Tuya Inc.

Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to TUYA's Inc. Fourth Quarter and Full Year 2022 Earnings Conference Call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to turn the call over to the first speaker today, Mr. Reg Chai, Investor Relations Director of Tuya. Please go ahead, sir.

Thank you. Hello, everyone. Welcome to our fourth quarter 2022 earnings call. Joining us today are founder and CEO of Tuya, Mr. Jerry Wong, and our CFO, Ms. Jessie Liu. The first quarter 2022 financial results and webcasts of this conference call are available at ir.tuya.com. A replay of this call will also be available on our 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 four 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.

Hello, everyone. Thank you for attending the 2020 Q4 conference. Hello, everyone. Thank you for joining our first quarter and the full year 2022 earnings call. Since the start of the 2020 Q4, we have experienced seven years of constant growth. Due to the harsh cycle of disbursement and the negative effects of mid-term consumption, the first income has been compared to the previous year. Our total income in 2022 is about US$2.1 billion, which is about 30% lower than in 2021. In 2022, our total income in autumn is about US$45 million, which is about 40% lower than in 2021. According to our observation, there is still a shortage of consumption. In general, the industry's indifference to the company's business execution, internal efficiency management, team construction, etc. has raised higher requirements. We have implemented a series of price-effective measures. covering business, operations, personnel, and other aspects. At the same time, while maintaining about 3% of the net profit, Non-GAAP's net loss from about $1.1 billion in 2021 is the same as $770 million in 2019-2022. In the fourth quarter, Non-GAAP's net loss is about $520 million, while the previous year's net loss of about $310 million is the same as $83 million. Our operating cash flow in 2022 is about $70 million, which is about $1.26 billion in revenue in 2021, which is about 40% less. In 2020, Q4's net revenue was only more than $100,000. These improvements show the firm strength in the industry and the long-term planning and confidence of the IoT industry in the future. In 2021, the company In 2022, we experienced our first year of revenue decline due to inventory stocking as consumer product and market turned down after seven years of hyper-growth since inception.

Our 2022 full-year revenue decreased by just over 30% to $210 million. In the fourth quarter, end-market consumption was sluggish, causing revenue to decrease by about 40% year-over-year to $45 million. Notably, industry has placed greater demands on business execution, operational efficiency management, and team development. We responded to microeconomic adversity with a series of cost control and efficiency improvement measures. This measure spans from product offerings to operating procedures to efficiency improvements, enabling us to sustain a 43% gross margin while narrowing the non-GAAP net loss by 29% year-over-year from $109 million in 2021 to $77 million in 2022. Additionally, our Q4 non-GAAP net loss narrowed by 83% year-over-year to $5 million from $31 million. Net cash used in operating activities was about $140,000 in Q4 and $70 million in full year 2022, which was down 44% compared to the $126 million in 2021. This improvement reflects our determination and confidence in the long-term growth prospects of the industry. We have also repurchased a total of over $53 million shares in 2021, and then repurchased the total of over $59 million shares in 2022.

In 2022, we will focus on the large customer strategy and customer focus, especially the sales and retail combination, a joint sales and retail delivery, back-to-back goods and customer service system, so that the company can more effectively distribute customer support, target customers with different attributes, The management team and other business teams are mainly involved in the control of the epidemic. In the beginning of the pandemic, we started a global customer visit and exhibition. In 2022, we acquired more than 1,100 new brand customers around the world, including Hollywood, H&M, Smartware, Korea, Kocom, India, Boat, Indonesia, Taiwan, and other high-end brands such as Teleton. In 2021, we will acquire more than 2,000 new brands, and the quality of the new customers. The total number of global brand customers is limited. We expect that we have achieved a good number of success rates among the brand customers with certain business scale capabilities. Next, we will further expand cooperation with more major brands with long-term growth potential. In 2022, we sustained our commitment to a customer-centric approach and implemented a strategy to better focus on large customers.

