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spk01: Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to Tuya Incorporated's first quarter 2022 earnings conference call. At this time, all participants are in 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. Ray Chai, Capital Market Associate Director of Tuya. Please go ahead, sir.
spk06: Thank you. Hello, everyone. Welcome to our first quarter 2022 earnings call. Joining us today are founder and the CEO of Tuya, Ms. Jerry Wong, and our CFO, Ms. Jessie Liu. This fourth quarter 2022 financial results and a webcast of the 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 translations.
spk04: Hello, everyone.
spk07: I would like to report our first recorded performance in 2022. Q1 2022 Q1 2022 Q1 2022 Q1 2022 Q1 2022 Q1 2022 Q1 2022
spk04: In the case of high inflation, the choice of consumer goods was greatly affected, and the inflation of QA began to deteriorate further. In this environment, IOT brands are becoming very conservative. On the other hand, we are the main shareholder of SaaS and Ares. This is the fifth consecutive quarter to remain strong, with a revenue of 5.8 million US dollars and a net growth of as much as 116.7%. Continue to use powerful product functions to cooperate with the equipment ecosystem to solve the customer pain points. Our revenue reached $55.3 million in the first quarter, exceeding the high end of our previous guidance range. Revenue represented a year-over-year decrease of 2.7% compared to the first quarter of 2021, where we saw rapid growth across the industry.
spk07: Our IoT past business revenue decreased year-over-year to $41.8 million in the first quarter. Consumer discretionary spending was adversely impacted by high inflation, and the Russian-Ukrainian conflict that started in the first quarter further exacerbated global inflation. In this environment, we observe that IoT brands have become more conservative. On the other hand, our 2B-based SaaS and other segments maintain a strong growth momentum for the fifth consecutive quarter, with revenue reaching $5.8 million, representing an year-over-year increase of 146.7%. This performance was driven by our consistent effort to offer a targeted solution to address the critical issues of our enterprise customers by leveraging our strong product functions. and the two-yard device ecosystem. In addition, since our Smart Private Cloud product, Qube Solution, was launched in the last November and officially released in early this year, it has achieved important breakthroughs with new customers in the first half of this year. .
spk04: The number of our customers in 12 months has contributed more than $100,000 in revenue, from 216 in the end of last year to 303 in the end of this year. Maintaining a large-scale customer base allows us to continue to reflect the advantages of scale and enhance the network effect between business and customers. In addition, the diversity and distribution of customers also allows the company to have a considerable capacity to look at the pressure in the external environment. On the customer front, as we continue to iterate our products and services, our total number of customers increased by 29% from the same period last year to approximately
spk07: 3900 in the first quarter. LT Pass premium customers with revenue contributions of more than $100,000 during the past 12 months increased from 216 as of March 2021 to 303 as of March 2022. Our ability to maintain a large-scale customer base enabled us to leverage our platform's economies of scale and improve the network effects between our business as well as our customers. In addition, the diversity of customers also helps reduce external risks in an increasingly uncertain micro environment. While some downstream brands are slowing down their sales and production plans, others are increasing their purchases. For example, the deployments of an established Canadian smart home brand with business across over 100 countries and regions reached millions the first quarter. six times more than what they ordered in the same period of last year.
spk04: Moving on to gross profit margin. In the first quarter, both our overall gross profit margin and the IoT PaaS gross margin improved slightly year over year
spk07: 41.2% and 42.3% respectively, remaining relatively steady compared to the same period of last year and the previous quarter. Now let me share specific progress of our business in the first quarter.
spk04: During the past 12 months since March 31, 2022, the dollar-based net expansion rate of our LT Pass business segment was 122%, remaining at the top of the Cloud Pass and SaaS industry.
spk07: We garnered nearly 500 new customers for our LT Pass business. growing the total number of our LT PaaS customers by 21% year-over-year.
spk04: At the beginning of this year, through the LT PaaS sales triangle strategy, we continue to attract well-known and high-quality companies to become our new LT PaaS customers. For example, in Europe, a company that has been around the world for many years, the German Taos giant, which is worth more than $500 million, and its free brand is currently working with us in the electricity and lighting field. The Dutch blockchain brand SmartVale, which is selling globally, has been completely switched from a free IoT platform to a print platform. Starting with home electronics sensor products, we strive to achieve all-round breakthroughs in all categories. A Czech head of the 5G blockchain brand, Immos, began to cooperate with us, planning more than 30 FCUs and so on.
