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spk03: Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to Tuya Inc. second 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. Rek Tsai, Capital Market Associate Director of Tuya. Please go ahead, sir.
spk06: Okay, thank you. Hello, everyone. Welcome to our second quarter 2022 earnings call. Joining us today are founder and CEO of Tuya, Mr. Jerry Wang, and our CFO, Mr. JC Liu. The second 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 corresponding English translations.
spk07: Hello, everyone. Thank you for attending the Q2 2020 phone call conference. At the same time, it is also the first conference in Hong Kong for the first 30 weeks.
spk05: Hello, everyone, and thank you for joining us on our second quarter 2022 earnings score. This is also our first earnings score after our top prime listing in Hong Kong.
spk07: In Q2 2022, we achieved a quarterly income of about US$62.5 million, which is in line with our expected net profit. The quarterly return on investment grew by about 3.1%, Compared to Q2 2021, which was in a state of industry explosion, the Q3 2021 fell by about 26.1%. Among them, the main business, IoT Card, earned about 47.6 million US dollars, while the growth was about 13.9%, but the decline was greater. In the second quarter, global supply and demand continued to rise, and without war entering the white-hot stage, the overall economic situation was declining more and more. Although the latest July CPI of 8.5% in the U.S. fell slightly from the previous month, it is better than expected, but the value is still high. The impact of high inflation on the economic industry, industry chain, and the financial status of consumers, and the changes in people's living habits and consumption habits will further cause a profound follow-up impact on the field of selectable consumer goods. Therefore, the recovery of the consumer electronics cycle requires time and patience. At the same time, we have noticed that the downward trend in the IoT equipment industry chain In the second quarter, our total revenue was $62.5 million.
spk05: in line with the midpoint of our previous guidance range. Sequentially, we grew our total revenue by 13.1%. However, on the year-over-year base, we recorded a 26.1% revenue decline as we left a period of robust growth across the IoT industry in 2021. In particular, our IoT PaaS business revenue increased to $47.6 million up 13.9% sequentially, but down significantly year over year. During the second quarter, global inflation continued to rise while the Russian-Ukrainian conflict region triggering the tsunami dramatically impacted the world economy. Although the latest CPI from the U.S. came in at 8.5% in July, lower than June and better than expected, the number itself was still high. High inflation impacts the economy, the industrial value chain, and consumers' wallets, changing people's lifestyles and consumption habits. These changes have a long-term impact on the consumer discretionary sector. A recovery in consumer electronics will take an extended period. Meanwhile, we note that the downstream players in the IoT device industrial chain, including IoT device brands, OEMs, and the distribution channels, faced massive inventory pressure from supply mismatches, which are expected to take longer to fix. As a result, our LT Pass business, DBNER, as of the end of the second quarter, declined to 84%.
spk07: However, our other core business, SAS and ALICE, which are based on 2B, has maintained a strong record of $7.2 million in revenue for the sixth consecutive quarter, with a growth of 114.3%.
spk05: However, our other core business, the 2B focused sales and other segments, remained strong for the sixth consecutive quarter since we completed our public listing, with revenue reaching $7.2 million, up 114.3% year-over-year. Our SaaS and other segment has sustained the year-over-year growth rate of over 110% for 10 conservative quarters, despite the recent turbulence in the global economy.
spk07: Our growth margin in the second quarter was 42.8%.
spk05: Our IoT PaaS gross margin was 42.5%, representing a slight improvement over the same period last year, and remained at a healthy level despite the hard wins.
spk07: Since Q2, we have continued to carry out many operations and business-level optimization, as well as follow-up and reception of product technology. I will now share some details with you.
spk05: Since the beginning of the second quarter, we have implemented several operational and business optimizations as well as product and technology iterations. I will share some highlights here.
spk07: In terms of brand, we are still in the process of expanding globally. For example, the DIY retail channel of the German business group, which has a world-class scale, is a free-brand collaboration in many fields such as delivery coverage, electricity, lighting, outdoor, home appliances, and so on. It is one of the top US consumer platform companies with more than 10 consumer brands. We also expanded our global brand customer base. For example, we added a Fortune 5 German business group whose DIY retail channel private label shipments cover a wide range of segments, such as electrical,
spk05: lighting, outdoor, and small appliances. Another customer is a leading US consumer platform and holistic company that offers more than a dozen consumer brands. We're also partnered with the top-tier Korean HVAC manufacturer with distribution in Europe, America, Asia, and the Middle East. In Mexico, we worked with the leading Mexican air conditioning brand that has integrated its suppliers and the product system to develop smart home appliances.
