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spk06: Good morning and good evening, ladies and gentlemen. Thank you for staying by and welcome to the TUYA INS First Quarter 2023 Earnings Conference Call. If you'd like to ask a question during the presentation, you may do so by pressing star followed by 1 on your telephone keypad. I'll now turn the call over to the first speaker today, Mr. Ray Chai, Investor Relations Director of TUYA. Please go ahead, sir.
spk01: Okay, thank you, everyone. Hello, everyone. Welcome to our First Quarter 2023 Earnings Call. Joining us today are founder and CEO of Tuya, Ms. Jerry Wang, and our CFO, Ms. Jessie Liu. The first quarter 2023 financial results and webcast of this conference call are available at ir.tuya.com. A replay of this call will also be available on our website in a few hours. Before we continue, I refer you to our safe harbor statement in our earnings press release, which applies to this call as well, as we will make forward-looking statements. With that, I will now turn the call to our founder and CEO, Mr. Jerry Wang. Jerry will deliver his remarks in Chinese, which will be followed by corresponding English translations.
spk03: Hello, everyone. Thank you for joining the Tuya's Q1 2023 Earnings Conference Call. Our revenue in Q1 of 2023 is about US$47.5 million. The growth rate is about 5% and the downfall is about 14%. The downfall of the downfall is due to the overall consumer demand disorder, which is still in the period of recovery. In the same period last year, the major factors leading to the heat industry, which is relatively more technical, and the fluctuation of the exchange rate caused a 6% downfall. However, from the perspective of the weather, Q1's revenue situation is better than our initial perception. Our revenue in Q1 2023 was approximately $47.5 million, recording a sequential increase of 5% and a 14% decrease compared to the same period last year.
spk02: This dip can primarily be attributed to three main major influences, a persistent lack in overall consumer spending, the continued cycle of inventory correction downstream, and a comparably high base from the previous year. Furthermore, foreign exchange fluctuations accounted for a six percentage points year-over-year drop. Yet, in spite of these challenges, our QR revenue exceeded our initial expectations set at the start of the year. And this is a milestone for us as for the first time things go in public that our Q1 rounding, despite incorporating the spring festival holiday period where most of the business and the production activities were suspended, has outpaced that of the traditionally strongest Q4. Moreover, our blended gross margin maintained a steady level around 44%. Under throating the determination of our team, the resilience of our business operations and the strength of our customer base amidst a challenging microeconomic environment.
spk03: Some specific data shows that the European and U.S. market share has dropped. In the end of the month, the CPI fell by 3.5%, and in the post-pandemic period, it fell by 6.9%. The previous severe red line was relatively mild in terms of data. With the further improvement of the market share, we can see that the confidence of some brands and customers is starting to improve. In terms of domestic consumption, the QE this year is slightly different. However, due to the impact of last year's COVID-19 pandemic, social consumer goods in QE this year are mainly concentrated in the category of food, clothing, and medicine, while the overall performance of home appliances, telecommunications, equipment, and electronic equipment is still the opposite. We can see that the impact of the pandemic and the economy on consumer habits and consumer areas is significant and continuous. Taking into account publicly available data, we have observed a consistent decline in inflation in both the United States and Europe. As of the end of March, the U.S. shortage CPI reduced by 5%, while Europe experienced a decrease to 6.9%.
spk02: These figures indicate a tempering of the previously severe microeconomic climate and an evolution which, when coupled with the ongoing inventory reduction, has begun to bolster the confidence of some brands and customers. On the China front, consumer expenditure saw a year-over-year uptick in Q1 2023. However, due to the carryover effects from the COVID-19 peak in Q4 of last year, this spending has been primarily focused on food, clothing, and pharmaceutical sectors. Contrarily, sectors such as home electronics and communication equipment experienced a year-over-year decline, reinforcing the substantial and lasting impact the pandemic and the economic climate have had on consumer habits and expenditure sectors. Elsewhere, in marginality regions like Latin America and India, characterized by relatively low smart device penetration rates, and smaller device basis, we have witnessed the promising year-over-year growth amid the easing of global economic pressures.