spk07: In this Q1, we continue to attract and acquire reputable new companies across the globe as customers of our IoT Pass business through our 2R Plus strategy. In rural, for example, we officially started a partnership with the German supermarket giant with business worldwide. That has been one of the Fortune Global 500 for many years. We collaborated with its self-operated brand in the electrician lighting field. Another customer is a leading Dutch brand, smartwares, with products sold all over the world. This Dutch customer entirely shifted from its own IoT platform to the 2R platform, which will enable them to achieve breakthroughs in all their product categories, starting from home appliances and sensors. In the Czech Republic, EMOS, a dominant local tools and hardware brand, also started a partnership with us, and now have more than 30 SKUs in the pipeline already.
spk04: In Asia, one of the top three private housing brands in South Korea, Shanshi Co., Ltd. has been able to realize a sustainable product by mass production. A Japanese headquarter, Shanshi Co., Ltd. is currently exploring the field of home appliances with Shanshi Co., Ltd. Also, India's famous new consumer electronics brand, Botte, has been able to start from TWS, and will continue to expand
spk07: In Asia, we enabled Korea's top three smart home brands and listed company, COCON, to implement visual capabilities into its doorbell products. We also relaunched joint efforts with one of Japan's leading furniture retailer and listed company to explore new business opportunities in the field of home appliances. We are also in the process of helping India's well-known emerging consumer electronics brand Bolt to expand into TWS Bluetooth headsets and IoT consumer electronics products, including smart glasses in the future. Given the current micro-environment, light-smart Bluetooth products will be the key strategic focus in 2022.
spk04: In South America and other regions, for example, with more than 1,000 companies in the South American region, Mark Leiter has become a strategic partner of Tuya's Star Self-Defense Project. In North America, he is the leader of a local anti-truck PICA yacht and zero-adjustment research and development industry. In Q1, he established and established the eco-environment of anti-truck smart products. And one of the leading English products in North America and professional brand 3. An excellent brand of North American housing and storage equipment. An environmental, electrical, health and customer-oriented brand in North America, etc. All become our customers.
spk07: In South Africa and other regions, notable new customers included Macrolide, a leading brand in Argentina that focuses on offline product distribution and has more than 1,000 partners covering the entire South American continent. Macrolide became a strategic customer of the Tuya Star Volunteer Program, In North America, a listed company and the market leader in the R&D and the production of RVs, pickup trucks, yachts, and spare parts confirmed their partnership with us in the first quarter to build a smart RV ecosystem. We also further expanded our customer base in North America with a leading audio and video solutions and accelerators brand, a leading residential irrigation equipment brand, a leading environmental appliances, health and personal care brand, and many others. This new customer's business scope is covering from personal entertainment to environment, outdoor, and others.
spk04: In terms of Chinese business, although after the Spring Festival holiday, the COVID-19 pandemic has greatly affected the communication and business of everyone in the industry, causing some domestic enterprises to be unable to move forward. But, for example, our key products, such as outdoor lines, can be acquired by a car company, information system, leading enterprise, domestic helmet industry, absolute leading brand, Yanma Helmet, Domestically, the resurgence of COVID after holiday season in the second half of the first quarter substantially limited all business activities in China.
spk07: However, our outdoor business line, which has been one of our key product categories, still acquired multiple customers with immense business potential. These customers included a leading vehicle information system developer and the undisputed leader of the domestic helmet products, Yamaha Helmets, and the leader in the portable and home energy storage industry. In addition, we launched the 100 Days for 100 Brands plan to penetrate Chinese e-commerce LTC brands before the Spring Festival this year, and successfully acquired more than 100 target customers by the end of April.
spk04: These global customer integration platforms have greatly enhanced the accumulation of our core customers, and these customers' products, business coverage, interview offices, and professionalism have also proven the competitiveness of the platform in the field of global innovation. The focus on customer quality has enabled us to establish a strong relationship
spk07: The addition of these new customers from all over the world further boosted our core customer base. The breadth and expertise of their products and services also served to illustrate strong competitiveness of our platform in the global intellectualization market. The quality of our customer base will enable us to strengthen the core of our business during this market downturn for smart consumer electronics. The foundation we have set fuels us with hope and excitement for the opportunities that will come when the industry eventually recovers.