spk07: In terms of high-quality clients represented by old clients, the number of high-quality clients in IOTPASS this quarter is 267, with a drop of 18. This is mainly due to the previous issue and some collective impacts. The decrease in the number of clients involved has led to a loss of income of less than $100,000 within 12 months, and the high-quality client groups have been moved out. 不过我们也看到了一些较新的客户后来居站。 例如,上季度Q4, 我们宣布的一家来自北美, 主业为户外出行的顶级品牌, 已经完成多款产品开发测试等阶段。 在Q1开始市场出货, Q2已经直接达到数十万台的量级。 The number of our ALT Pass premium customers, mainly existing customers, was 267 in the second quarter.
spk05: down from 285 in the same period last year. The decrease was due to the issues I mentioned earlier, as well as seasonality. This resulted in certain customers reducing their orders, thus falling below the premium customer revenue contribution threshold, which is $100,000 in the last 12 months. However, we also have new customers qualified, including the top brand from North America that we announced in the first quarter last year. whose primary business is outdoor travel. The new customer has completed the product development and the testing processes for various products, started trial production and shipments in the first quarter, and completed hundreds of thousands of units in the second quarter.
spk07: Next, I will share some updates on our SaaS and other segments. The development of our commercial lighting and building and SaaS in the last half of the year has achieved a growth of nearly or at least twice as much as the growth of our new brand, service and customer service. The addition of these partners to our business is an effective supplement to our business. For example, the global leading mobile electronic products and car system supplier, the factory under the name of Amboft, and the production of gas-fired gas-fired gas-fired gas-fired gas-fired gas-fired gas-fired This will also be the focus of our products and businesses.
spk05: During the first half of 2022, our commercial lighting and property SaaS achieved a year-over-year growth of around 100% in the number of new brand owners acquired, new customer projects served, and new devices interfaced. The addition of these partners has effectively complemented our business further. For example, The factory of Aptiv, a leading global supplier of mobile electronics and automotive system, completed an intelligent transformation through our commercial lighting SaaS. The transformation saves Aptiv at least 900 kilowatt hours of electricity per day with an energy saving efficiency of over 70%. In addition, It enabled the factory to refine its lighting management in accordance with the different needs and working hours of each workshop. As such, the factory was able to improve the productivity of its production lines while saving energy. The commercial lighting segment itself has significant energy saving potential. Going forward, carbon accounting, theoretical energy consumption analysis, events hub, and other similar functions will be in our products and the business key development direction.
spk07: 酒店SaaS业务就和我们的国内酒店SaaS构策的语音、 真空屏相结合的基线版本,并以此为基础在业务上拓展至的全新的数字三圈领域。 产品上完善的根据性价比的功能, 比如非凡的监测、电竞酒店、高级施工等, Now let's turn to the progress of our hotel and apartment SaaS sector.
spk05: In the second quarter, we developed a baseline version of our domestic hotel SaaS that integrates voice and central control. On the foundation of the baseline version, we expanded our business to the new digital commercial circle vertical and optimized our products with more cost-effective features such as room monitoring, e-gaming hotel, and advanced construction. For the overseas hotel SaaS, We started to scale our sales coverage, adding over 1,000 new rooms. The hotel and rental segment is a market with clear industrial leaders, but is otherwise highly fragmented. Looking ahead, we will focus on industrial leading service providers and hotel groups, improve our product offerings, expand the model use cases, and continue penetrating the industry leaders.
spk07: Q2 The real estate downturn in China during the second quarter affected our smart office and smart community SaaS solutions. However, by leveraging our solid software products and hardware device ecosystem,
spk05: the intellectualization projects being implemented by various real estate group customers that sign contracts with us before maintaining smooth operations.
