Tang

Analyst

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?

Alex Yang

Analyst

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.…

Operator

Operator

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

Timothy Zhao

Analyst

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.

Alex Yang

Analyst

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…

Operator

Operator

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

Kai Xiao

Analyst

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.

Alex Yang

Analyst

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…

Operator

Operator

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

John Roy

Analyst

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?

Alex Yang

Analyst

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.

John Roy

Analyst

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?

Alex Yang

Analyst

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

Operator

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

Alex Yang

Analyst

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.

Operator

Operator

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