spk04: The total electricity consumption is about 4%. The consumption of cameras and sensors is about 25%. The total electricity consumption of families and pets is about 20%. The total electricity consumption of other stars is about 15%. Among them, the electricity consumption and lighting products that constitute our main income source are greatly affected by the high-end environment. The analysis of its reasons is mainly due to the large quantity and price sensitivity of the electricity consumption and lighting products. Its current products are called high-end products. the price difference is usually up to three times. Therefore, consumers will buy conventional products that are required to be transferred, but will abandon the smart function to save budget, or the priority of buying smart products will be greatly delayed. We noticed that this phenomenon is very obvious in the European and American regions. But in terms of other products, we see that the overall IoT penetration rate is relatively higher. Smart consumption, camera and sensor products have their own security characteristics, and some family products with smaller price differences between smart and non-smart,
spk07: In the first quarter, we continued to diversify our business and our IoT path product categories are increasingly balanced. In terms of the revenue contribution, electric lighting accounted for about 40%. Consumer IPC and sensors accounted for about 25%. Household appliances, kitchen appliances, paths and other small appliances accounted for about 20%. and other emerging categories accounted for more than 15%. Among them, the electrical and lighting categories, which constitute a significant portion of our revenue, have been largely affected by inflation, recording a year-over-year decrease. This decrease was mainly because consumer grade electrical and lighting products are price sensitive products, usually sold in large quantities. Smart products typically sell for sell for approximately three times the price of traditional products. As a result, consumers tend to shift their purchasing needs to conventional products and will sacrifice smart functions or delay the purchase of smart products to save money. This market shift was especially notable in Europe and America. In other categories, we observed that the smart IPC and security sensor products, which have relatively high IoT penetration rates, are in strong demand. This is driven by the unique characteristics of consumer IPC and the sensor products where IoT functions are necessary to maximize security. Meanwhile, household appliances with little price gap between IoT and traditional products maintain a solid year-over-year growth momentum.
spk04: Next, I would like to introduce you to the next slide, which shows the growth of AZI. This board is currently growing at 1.5% and maintaining a steady growth rate of about 147%.
spk07: Next, I will share some updates on our SaaS and other segments. This segment continued its robust performance in the first quarter, with revenue increasing 147% year-over-year to $5.8 million.
spk04: with the software capability of Tuya, to complete the construction of its 3G smart platform and many industrial lighting projects. It is also the top three lighting brands in the world, and Tuya's business cooperation has expanded to its Korean lighting business model. Through the 3G professional version, the 3G's professional smart lighting capability will be integrated into the Tuya platform to develop 3G smart control products. Such a business development model allows us to see Tuya's and SaaS with PaaS business. In the SaaS business of the hotel industry, we have recently released a strategic partnership with Zewbao, which is the leading local hotel company in overseas Malaysia. CST is using the hotel SaaS solution to integrate the first real smart hotel in Malaysia. A world-renowned smart product group of 500 companies in the world
spk07: First, in commercial lighting, our premium SaaS solution were adopted by China Construction Development Corporation, which has been ranked among the Fortune Global 500 for five consecutive years. For its street lighting project in Xiamen, Mexican industrial lighting brand Dimas Lighting also leveraged our software capabilities to complete the construction of its intelligent platform for commercial lighting and implemented several industrial lighting projects. A top three lighting brand in the world also expanded our partnership into its lighting business in its Korea business segment. The customer utilized our commercial lighting SaaS solution to improve its smart lighting capabilities. and will leverage smart lighting products developed on the Tuya platform. This is a prime example of how our SaaS and PaaS business complement each other in our ecosystem. Turning to the progress of our hotel and apartment SaaS sector, we recently launched a strategic partnership with Alipay in China. Internationally, the leading hotel system integrator in Malaysia, core system technologies is using Tuya's hotel SaaS solution to land the first smart hotel in Malaysia. Additionally, the smart products arm of a world-famous Fortune 500 group is cooperating with us to use our hotel rental SaaS and platform SDK capabilities for overseas hotel rental operations. As the pandemic is being brought under control in Q2, our hotel SaaS solution has received a number of orders from Europe and Southeast Asia. On a political level, For value-added services, the strong momentum of our customer-paid cloud storage services carried through into the first quarter, with revenue growing over 200% year-over-year. The number of active devices with paid cloud storage services by the end of the first quarter of 2022 also doubled from the same time last year.