Notably, we formed our sales triangle system, a back-to-back customer acquisition and customer service system that combines our efforts in sales, solution architects, and customer deliveries enabling us to provide targeted services to customers with diverse needs and allocate customers support resources more efficiently. As China started lifting COVID control measures, our management team and major department leaders quickly began visiting customers and participating exhibitions worldwide. During the year, we acquired more than 1,100 new brand customers around the globe, including notable customers such as Honeywell, Smartware from the Netherlands, CoCom from South Korea, Boat from India, Polytron, a home appliance brand on the Indonesia's tier one foundation, and many more. Compared to the acquisition of over 2,000 brand customers in 2021, the 2022 customer wins reflected a recalibrated focus on the quality of new customers in our customer acquisition efforts. Our penetration rate is relatively good among a limited number of large-scale global brand customers. We intend to partner even more with brands that are either large today or have a high long-term growth potential. We will leverage our technology leadership and our unique integrated upstream and downstream ecosystem to develop win-win relationships with customers based on their skill and influence.

We are developing project management, cloud management, control of market costs and limits, acquisition, distribution, storage, fixed assets, etc. to carry out efficient management and improve our business efficiency.

We made tremendous efforts to reduce costs and carry out efficiency management across many functions, such as refining R&D projects, controlling cloud costs, managing market expenses and lease acquisitions, travel and entertainment expenses, inventory, and fixed assets to improve our operating efficiency.

In addition, at the beginning of July last year, we completed three major projects in Hong Kong, including our international business. It strengthens our position in the international capital market and also provides better insurance for shareholders.

Additionally, in early July 2022, we completed our dollar-per-million listing in Hong Kong, which further complemented our international business strategy. This move has strengthened our position in the international capital market and has also helped to provide better protection for our shareholders.

I fully understand what you are saying. However, in the past three years since 2020,

To better understand our business model, competitive advantages, and competitive landscape, it is essential to have a comprehensive understanding of the events and trends shaping our sector since the COVID outbreak in 2020. Therefore, I will briefly review the past few years and then share our outlook.

In 2019 to 2021, with Tuya's strong software capability and platform-based extreme delivery experience, Tuya has become the largest IoT development platform on the market and enjoyed the prosperity of the industry's rapid development. In the past three years, the revenue has increased from US$100 million in 2019 to US$300 million in 2021. In the fall of 2021, due to the subsequent global growth of the global market due to the epidemic, the sea price rose and the supply chain was disrupted, and the supply chain was misplaced. During 2019 to 2021, by leveraging our strong software capability and robust platform-based delivery experience,

We became the largest IoT development platform in the industry, and it benefited from the strong industry tailwinds. Our total revenue achieved a robust growth during these three years, tripling from $100 million in 2019 to $300 million in 2021. In the second half of 2021, a supply-demand mismatch emerged in the consumer electronics sector due to the COVID-induced global inflation, rising shipping costs, and the supply chain disruptions. This mismatch had a significant impact on business plans across the value chain and was further magnified by global events such as the Russian-Ukraine conflict and energy shortages in 2022. Downstream inventory piled up throughout the industry, causing a half cycle of destocking under high inflations.

According to data from senior consulting companies, consumer electronics, IoT products, and smart homes are expected to decline by 7% in 2022. We see growth and adjustment in both upstream and downstream brands and retail channels, becoming extremely conservative. The short-term industry is visible to be low. In the holiday sale season in Q4 of 2020, According to industry consultant CIC, global shipments of consumer electronics LED products such as smartphone products is expected to have a decrease by 7% in 2022 versus 2021. Looking at upstream chip makers,

to downstream brands and retail channels, everyone is struggling and adjusting. Our customers are increasingly conservative, resulting in low visibility in near-term demand trends. In the Q4 holiday sales season, map card data showed that United States holiday sales of electronics products declined by 5.3% year-over-year, a significant weakening versus the 16.2% gain in the previous year.

