Tuya Inc.

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to TUYA's Inc. Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a 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. Reg Chai, Capital Market Associate Director of TUYA. Please go ahead, sir.

Thank you. Hello, everyone. Welcome to our third quarter 2022 earnings call. Joining us today are founder and CEO of Tuya, Mr. Jerry Wong, and our CFO, Mr. Jesse Liu. The third quarter 2022 financial results and the 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 referred 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 Wong. Jerry will deliver his remarks in Chinese, which will be followed by a corresponding English translation.

Hello, everyone. Thank you for attending Q3 2022. First, I would like to explain the overall situation of Q3 2022. Hello, everyone.

Thank you for joining our CIRC Core, the 2022 earnings core. I will start today's core with an overview of our financial and operating performance.

Our performance in the third quarter reflects the challenges we are facing and the opportunities we are focusing on. The global growth of the third quarter is at a high level, with the US CPI of 8.2% at the end of September, the European CPI refreshment record of about 10%, the international conflict has increased, the Russian war has eased, Earthquake is a major impact on energy consumption and other aspects. The overall business environment is full of challenges and uncertainties. In terms of industry, it is possible to choose the right path for consumption. We have seen that the sales channels of Walmart, Best Buy, Amazon and other major online stores have been strengthened. They will clean up the storage to a reasonable level, which is the main goal at the moment. The focus of the electronic products and household products On the brand side, many consumer electronics brands have maintained a conservative process and purchase strategy since the first three seasons of this year. In the face of the uncertainty of sell-out, the downfall of retail and retail sales, such a downfall environment and strategic period affect retail companies, including the greater pressure and fluctuation of the industry. For example, some of the brand customers we are familiar with are purchasing PVTs and smart devices. Our third quarter results reflect both the challenges we face and the opportunities we are focusing on. In the third quarter, global inflation continued to increase and remained elevated. By the end of September,

The US CPI reached 8.2% while the Europe CPI hit a new record, 10% in Europe. Meanwhile, the intensifying Russia-Ukraine war, geopolitical unrest, and the consequent regional turmoil created extensive impacts on global energy and consumer sectors. As such, the overall business environment is still full of challenges and uncertainties. As you all know, the consumer discretionary sector is undergoing a severe inventory correction. Major online and offline retail channels, including Walmart, Best Buy, and Amazon, are reducing their inventory to appropriate levels, especially in electronics and household products. As the year has progressed, many consumer electronics brands maintain their conservative approach towards their inventory management. and procurement strategies in the first three quarters of the year in response to the uncertainties in the market south. The contraction of the downstream.

In order to respond to the downward trend, we are actively allocating resources to optimize the basic structure of our customers, and to introduce a new production line with specific prospects. To optimize operating costs and costs,

As part of our effort to navigate the down cycle, we are actively channeling our resources, refine our customer base structure, invest into new promising product lines, and optimize operating costs and expenses. We believe these efforts will enable us to emerge with an improved customer base and a more efficient operation structure when the microenvironment recovers. 第三季度,工资实现季度总收入约4500万美金, 其中下升的RS板块实现收入约890万美金, 同比增速超过60%, 季度毛利额约1965万美金, 季度综合毛利额约43.6%,

to maintain a stable overall profit margin. In terms of expenses, our third quarter's non-US express payment, or non-GAAP, totaled a total of $43.38 million, while the same period the same share fell by 37.1%. This shows the improvement of the company's focus. In terms of losses, the non-GAAP of the third quarter lost about $15.94 million, while the same share fell by 49% in the third quarter last year.

Third quarter total revenue was $45 million, among which our SaaS and others revenue grew by 60% year-over-year to $8.9 million. Our gross profit for the third quarter was $19.6 million, and the overall gross margin was 43.6%, maintaining steady amid a challenging environment. Most importantly, we reduced our non-GAAP operating expenses 37.1% year-over-year to $43.4 million and then narrowed our non-GAAP net losses by 49% to $15.9 million as we continue to streamline our operations. Now let me elaborate on each of these areas.

265 customers and 267 basic products in the second quarter. In this quarter, the number of premium customers is more than 30 due to the low order volume, and the number of premium customers is more than 30 due to the low order volume, and the number of premium customers is more than 30 due to the low order volume, and the number of premium customers is more than 30 due to the low order volume, and the number of premium customers is more than 30 due to the low order volume, and the number of premium customers is more than 30 due to the low order volume, and the number of premium customers is more than 30 due to the low order volume, and the number of premium customers is more than 30 due to the low order volume, and the number of premium customers is more than 30 due to the low order volume,

First, the number of our IoT PaaS premium customer was 265 in the third quarter, remaining stable compared to 267 in the second quarter. Looking closer, we had over 30 customers that dropped below the premium customer revenue contribution threshold. This is largely offset by more than 30 others that qualified for premium customer in the third quarter. The addition of this new premium customer is a positive sign that despite the difficult environment, we are still well-precision to leverage our premium IoT PaaS offerings to continue the expansion of our customer base and navigate the challenging environment.