spk04: Finally, let's talk about this year's core strategy, our Smart Private Cloud Product solution. In the first half of 2022,
spk07: We have made substantial progress in our private cloud business. After thorough evaluation, analysis, and inspection, several leading customers in different countries and industries have recognized our private cloud solution.
spk04: For example, a family in Indonesia, which covers 55% of the country's largest population, will be able to use Kube smart cloud solutions, integrated channels, network, and more powerful C-end customers' consumer capabilities, accelerate the development of Indonesia's smart furniture market. Tuya will deploy software from the cloud platform. Powered by Tuya, eco-friendly, smart equipment, Internet communication, and follow-up continuous middle-end users and services, three levels, will become a customer-oriented, long-term partner. In China, a Chinese-led energy hub will cooperate with Tuya to achieve long-term cooperation. and achieve their own IoT smart platform system in stages. The main CUBE solution will help to complete the deployment of IoT smart platform, build up the smart platform capability, and support customers to solve the energy use safety problems of thousands of families in the security field, and help the leading companies in China's second-row, third-row electric vehicles and the front of the opening, also choose our CUBE smart smart cloud products.
spk07: For example, Telecom Indonesia, the largest telecom operator in Indonesia, with service coverage of over 55% of all Indonesian households and hundreds of millions of registered users, will use our cube solution to tap into the strong consumer spending power of consumers in its network to accelerate the development of its Indonesia smart home appliances market. Our goal in such collaborations is to become its long-term partner in three ways. First, private cloud platform software development. Second, powered by Tuya ecological smart device interconnections. And finally, additional recurring value-added services for the end users. In China, a China-leading utility giant is establishing a long-term collaboration agreement with Tuya to build its own IoT intelligent platform in stages. Our CUBE solution will help customers complete their deployment of IoT private cloud platforms and build their IoT platform capabilities. CUBE can also support customers with security software capabilities to help adjust the energy consumption security issues for thousands of households. These qualities also help us to attract industrial leaders, such as one of China's top five two-wheeled and three-wheeled electric vehicles developer to our CUBE solution.
spk04: So far, we are getting positive feedback from our customers that they choose our products
spk07: and trust us because of our product innovation of technology covering cloud, edge, and application, and the scale effect of the integrated software and hardware products based on our deep cultivation in the intellectualization field for more than seven years, as well as our rich Power by 12 device ecology through a long-term accumulation in the years. We believe in our ability to capture long-term opportunities in the market with strong demand for smart private cloud solutions.
spk04: In general, QA is full of challenges. In the second half of 2021, all kinds of economic problems and environmental challenges broke out in QA. In addition, the global demand for smart private cloud is still high, and there is no expected improvement in Q2. This is a huge challenge for our IoT PaaS business, but we will be able to achieve this
spk07: Overall, the first quarter was full of challenges, economic and other disruptions that started in the second part of 2021 intensified in the first quarter, exacerbated by the Ukraine war. Global inflation is running high and is not expected to improve in the second quarter. While we remain cognizant of these major challenges in our IoT PaaS business, We will explore additional growth drivers through our smart private cloud and smart industrial sub-segments.
spk04: QE, we focused on improving the internal organization efficiency and achieving the balance of losses as an important goal for growth. We are also improving the efficiency of management at the same time, making the company's long-term profits.
spk07: On profitability, in this quarter we focused on the optimization of our organizational structure efficiency as we aim to better balance our business growth and timeline to profitability. And we're also improving our management efficiency simultaneously, which will sustain our long-term prospects. That concludes my remarks. I will now turn the call over to Jesse, our CFO, to review the financial details.