After the end of 2002, we exchanged ideas with many core brands, customers and channels. They sent us information that the sales volume of the fourth quarter of 2022 was very weak. Many brands took cautious sales strategies in the fourth quarter, instead of selling aggressively like last year. Because they may need to give more discounts to attract consumers, and the return effect is limited, the number of purchases is limited. At the same time, every discount is a serious loss for them. After the end of 2022, we had discussions with many of our core brand customers and channel partners who told us that the retail market in Q4 remained very weak

Many brands adopted cautious sales strategies in the fourth quarter instead of aggressive promotions during the holiday sales season. They may need to offer more discounts to stimulate consumer demand, but this may only result in limited incremental purchases. At the same time, every discount represents a tangible loss to them. In this context, we need to provide customers with more valuable and cost-effective products and services. Based on our product augmentation strategy, which involves the development of cost-effective products and services, based on our product augmentation strategies, the development and release of more valuable, enhanced, and integrated software and hardware product solutions. Our overall average selling price of LTPath has increased by about 11% year-over-year in 2022.

On the other hand, the huge challenge that we have brought is that, like some other players to rethink their business positioning and business transformation. We saw the news that the tech giants Google, SAP, and IBM will close their IoT services between 2022 and 2023. AliSync will sell its IoT business in 2023. In the market, we noticed that some IoT smart service providers are looking for companies to sell their IoT services due to financial difficulties. In the end of 2022, the current cash flow will exceed 9.5 billion US dollars. This challenge is leading other IoT players to rethink their positioning and transform their strategies. Technology giants such as Google, SAP, and IBM are reported to be shutting down their IoT services in 2023.

while Ericsson may sell its IoT business in 2023. Furthermore, we have noticed that some private IoT intelligence service providers are seeking to sell their companies due to the financial constraints. In contrast, we had a net cash balance of over $950 million at the end of 2022. As an R&D-driven, asset-like technology company, we have no interest in bearing debits. bank loans, or any long-term asset capital commitments, reflecting our strong capital positions.

From a long-term perspective, we are fully confident in the development of the IoT industry in our company. According to a comprehensive analysis of the data of Euromotor, CIC, B2C, and other smart research institutions, the current market share of IoT is about 4% to 5%. Overall, it is at a very low level. The family and business environment may be slightly higher, but due to its daily habits, Although the frequency and degree of interference is not as good as 1 to 10, it will continue to advance the overall penetration rate with the development of the economy and the times. This is because people will always build a better life in continuous competition and innovation. This is also proven by the pattern of historical development. The penetration rate needs to go through a long period of time from 0 to 1 to reach a point where the next quality and quality breaks through. The new technology industry is a typical example.

Taking a long-term perspective and looking at the industrial landscape, we're confident about the future growth prospects for IoT. According to the comprehensive analysis of the data from Euromonitor, CIT, BCG, and other well-known research institutions, the current penetration rate of IoT is only about 4% to 5%, a very low level. perhaps slightly higher in home and commercial uses. However, due to its daily attributes, although not as frequent or necessary at the crossing of foot, it will certainly continue to iterate and further penetrate people's daily lives as economies recover and society grows. History shows that people always strive to create a better life through continuous competition and innovation. Once the penetration reaches a certain stage, it usually takes a period of time to reach the next breakthrough point for qualitative change. EVs are a typical example. In addition, the IoT consumer electronics industry is also extremely fragmented, which is both a challenge and an opportunity to build competitive barriers.

In this competitive framework, we will go over several aspects in 2023.

Against a backdrop of emerging industry opportunities and a more favorable competitive landscape for us, we are primarily focused on three areas to navigate the industry cycle in 2023.

The first is to move steadily towards the IoT developer platform model. From the consumer sector to the commercial sector, and then to the industry, we will take steps to upgrade to the commercial sector model. In fact, the core of the service of enterprises is the IoT industry, and it will be a trap for enterprises to keep investing and investing. Therefore, we use developer products and platform services to solve the problem of the long-term category of energy efficiency. The competitiveness of multi-category and multi-spectrum Internet interaction will increase with the increase in productivity and increase in growth.