spk07: In addition, our new field, smart industry, has also achieved a good start. Lanjian Group is a high-pressure, electronic-controlled equipment-based professional enterprise. For a long time, it has been a partner of many large enterprises in the supply and procurement industry. The equipment management system in the field of memory suppression has realized the data collection and monitoring of equipment temperature, current voltage, and other equipment operation data, predicted the safety of the electrical stability, and carried out the power supply efficiency management platform jointly created by the two companies. Through the analysis of the voltage, current, power factor of the equipment, the operation parameters of the equipment such as power supply, moreover, we achieved solid progress in the smart industrial vertical.
spk05: One of our new customers, LancGen Group, is a large enterprise specializing in the production of high and low voltage electric control sets. LancGen has been a long term material supplier and high quality partner of large scale industrial enterprises. LancGen utilized our industry equipment management system to monitor and collect equipment operation data, such as temperature, current, and the voltage of power distribution equipment. in order to assess electrical stability and safety and receive timely malfunction warnings. We also helped the LENGGEN develop the power distribution energy efficiency management platform that can analyze the power distribution equipment's current, voltage, power factors, active energy, and other operating parameters. Based on the analysis, the joint developed platform established a distribution energy efficient model to conduct statistical analysis of the electricity consumption for various purpose to improve the electrical parameters, effectively saving 60% to 15% of electricity. Recently, when serving customers in factories and industrial parks, LeftGen also developed the need for managing new energy sources such as photovoltaics in addition to utility power management. With our SaaS and application expansion capabilities, we are currently helping LACGEM build a full-suit energy management platform.
spk07: We are currently helping LACGEM build a full-suit energy management platform. As for value-added services, our 2C VAS maintains solid performance in the quarter.
spk05: At the same time, demand for 2B VAS is also on the rise. For example, our OEM app and value-added services such as the app function enhancement and related services as well as voice capability generation and launch services grew more than 100% or even higher year over year. In addition, services such as IoT certification and the cloud development framework product have also delivered solid performance. Such results indicate that in the current macro environment, customers and brands are still investing and are confident in the smart business.
spk07: Moving on to our smart private cloud product. Since Q2, we have signed with Zulu, one of the world's most power-saving manufacturing and development companies, and one of the largest Chinese comprehensive industrial investment group. Such a typical large client's project, and the project we announced before, China's South China Sea Internet, is also being steadily promoted according to the plan. As of the second quarter, we have acquired exemplary private cloud customers such as a prominent Chinese integrated industrial investment group
spk05: and a multinational electrical electronics and automotive brand headquarter in Southeast Asia, which is one of the world's most extensive manufacturing and R&D facilities. The IoT project with China Gas that we previously announced is also progressing steadily as planned. Since its launch, we have achieved several milestones, such as completing the building of the things model for gas solution, rolling out a demo version, and introducing the development standards and instructions. As we expand our customer base, we see tremendous business opportunities from these industrial customers in their pursuit of smart solutions. And we will strive to convert them to our customers.
spk07: Qube, as one of the core product strategy, has upgraded a series of product technologies in Q2. We have completed the advantage of Qube with NB-IoT protocol. The protocol has the characteristics of low cost and high recovery. It has been widely used in more than 10 typical industries, including the company, business, logistics, logistics, and manufacturing. It is one of our better service industry customers. We will use UI Business Pack to integrate Tube App SDK to speed up customer development. We are going to apply all the nine mature product capabilities in the public cloud system to the Tube Solution to further enrich the customer's device ecosystem selection and solution diversity. In this quarter, the self-operating system that can fully cover the scope of the IOT infrastructure in the cube project will be able to deal with the overall operation situation of the cube, and quickly locate and solve problems. As a cloud-based product, it is our advantage to solve and continue to optimize the structural adaptability of the cross-cloud deployment in the standardization process. In addition, the security of the cloud platform on different IOS layers As one of our core long-term strategies, CubeSmart Private Cloud underwent a series of product technology upgrades in the second quarter.