In the third quarter, the total number of customers in our service is about 3,100, with a reduction of 24% compared to last year, which is about 4,500. with a reduction of about 31%. This is due to two reasons. The first is that in the current environment, there are brand channels, and the budget has been greatly compressed, and the orders have been reduced, which has led to many small and medium-sized customers on our platform having technical difficulties, or small-scale, low-pressure IoT platforms, and customers' business has been compressed and transformed. Secondly, we believe that since the beginning of the year, we have been implementing large-scale strategy, and we have achieved this kind of result. The total number of customers we served in the third quarter was 3,100, down 24% sequentially

and a 31% year-over-year from 4,500 in the same period last year. Let me explain what led to the changes in our customer number. First, the current environment forced the downstream brands and channels to tighten their budgets and reduce orders. Many of our small and medium-sized customers on our platform had to suspend their business and stay dormant during the market downturn. Moreover, some of our long-term customers with small operations and less business resiliency that were experimenting with IoT, either reduced their business or transitioned away from IoT. The second factor is the consistent execution of our key and count strategy since the beginning of the year, with our focus now on efficiency. We upgraded our customer service systems and reformed our service team to utilize the trilateral collaboration to provide targeted support to both new and existing customers. For our long-tail customers and those that suspended their business, we integrated them into our platform operation model to continue serving them through our operation teams while matching them with the appropriate resources.

In this strategy, we can see that since the launch of 5X1 in the same period last year, we have seen an increase in the number of new customers in the third quarter of this year. There are more than 20,000 US dollars worth of outstanding customers, even more than the same period last year, and a Spanish project client has a record of 1 million US dollars in revenue. This kind of client contributes 64% of the total income of the new client in a single quarter, which is less than 50% of the same period last year. The structure of the client contribution is optimized, prominent, and effective, and will effectively improve the efficiency of the company.

With this strategy, we further refined the structure and improved quality of all the new customers required in the quarter. In the IoT PaaS segment, the number of customers with the initial business scale, which we define as customers spending over $20,000 on our IoT PaaS solution, has exceeded 11 of the same period last year. Notably, a Spanish project company contributed nearly $1 million to our revenue in the third quarter. This kind of customers with initial business skills collectively contributed to almost 64% of our revenues from new customers, compared to less than 50% in the same period last year. The refined structure of our customer base further illustrated the effectiveness of our improved and more focused customer acquisition strategies, and will enable us to further improve our efficiency.

In the third quarter, following the global pandemic, Our management team and team conducted a global brand customer and channel customer visit, mainly in Hong Kong, Singapore, Asia, Southeast Asia, North America, Europe, the continent, and Australia. We have achieved a series of new regional head brand customers and established a three-way cooperation with the old customers who have been cooperating for a long time. In the past three years, under the epidemic combination, we have again met face-to-face, improved cooperation and problem-solving,

In the third quarter, as the world reopens in the wake of the pandemic, our senior management and operation teams visited our customers across the globe from Hong Kong, Singapore, and other Asian and South Asian regions to North America and Europe. Through our visits, we forged new partnerships with many region-leading brand customers and strengthen our long-standing relationships with existing customers by discussing their needs. I want to highlight a few examples of IoT past customer updates.

A small machine manufacturer that has a history of more than 100 years in the United States has confirmed its intention to cooperate with small stores. A German and even European-based Apple III battery packs, electric tools, home appliances, and health care, etc., to become our customers. A consumer electronics and office supplies channel in the capital of Mexico is building itself on the basis of a substandard platform, including pet products, lighting, and air conditioning products. The largest drive manufacturer in Brazil, Intro, has become our customer in Q3, cooperating with web-based drive products, etc., which is expected to be automated in Q4. Also, in the Indian region, for example, some of the Indian businesses of some of the Chinese companies, the local comprehensive mobile consumer electronics product headquarter, Lava, and Kernel Road Systems, which has 40% of the market share of its equipment, are purchasing smart equipment plans for various smart services through the print platform.