First, we are committed to our IoT-developed platform model. We will refine our business model to drive the digitalization of the consumer sector, the commercial sector, and then the industrial sector. The essence of the enterprise services is always ROI. and the fragmentation of ILP sector can easily end prices to fall into a cycle of endless investment. Therefore, we'll leverage the developed products and platform services to adjust the energy efficiency challenges in the long-term product categories. And as penetration rates improve, our capabilities to cover multiple categories, use cases, and interconnections will become increasingly competitive.

Yeah. and continuously improve the organization and performance of the sales platform, and continuously take over the main category of technology and products to increase the scale, growth, and penetration rate of the main category. For example, in 2022, we will assist North America's telecommunications, lighting, head, and large customers to improve the development threshold of META, and more quickly, through META certification, to temporarily resolve the difficulty of customer front-end technology, and the problems such as over-development and investment. We will synchronize the latest customer image and CSA Secondly, we will boost the growth and penetration rate of our key product categories through collaborations with upstream and downstream partners and ecosystem partners.

continuous improvements in the organization and performance of our sales triangle system and ongoing technology iterations of these key product categories. For example, in 2022, we assisted a leading North American electrical and lighting customer in reducing the development threshold of Matter. This allowed them to obtain Matter certification faster and solve all of their customer technology issues and high R&D investment challenges in a single stop. We synchronize the latest solutions and the technological iterations from Tuya and CSA to our customers and assist them in planning their product roadmap at an early stage. As a member of the CSA board of directors, we are well-positioned to collaborate effectively with our upstream and downstream partners to promote and streamline the implementation process of matter products. Such capabilities enable us to help our customers seize opportunities which will be a testament to the strength of our Tuya ecosystem. The third one is technology innovation centered on our Cube Smart Private Cloud, which complements our existing IoT PaaS product system. Cube enables us to address the need for independent control over IoT platforms for large-scale conglomerates such as our Fortune 500 customers. In addition, Cube also allows customers to access the full range of capabilities of our IoT development platform to build out their IoT business faster with improved sustainability and value creation. In the past year, we've won a number of top clients from different regions and industries and completed several major benchmark projects with Indonesia Telecom and China Gas Corporation. Qube will continue to generate long-term collaboration opportunities with large key account global customers.

Finally, although we have made many difficult decisions this year, our brand's core traditional product line has still shown a strong resilience. The pressure on customer support and service delivery, product development, and technical support in all product lines has not been directly affected. Finally, despite implementing many difficult measures this year

Our long-standing core traditional product lines do demonstrate strong resilience. Currently, structural and expense optimizations have not substantially affected customers' parts, service delivery, product development, or technology integration capabilities in each product line. We are highly motivated by these encouraging results and our relatively lean operations. We are confident in continuing to pursue our goal of achieving break-even as soon as possible as one of our top priorities, while carefully nurturing and investing in new potential product lines with strong value propositions, such as gateways, voice control products, outdoor travel products, consumer-level stances, and non-consumer products with a balanced approach.

The following financial statements and general data are presented to you by our CFO, Jesse.