spk05: We completed the optimization of the NBN IoT protocol for Kube. The protocol will help us better serve our industry customers as it features lower power consumption and higher coverage. It has been widely used in over 10 industries, including public utilities, logistics, warehousing, properties, and manufacturing. We also packaged the UI business into the SDK of the Kube app which significantly accelerated the customer's new app development process. We are currently replicating the capabilities of the nine mature categories under the 3R public cloud system to the cube solution to further enrich customer's device ecosystem choices and the solution diversity. We completed the independent operation and the maintenance system, which fully covers the IoT infrastructure. meet operations and business operations under the Kube solution, enabling the technical staff to better understand Kube's operations to quickly locate and solve problems. As a cloud-neutral product, we have the advantage of addressing and optimizing the complex architectural adaptability for cross-cloud deployment in the standardization process. In addition, the security of setting up a cloud platform on different ice layers also a challenge. In this regard, we replicated our experience with the Tuya cloud systems and further enhanced the WAF and the JVM reinforcement capabilities to give our customers a world-class security experience.
spk07: Lastly, it is worth noting that on July 12th,
spk05: IOXT, along with various authoritative experts, released the 2022 Global IoT Security White Paper, in which Tuya was nominated at the best security practice in the IoT industry. This nomination illustrated the industry recognition of our ongoing efforts in security compliance, and further highlighted security compliance as one of the core competitive advantages of our platform.
spk07: These are some of our Q2 and recent business progress and strategic sharing. There are our business progress and strategy developments in the second quarter. Overall, the severe challenges throughout the quarter are persisting.
spk05: and we do not expect the economic downturn, high global inflation, supply chain inventory, and other issues to improve soon. However, our mission is unchanged, to actively leverage 2S technology and product strengths to explore new opportunities.
spk07: Finally, on our internal management,
spk05: efficiency-centric initiatives we previously announced are already having a positive impact on our financial results, which our CFO, Jesse, will discuss in more detail.
spk04: Okay, 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 continue to face a series of unprecedented challenges, specifically global inflation. A COVID resurgence in mainland China caused significant business disruptions and inconvenience, and the macroeconomic headwinds further exacerbated downstream inventory backlog issues. Despite these challenges, we continue to focus on executing our efficiency improvement strategies toward our goal of prioritizing profitability and leverage our competitors to explore new long-term opportunities in the IoT industry. Now I will provide a closer look into our financial result. For the second quarter of 2022, our total revenue was 62.5 million within our previous guidance range and down 26.1% year-over-year. The decline was driven by a 38.1% year-over-year decrease in our IoT path revenue. which was down to $47.6 million for the quarter. Based on our own estimates gleaned from downstream and consumer discretionary industry sources, broad-based demand declined in a consistent trend with our revenue decline. Major markets, notably the U.S. and Europe, slowed significantly, whereas China grew slightly versus last year. The smart consumer electronic sector is subject to fast-changing short-term demand, which is thus more susceptible to a slower economy versus other sectors such as industrial, agriculture, automobile, and new energy, in which companies, especially those with large scale or in the electrical vehicle sector, are more resistant to short-term downside risk. We're actively exploring opportunities to enter a wider range of these stable industries by leveraging our competitiveness and existing technology and ecosystem advantages. Total growth margin and IoT PaaS growth margin for the quarter were stable at 42.8% and 42.5% respectively, as we effectively implemented a series of business management and efficiency improvement initiatives. Now let's focus on our operating activities and the related expenses. Please note that we are presenting our operating expenses on a non-GAAP basis by excluding share-based compensation expense from our GAAP numbers to provide better clarity on the trends of our actual operating-based expenses so that you can review performance in the same way as our management team. During the quarter, non-GAAP total operating expenses decreased by 21.1% to $49.1 million from $62.2 million in the same quarter of 2021. Specifically, non-GAAP R&D, sales and marketing, and G&A expenses decreased to $33.8 million, $13.2 million, and $5.3 million, respectively. And other operating income net was $3.2 million. The significant improvement in the non-GAAP operating expenses was mainly due to the large decrease in the basic employee-related costs, such as payroll and benefits partially offset by one-off additional costs arising from, for example, headcount optimization and the restoration and identification related to rental termination. Our average salaried employee headcount during the quarter decreased by approximately 23% year over year. Dynamic adjustments will be made based on the current scale and overall organization objectives to achieve