The robot vacuum cleaner brands of the leading home cleaner manufacturer in the U.S. with over 100 years of history has confirmed a partnership with us on small home appliances. One of the largest importers in Germany and Europe with products ranging from battery packs and power tools to household appliances and personal health care also became our customer. One of Mexico's largest consumer electronics and office supplies retail channels is building its own smartphone ecosystem, including pads, lighting, and electrician products based on our platform. Hintro, Frodeo's largest manufacturer of device drivers, became our customer in the third quarter. Our collaboration will focus on products including gateway system and device driver products, where we expect to complete the intelligence transformation of the local Java production in the first quarter. We also expanded our presence in the Indian regions during the quarter. We have acquired a customer including Chinese listed companies with operations in India and the Indian business divisions of the telecom groups, including Lava, a leading local mobile consumer electronics brand, and KMRO system, which has 40% of the market share of the purified devices in India, if that's wrong. These customers can now leverage our value-added services through the Tuya platform to execute their smart device product strategies.

In Europe, not long ago, IFA, Caddx, NetEase, Tail, and many other Tuya K-brands took the lead and came to the scene to share and communicate the strategic market needs of new products, focus on product selection and future planning. Many world and European Logitech brands are also Tuya customers, such as Italian private home appliances brand Candy, German private e-commerce brand Hama, Spanish home appliances brand Toros Group, Greek home appliances brand Morris, etc. have launched a variety of products that cooperate with each other, covering from indoor home appliances, coffee machines, coffee machines, Samsung machines, mobile air conditioners to outdoor appliances, lawnmowers, scooters, and so on. One of them is a European business of a global Japanese brand home appliances, It will also be pre-installed in Android TV as a smart gateway to its family ecosystem through the OEM app. In addition, due to the cost of logistics due to the epidemic, business management is not changing. We have noticed that the 3G production in Europe is constantly increasing. We and the world's third largest home appliance manufacturer, ZD, a private home appliance manufacturer, have achieved the goal of cooperating with the new model of direct supply IoT PaaS products. with an Italian local network-based private brand to confirm the collaboration of Made in Italy to further focus on the digitalization of Italian local companies. From the point of view of consumer and electronic products, such as TWS, we successfully motivated some of our customers with the support of a variety of needs and the two major features of FANDIU, such as the Spanish private electronic brand Energy System, We also achieved solid progress in Europe.

At the recent IFA, many of our key account brands and the channel customers, such as Calix, Nidius, and Pearl, shared their new product strategies, market insights, key product selections, and future strategy updates on site. As our customers, we saw many dominant home appliances brands in Europe or across the world, such as Italy's well-known appliances brand, Candy, Germany's well-known consumer electronics brand, Hama, a leading home and kitchen appliances brand in Spain, Taurus Group, and a leading home appliance brand in Greece, Morris, also showcased the wide range of products they developed through partnership with us. These products included home appliances, such as coffee machines, floor sweepers, oil diffusers, portable air conditioners, and outdoor products such as lawn mowers and scooters. A world-renowned Japanese home appliance company will also pre-install the 2.0 EM app in its Android TVs as one of the portals to its home IoT ecosystem in its European business. We also made an Italy partnership with a well-known Italian home appliance brand within extensive network of local connections to accelerate the implementation of intelligent solutions in local Italian manufacturing enterprises. As for consumer electronics, such as TWS headphones, we leverage our multiple EQ spots and tracking capabilities to impress a number of customers. For example, a well-known Spanish consumer electronics brand's energy system showcased its PBT smart headphones at the EVA. We then shared this successful use case with other headphone brand customers and garnered significant interest.

Some of our customers are old customers who have further improved cooperation, and some are new customers who have just established cooperation. Although some of our customers are facing severe stress and high growth, they are still enthusiastic and optimistic about their smart business. Some of them are interested in a very high-end global leading brand, cooperated with us and purchased the voice skills of the upgrade products that pay for real-time service. However, they also told us frankly that they are very optimistic about the market and are preparing to make a big investment. But in the current economic market environment, there is no bigger order than this year. They will show a clear market pivot signal in the process of opening up a large-scale launch.

The above customers include existing customers that are deepening their partnerships with us and new customers who have just established the relationship. Although our customers under the downstream markets are facing severe inventory pressure and high inflation, they remain enthusiastic and optimistic about the transition to intelligent products in the long term. One of the leading brands in the world with a dominant share of the cooling fan market has partnered with us and purchased our value added services to upgrade the voice control capability of his products. At the same time, this customer also told us that they are very optimistic about the smart device sector and ready to make a large investment. However, they couldn't place substantive orders this year under the current market environment. They will wait for a clear signal of the market rebound to start scaling up their smart device business.

On the other hand, from the perspective of products, the CCP's products have received a lot of customers' welcome. We saw that after further polishing the products, it may become a 3G that will be out of stock. In the third quarter, our income from the CCP has increased by more than 140%. Although the absolute number of contributions is smaller than the overall business and the number of people, since the first three quarters, the market has reacted quickly. In the same way, in the current energy and environmental issues, the fuel consumption industry is also in need of energy-saving products. The main energy-saving products include solar panels, water panels, chargers, and other products. In the first three weeks of this year, the same number of solar panels reached 155%. Our industry will continue to invest and develop efficiently in these new fields.