With that, I will now turn the call over to CFO Jessie 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-on-year basis, unless otherwise stated. For the full year and the fourth quarter of 2022, our total revenue was $208,000. and $45.2 million, down 31.1% and 39.6% respectively. Within that, our IoT PaaS revenue was 152.9 million and 32.6 million, decreasing 41.5% and 47.4% respectively. Please note that Chinese Renminbi experienced significant fluctuations in 2022 and weakened against the US dollar. At the start of the year, the exchange rate was 6.38 RMB to 1 USD. By the end of the year, it had decreased to 6.96 RMB to 1 USD. As a result, the revenue earned in RMB converted to approximately $8.5 million less than it would have if the 2021 average exchange rate had been used. SAS and others revenue in the full year of 2022 increased by 6.6% to 29.8 million from 18.6 million in 2021, sustaining a strong growth momentum. The growth was mainly driven by our continuous efforts in offering value-added services and various software products with strong value propositions for our customers. However, it is worth pointing out that we have implemented our customer-focused and key account strategy in 2022. As a result, we will be investing more resources proactively on high-value customers. Due to this strategy, certain services, including specific value-added services such as OEM ads, and the customization services may experience a slower momentum compared to past quarters. Our overall growth margin slightly increased to 43% in 2022 from 42.3% in 2021, demonstrating the resilience of our value proposition despite facing headwinds. Our IoT PaaS growth margin slightly decreased from 42.4% in 2021 to 41.1% in 2022, including an active 2.4% points impact caused by a 3.7 million accrued inventory allowance for certain slow-moving IoT chips and the raw materials during the year. Now let's move on to activities and the related expenses. Please note that we are presenting our operating expenses on Nungap basis by excluding share-based compensation expenses from our GAAP numbers to provide better clarity on the chain of our actual operating-based expenses so that you can review performance in the same way as our management team. In the full year of 2022, non-GAAP total operating expenses decreased by 23.1% to $188.6 million from $245.3 million in 2021. For the fourth quarter of 2022, Nungat's total operating expenses were $33.5 million, down 46.4% year-over-year, from $66.3 million in the same period of 2021. At the end of 2022, as a result of our internal cost control measures and the resource realignment initiatives, we reduced our team size by approximately 47% to 1,835 compared to the end of 2021. This would result in an effect of direct financial savings of more than $18 million a year. With our team restructuring optimization, we paid a total of over RMB 68 million in one time additional severance payments and office lease termination and the restoration cost in 2022. Excluding the impact of this one-time non-recurring expenses, we reduced our non-GAAP operating expenses in 2022 by approximately 27% compared to 2021. Additionally, the fourth quarter of 2022 also marked our fifth consecutive quarter, with substantial decrease in our non-GAAP operating expenses. Q4 non-GAAP Operating expenses were nearly 50% lower than the highest point in the third quarter of 2021. I will name a few examples of initiatives here. In 2022, we streamlined our R&D, improved our efficiency evaluation procedures, and implemented and upgraded value management initiatives. Since then, around 100 major projects have been submitted and reviewed covering areas such as core program upgrades, new program developments, high-value revenue generation, and the capability expansion projects from our core product lines, such as gateways, central controls, and new energy. We also undergo strict efficiency evaluation and review. We successfully kept our cloud infrastructure costs within the expected range during 2022. And we'll implement a series of follow-up measures to encourage our IMD team to carry our technology iterations and structural upgrades for more efficient uses of cloud services. On the marketing front, our finance team worked closely with our business division to institute multiple rounds of expense analysis. Together, we faced challenges and executed optimization and improvement plans. For several exhibitions, we built booths Our internal professional design team provided substantial support, among which the maximum reduction of budget cost of booth construction in a single event reached about 35%. We are also targeting companies in 2B software, enterprise services, and the technology sectors as benchmarks to set up our marketing budget at an industry average level and to make every dollar we spend worthwhile. In addition, we have raised the bar on our employees' business travel requirements. They are now required to provide a clear explanation of the purpose, duration, expected outcomes of their trips, and undergo a review afterwards to ensure that travel costs are creating value and not spurring out of control. Additionally, every team leader is responsible for these outcomes. One more case for asset management was successfully This post about 1,400 idle laptops saved from headcount optimization at price two times their amortized book value, recovering millions of cash in RMB. With that, our non-GAAP loss from operations narrowed by 15.6% to 99.2 million in 2022, from 117.5 million in 2021. Our non-GAAP net loss significantly narrowed 29.4% to $77.2 million in 2022, from $109.3 million in 2021. Our non-GAAP net loss improved more than our non-GAAP loss from operations in the full year of 2022, mainly due to our interest income. In 2022, due to work executed treasury management, we generated over $22 million in interest income during the year, with nearly $10 million in the fourth quarter loans. We are fully committed to reducing cost and enhancing efficiency, which has significantly contributed to our ability to minimize losses, especially during periods of revenue decline, such as the fourth quarter of 2022. As a result of this initiative, we were able to achieve our lowest quarterly non-GAAP net loss of $5.2 million since the start of 2019, moving on to balance sheet and cash. Inventory and account receivables, which are our main assets other than cash, subsequently declined quarter over quarter in 2022. These decreases resulted from our active efforts to minimize operational risks, such as inventory depreciation and credit losses, as well as improve operating capital efficiency while ensuring business delivery, as well as upstream and downstream cooperation. Our net cash used in operating activities for the year 2022 decreased by 44% to 70.7 million from 126.1 million in 2021, and by about 99.7% to 138,000 for the fourth quarter of 2022, from 53.2 million in the same period a year ago, thanks to significant reductions in operating expenses. Admittedly, the improvement in cash flow was affected by seasonal fluctuations in operating capital. Nonetheless, our cash flow significantly improved since Q2 2022 and is now at a much more controllable level. As of December 31st, 2022, cash equivalents and short-term investments that were mainly in-time deposits totaled $954.3 million, up $8.4 million quarter over quarter, and down $111.8 million compared to the end of 2021, primarily due to operating cash outflows, and $48.7 million in payments for share repurchase during the year. As we look ahead, there are a few important factors to keep in mind. First, inflation remains high, and the consumer sentiment continues to be weak and fragile. Additionally, we recognize that downstream players still need to make efforts to reduce their event rates. This is our anticipation that the industry outlook for this year will depend primarily on downstream destocking. If the downstream channels can destock smoothly and considering that 2022 was a low basis year, we may see a possible rebound in the second half of the year, assuming no other unprecedented events occur. Nonetheless, there are various factors that may lead to uncertainties. And accordingly, we remain committed to executing our determined strategies while continuously monitoring the market environment. 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 1 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. We will pause here briefly as questions are registered. The first question is from the line of Yang Lu with Morgan Stanley. You may proceed.