spk03: 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 are facing a series of unprecedented challenges. Nonetheless, our total revenue in the first quarter exceeded our previous expected guidance range. Now I will provide a closer look into our financial results. For the first quarter of 2022, our total revenue was $55.3 million, down 2.5% year over year. The decline was driven by a 16.1% year over year decrease in our IOT path revenue, which reduced to $41.8 million for the quarter, impacted by factors Jerry mentioned earlier. If we look into the ultimate demand contributions to our revenue across the globe, which represents our estimate based on various business information from and regarding our customers. We did experience a slowdown in the US and Europe, but we were able to deliver growth in China, Latin America, Southeast Asia, and other Asian regions. Moving on to our customer base, we had 303 premium IoT past customers for the trading 12 months ended March 31, 2022, up 40.3% from 216 a year ago. During the quarter, premium customers accounted for approximately 85.6% of our IoT PaaS revenue, forming a solid customer foundation for our business. Our dollar-based net expansion rate for IoT PaaS segment maintained at a healthy level of 122% for the trailing 12 months ended March 31, 2022. Our DB and ER demonstrated our ability to continually expand our customers' usage of the 2ER platform over time and generate revenue growth from existing customers. On the other hand, as Jerry mentioned, we delivered a satisfactory performance in acquiring new customers with exciting business potentials. This is a direct result of the target customer acquisition strategies we have adopted. For example, in the first quarter, We still made decisive efforts in the Chinese market by launching the 100 Days for 100 Brands plan, under which we obtained more than 100 China brand customers in various segments within 100 days. Among the customers who agreed with us, about 40% were customers in small and large household appliances, kitchen appliances and pet appliances. 40% were electrical and lighting related brand customers. And the rest 20% were customers in emerging verticals, including personal health care, home decoration, home safety, outdoor, automated products, and other fields. We believe that our cooperation with these benchmark brands across different verticals, such as according to the public industry ranking, one of the top three baby care brands in the Chinese market, one of the leading brands in the vertical category of electric tours, One of the top ten brands of bathroom heater switches and one of the top ten brands of screen lights, especially in China, will further complement us and enrich our business in the China market. Our overall growth margin and IOT past growth margin for the quarter remained stable at 41.2 percent and 42.3 percent, respectively, as we effectively implemented a series of initiatives to improve our business management efficiency. Now, turning to our operating expenses, please note that we're presenting our operating expenses on a non-GAAP basis by excluding share-based compensation expenses from our GAAP members to provide greater clarity on the chance of our actual operating-based expense so that you can review performance in the same way as our management. During the quarter, our non-GAAP total operating expenses were $6. Specifically, non-GAAP R&D expenses rose to 43.5 million. Non-GAAP sales and marketing expenses increased to 13.6 million. Non-GAAP G&A expenses increased 6.2 million. And other operating income net was 2.6 million compared to 2.5 million a year ago. The increase in the non-GAAP total operating expenses was mainly due to the increase in employee-related costs. For example, our average salaried R&D employee headcount increased by approximately 30% in this quarter versus a year ago. It is worth pointing out that we are actively optimizing our operational structure and have already reduced average number of our R&D headcount by approximately 10% in the first quarter from highest point. As we carry through this optimization effort, our headquarter is now decreased to has now decreased to an even lower level. Our non-GAAP loss from operation was $37.8 million in the first quarter, representing 68.4% of total revenue. And our non-GAAP net loss was $37.3 million in the first quarter, representing 67.4% of total revenue. In fact, with increasing uncertainty in the macroeconomic environment, we are pivoting away from top-line growth toward balanced efficiency, profitability, and sustainability. As part of our efficiency first strategy, not only have we refined our team structure, we are also reducing our office lease by toning down our office plans to match our current growth trajectory. In addition, we continue to implement measures that help boost efficiency of our staff. For example, in our IoT path and smart device distribution business, a small percentage of large orders contribute to the majority of the revenue, while the rest are mostly small and scattered purchases. Since the manpower and other related costs need to process each order regardless of size, it's usually similar. Our teams are now bundling groups of smaller orders to reduce such costs. While the positive impact of this optimization initiative on our financial statement may not be evident immediately as it is offset by the substantial one-off costs occurred in terms of this initiative, our refined cost and expenses structure will enable us to spend our money on what matters the most. In the first quarter, specifically if we exclude those one-off expenses related to the compensation paid to employees due to team restructuring, rental penalties, and the restoration costs, our non-gap royalty margin and the net margin would have increased about 5%. Moving on to the balance sheet, as of March 31st, 2022, our cash equivalent and short-term investment were $984.2 million. We believe this balance is sufficient to meet our current liquidity and working capital needs in the long run. Finally, turning to our share repurchase program, during the first quarter, we repurchased approximately 4.9 million ADS from the open market for a total consideration of approximately $25 million pursuant to the share repurchase program, representing around 12.5% of the $200 million authorization announced pursuant to the share repurchase program. This shows our strong confidence in the company's long-term growth prospects. Now turning to outlook, for the second quarter of 2022, we expect total revenue to be in the range of $60 million to $65 million. As you can see in the market in the second quarter, Today, they're full of uncertainty and the factors leading to the industry-wide challenges everyone's facing have not significantly improved. In terms of economy, last Friday, the CPI of the United States increased by 8.6%, hitting a new high, representing a very high level of inflation. Turning to geopolitics, the war between Russia and Ukraine continues. Regarding the COVID epidemic in China, April and May were the most challenging months. And the inventory backlog experienced throughout the supply chain, including OEMs, brands, and the retail channels, have hidden those players from placing orders to upstream. These factors affected our sales and the business activities, as well as the customer's acceptance of product and services and the implementation of smart industrial projects through our SaaS and the PPT devices. In general, the second quarter of 2022 will undoubtedly remain difficult. As a response, we will remain cautionary and continue to move forward by formally implementing the aforementioned measures and strategies. This concludes our prepared remarks for today. Operator, we are now ready to take questions. Thank you.