On the other hand, from a product perspective, we are encouraged by the warm reception of our central control products, and we believe that these products have the potential to explode onto the market. In the third quarter, our revenue generated from the central control segment grew by more than 140% year over year, although the contribution is still relatively small in dollar amounts compared to our overall business. This segment has demonstrated robust growth momentum and positive market response in the first three quarters. Similarly, in the current situation where energy and environmental issues are becoming increasingly prominent, there is a strong demand for energy-saving products in the downstream residential and commercial sectors. Tuya-enabled energy-saving products, including smart circuit breakers, utility meters, and charging-related products recorded a 155% year-over-year revenue growth in the first three quarters of the year. We will also continue leveraging our industrial research resources to maximize efficiency as we invest and develop solutions in these emerging areas.

In terms of R&S customers, the domestic expansion of hotel business is relatively slow due to the extended impact of the epidemic. However, the expansion overseas completes the goals as planned, such as the signing of a contract with the United Kingdom, and the promotion of a medium-sized target by the Chinese Air Force. In the SaaS and other segments, we slowed down the expansion of our hotel business in China due to the impact of COVID resurgence.

However, we have completed several key milestones in our overseas expansion, Such milestones included signing our distributor in the UK and are progressing towards signing our distributor in Hungary. These smart hardware distributors will match our SaaS customers with the equipment solutions and options needed for the hotel and rental SaaS products to better support the smart business implementation of our customers.

In terms of smart building and architecture, we are working with the world-renowned company Hulingwell It will focus on speedy solutions to help build healthy, low-carb, and double-carb operations. And Tuya will provide IoT ecosystem support in smart hardware, application programs, and cloud development platforms. Currently, we have achieved the cooperation of the leader in equipment and apps. Hulingwell has completed the development of HiLive smart apps. In terms of cloud platform development, both sides will realize the development of the cloud platform

In the commercial lighting and property SaaS segments, we have partnered with the world-renowned Honeywell. Honeywell is dedicated to helping building owners and operators build healthier, safer, energy-efficient, and sustainable facilities. And we will provide IoT ecosystem support in various aspects, such as smart hardware, apps, and cloud development platform. To date, for device, we have collaborated on visual intercom devices. And Honeywell has completed the development of HLive smart app. In cloud platform development, we'll continue to utilize the Kube smart private cloud and deepen our partnership. For example, we'll improve the construction efficiency of smart properties by utilizing advanced construction solutions

In terms of real-time service, the application related to this issue, as well as the VAS related to the device capability, such as the VAS version of various products such as cloud and cloud technology, have all achieved good results. In addition, we have worked with a number of global-level leading telecommunications operators in the IoT service field. There is the largest telecommunications operator in Latin America with a ranking of the top 500, as well as the leading telecommunications operator in Thailand, Indonesia, Indonesia, and other regions. Telecommunications operators have a natural In terms of our value-added services, our VAS including the right products such as cloud storage,

app-related services, and device capability-related VES, such as voice skill services, delivered solid results in the third quarter. In addition, we partnered with several leading global telecom operators in their respective regions for our IoT services. These partners included Fortune 500 and also one of the largest telecom groups in Latin America, as well as the leading regional telecom operators in Thailand, Indonesia, and Nigeria. Telecom operators have unique business strengths in users and channels, as well as strong communication services infrastructures to support their technology capabilities. Our software capabilities and hardware ecosystem would allow them to offer more value-added services to their users and strengthen their user operations. These telecom operators may also be potential customers of our CubeSmart Private Cloud.

India is planning to build a complete smart home standard project based on the goal of developing a smart home in the region of Europe. A well-known mobile phone brand, Australian General Manager, has paid for the project by using the smart home cloud, smart life app, and some devices around the Chinese Communist Party to focus on the smart home and improve local quality of life. Moving on to our private cloud business segment.

With our key account strategies and the relentless efforts, we added several new customers or projects for our Cube Private Cloud business. For example, Thailand's construction material industry leader with over 100 years of operating history will use Cube Private Cloud to expand its hardware ecosystem in these IoT residential projects through the Kube platform. Another example is a well-known Fortune 500 multinational conglomerate, which has been our IoT past customer, also adopted Kube to build a complete smart home landmark project in India with plans to replicate its success in Europe in the future. An Australian distributor of the well-known cell phone brands has already paid in advance to leverage our private cloud smart life app, central control screen, and other devices for property installation to improve the local life quality. These customers have already paid the deposit, and this revenue will be recognized after products are implemented and accepted.