Thanks for the opportunity to ask questions. As Justin mentioned, the downstream demand will be the key thing to watch for potential rebound this year. I would like to follow up on this. Could you please share, based on your observation, what is the overall inventory level at your core customer side? And based on the current basket, once we see the demand rebound this year. Thank you.

Thank you, Yang. As an upstream company, we won't be able to accurately predict the downstream inventory levels, including OEMs, brands, and the retail channels across the globe. However, as far as we know, we can share some information from both the market consumption and the inventory aspects. Starting with a bit more information on the consumer industry regarding US consumers, Jerry has mentioned the fourth quarter credit card consumption data that was not very optimistic. As for retailers, Best Buy, which mainly sells consumer electronics products, talked about the trend of a 15% decline in sales in November compared to October when it announced its Q3 performance at the end of November. For brands, well-known vertical leading brands such as iRoberts and Allo in United States and a lot of others either experienced a decline in Q4 revenue or reported weak sales performance, even with increased discount efforts in retail channels. In other typical consumer products verticals, such as smartphones, according to a report by Omidyar, global smartphone shipments in Q4 2022 fell by 15.4% compared to the same period of last year. The top five global brands, including Apple, Samsung, and Xiaomi, all experienced different degrees of decline in shipments, ranging from 13% to 29%. In China, COVID cases peaked between late November 2022 to early January 2023. This coupled with spring festival holiday significantly slowed down economic activities in the country and had a substantial impact on electronic product consumption and overseas supply. That news that offers some relief is that the warm weather observed across very parts of Europe this winter has partially elevated the energy crisis. However, natural gas prices are still at a historically high level. And the current expectations in the consumption market remain subdued. We were seeing similar regional trends from activations of smart devices on the end market. Since November last year, the US segment has been slightly down year over year. The China segment has continued to decline. The European segment has delivered a year-over-year growth rate of over 20%. And the remaining regions have a combined double-digit year-over-year growth rate. In terms of consumer behavior, each consumer is weighing their options, especially considering the significant impact of inflation on necessities such as food, fuel, and accommodation. People may be interested in new technologies and the trends such as VR and AI, but inflation and a weak economic environment have a significant inhibitory effect on discretionary spending. Therefore, purchasing products that have immediate practical value or higher cost effectiveness is particularly important for everyone. As such, consumers, brand owners, and the retailers continue to adjust under high inflation to find a new balance point. In the first two months of 2023, we continue to see flat performance in the lighting category in terms of end market consumption and activation. While there has been a rebound in electrical products related to electricity and energy saving. Sensor, security, and home appliance products have performed relatively stable year over year. In terms of downstream inventory, the pace of destocking is mainly dictated by the retail channels. According to Morgan Stanley's research reports at the end of last year, inventory destocking in the first quarter of 2023 will move from the retail stores to the retail distributors. Brands are expected to return to a relatively normal inventory level around late Q2, followed by the OEMs in the second half of 2023. This is basically consistent with our estimation that we shared with everyone during last quarter's earning call. After nearly two quarters of industry-wide stocking efforts in the second half of 2022, our brand customers currently have a variance in their perceptions. Some brands in certain verticals, such as small home appliances, believe that the inventory pressure has somewhat elevated. And the supply chain sentiment is improving, resulting in a rebound in regional sales. However, we have a group of general brand customers who indicated that inventory pressure remains high and that they need to continue monitoring the situation. The downstream consumption environment still isn't strong enough