spk03: Thank you, Ayan. The supply chain from the top to the bottom of the supply chain from the top to the bottom of the supply chain from the top to the bottom of the supply chain from the top to the bottom of the supply chain from the top to the bottom of the supply chain from the top to the bottom of the supply chain from the top to the bottom of the supply chain
spk02: In a broad view, the consumer electronics supply chain from upstream to downstream experienced the sustained pressures through Q1 and is expected to continue into the first half of 2023. We continue to navigate an environment of industry and economic uncertainties. Yet despite these challenges, the aforementioned early positive signals that we have observed in the rise market bring hope for the potential of further industrial recovery in the second half of the year. Rest assured, we remain vigilant in monitoring these trends and committed in our execution of established strategies.
spk03: Moving on to our business operations, we held our non-GAAP operation expenses in Q1 at the same level as Q4 last year.
spk02: Combined with our sequential revenue growth and steady gross margin profiles, we were enabled to further narrow down our operating loss. This has led to a non-GAAP net loss of $3.7 million, a figure that marks a historic low for our company in recent years. It's evident that a year of committed adjustments has effectively steered us toward a more efficient and focused operation model.
spk03: Now let's dig into the details.
spk02: LT Pass revenue in Q1 was approximately $33.6 million, sequential growth of 2.9% and a year-over-year decline of 19.6%. There are a few reasons for this stabilization in revenue. First, we are successfully executing our intensified customer focus strategy.
spk03: We served approximately 2,800 direct customers in Q1. Among them, the number of ILTPath customers was around 2,000, a sequential contraction of about 17%.
spk02: Despite this decline in customers' revenue growth, indicating increased efficiency in revenue generation per customer, several brands provided a solid foundation for revenue. Apart from these core customers, the remaining customers can be broadly characterized into two main groups.
spk03: This is a group of brand customers who received a larger supply last year. This customer has a large-scale feature. This year, we received more orders than last year. Therefore, we continue to adjust and maintain the strategy this year and the overall strategy. Therefore, the contribution of this year's Q1 is the same as the previous year. In terms of numbers, it has a greater impact on our business. We are not worried about this part of the customer. On the one hand, it is due to the strategic strategy of our good customers, which makes them more intimate with our relationship and system planning. On the other hand, we also understand that most of them have achieved good growth. The first category consists of a group of brands that made significant IoT path deployment contributions in Q1 last year. Due to their leading and scalable characteristics, these customers had higher baseline number
spk02: last year and larger inventory levels. As a result, they have been prioritizing inventory adjustments and have adopted a more conservative strategy this year. Consequently, their contribution in Q1 was down versus last year, causing a notable impact on our business. However, we are not concerned about this group of customers for several reasons. Firstly, our well-implemented customer-focused service strategy has fostered closer relationships collaborations, and planning with these customers. Secondly, we understood that the majority of them have achieved stable to growing end-user device activations, educating healthy sales of consumer end products, and the progress in the stocking. This findings align with input we gathered with brand customers in late February and early March.
spk03: This year, the growth of Q1 has led our new customers, including our IPC products after the launch of the software, to develop home delivery services, and to integrate with the Southeast Asia headquarter of Yuyingshan Group of customers. In this year's Q1, the sales of up to hundreds of thousands of units were close to double that of last year's total sales. Our Fuhua product line has a small number of customers, including the sub-brand customers of the foreign product line. The total sales of more than 100,000 units has increased. In terms of volume, the process of cooperation from 0 to 1, the volume of these high-quality new customers led to a certain decline in the volume of large companies, which also led to a good contact with the subsequent industry. In addition, we generally see that some of the e-commerce customers that had previously been shut down have recovered, and some of the high-quality new players after overseas e-commerce have shown a significant potential, making a growth of more than 3% or even several times.