spk01: Thank you. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask a question, please ensure your phone is unmuted locally. When asking a question, please state your question in Chinese, then immediately provide an English translation for the convenience of everyone on the call. Our first question comes from Goldman Sachs. Please go ahead.
spk05: Good morning. Thank you, Jerry and Jessie, for giving me a chance to ask a question. My question is, when we encounter some challenges in the European and American markets, what is the situation of our Chinese business? Can you please share with us some of the challenges some of the market progress, including which needs are relatively strong, and can support the growth of our entire Chinese business in the medium and long term, including which type of customers may be some of the customers that we are currently focusing on developing, and there may be some obvious income contributions in the next two quarters. Good morning. Thanks, Jerry and Jessie, for giving me the chance to ask a question here. My question is that while we face challenging environments in the EU and US market, Can management share some colors on the progress of our China business and what type of our demands are emerging in China market? What type of clients are we focusing on? Can we have more meaningful progress in the next couple of quarters? Are we expecting a higher or lower margin in the China market in the near to medium term? Thanks. Excellent.
spk03: Let me take this question. China market is vast, and the scale of each of our business is still small. Therefore, we are expanding a few of our business to grow quickly and to grow the revenue contribution from China, including PaaS, SaaS, and the Tuya Cube, our new strategic private cloud product. Regarding PaaS, we are aggressively developing clients in the electronics device brands, just as Jerry has discussed. And for the SaaS business, since the end of 2019, we have started SaaS business in hotel, property, community, and the commercial lighting in China. Each of them has gained top three market positions by now in China and is still gaining shares. For example, we've formed strategic partnership with Alipay in hotel SaaS business in the first half this year to build up hotel-centric digital commercial ecosystems for thousands of hotels covered by 3R SaaS network. This partnership will enable us to quickly integrate business resources to provide seven-day, 24-hour customized quality and diversified digital services nearby for the guests in the hotel room that stayed there, which will be converted into revenues. Commercial lighting has launched many energy-saving use cases in China this year and are widely recognized very positively, including implemented in gas stations, factories, communities, group lights in city centers, large-scale parking lots, etc. And our community staff supported quite a few cities in China to transit to smart residential community for the future generations this year. We are also very excited that we have seen breakthrough of our Tuya Private Cloud, Tuya Cube product in China. We announced it last November, we have signed up contract with a number of industry leading players in China for this new strategic product, including leading telecom operators, leading utility companies and auto group, and with a few other large enterprise in the process of signing contract such as leading energy companies. Private cloud clients told us the reason they selected us for majorly four reasons. First, Tuya's IoT cloud connected hundreds of millions devices on a global basis with 80 years track record for safety and reliability. Second, our technology system is most comprehensive that can provide a full service coverage IoT cloud, IoT OS, apps, and SaaS. And thirdly, our hardware ecosystem is unparalleled. And number four, our deep focus in IoT. So we have a strong belief in China market, and we believe China market has huge potential for IoT. For the new strategic 2-yard cube product, the revenue contribution will start to reflect in Q3. In Q1 and Q2, we mainly sign up new customers and start the deployment of the private cloud and the recognition of the revenue will start in Q3. So that's the answer for your question. Thank you. Thanks.