Yifan, on this phone call, I will mainly share with you some of the current customers' cases and contracts. We are looking for a lot of new customers who have achieved a lot of advantages. to seize some new opportunities and build mutual cooperation with old customers at the same time is still stable. In fact, all the enterprises in the industry chain of Tuya are in the middle of an economic downfall. We hope that everyone can see the adjustments and efforts made by us in the face of adversity and challenges. The company wants to realize the steady pace of profit and loss balance as soon as possible, and Tuya continues to deepen its industry, actively seeking long-term confidence in customers' development and supply.

In addition to the customer use cases I highlighted so far on the call, we are also actively acquiring a large number of high-quality new customers with high business potential. As such, we are solidifying our partnerships with existing customers while capitalizing on new opportunities. Admittedly, Tuya and many other companies in the industry are in the midst of an economic downturn. and an increasingly challenging macro-environment. However, I want to highlight the adjustments and efforts we have made in the face of these challenges. Our steady path towards breaking even, our long-term commitment to the IoT industry, and pursuing mutually beneficial relationships with our customers. Finally, Meta is a market-oriented topic.

Three weeks ago, Meta was involved in the launch of the CSA, which is the CFO of Meta. Our co-founder Alex talked about the sharing of the MET project in the Netherlands and gained a lot of attention. At the same time, the CSA Alliance issued the first batch of MET-related project certificates to Tuya. This not only realizes the strengths and advantages of Tuya's powerful technology, but also proves that Tuya has made a lot of efforts to promote the development of IoT and to build an open and positive ecosystem. The CEO of the CSA Alliance said that as a member of META's general committee, Finally, I will talk a little about Matter, which has been a topic of interest. Last week, we participated in a launch event in the Netherlands organized by the Connectivity Standards Alliance, the committee behind Matter.

One of our co-founders, Alex, delivered a keynote speech on the Tuya Matter project during the event, which garnered the audience's attention. At the same time, the CSA issued the first batch of Matter product certifications to Tuya. This is a testament to our strong technology and product leadership, as well as our ongoing efforts to promote IoT development and the open intelligence ecosystem. The President and the CEO of the Connectivity Standards Alliance stated, Tuya's commitment as a board member and active alliance participants is critical to Matter's success. Their adoption and integration of Matter will enable global customers to achieve commercial success and deliver enjoyable experience for smart home consumers. With that, I will now turn the call over to our CFO, Jesse, to provide everyone a closer look at our operating and financial performance.