for everyone in the value chain to start placing their orders aggressively yet. As for OEMs, the inventory of some core OEM customers is still high. In fact, one of the customers with higher inventory level is still maintaining an inventory close to 40% of the annual procurement volume from us in 2021, when the upstream and the downstream players were aggressively stocking up. However, customers currently are starting to perceive that the downstream is entering a more orderly stocking phase. So in summary, market consumption varies widely by region, with Europe performing relatively better, while the US has yet to see a rebound from our perspective. The pace of overall inventory stocking will be relatively slow in the first and the second quarters. Additionally, due to the relatively higher comparison base in the first half of 2022, we expect the industry's performance in the first half of 2023 to remain mediocre. In the second half of 2023, if inventory destocking progresses smoothly, as we all hope, the energy crisis improves and the inflation stabilizes and slowly declines, the overall industry may reach a turning point for recovery when compared to the relatively lower base in the second half of 2022 sales across the value chain. So at that point, consumers and the business may begin rebuilding their confidence. So this is my answer to the first question. Operator, please go for a second question.

Certainly. The next question is from the line of Timothy Zou with Goldman Sachs. You may proceed.

Great. Thank you, management, for taking my question. My question is on the cost and expense side. As you mentioned, you have already done some jobs in cost control or expense control. Just wondering could management could help further quantify the impact on this year's financials and especially how would you look at the profitability path for this year and into next year? Thank you.

Thank you, Timothy. In 2022, we implemented various measures to reduce cost, increase operation efficiency, and improve internal operations. The execution of these measures was undoubtedly difficult, but firm. From an external perspective, the downsizing of our headcount each quarter may seem like frequent adjustments in response to dynamic changes in market conditions. Here we can provide some additional insights. Due to the unique model of our IoT development platform, we saw the inflation trend start in late Q3 2021 ahead of other software in the internet technology peers in the market. We then stopped our team expansion efforts then and began to develop an extensive organizational restructuring plan. In 2022, we completed our strategic reorientation around our sales triangle, as well as the production and the research upgrade centered on our Qube private cloud. This strategic adjustment included shifting the focus of our product lines and R&D efforts as well as changes in employee arrangements to fill each position with suitable candidates. We also restructured our value management and evaluation system for R&D projects to ensure the value of our R&D efforts. This process was reflected in our phased team adjustments with significant reductions in team size every quarter. However, our product R&D and service support functions remained stable throughout. Currently, our expenses have reached a relatively reasonable level in the current business environment, despite the increase in labor costs due to factors such as annual adjustments in salaries and social securities. will offset some of the savings we made from downsizing our headcount. In addition, except for specific necessary professional service expenses, such as certification, compliance, and legal fees, we will continue to adopt a more strict and cautious approach towards non-labor expenses, such as marketing and travel expenses, to ensure that expenses remain in line with our targets. There is still much we can do to increase efficiency in terms of expenses, and we will continue this in 2023 and 2024 going forward. On the other hand, it should be emphasized that considering the seasonal fluctuations in revenue, the situation will vary from quarter to quarter. Operating losses and the net loss will fluctuate with changes in revenue and the gross profit and the net loss in quarters within lower revenues will be relatively larger. Overall, we expect a substantial reduction in expense in 2023 compared to 2022. We also expect a better operating cash flow in 2023 compared to 2022. We aim to achieve the goal of break-even on a non-GAAP basis as long as possible as we have communicated previously. So this is my answer to the second question. And operator, please move to the third question.