spk02: The second category encompasses growth-oriented customers that we have acquired from last year up to this Q1. For instance, we successfully see prominent Southeast Asia telecom operator group through our comprehensive solution, which integrates hardware and software enhancements, combining IPC product solutions and value-added cloud storage services. This customer contributed several hundred thousand units of IoT PaaS deployments nearly doubling year-over-year. Several brand customers in our incubated product line, such as robotic, vacuum cleaners, and outdoor products, each contributed over 10,000 incremental units of deployment year-over-year, driving significant year-over-year growth. Incremental deployments from these high-quality new customers offset a portion of the overall decline and the lead solid foundation for future business. Furthermore, we see some signs of recovery among e-commerce customers who were previously impacted by stock closures. Additionally, some promising new players have emerged in overseas e-commerce following a market reshuffling, showcasing impressive growth potential with year-over-year growth ranging from 30% to multiple times. Here, we would like to talk about a product that has a high profit margin. Secondly, we are committed to investing in and incubating high-yield cost-effective products. Looking at consumer sector, the electrical and lighting categories do experience significant pressure due to the high inflation and destocking. In the home appliance categories, the situation varies across different subcategories, but our strategy of expanding product offerings and focusing on high-value products contributed to Q1 revenue growth of approximately 10% year-over-year. In the safety and the sensor category, a slight decline in revenue compared to the previous year due to changes in product mix, but the volume of deployments remains stable.
spk03: In addition, we mainly want to share some of the new products that we have seen on the IOT channel, and some of the opportunities after the product has been made. In order to achieve the success of the implementation, according to the performance of the product, and other types of contributions have reached 50% in 2020. This kind of product in the professional industry, such as smart communicators, switchers, and other contributions have reached 3.2% in 2020. Our online products are more diverse, covering wired to wireless, 4G, Ethernet, Wi-Fi, ZigBee, and all networks. Supporting the use of SMB, business engineering, and other scenarios, we have combined a rich ecosystem of equipment, to become the first choice for the multi-brand and industry service industry. We will use China's products to achieve the same income growth of 90% and continue to open up different levels of local markets with innovative products, such as RTOS China's products in the field of energy efficiency, expand some of the brand channels with smart watches, focus on hotel, three-dome, full house and other three-dome scenarios with sound capacity, Furthermore, I would like to share that we have seen positive results from our efforts in seizing
spk02: the opportunities in developing, expanding, and augmenting interest level and quality product categories. In terms of product line performance, the revenue contribution from energy saving and energy related products in Q1 has already reached the 50% of the total revenue for the full year of 2022. The revenue contribution from professional and industry specific products such as smart switch, circuit breakers, water valves, and irrigators in Q1 has approached two-thirds of the total revenue for the full year of 2022. Our gateway for that portfolio has become more diverse, covering wired and wireless options, supporting particles such as 4G, Ethernet, Wi-Fi, and Big B, and catering to various application scenarios including home, SMB, commercial, and engineering. This, combined with our rich device ecosystem, has made us the preferred choice for many well-known brands and industry service providers. Our voice control products have experienced an over 90% year-over-year round of growth in Q1, and we'll continue to target different market segments and regions with tailored products. For example, we will enter the cost-effective market with our RT-NOAS-based essential control products, expand our downstream brand channels with smart voice products, and a focus on smart commercial scenarios such as hotels, commercial lighting, and smart homes with our speaker capabilities. Taking smart voice enable world-sharing example. Our world solution with its core health and fitness monitoring software features and the integration of 3D IoT OS and Alexa building capabilities can serve as a substitute for smart speakers in certain scenarios. in Q1 and received a positive response in the young brand market in Japan. Let's talk about Q1. Q1's Q2 sales revenue is about 5.4 million US dollars. In the same year, Q2's sales revenue is about 3 million US dollars.