further improvement, if any. We optimized operations during the quarter, especially with two major initiatives to improve our technology research and the development efficiency. Let me give you some examples. First, we established an IND project review committee to carefully re-evaluate each of our IND projects and developed an itemized evaluation system to conduct value management on the aspect of internal efficiency improvement, key and core capability construction and opportunities and revenue generation. Approvals from the committee led by our CTO and heads of business units, along with their refined budget models, are required for projects to be executed. Second, we complete classification of R&D team resources into four types in order to allocate resources by type to our R&D objectives, thus managing R&D more efficiently. We also optimized other aspects of operations. For example, in terms of inventory, we retired more than 1,000 redundant material codes improving the speed of system processes and laying a good data foundation for further in-depth operating analysis. We also launched a system function to collect services fees to recover the internal time costs incurring in executing less cost-effective mini-orders, so as to promote order bundling and improve customer service efficiency. Regarding employees, we launched an action plan named 100 Day Sprint. In Chinese, we call it to encourage our employees to make accelerated progress. We also launched a Project 360 evaluation project to help most potential employees to achieve outstanding improvement in workplace. Now turning to bottom line, our non-gap loss from operations narrowed by 15.9% to $22.3 million in the quarter from $26.5 million in the same period of 2021. And our non-GAAP net loss narrowed by 19.1% to $18.7 million in the quarter from $23.1 million in the same period of 2021. Our non-GAAP operating margin and the non-GAAP net margin in the quarter were negative 35.6% and negative 29.9% compared to negative 31.3% and negative 27.3% in the same period of 2021, respectively. If we further exclude one-time additional expenses related to operating efficiency improvement initiatives and expenses that were irrelevant to daily business operating activities, our non-gap operating margin and non-GAAP net margin for the quarter would improve to negative 31.2% and negative 22.7%, respectively, after a sequential decrease during last three quarters. That indicates that our measures to address market headwinds are showing early success. Moving on to the cash, you can refer to our earning release of operating cash flows during this quarter. Our operating cash flow, excluding the cash received from ADS sharing program, has improved greatly to an outflow of $1.5 million in this quarter, compared to the outflow of $7.2 million, $46.1 million, $53.2 million, and $57.4 million for each quarter since last Q2 to this Q1. As of June 30, 2022, cash, cash equivalents, and short-term investments were $951.5 million. We believe this balance is sufficient to meet our liquidity and working capital needs for the foreseeable future. The sufficient capital reserves are one of our greatest advantages, giving us resilience to navigate adverse macro environments. Finally, turning to our share repurchase program, during the second quarter, we repurchased approximately 11.2 million ADS on the open market at a cost of approximately $30.0 million. Today is the end date of our share repurchase plan authorized on August 30, 2021. We have totally bought back $23.1 million of ADS with total cost of US dollar $109 million, which represents our commitment to shareholders and the market and shows our high confidence in Tuya's long-term growth prospects. Before I close, I would like to emphasize that the global consumer discretionary industry and the consumer spending are expected to be challenging in the second half. due to softening economy conditions, high global inflation, the downstream inventory glut, and the greater competition brought on by technology iteration in the IoT industry or other sectors that are outside of our control. You can refer to business outlook section in our earning release for more details. Despite these challenges, we are confident in our long-term growth prospects and are committed to iterating our products and services further enhancing our software and embedded hardware capabilities, expanding our customer base, diversify our revenue streams, and further optimizing operating efficiency. With that, operator, we are now ready to take questions. Thank you.
spk03: Sure. Thank you. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on telephone keypad. If you change your mind, please press start followed by two. When asking your question, please state your question in Chinese first. Then immediately provide an English translation for the convenience of everyone on the call. We have our first question from Liu Yang from Morgan Stanley. Please go ahead.
spk00: Thank you for your question. I have a question about the company's demand. On the one hand, it is based on the interaction between the company and some core customers and their storage situation. The management team thinks when the possible buy point will appear. If there is such a prospect now, the other related question is the overall Let me translate my questions. It's all about the demand. The first question, what is the management outlook in terms of the demand inflection point based on the conversation with key customers and their business plan at the inventory level? Another question is, given the overall demand currently is weak, is there any chance for Tuya to see a better demand helped by the market share gain? Thank you.
