Tuya Inc.

Good morning, good evening, ladies and gentlemen. Thank you for saying bye and welcome to the Tuya in second 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 one iron telephone keypad. Additionally, when asking a question, please state your questions in Chinese first, then immediately translate them into English for the convenience of everyone on the call. I'll now turn the call over to the first speaker today, Mr. Rick Chai, investor relations director of Tuya. Please go ahead, sir.

Okay. Good morning. Thank you. Hello, everyone. Welcome to our second quarter 2023 earnings call. Joining us today are founder and CEO of Tuya, Mr. Jerry Wang, and our CFO, Ms. Jessie Liu. The second quarter 2023 financial results and webcast of this conference call are available at ia.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 class release, which applies to the score 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 participating in the call of the year of 2003.

Hello, everyone. Thank you for joining 2S Q2 2023 Earnings Conference Core.

In 2003, Q2 was a very important milestone. We first achieved a record non-GAAP net profit balance and small-scale profit of about $1.5 million. The non-GAAP net profit was about 2.7%. At the same time, our net cash flow in this quarter achieved a positive flow of about $7.5 million. The transformation of GAAP's net profit and the further expansion of the positive cash flow signifies that we are starting to show the ability to raise money in the overall daily business. This is the kind of thing that should be done as an enterprise to run a business. The above results show that over the past two years, the hard and firm organization and business strategy has been adjusted, and the hard work of all the members has been paid off. We will continue to work hard to further enhance the effect of business on the organization,

The second quarter of 2023 marked a significant milestone for us. For the first time in our company's history, we achieved a quarterly break-even and recorded modest profit on non-GAAP basis of approximately $1.5 million, translating to a non-GAAP number margin of around 2.7%. Moreover, we achieved a positive operational cash flow for the quarter, bringing in about $7.5 million. The moving to positive non-GAAP profitability and the expansion of positive operating cash flow both marked a turning point in our overall day-to-day operations. This signifies our growing capacity to generate value and potential responsibility for any enterprise and its business operations. Undoubtedly, These accomplishments attach to the dedication of our team and the strategic operational adjustments we have implemented over the last two years. Each member of our organization has played a crucial role in this milestone. Going forward, we remain firmly committed to focusing on further refining our operations, both structurally and functionally, seeking avenues to enhance efficiency and reduce costs. Our aim is to ensure consistent financial performance and progress towards achieving breaking even at the non-GAAP operating level.

Our revenue in 2003 and 2012 was about 5,720 jins, which is about 20% of the net growth, which is the third consecutive record of net growth. In terms of the net profit, the total revenue dropped by 8.9%. Among them, the exchange rate fluctuated, especially when the RMB fell to the US dollar, resulting in a net profit of about 5.6%. If we eliminate the influence of the exchange rate, the revenue will be close to the net profit level, The global consumer demand has not fully recovered, and the growth cycle of small and medium-sized enterprises has become conservative. These two factors have still had an impact in this quarter. Our comprehensive interest rate has increased further to 46.7%. The overall interest rate of IoT PaaS has increased by 44.2%. The interest rate of the equipment distribution business interest rate continues to increase under the good implementation of the new strategy of IoT hardware solution. In the second quarter of 2023, our total revenue reached approximately $57 million.

representing a sequential growth of around 20%. This marks the third consecutive quarter of sequential growth. Comparing year over year, there was an 8.9% decline in our total revenue. A factor in this was the currency fluctuation, particularly the weakening of the RMB against the US dollar, which accounted for around 5.6 percentage points of the year over year decline. Excluding the impact of the currency fluctuations, our total revenue was close to flat year over year. It's worth noting that the resurgence in consumer demand has not yet reached its full potential, and the cautious operating strategies adopted by downstream business during the stocking cycle persists, thereby impacting this quarter's redoubts. Our overall gross margin advanced to 46.7%. Within this figure, the gross margin for IoT PaaS climbed back to 44.2%. Meanwhile, thanks to the successful implementation of IoT device solution strategy, the gross margin of our smart device distribution segments for our growth to 23%. Our software and value added services maintain a steady gross margin of 74.5%. Of particular note, our cloud storage services have been consistently generating solid cash flows and stable revenues marking this transition into a period of scalable growth.

Regarding our corporate operational management, our non-GAAP operating expenses for this quarter showed a sequential decrease

Attachment to our stringent cost of budgeting across all departments. When we speak of efficiency, our revenue supported by HACOM and gross profit supported by HACOM reached historical highs in this Q2, following several quarters of continued improvement. Now let's dive into some business updates from the second quarter.

In terms of our business strategies,

Our focus remains on three key areas, executing our customer focus strategy, improving our IoT developer platform, and continual product enhancement.