spk03: According to the stock market, the stock market has been fluctuating. The trend is that its profit and loss are about 1.4 million US dollars. The stock market has been fluctuating. The trend is that its profit and loss are about 1.4 million US dollars. According to the stock market, the stock market has been fluctuating. According to the stock market, the stock market has been fluctuating. According to the stock market, the stock market has been fluctuating. According to the stock market, the stock market has been fluctuating. According to the stock market, the stock market has been fluctuating. According to the stock market, the stock market has been fluctuating. According to the stock market, the stock market has been fluctuating. According to the stock market, the stock market has been fluctuating. The price of the watch, bracelet, and other products has increased by about 25% or even 30% in terms of retail price. The retail price of the whole board has increased by 12% or about 21% in terms of retail price. With SmartTag products as an example, we are able to use the network capability of Apple's FinderMind network Combined with the good product experience provided by Bluetooth BLE and the rich product environment of Bluetooth, Apple has achieved the ability to use both Bluetooth 3.0 and Apple App. The cost-effectiveness of the product is high, and the experience of the product is rich. The unit range of the product and the unit range of the product are high, and the product has a high range of high-tech smart anti-theft devices and other products. We have developed a strategy to promote specific products with unique products in this area.
spk02: Moving on to our smart device distribution business. In Q1, our smart device distribution business generated revenue of approximately $5.4 million, representing a year-over-year decline of around 30%, which is in line with normal fluctuations in customer demand. However, it is It's worth mentioning that the gross profit amount reached approximately $1.14 million, showing a significant year-over-year increase of 61.1%. Thanks to the integration of hardware and software solutions and the product enhancements, our smart taps, gateways, smart watches, and the bracelet product solutions showcase their value. Notably, a portion of order placed for this solution in the form of the finished goods business model contributing more than 25%, or even over 30% of the gross margin. As a result, we observed a structural year-over-year increase of 12 percentage points in the gross margin of our smart device distribution business, which amounted to approximately 21% for the entire segment. As an example, our SmartPak product combines innovative capabilities such as Apple's Fund My Network and our expertise in Bluetooth Low Energy BLE products, along with our extensive product ecosystem. This allows for simultaneous usage of both Apple app and the Twitter-powered app, creating a SmartPak device with high cost effectiveness, excellent user experience, versatile usage scenarios, and strong differentiating barriers in terms of business and product dimensions. We have developed product-specific marketing strategies for such unique product solutions to support our global core brand customers who aligns with our product positioning to seize the opportunities in emerging sector through differentiation and achieve breakthroughs.
spk03: On the other hand, we are more familiar with the real-estate products of the telecommunications industry and focus on the customers of the telecommunications industry. and the real estate ownership of the real estate, and the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate ownership of the real estate In the SaaS and other segments, we are committed to providing more integrated software and value-added service products with the focus on serving strategic-level customers.
spk02: For instance, we have partnered with the leading real estate development group in Thailand, offering them an integrated solution that combines real estate smart home service capabilities, full device categories, and cube smart private cloud deployment. Moving forward, we will support them in building their in-house independent and comprehensive IoT platform for their smart housing and community business. Our smart hotel service providers and integrators customers are leveraging our solutions to efficiently implement smart hotel projects through a unified hardware and software approach. Furthermore, our industry-specific editions of voice and essential control devices complements these efforts. In terms of CubeSmart's private cloud, several benchmark cases from last year have been successfully accepted by customers in Q1 2023. resulting in meaningful software revenue recognition. These projects have also established a bridge and created opportunities for further collaboration between Tuya and these large professional industry groups in the IoT business. 深度服务板在客户聚焦设计下的2B的深度服务合并, 开发的收入整体的规模与确认同期基本之中。 我们看到客户在IoT能力上的投入需求不减信息认证, 交织OEM App和语明技能,
spk03: ah, ah, ah, ah,
spk02: As for value-added services, the overall revenue scale of 2B value-added services and custom development under our customer-focused strategy remained largely stable compared to the same period last year. We have observed that customer investment demands and confidence in IoT capabilities remain strong. On the other hand, OEM app and customer voice skill revenue decline is expected due to reduction in the number of customers. However, a range of reach for more diverse and value-driven cloud development products achieved over 60% year-over-year growth in Q1, aligning with our development strategy of focusing on the IoT developed platform model. Additionally, certification-related value-added services demonstrate a high growth rate of nearly five times year-over-year, mainly because of small base. In the 2C field, cloud storage value-added services consistently contribute to robust and high-quality revenue in the million-dollar range, with the year-over-year growth exceeding 360%. That's what we do.