That concludes the remarks by Jerry. As I review our results, please note that all amounts are in U.S. dollars, and all comparisons are on a year-over-year basis, unless otherwise stated. For the third quarter of 2022, total revenue was $45 million, down 47.4%. The decline was mainly driven by a 57.4% year-over-year decrease in our IoT PaaS revenue, which decreased to $30.9 million for the quarter. Please note that RMB weakened against dollar during Q3 from 6.69 to 7.1, which resulted in RMB revenue translating to US dollar $2.9 million less than it would have using the start of quarter exchange rate. Let's focus on the business. Among all the product lines of our IoT past business, the consumer lighting sector experienced the most pressure as consumer demand softened. In response, our customers slowed orders as they were adjusting their inventories. As Jerry mentioned earlier, we believe that smart device developers overreacted to strong market conditions last year and overstocked their inventories. Consequently, almost all online and offline retail channels are now working through their excess inventory. This summer, brands and wholesalers experienced large order cancellation from retailers. Naturally, we closely monitor our customers' demand and overall environment through public macro and export data, estimate sale volume of retail channels, economic trends, as well as shipment information directly from our customers. Break down the revenue contribution by profit line in the third quarter. We achieved a more balanced revenue structure. Contributions were balanced between 20% to 30% for each consumer IoT path category, which includes lighting and electricals, consumer security and sensors, appliances, and others. The revenue contribution of non-consumer products, such as industrial smoke detectors, circuit breakers, mining lighting, heat pumps, electrical chargers, increased to nearly 3% of total IoT path revenue. This is a result of the successful execution of our vertical expansion strategies. Looking at geographic and market demand, we estimate that the contribution of each region remains stable. We constantly strive to maintain balance across our global business. SAS and others revenue in the third quarter of 2022 increased by 16.2% to 8.9 US dollar. from $5.6 million in the same period of 2021, sustaining its robust growth momentum. The growth was mainly driven by our continuous efforts in offering value-added services and various software products with a strong value proposition for our customers. Our growth margin expanded to 43.6% in the third quarter from 42.6% in the same period of 2021, primarily due to an increase in higher margin SAS revenue. IoT PaaS growth margin decreased from 42.9% in the same period of 2021 to 37.2% in the third quarter. The contraction was mainly caused by a $1.6 million increase in accrued inventory allowance for certain slow-moving IoT chips, which negatively impacted our IoT PaaS growth margin by about 5 percentage points. We originally stocked this material in 2021 to adjust chip shortage risks at the time. Excluding the inventory allowance impact, our IoT PaaS growth margin would have been about 42.2%, representing a steady and healthy trend over the past quarter. Now let's move on to 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 expenses from our GAAP numbers to provide better clarity on the channel 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 37.1% to $43.4 million. from $69 million in the same quarter of 2021. Specifically, non-GAAP R&D, sales and marketing, and G&A expenses decreased to $29.3 million, $12.4 million, and $4.3 million, respectively. And the other operating income net was $2.6 million. Similar to the previous quarter, the reduction in our non-GAAP operating expenses were mainly due to large decreases in employee-related costs, such as payroll and the benefits, partially offset by one-off additional costs arising from headcount optimization initiatives. Our average salaried employee headcount during the quarter decreased by approximately 38% year over year. The reduced headcount was combined with initiatives to improve efficiency. We further optimized our team structure and the work allocation in line with our financial and operating plans. We believe that this efficiency improvement measure will continue to benefit the company in the long run. We also keep implementing initiatives that accelerate our efficiency improvements and drive our progress toward our business goals. Now turning to our bottom line, our non-GAAP lost from operations narrowed by 27.1% to $23.7 million in the third quarter from $32.5 million in the same period of 2021. And our non-GAAP net loss significantly narrowed by 49% to $15.9 million in the quarter from $31.2 million in the same period of 2021. In the third quarter, our non-GAAP operating margin was negative 52.7% compared to negative 38% year-over-year, as total revenue declined at a faster pace than expenses. But our non-GAAP net margin was negative 35.4%, up 1.1% points from negative 36.5% in the same period of 2021. The delta between our non-GAAP operating margin and the non-GAAP net margin mainly included 6.8 million net financial income, primarily consisting of interest income. As our monetary assets are mainly cash in US dollar held offshore in large banks, we generated more interest income as a result of higher interest rates on US dollar holdings. Moving on to cash, net cash used in operating activities for the third quarter of 2022 decreased by 70.6% to $13.5 million from $46.1 million in the third quarter last year, thanks to the significant reduction in operating expenses. As of September 30, 2022, cash, cash equivalents, and short-term investments that were mainly time deposit totaled $945.9 million, down only $5.6 million sequentially, representing about 0.6% of the total cash assets. Here, I want to reiterate a point Jerry made. We are always committed to maintaining a strong cash position during this difficult economic period. Our stock market valuation is implying that we're going to consume a massive amount of cash Our intention is quite the opposite. We have cut expenses significantly and are actively working to stabilize our gross margin. We have a sufficient cash position to support us through the recession. We encourage our investors to consider our efforts on preserving cash and our ability to conserve cash when you analyze our market valuation. Finally, turning to the share repurchase program. Pursuant to the general mandate of share repurchase to directors, was approved by the general meeting. Our board has approved a new share repurchase plan to purchase up to 50 million US dollars worth of shares, including the form of ADS, as announced this evening is time, or morning Hong Kong time. This shows the company's long-term confidence in this business prospect. Before I close, I want to discuss the near-term outlook. Inflation is still high. The global central bank's firm intent arresting inflation before it gets out of hand. They do not appear to be finished raising rates, and the global recession is a distinct possibility. Under the situation, our job is to, first, continue to operate prudently and to conserve our cash during the downturn. Second, invest in promising new products that will eventually enable us to grow rapidly and profitably in the long run. With that, operator, we are now ready to take questions. Thank you.

Certainly. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. 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 will pause here briefly as questions are registered. The first question is from the line of Yang Lu with Morgan Stanley. Please proceed.

Yang, your line is open. Hello, Yang. Hello?

Yes, we can hear you, Liu Yang. You can go ahead for the question.

OK. When can we see the end of the storage cycle? Then we can see the reversal of demand. I'll translate my question in English. My question is about the demand. Given the current relative weak demand and based on 2 years observation or discussion with the value chain, what is the inventory level now for key customers? And based on current inventory digestion speed, where should we see the inventory fall to a comfortable level and customers restart to build their inventory? Or we see a demand turn around to their side? Thank you. OK.