Certainly. The last question is from the line of Lee Mingran with CICC. You may proceed.

Thanks for taking my question. Given your strong capital position with high level of cash and short-term investment in several consecutive quarters, what is your future strategy for cash? And have you considered using it for exploring new application scenarios? And what's your investment plan? Thanks.

Thank you. Now, we are committed to our conservative and cautious capital strategy in order to maintain cash reserves for any unexpected risks. As of December 31, 2022, our net cash balance exceeded $950 million, of which $820 million is in fixed bank deposit, with maturities ranging from six months to one year. and some of fixed deposit interest rates go as high as 6.5% annually. We collaborate with several large, very reputable commercial banks to manage our funds and strive to obtain the best deposit rates while ensuring the safety of our principal. In 2022, we achieved an interest income of more than US$22 million. which provided solid support to our overall cash flow. Our strong cash position has made it easier for us to implement adjustment in our operations, support new business and investment, incubate new products, and safeguard our operational activities. We also use our cash to fund share repurchases within regulatory limits. as a way to reward our shareholders and demonstrate our long-term confidence in the company. And from August 2021 to the end of 2022, we have repurchased more than 110 million US dollar stocks. In addition, although the headwinds in the consumer sector and the stock markets led us to reassess our investment strategy for the ecosystem chain in 2022, we continue to check and monitor promising IoT companies, solution providers, and emerging industries. We are prepared for opportunities where we can leverage our capitals or other means to partner, integrate, or consolidate this prospect at the right time. In terms of exploring and investing in new application use cases, in 2023, we will continue to focus on two areas. First is acquiring and serving major high-value customers. Secondly, we will focus product lines with potential and strategic value. For the former, we will continue refine our private cloud products. We have already completed two benchmark projects for China Gas and Indonesia Telecom in 2022. And we will replicate the successful cases to serve other large groups across the globe. In addition, our value-added services, such as cloud storage, also have generated solid revenue in 2020, growth more than tenfold compared to the previous year. We will continue to penetrate the top telecom groups in each region with our private cloud offer and our software capabilities in cloud storage service, helping them build cost-effective IoT platforms and the sustainable revenue generating customer operations. In terms of product lines, in categories such as gateways, central controls, and others, there are both consumer-grade and commercial-grade specifications. We also see future market potential of products with increased integration with software as its core. Our revenue from gateway and central control products also grow by more than 80% in 2022. Aside from consumer products, Some commercial and non-consumer devices that can meet professional needs have more technical barriers and higher unit prices. For example, our community industry edge gateway products with increased integration are priced more than RMB 10,000 per unit, with a gross profit margin around 70%. while simpler hotel commercial gateways can achieve unit price ranging from less than 100 to a few hundred RMB. Of course, we will also continue to strengthen the capabilities of other consumer grade product lines. Overall, we will maintain a consistent investment pace to align with both our product management and the market demand plans. while also ensuring it is in line with our existing organizational structure. Our priority is to achieve profitability as soon as possible. So this is my answer to the third question.

Thank you. There are no additional questions waiting at this time, so I will hand the call over to the management team for any further remarks.

So 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.

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