spk04: Okay. Thank you, Liu Yang. So to address your question, first, we have not seen signs of a turning point of overseas demand for IoT device consumer electronics devices yet. And we feel the turning point will only come when the inflation has significantly improved and the inventory backlog is cleared at the retailer and the brand side. So let's take an overall look at the global economy and the feedback from our customers. In the United States, for example, according to the latest our brand customers' feedback, consumer electronics retail quantity is currently down about 30% year-over-year at the retail side. The decline, combined with the retail channel and brand inventory backlog, pushed the brands to a more conservative approach, so they placed fuel orders to OEMs. So it wasn't surprising to see OEM purchase orders from rent by quantity shrink as much as 50%. In Europe, the European Central Bank raised interest rates by 50 basis points in late July to curb high inflation. This is Europe's first rate hike since 2011, just as Europe struggles with record inflation triggered by COVID and the war and the rising food and energy prices. According to Eurostat, Europe's annual inflation rate jumped to 8.9% in July, more than four times the ECB's inflation target of 2%. So we have seen Europe is experiencing a significant weakening demand of discretionary products, which include IoT consumer electronic devices. So basically, our European customers are giving similar feedback as U.S. customers. In China, one of the more representative figures of Chinese consumer spending is the number of smartphone shipments. Based on the IDC report, shipment in the Chinese smartphone market declined by around 15% year-over-year in the second quarter. Also, based on numbers from the National Bureau of Stats, Total retail sales of consumer goods nationwide fell 4.6% year over year in the second quarter. So overall, the global economic environment is becoming more complex and challenging. Energy and the commodity prices were rising. And the imbalance between supply and demand is increasing, adding more downward pressure on the global economy. We think the weakening of demand for IoT consumer electronic devices will continue until inflation shows significant improvement. We will continue to work to improve our efficiency and continue to set breaking even as one of our core priorities. Regarding our business in China, we have highlighted several business opportunities earlier. Companies nationwide are facing challenges due to the resurgence of COVID during the second quarter. However, we still added many like-minded partners. For example, we helped a leading portable power energy storage brand, Halotech Energy, develop an outdoor portable power supply. We partnered with world-renowned smart energy system solution provider, Chint Group, to develop the prepaid electricity meter and the management system. This partnership will enrich our energy saving related product capabilities from both software and hardware aspects. We believe these capabilities will further complement our core IoT business. To fight against this quite negative environment of inflation and downward consumer demand, our strategy is more to expand beyond consumer electronics. In terms of IoT paths, we're making progress in developing the business of, for example, energy-related equipment, IoT for commercial and industrial environments. In Q2, close to 2% of our current IoT path shipment went to industrial equipment, so it's outside of consumer electronics, including like industrial sensors, professional lighting or commercial lighting, industrial energy reservation products, and the commercial and the industrial security products, and also like central HVAC equipment for the large commercial buildings. At the same time, we are expanding our customer base beyond the consumer electronics devices industry through Cube and through our multiple SaaS offerings. So we believe that expanding beyond consumer electronics are a good strategy for the company for the long term. So I hope this answers your questions, and we can go to the next one. Thank you.
spk03: Sure. Thank you. Next question we have from CICC. Go ahead. .
spk02: Let me translate quickly. In July, Tuya and Amazon Alexa launched another solution and expected to complete some operation tasks with other partners. So from X-Men's perspective, do you see demanding standards as salaries, and how do you see the substantial impact on the industry? Thank you.