spk01: Thank you. Our next question comes from Morgan Stanley. Please go ahead.
spk08: Thanks for the opportunity. I have two questions here. The first one is could management update us in terms of the negative impact from the lockdown in China, whether Tuya and Tuya's customer, especially the OEM located in Yangtze River Delta, has fully recovered after reopening, or if not, what is the current status and the forward recovery trajectory? going into next few months. The second question is could management update us in terms of the overseas consumer electronic device related demand outlook going into the second half? Assuming the, I think management mentioned assuming the CPI will continue to be high, but what about the volume and shipment growth or early color from your customers in terms of second half demand from the overseas side. Thank you.
spk03: Thank you, Liu Yang. For the first question, we saw the most impact our business activities in China happened in end of March, April, and May, including customer acquisition efforts has been significantly slowed down. and especially deliver our SaaS solution which require the customer to be satisfied with the result, give us a paper confirmation that was delayed as well. And also some of the customer acquisition of past business and the private cloud business was also affected. And the sales performance of our brand customer in China was also slowed down in that two months. However, we do see a recovery in June. So it looks like right now all cities are restarting their normal business economy. The consumption is recovering soon. So we saw the overall trend in China is improving and be positive. And at the same time, because Europe and the US had inflation challenges too, so to address that, this year we have been very focused on the cost control. We have realigned our business to focus resources on key business segments and pause the segment which require long-term investment or their specific market size are not too big. And second, we refine our team structure and focus on improved organization efficiency. And thirdly, to improve our past long-tail business model to more focus on large customers and the large contracts, we tiered our customers based on their revenue contribution and the potential. We also tiered our orders. to adjust expenses for small orders, which led customers to combine into large orders to significantly improve our efficiency. For the second question, regarding the overseas demands for the customers, geographically, inflation has been moved higher by the Russian-Ukraine war, and that impacted Europe and the US a lot. the purchasing power were weakened, so the consumer more forced to prioritize food and the daily necessities. However, India, Latin America, Southeast Asia, and other regions seems relatively better situation. So accordingly, we have observed a healthy growth trend for brands and markets in those regions. So we think this is also the case for the consumer demand. In terms of product categories, consumer electronics and lighting categories in the overseas market was impacted most by the inflation, and the price gap between IoT products and their traditional counterparts is large, especially in lighting and electrical product segments. In addition, purchase in these categories often come to enlarge quantities, further magnifying the price gaps. So as a result, in lighting and electrical segments, consumers tend to prioritize traditional products over IoT products. However, for different other segments of products, for example, the home consumer cameras, sensor products, and home appliances, we saw less impact by the inflation. So for the second half year, we think major factors coming from how U.S. Treasury can effectively control the high inflation and also the European central banks. If the inflation can be quickly controlled, we do believe and also our brand customers believe that the demand will recover quickly from the end-users side. From the activation of new devices, actually since April, we do see a better trend than last Q4 and the Q1 this year. Like in Q1 this year, the new device activation, which we have visualized, was in a slightly negative zone. However, in April, May, and June, it start to it starts to turn into a positive trend. So we're still closely observing this trend. We hope this will continue. That may mean, although the inflation hasn't came down significantly, the customer's reaction to the inflation has picked out. So we will closely monitor this with our brand customers. One more thing, it's worth noting that our customer-facing value-added services, for example, cloud storage, recorded an overall 200% year-over-year revenue growth in the first quarter. This performance indicates that the market has robust demand and the feedback for the high-value IoT services. So for home appliances, as a category with relatively high overall value, also have a single-digit year-over-year growth in the first quarter. And also, despite our brand customers are facing huge challenges, they are conservative in terms of placing orders to OEMs. But the majority of them keeping very optimistic for the long-term trend of IoT. So, for example, last two weeks, myself and our president, through Zoom, we have discussed with six of our top brands, companies, CEOs. They are all still focusing on R&D to expand new IoT SKUs and ask us to recommend more exciting new different types of IoT devices for them. Based on the status number in the first half of this year, for all the brand customers we acquired before the end of 2020, about 48% of them have expanded into new IoT devices, SKUs, this year. That gives a lot of confidence that even in a very challenging period, the trend of IoT is not changing. So that's our view for the short-term future of the IoT market.
spk08: Thank you, Jessie.