spk03: That concludes our report on business in Q1. Lastly, let's touch on the hot topic of AIGC. Since many investors show interest in AI, I'd like to briefly discuss it. problems and users to meet their core needs. The AI model is still in its early stages, but it has greatly reduced the application threshold of AI technology. We will explore how to use AIGC in the direction of developer and product applications. For example, we will explore how to use AIGC in the direction of AIGC in the direction of AIGC in the direction of AIGC in the direction of AIGC. The key point is how to commercialize and implement the technology to adjust the pain points of customers, thus meeting their core needs.
spk02: Generative AI models are still in the early stage, but they have lowered the barriers to applying AI technology. We'll explore using AIGC in developed applications and product applications. For example, with applications developed by IoT developers such as energy saving, efficiency, and fitness solutions, we can explore how to enhance the interaction experience and the practical application efforts of the commercial and industrial solutions by incorporating AIGC. In terms of product applications, AIGC primarily improves the voice interaction experience, which could potentially accelerate the acceptance and adoption of IoT products by customers, leading to increased IoT penetration.
spk03: Currently, AIGC's research in the IoT field and direct transformation discussions are likely to continue. We are moving forward in the future, and we will share more with you in the future.
spk02: Currently, discussions regarding the commercial value and direct monetization of AIGC in the IoT field may still be premature. We will continue to explore the possibilities and will share substantial advances when they happen. With that, I will now turn the call over to our CFO, Jesse, to provide everyone a closer look at our financial performance.
spk07: 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. In the first quarter of 2023, our total revenue was $47.5 million, down 14.2 percent compared to the same period of 2022. However, adjusting for the impact of foreign exchange rates, the year-over-year decline in total revenue would be a modest 7.7%. It is important to note that the first half of 2022 set a relatively high revenue base as the adverse impact of the inflation just beginning in the late second half of 2021 and the overstocked inventory on supply chain players had not yet fully materialized at that time. Despite these challenges, our Q1 2023 revenue performance increased about 5% quarter-over-quarter, driven by ongoing inventory corrections, revenue generation from high-value products and services such as cloud storage, and the recognition of revenue from CubeSmart private cloud projects. The distribution of revenue by category and region in Q1 2023 closely mirrors the pattern observed throughout 2022, with slight increases in revenue contributions from both Asia and Europe regions, while the US region experienced a minor decline. Our blended growth margin for the first quarter was 44.3%, aligning with expectations. The growth margin of IoT PaaS experienced a minor decrease of 1.8 percentage points, mainly due to price adjustment on specific products based on market conditions, structural shifts in product mix, and negligible impact from the accrual of inventory allowance in Q1. The growth margin of the smart device distribution increased significantly from 9.1% in the same period last year to 21%, driven by certain innovative and strategic products such as the smart air tech and smart watch in the first quarter. Our focus on enhancing product strength and improving product strategy last year allowed us to capitalize on these vertical opportunities. For our SaaS and other business segments, the growth margin continued to remain stable. Moving on to our operating activities and the related expenses, we are presenting our operating expenses on a non-GAAP basis by excluding share-based compensation expenses from our GAAP numbers. This provides better clarity on the trends of our operating expenses, aligning with how our management team reviews our performance. In Q1 2023, our non-GAAP total operating expenses decreased by 40.6% to $36 million from $60.6 million in the same period of 2022. I will break down our costs and expenses to provide additional clarity. Our employee-related costs, excluding share-based compensation, declined by 46.2% year-over-year in Q1, and the costs related to office and property leasing currently decreased by 38.4%. Maintaining a lean team of under 1,800 