主要IoT平台的价值继续获得重要客户的青睐,因为说我们与海尔集团旗下的新能源品牌纳辉新能源进行了合作签约,共同打造家庭能源管理,关注从热卖等智能设备,供电, to build a family smart energy management platform. We also started to serve a company of nearly 1,000 yuan, which is currently working in the home appliances industry, to provide mutual utility EMS management system, as well as smart communication solutions. We acquired a retail unit with a green headboard, and a network network that covers North Europe, They are a type of business-based DIY furniture. Their sub-company, Smart Furniture Co., Ltd., will use the same platform. And we have just acquired a global engineering-connected product and veneer equipment brand. It is a leading company of European engineering-connected technology. It mainly covers markets such as North America, Europe, and Australia. The payment has begun.

The value of the 2IoT platform continues to be favored by top-tier customers. In early June, we held a signing ceremony in collaboration with our customer, Hire Group's new energy brand, Nahui New Energy Technology. Together, we aim to jointly develop smart devices for home energy management, including PV, storage, charging devices, and heat pumps. and to establish a smart home energy management platform. We initiated services for a prominent listed company with a market cap close to 100 billion RMB and the leading player in the electrical and home appliance industry. Toya will provide them with the residential energy storage EMS management system combined with the smart communication stick solution. We have secured a partnership with the leading Swedish retailer whose distribution channel extensively covered the Nordic region and whose business focuses on DIY and home products. All smart home brands under their umbrella will utilize the 12 platform. Additionally, we have newly acquired a renowned global brand specializing in engineering joint products and irrigation equipment, which is also a subsidiary of a European listing leading company in engineering jointing technology. They predominantly cover markets in North America, Europe, and Australia, and have already made payments to commence preliminary preparation related to their IoT app in Datra.

Tube, as a private investor, will continue to help us acquire large-scale investment customers. We recently signed a contract with the third private investor in Thailand, which is a company under the Thai Investment Real Estate Group. We have established a relatively good customer base and influence in Thailand. We have a large number of large-scale corporations that cover local influence, including some comprehensive corporations, telecommunications and real estate corporations, and so on. We will also attribute the experience of the Thai market to more countries.

CubeSmart Private Cloud products also continue to help us acquire top customers. We recently forged an agreement with the subsidiary of a leading real estate conglomerate in Thailand. Marking our third private cloud collaboration in the country. To us growing pretense and influence in Thailand are underscored by our collaborations with influential local companies, including conglomerates, telecommunications operators, and the top real estate groups. The insights and experience gathered from our ventures in the Thai market will serve as the strategic roadmap for our expansion into other countries.

In order to further enhance the experience of iOS developers, we have to look at the opportunities and values of developers and enterprises in addition to the market. For example, in the field of modern energy, due to its practical and sustainable characteristics, we have to pay attention to global enterprises. For this reason, at AWE, we have demonstrated the most important smart interoperable power solution solutions. We will also add these advanced capabilities to the next solution products, such as medium-sized

As we continue to enhance the IoT developer experience, we are also exploring opportunities and value beyond consumer electronics with developers and enterprises. For example, the energy saving sector, with its practical and sustainable nature, garnered significant attention from global corporate customers In light of this, we showcase the Tuya residential PV energy storage solution at AWE. Additionally, these modular proficiencies have been seamlessly integrated into our SaaS offerings. A case in point is Tuya's SMB Bluetooth mesh lighting control solution, empowering more and medium-sized businesses to easily achieve a green, energy-efficient indoor environment. 智能设备分销业务赶快作为软硬跟后特别的一环,是去年中开始。

Since the strategic adjustment, the business mainly comes from the new customers in the first two years. The revenue of this Q2 is about 1.49 million US dollars. The total growth is about 30.8% and the total growth is about 68.2%. The overall revenue is 23%. Our standard product solution, such as B, Netglow, Zhongguping, etc., in the IoT solution model,

Our smart device distribution business as the integral component of our software and hardware enrichment strategy has mainly originated from new customers we acquired since our strategic realignment in the middle of last year. The gross profit of this segment in Q2 was approximately $1.49 million. marking a sequential growth of around 13.8% and a year-over-year increase of around 58.2%. The overall gross margin was 23%. Our flagship product solutions, such as the big gateways and central control screens, as part of the IoT solution model, contributed to the healthy, comprehensive smart device growth profit. 产品现方面,举例来说,我们的语言中共产品,

in Q2, the total revenue of Q2 has increased by more than 160%. Among them, the solution model of smart devices has increased by more than 280%. In the industry, remote control products are the entrances and exits of IoT, and they can indirectly replace the traditional panel switches under some products, thus presenting a diversified and fast development trend. In particular, it has a strong competitiveness. Our remote control product solution covers all kinds of OS systems, panel components, regarding our product lines. In Q2, the comprehensive revenue from our voice central control product line registered a year-over-year growth passing 50%.

with the smart device solution model seeing an impressive year-over-year surge of approximately 280%. From the industry standpoint, central control products act as the entrance for IoT interaction, possessing the capability to replace traditional panel switches in a variety of settings, indicating a dynamic and swift growth trajectory. 3UP boasts robust competitiveness in this sector, Our central control product solution encompasses a diverse area of operating systems panel firmware. This also extends to software service features like multimedia, visual intercom, gateway, dancers, gestures, and content. In terms of hardware, we offer full-size adaptability, support for all communication protocols, and integration with popular controller ICs. meeting the product requirements of mainstream brands worldwide.