spk03: Thank you, Liu Yang. I think we can go to the next one.
spk01: Our next question comes from CICC. Please go ahead.
spk02: Hello, Director Chen. Thank you very much for answering this question. My question is about the business of Siyouyun, which is the newly launched one. You mentioned that there are some newly acquired energy and electricity customers. From the mid-term perspective, what is our expectation for the business of Siyouyun? And now we see more of a large number of public cloud customers moving to Siyouyun. Or is it mainly to expand a new customer group? How should we expect in the mid to long run the RAMU proportion? And do we see more from existing public cloud customers switching to private cloud solution? or are we going to expand to a new customer profile? What is the marginal change to the gross margin expenses? Thanks.
spk03: Thank you. Most of our private cloud services customers are new customers, almost all of them. So we are promoting the product not to our existing customer base, but to new industry, new customers. And our acquisition efforts are progressing smoothly in China and outside of China right now. We have signed the legal contract with dozens of customers. All of them are very well-known, large-scale industry leaders in China and also outside of China. These customers included the largest telecom operators in Indonesia and in China, one of the largest utility group in China, and also a couple more similar utility groups in discussion with us for signing contracts, and the leading top three automobile group in China and in Southeast Asia. We currently also have a very healthy pipeline for large-scale companies, including leading energy companies in the stage of negotiating contracts, and also very large European retail groups. They have thousands of large-scale retail stores across many countries in Europe. So this client has all demonstrated our private cloud technologies can be implemented in many different industries, which we feel very excited that the Tuya Cube product can enable Tuya to grow outside of consumer electronics industry. In the past seven years, we have been very focused on consumer electronics industries. And we all have seen consumer electronics industry can be impacted significantly by high inflation, by the economy cycle, the consumer down cycle in China. However, many other different industries, for example, utility industries, the auto industries, and the telecom industries, they are less vulnerable and more sustainable to this kind of economy cycle. So we believe folks on the two-yard cube solution, which will not only provide a lot new growth field for us, but make our business in the long term much more sustainable in a down cycle of the economy. So we will take the two-yard cube as one of our most important strategy for the next few years. And we believe this will bring us the new growth support for the next three to five years. And because this is a pretty new business in the early stage, we need the time to determine the best pricing and the deployment strategy. So based on our experiences with existing and prospective customers, our private cloud projects are typically operated at large scale for very large customers, given their commercial value and the business binding model. So in addition to the implementation and deployment in the launch stage, there will be more business and the revenue opportunities in the IoT product ecosystem and our SaaS capability for those large 2-yard cube customers in the long-term future. So we are also making our private cloud deployment implementation process more standardized and packaged. As such, future customers can even have their in-house R&D team or hire a third-party implementation team to deploy our products directly. So we want to emphasize that's why a private cloud, a customer-specific system, they will be a standardized product because it is providing a very infrastructure-like capability. First, it's to use all kinds of different communication ways, including Wi-Fi, ZigBee, Bluetooth. like Cat1 and NB-IoT, and also industry networks to connect all kinds of IoT devices. That's the number one capability. So the industry leaders, they don't need to worry about this very fundamental infrastructure-like capability. They don't need to invest R&D on this capability. And second is to provide a highly secured cloud structure and which is in compliance with all the different countries' data security rules, including China, including Europe, U.S., and, for example, in Southeast Asia. So the customer also doesn't need to invest heavily in how to comply with security law, the data security law in different regions. And thirdly, our our private cloud structure can utilize our very ample unparalleled hardware ecosystem we've built in the last eight years. So thousands IOT devices can – different type of IOT devices can be connected into this two-yard cube infrastructure. And if it's a different category, we never worked with our ample experiences And the thousands OEMs we have worked in the past eight years, within 30 days, any new IoT devices can be connected into this private cloud structure. So this three very fundamental infrastructure can be highly valuable in many different industries. It's like water and electrical services for many different industries. So we are excited with this new business opportunities. We will, through next six to eight months, we will focus on deliver our first dozens of projects for our top customers as well, and also figure out what would be the best pricing strategy to achieve a healthy growth margin and net margin for this new business. Thanks.
spk01: Thank you. I will now hand over to Greg for closing remarks.
spk00: OK.
spk06: 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 good day. Thank you.
spk01: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect your lines. Thank you.
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