Based on the information we have now, it's difficult to determine accurately when we can see the turning point in the downstream market demand. However, based on publicly available information from downstream customers or other sources, we can share some qualitative assessments for your reference. Please keep in mind that we cannot guarantee the accuracy and reliability of this market data. On the inventory front, while the market conditions are rapidly evolving, we estimate it will still take 8 to 12 months for the downstream OEMs, brands, wholesalers, and the retails to all together work through their excess inventory and return to a healthy inventory position. What may be good news, however, is that the end market sales of smart devices appear to have picked up slightly in the third quarter after experiencing continuous sequential declines of stagnant year-over-year growth since the beginning of the year. Therefore, as the slow but steady recovery trend continues into the fourth quarter, which is typically the peak sales season of the entire year, it will be a good sign for the industry as the market balances supply and the demand balances under the current economic environment. We believe there's still substantial downstream demand for IoT device in the long term. The problem is simply too much inventory in the retail channel brands, wholesalers, warehouses, and OEMs. As a result, the supply from upstream sales lags behind the downstream demand by several quarters. As such, if we assume first our brand customers worldwide sell the same number of end market IoT consumer electronics device in 2023 as they did in 2022 this year, And the second assumption, the number of IoT paths we delivered next year is almost the same as this year. Then by Q4 2023, the downstream inventory level of PBT devices will return to a relatively healthy level as it was before. In addition, we analyzed information from several listed companies in the consumer electronic sectors, as well as upstream chip developers, downstream OEMs, brands, and retail channels. The upstream and downstream markets have shown a similar year-over-year trend in the first and the second quarters of this year. However, starting from the third quarter, we noted that the consumer electronics upstream and downstream trends had diverged somewhat. The upstream chip developers, especially those focused on smart device chips, IoT communication chips, and consumer products, recorded year-over-year revenue decline in Q3 similar or even greater than the first two quarters. Meanwhile, some downstream brands and manufacturers, such as robot vacuum cleaner brands, have started decelerating their revenue declines. Although this may be a positive result of the aggressive inventory correction downstream, this company's reduced order size and the conservative procurement approach still create pressure on upstream suppliers. At the macro level, as mentioned earlier, inflation levels in Europe and the US remained elevated but haven't increased any further yet. We hope that this is where inflation peaks. If the economy remains stable and stops deteriorating, we should see a gradual relief of inventory pressure and a short to medium term balance in market supply and demand. Of course, the industry growth will still be dictated by the overall economic conditions and the consumption landscape. We still need to analyze the sales figures from the peak sales season in the fourth quarter to make further judgments. With that said, we will adjust our sales and pricing strategies dynamically as needed to support our customers to weather the challenges. So this is my answer to the first question. And we can go to the second question.

The next question is from Mingran Li with

CICC, you may proceed.

It looks like Mr. Lee dropped off.

Once again, to ask a question, press star 1.

Mr. Lee, you may proceed. Miss Lee, you may proceed with your question.

Ms. Lee, you may proceed with your question.

The next question is... Yeah, we can go to next question.

John Wang with Goldman Sachs. Please proceed.

Okay, thank you for the opportunity to ask questions. I would like to ask some questions about cost management. I would like to ask about the goal of the entire number of employees by the end of the year and next year. So good morning, management. Thanks for taking my question. Can you share some colors on your cost control measures? What will be your target headcount by the year end and next year? And any additional measures on the operation cost reduction? Can you share your target for profit break-even? Thanks.

Okay. Thank you, John. Since the end of last year, we have been strategically optimizing our team structure as we planned to improve our efficiencies in customer services, R&D, internal workflow, and expense control. In the first half of the year, we focused on trimming down our business and the product lines that are fragmented or yet to be proven successful. We recalibrated our focus on large customers by reforming our customer acquisition and service systems. We also adjusted resource allocation of R&D projects at the top level. We established an evaluation system to assess the ROI of our every R&D project. We also set up a framework of tours for each business line to continue to improve their efficiencies. Our strategic focus since the third quarter has been implementing detailed adjustments in our core business and each product line. For example, each department will now analyze their workload in detail and gather team members from different functions to review the decision and ROI. We request each product line to break even in a few years. These initiatives will help us control our costs as needed. On the other hand, we perform various monthly and quarterly financial results for every product line to help us review and control expenses outside of R&D and customer support. Expenses such as T&E and the marketing expenses are now under strict control. In fact, We reduced our marketing expenses by approximately 62% year-over-year in the third quarter, resulting in year-over-year expenses saving of over $2.5 million. Marketing activities are undoubtedly important, but in the current economic environment, we must evaluate what marketing activities are more effective. For example, some expenses saved from our marketing programs can be used for visiting our core customers, helping us keep maintain key relationships, and developing business strategies. We have been actively refining our team structure in the past year with this initiative. Last year, we quickly expanded our teams as industry snowboard. Now our headcount has returned to the same level as late 2020, so two years ago, at around 1,900. And we are maintaining stable operations The increased salaries over the last two years, high expenses as a compliant public company and incremental expenses as we expand our business have offset some of the expenses we saved by improving our efficiency. However, excluding one-time expense such as employee severance and rental termination, we have slimmed down our non-GAAP operating expenses to the same level as in late 2020, two years ago. So in addition, we are executing the initiatives I mentioned earlier in stages, we still have room for future optimizations. So going to next year, we will still do our best to maintain a concise team. And whenever we see opportunity to improve the efficiency, we will continue to do that. Based on our 2022 revenue growth profit estimation and the current 1,900 staff size, we estimate that our lighting, electrical, and home appliance product lines in our path segments are profitable after all expenses, including all overhead, are appropriately amortized to each business line. As we budget for 2023, we have required all product teams to prioritize improving profitability by either turning profitable or significantly narrowing the loss, with a goal is to make profit in a few years for every line, including new lines. Meanwhile, we have dramatically improved our cash flow. Our cash outflow since the second quarter have reduced significantly compared to the period between Q3 last year and Q1 this year. So turning profit and improving the efficiency will be our top priority for the next few years. So this is my answer to John's question.