spk04: Okay. Thank you, Hongxie, for the question. We can look at the matter from both a commercial and a technology development perspective. As an early adopter of the matter and also a key board member of the Connectivity Standards Alliance, Tuya has officially launched the enabled solution this year. Matter is a connectivity protocol that connects local smart home devices for common functionality. Simply put, using the Matter protocol, devices can be directly shared with the Apple HomeKit or connected to different brands of smart speakers, such as Alexa and Google Assistant. without having to be interfaced in the development process to achieve basic local interaction. This will be very convenient for developers of IoT products. We believe such technology progress will further promote IoT penetration rate, especially for smart home devices. From business and the market perspective, there have been no significant technology or perception changes in the market over the past two years regarding connectivity protocols. Meta belongs to local general control, which cannot realize the cloud control and exclusive special functions with multiple device interactions. does experience differs greatly compared to the mature and mainstream Wi-Fi products nowadays. So it is estimated that after the release of the specific speculation, it will take a period of time for adjustment and adaption to evaluate its actual performance. Some of those IoT products with very simple limited functions, they chose method direct connection as the path to achieve IoT. Most products will have increasingly rich IoT capabilities and a personalized demand, but cloud service will still be a rigid demand. Overall, we will Tuya will incorporate matter into our technology system based on just one-stop capabilities, including Wi-Fi, thread, and especially gateway and central controller, as well as our product-level solutions across all categories. While adjusting the need for standard local connectivity features, our cloud-based IoT capabilities, software algorithms, and app capabilities will help make devices using the META protocol smart. In addition, our META solution will enable customers to achieve information transfer and OTA upgrades with stock devices directly through the 2R IoT path without having to rebuild DCL servers. Overall, we see Matter as a complement to many protocols in the IoT industry. We have participated in various tests of Project Matter and have brought first-hand information to our customers. We believe our customers will make the best choice for their products and their business, which we can totally support. So this is our answer to the Matter question. Please, you can go to the next one.
spk03: Thank you. Next question, we have John Wang from Goldman Sachs. Please go ahead.
spk01: Thank you. We have been able to narrow the net loss under the macro pressure. What's your plans on headcount in the second half of this year and the cost control measures? And also, maybe can you refresh your roadmap and target for the margin? Thank you.
spk04: OK. Thank you, John. So in today's report, we highlighted the impact of Q2 expenses on our non-GAAP operating margin and the non-GAAP net margin. Our efficiency and optimization initiatives in Q2 positively impact income statement and cash flow. Therefore, in the second half, we will use the same approach to manage our operations and driving expense control while exploring measures that can more efficiently support our operations, sales, products, and IMD systems. Specifically, our organizational structure and internal adjustments are centered on the strategy we adopt at the beginning of 2022 to serve, first, the upgrade of product and research centered on tube private cloud offer. Second, the expansion of business in China. Third, we formed the two-year-plus IONS Triangle team structure to support our initiatives to focus and get more K customers. We have different goals and strategies for each stage of development. We are also actively transforming and upgrading from a developer platform based on consumer electronic products to using the accumulated experiences and the technical advantages of IoT PaaS. Platforms that serve the industrial, commercial, and industrial fields are targeted to implement key customer strategies. In the early stage of team restructuring and scale-up, we matched our personnel with positions based on general principles of suitability. After comprehensively evaluating factors such as business demands, stage of development, and demand characteristics, we assigned teams and members with characteristics that provide targeted support and expansion. For example, with the private cloud, many customers need to combine many technical details with complex market needs. So we used experienced sales manager, product manager, and project manager together to systematically provide a service from the perspective of pre-sale solution and delivery, breaking from the traditional conflict between personnel. We're following the same approach to R&D. So more detailed efficiency measurements have been discussed before, so I will not repeat. As for managing the other business units, the functions and teams of G&A are relatively simple to adjust. So improvements in human efficiency will in turn lower costs On the other hand, because of our listing in Hong Kong this quarter, professional fees such as compliance auditing will increase slightly in the future. In general, in the future, we strive to achieve an appropriate team size by operating and managing more efficiently and through fine-tuning adjustment while supporting our new strategies, developer platform products, basic capabilities, and R&D tasks At our current scale, we will dynamically evaluate the demands, the market demands and the business expectations to ensure that efficiency output and the financial results are in line with our goal. So we will dynamically evaluate the size of the company's employee number. So At present, we still see a lot of room to further optimize our operation efficiencies through different initiatives. And our goal to make the break even as top priority of the company remain the same. So we will still work on all the different means to be able to achieve this goal as early as possible. So thank you. That's the answer to John's questions.
spk00: Thank you.
spk03: Thank you. I will now hand you back to the management team for the closing remarks. Please go ahead.
spk04: OK. So thank you again for joining our call today. If you have any further questions, please feel free to contact us through our IR website. We look forward to speaking with everyone in our next earning call. Have a good day.
spk03: Ladies and gentlemen, this concludes today's call. Thank you for joining and you may now disconnect your lines.
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