salaried employees at the end of the quarter was crucial for our cost-saving efforts, as this cost constitutes over 75% of our total non-GAAP operating expenses in Q1. Marketing and promotion expenses decreased by 21.5% year-over-year thanks to our strict budget control. Travel-related expenses increased by about 40% year-over-year due to the very low comparison base in Q1 2022 during the pandemic resurgence. But the expense amount remained well controlled within the expected range. Cloud infrastructure costs decreased by 17.7% year-over-year. This accomplishment is rather challenging considering our ongoing innovation, the expansion of capabilities on the cloud platform, and the maintenance of a large, stable global operation system. Our team will continue to make efforts in the technological aspect. In addition, we've introduced new reliable cloud providers to respond to the cloud demand of both our R&D side and our customers. By choosing the most effective solutions, we managed to reduce cloud cost. Professional fees and the GMA expenses increased by 22% year-over-year, resulting in an incremental expenses of approximately $300,000. This increase was relatively minor and manageable considering our overall financial position and was primarily driven by the need for professional services, such as legal, consultancy, financial printing services, et cetera, to ensure the company's compliance with additional listing and disclosure requirements following our due primary listing in Hong Kong, in addition to those of the U.S. market. We will not elaborate on the remaining types of expenses as they are not as significant to our overall financial performance. Our step-first focus on cost reduction and efficiency enhancement since 2022 has led to our non-GAAP loss from operations narrowing by 60.4 percent to 15 million in Q1 2023, from 37.8 million in Q1 2022. Moreover, we generated approximately $11.5 million in deposit interest income as a result of our conservative capital strategy. The income was recorded as our financial income for the quarter. Consequently, our non-GAAP net loss shrank dramatically by 90% to $3.7 million in Q1 2023 from $37.3 million in Q1 2022. marking our lowest quarterly non-GAF net loss since the beginning of 2019. Moving on to cash, as of March 31, 2023, our cash balance comprising cash and cash equivalents as well as short-term investments stood at $937.5 million, slightly down from $954.3 million at the end of 2022. The decrease was primarily due to the payment of annual bonuses, a customary matter in the first quarter of each year. While cash flow is subject to fluctuations in working capital changes, our net cash used in operating activities for Q1 2023 was $18.9 million, demonstrating a significant reduction of 67.1% compared to $57.4 million in Q1 2022. Finally, we continued our share buyback in Q1 2023, but due to various factors such as extended blackout period for our annual results announcement and the heavy mandatory cancellation procedures to be completed after the first stock repurchase, our buyback volume this quarter was relatively limited. However, we still have an active buyback plan with sufficient capacity and have submitted a new proposal for the approval of a new annual cycle of repurchase authorization at the upcoming shareholders meeting. As articulated in Jerry's strategic outlook, we remain confident in the long-term perspective of our company. With that, operator, we are now ready to take questions. Thank you.
spk06: Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star 4 by 1 on your telephone keypad now. If you change your mind, please press star four by two. When preparing to ask your question, please ensure your phone is unmuted locally. Additionally, when asking your question, please state your questions in Chinese first and immediately translate them into English for the convenience of everyone on the call. Thank you. We now have our first question from Yan Liu of Morgan Stanley. Please go ahead.
spk00: Thanks for the opportunity to ask question. Just one question from my side. Based on the current customer's inventory and also the order placed to Tuya, when do you expect the demand will recover for overall company, especially the the trajectory for the potential demand recovery going forward. Thank you.
spk07: Okay, thank you, Yang. We'll update everyone on the knowledge. Sorry, go ahead, Yang.
spk00: Sorry, I need to translate. Let me repeat the question in Chinese. My question is to ask about the management level based on the current customer storage and order situation, the recovery of future needs, Okay, thank you.