Thank you, Mr. Wang. The next question will be from the line of Mingran Li with CICC. Please proceed.

Okay. Let me translate myself quickly. Given the relatively weakening demand for consumer electronics, we need to step further on more growth drivers. Also, could you give us more details on the expanding progress besides consumer electronics, like the commercial and industrial segments and the private cloud or anything else? Thanks.

Thank you. Yes. In addition to the traditional smart consumer electronics, We believe there are new use cases we can capture and expand into. For example, first, the voice control products in our IoT path business. Take the central control screen as example. It combines voice capabilities, display control, and other functions into one entrance level product. The product can cover all the intelligent interactions needs in any given space with a similar positioning as an app in a smartphone. The current market demand is quite strong for this product, mainly in commercial use cases, such as hotels, commercial buildings, office, et cetera. Additionally, there's still demand for home use for this product. However, no brand has been able to deploy high-quality IoT software capabilities to integrate a relevant ecosystem. So our central control products line covers different industries and use cases, integrating third-party voice functions into our software capabilities to make the product more versatile. As such, we can provide developers with voice workstations to reduce configurations and the development barrier. We also offer operational value-added services and other capabilities to enable customers to improve the thickness of their products and boost their revenues. We have also developed a flagship version, a cost-effective version, and a strategic version for different type of customers. Geographically, we have different solutions under US and European standards to meet the needs of various customer groups. As one of the products from our software and hardware enhancement strategy, the revenue we generated from the voice capability products line grew by over 110% year-over-year in the first three quarters of this year and over 140% year-over-year in the third quarter. The energy saving and the power product in our past business can serve a wide range of commercial and industrial use cases that align with today's environmental and sustainable development concepts. During our overseas trip in the third quarter, we found that the demand for energy saving in Singapore, Southeast Asia, and other parts of the world is increasing quickly. There is a lack of cost-effective software and hardware solutions. Based on our experience in commercial lighting sites and the property energy management. We have already developed replicable use cases of energy-saving products in the industry. I will share a few examples. First, we have a hardware ecosystem based on Wi-Fi and Bluetooth dual-model SOC solution covering high current applications and flexible remote power distribution. With the solution, we have partnered with an A-share-based Asia listed company engaged in new energy and special equipment. The partnership focused on developing energy storage power and inverter solutions by leveraging the multi-power adaptive smart charging solutions based on our two-yard link interface with extensive data functions, quantitative power generation revenue analysis, and proficient self-test and alarm capabilities and other core competencies. On the software front, at the end of September, we released an energy-saving and low-carbon applet to streamline our value-added services. The release has paved the way for our future launch of energy-saving algorithms, reports, and other application capabilities. We are now in the process of testing the energy meter management system for smart meters in property use cases. We have also launched our smart sensors management system focused on the sensor market and brand enterprises. Meanwhile, we have various new energy storage solutions under R&D. This hardware and software solutions not only serve the needs of a single customer in the industry, but they also provide sufficient product support for various new energy projects. In addition, the solutions can also complement our energy private cloud services to customers, such as China Gas Holdings. The energy saving and the power sector is massive, and we will leverage our own strength to focus on our strategic point of entry to avoid overexpansion. We have been expanding steadily in the private cloud sector, signed up more major customers in the third quarter, including one of the largest telecom operators in Latin America. For our SaaS solutions, we have been focusing on the Chinese market for the past three years. Now we are expanding into 12 countries, including UK, Spain, Italy, Germany, France, Canada, Singapore, Mexico, Brazil, and other countries. Our expansion will have regional distributors in each country providing integrated hardware and software solutions to serve local customers. Currently, we have signed national distribution agreements in several countries in Europe. We are negotiating with very capable distributors in almost all other countries. In the top countries, we have We will continue to expand in consumer electronic segments to navigate this high inflation period. Thank you. Thank you for attending our call today.

There are no additional questions at this time. I will turn the call over to the management team for any closing remarks.

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 earning call. Have a great day.

That concludes today's call. Thank you for your participation. You may now disconnect your lines.