spk07: We'll update everyone on the knowledge gained from various public information and the perception from our customers. In the consumer electronics industry, where we continue to check representatives listed companies throughout the supply chain, most reported year-on-year declines in Q1 revenues, with some companies achieving growth but at a slower pace. The signs of stress among upstream and downstream companies remained widespread and obvious in early 2023. We've observed 12 upstream semiconductor and module companies ranging in market capitalization from tens of billions of IMB to hundreds of billions of USD. The Q1 revenues varied between a year-over-year decrease of about 40% to an increase of about 10%. averaging down 10%. Many of these firms believe that Q1, especially for consumer spending, was still under pressure due to a slowdown in demand and not so low inventory levels, suggesting a slow recovery and a bottoming out. Some companies expressed cautious optimism for the second half of the year, but emphasized that actual conditions still warrant observation. On the brand side, we observed 17 representative listed companies, except for a charging product company that saw year-over-year revenue growth about 18%, and three companies offering near-necessity products with slightly year-over-year increase. The remaining 13 companies spending sectors like lighting, robot vacuum, kitchen appliance, outdoor products, and the mobile phones all reported revenue declines in Q1, ranging from negative 45% to negative 6%. They generally perceived some relief in their own and the channel inventory pressure, expressing hope for recovery beginning in second half. From a product perspective, companies with more discretionary offerings faced greater pressure, while those closer to necessity products had a more positive outlook. In downstream retail channels, Best Buy, a specialty consumer electronics retailer, reported a year-over-year revenue decline of 10.3% and guide a further decline of about 6.4% year-over-year in Q2. Best Buy reviewed 2023 as the bottom for consumer electronics. with industry adjustments continuing in the first half of the year and the potential recovery in the second half, levering out for the year. General retailers like Walmart, Amazon mainly analyzed robust demand for necessities such as foods and consumer goods under inflation, pointing out that consumers still have a cautious attitude toward discretionary items, especially electronic products that are focusing on value. From a macroeconomic perspective, recent months' consumer economic data have shown some improvements. And with three-quarters of inventory destocking, the operational pressure on global downstream enterprises and end-consumer pressures should have eased to some extent. Most companies are still under performance pressure, however, highlighting the substantial continued impact of inventory adjustment. But on the other hand, the outlook that the second half of 2023 would possibly start to warm up reflects, to some extent, the hopeful industry recovery and signals that bottom has been reached. For Tuya, our main brand customers are generally still cautious about placing orders, though they exhibit optimism for high-value, strong-demand products in areas such as energy-related, renewable energy-related home products, home appliance, consumer safety-related products, and outdoor products. There's considerable variation among different device categories, customers, and regions. We note a common trend aligning with the perception of those representative listed companies in the industry, where our brand customers in the context of weaker purchasing power tend to be conservative with non-essential categories, and instead strive to expand to more necessary and cost-effective categories. From a regional perspective, in Europe, brands involved in lighting products tend to have higher inventory, so they are more conservative. Brands in other categories, however, are more optimistic. In North America, due to sustained economic pressure, There's yet no sign of obvious recovery in discretionary spending, hence no signal at brand level. In Latin America, given the limited IoT penetration in emerging markets and the half-year inventory digestion, the inventory of some customers whose revenue declined last year has returned to a manageable range, so brand customers are relatively active now. Brand customers in Asia Pacific region are cautious with different circumstances. For instance, Japanese customers, faced with soft consumer spending, high inventory, and the currency depreciating, prefer to focus on and promote popular and attractive products. In China, the focus of post-pandemic consumption is primarily on tourism and enjoyment. On the China OEM side, we continue to maintain communication with our major top-tier OEM customers. Among them, 60% adopt a wait-and-see approach. About 20% are optimistic based on their own business conditions. And the remaining 20% believe right now it's still hard to make a judgment about the rest of the year. Overall, different regions face varying market challenges and economic pressure. Under these circumstances, customers' order volume won't return to the aggressive level seen in 2021. But we'll start leaning toward arranging subsequent orders by closely observing sales performance month over month. Therefore, we still maintain a viewpoint similar to last quarter's. The first half of 2023 market performance will be relatively mediocre, while second half may see turning points and opportunities. As such, we need to persist in the strategy of focusing on and intensifying efforts on key products and customers, proactively expand efficient revenue to offset revenue uncertainty caused by market downturns, and also understand and pay attention to market dynamics in different regions to seize business opportunities. Thank you. We can go to the next question. Hi.
spk04: Jerry, Jesse, Rex, thank you for accepting my question. My question here is about interest rates. I saw that in the first quarter, we mentioned that our interest rates have been affected by the product structure, including the exchange rate and some of our inventory. I would like to ask the management to help us look at the trend of our overall interest rate this year, especially in the second half of the year, we may have the overall exchange rate pressure and the Thank you, Benjamin, for taking my question. My question is regarding the gross margin trend into the second half of this year and the full year. I noticed that in the first quarter, the gross margin was impacted by the product exchange as well as the inventory provision and also FX. Just wondering if we look into the second half, when there's less pressure from FX and potentially lower raw material costs, what is the margin outlook? Thank you.
spk07: Thank you. Continuous improving growth margin is one of the most important goals of the company. We believe we will be able to maintain a stable growth margin around Q1 level for the rest of the year. And if there's opportunity to improve the growth margin, we will do. So there are several factors affecting growth margin. First is the chips cost. The chip shortage is now a thing of the past. The semiconductor industry, aside from products related to AI such as GPUs and industrial scenarios, generally faces the challenges of sluggish demand for chips application and the challenges of excess production capacity. So the financial impact of falling chips prices will be slower to manifest in high inventory and period. but it will indeed create some room for price adjustment in business, which will be transmitted downstream through the industrial chain, thus lowering cost for customers and the users. As for growth margin, we largely ensure that growth margin targets for different periods through our pricing committee mechanism. While achieving our own growth margin, we will support our customers as much as possible jointly face challenges or share the price reduction dividends from upstream. In Q1, considering our own costs, market conditions, and customers' business situation, we adjusted price of some of the past products to help our customers navigate a slowing industry cycles while we maintain a growth margin above 40% in line with our own cost control expectations. Additionally, we are always committed to producing products with corresponding value propositions. Therefore, even if there are short-term fluctuations, it's not a major issue. Over an extended period, value will always be reflected in the overall growth margin. That's my answer, so we can go to the next question.
spk05: Um, thanks for taking my question. Um, my question is about strategy, like for, for the next two years, what's your plan on new products with higher investment priorities? Okay.
spk07: We shared our core strategic themes and thoughts for the foreseeable future at the beginning of the year. Among this, on the product line, focus on products that carry high value propositions, high revenue efficiency, strong market demand with long-term potential. We will continue to commit on this strategy to seeking opportunities beyond consumer electronics fields. For example, outdoors, for example, for our renewable energy-related field. In addition to the frontline perspectives shared just now from our interactions with core brands and the customers, we have gained another important insight. For example, in the European region, there are numerous reorders and promotions for energy-saving-related products. such as power metering plugs, thermostatic valves, thermostats. There's an increasing demand for consumer safety products worldwide. IPC demand is becoming more robust, contributing to the continued growth in cloud storage revenue. Census products such as temperature and humidity sensors are also seeing increased demand. Moreover, our Q1 smart tech products which is outdoor products, falls under the outdoor tracker category has seen very rapid demand growth with the resurgence of the travel and increase in outdoor activities. We can clearly see commonality in value consumption across global markets. Energy saving, central control, gateways and some outdoor categories will continue to be the newer categories that we persistently invest in. Take energy-saving products as example, categories including smart circuit breakers, inverters, achieved nearly five times year-over-year growth in Q1, and we see a very strong downstream demand. Of course, the lower base from the same period last year as being a relatively new category also contributed to a high growth rate. We will continue to build core hardware and software system around energy saving, create central products, and form a product system with complete solution. We will expand overall revenue scale by rapidly promoting expanding by leveraging our existing customer base and the global business foundation. In reinvesting in existing categories and incubating new ones, we need to chose the right sectors Focus on the products and avoid working in isolation. Thank you. I think this comes to the end of the conference, the regular one.
spk06: The operator, you can go ahead. Thank you. So as a confirmation, there are no additional questions at this time, so I'll hand back to the management team for any closing remarks. Thank you.
spk01: Thank you again for joining our call today. If you have any further questions, please feel free to contact us or request through our IR website. We look forward to speaking with everyone in our next earnings call. Have a good day. Thank you.
spk06: This concludes today's call. Thank you for joining. You may now disconnect your lines.
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