The IOS Parts and Smart Equipment Solution Model and high-end products provided by Wanyin have more choices. K-Eco can choose the IOS Parts new model according to the needs and characteristics of its own personalized business. Thus, the business development will be more autonomous. At the same time, some cross-border companies The dual model of IoT PaaS and smart device solution underpainted by our software and the hardware enhancement strategy has provided our customers with the broad spectrum of choices. For instance,

KA customers can leverage the IoT PaaS model, incorporating OS, cloud, and app SDK in accordance with their unique business needs and organizational characteristics, enabling them to foster a more autonomous business development environment. At the same time, some cross-sector multinational corporations, SaaS service providers, and integrators can choose smart device solutions for a streamlined and an appetizing market entry, which in turn further drives the sustained generation of software revenue.

The overall sales growth of Shazen and others in Q2 is 3.2% to 9.4 million pounds. The cloud storage capabilities mentioned above in each of the main products continue to show good sales characteristics. In the stable growth of the equipment scale, cloud storage is able to provide high-quality Our SAS and other segments reported year-over-year revenue growth of 30.2%, as Q2 revenue reached $9.4 million.

breaking this down to key products. As previously mentioned, our cloud storage value added services consistently demonstrated strong revenue characteristics. Aiming the steady growth in device scale, these services have continuously delivered high quality revenues in the millions of dollars level, more than doubling year over year. As for SaaS, sectors such as hotel, rental, and real estate achieved the moderate year over year growth despite the soft economic cycle. Conversely, commercial lighting falling within the broader lighting industry reduced the year-over-year decline attributable to microeconomic challenges.

In May of this year, we will become a company that supports VIT and non-VIT at the same time. We will be able to meet all the requirements to sign the PAI of the VIEC members of the alliance. Therefore, Tuya not only can reduce the cost of verification of META devices for developers, and achieve self-control verification, but also can assist developers to shorten the time of product delivery. In addition, Tuya can also provide the management of the whole life cycle of PAI verification, and assist developers to focus on device development, and enjoy some extremely smooth experiences.

I also want to highlight another milestone we achieved in May 2023. Toyota officially became the world's only company to offer support for both vendor identification, the VID, and non-VID scope to product attestation authority, the PAA. Within the matter of full-stack solution, this allows us to assign product attestation intermediates for VID to meet the requirements of any eligible alliance member. As a result, Tuya is capable of not only reducing the cost of matter device certification for developers, but also facilitating an autonomous and controllable authentication process, allowing developers to advertise their products time to market. Moreover, Tuya can also provide comprehensive lifecycle management for PAA certification, enabling developers to focus on device development while enjoying a seamless experience.

In general, in Q2 and the second half of 2023, the demand for e-commerce channels is still under pressure due to the impact of the high inflation and the impact of the stock market. In terms of the global scope, we also see good signs. For example, the inflation in Europe and the United States has continued to decline for more than two years. The end of some IoT and smart equipment products sales have begun to recover and grow. We have been able to improve our own operating situation Overall, during Q2 and the first half of 2023, the consumer electronics segment continued to face the residential pressures of high inflation

and the associated inventory implications. However, there are encouraging signs globally. For example, inflation rates in Europe and the United States have descended to their lowest level in over two years. Anticipated sales for several IoT smart device categories are trending towards positive year-over-year growth. Drawing from this external change in our internal metrics, We believe that we have navigated through the toughest times, and we expect to return to year-over-year round of growth in the second half of the year. Our linear and more streamlined operational structure also gives us the confidence to pursue ongoing improvements in our financial performance. As we look ahead, we are looking forward to a future of sustained and steady growth. Thank you for your introduction. With that, I will now turn the call over to our CFO, Jesse, to provide everyone with a closer look at our financial performance.

That concludes the remarks by Jerry. As I review our results, please note that all amounts are in US dollars, and all comparisons are on a year-over-year basis, unless otherwise stated. In the second quarter of 2023, our total revenue reached and our gross profit was 26.6 million. Both metrics have shown sequential improvements over the past three consecutive quarters. However, both metrics recorded a decline on a year-over-year basis. When we excluded the impact of the depreciation of the IMB against the USD, which now has an exchange rate surpassing 7.2, our revenue essentially remained stable compared to the same period last year, while our growth margin showed a 6% increase from the same period last year, considering the currency rates we anticipate facing ongoing challenges related to currency exchange in the third quarter. The global consumer electronic sector is grappling with the pervasive impacts of heightened inflation. However, our forward thinking and strategic interventions have yielded encouraging results. By adopting a customer-focused strategy, our average revenue per customer increased sequentially. Additionally, we've reported a significant uptick in revenue and the gross profit per employee basis, and have noted a more equitable distribution in geography revenue contributions, fortifying our position against the market headwinds. Our blended growth margin for the second quarter expanded to 46.7% from 42.8%, achieving a historically high level since our inception. I'd like to emphasize the growth margin is pivotal for the long-term sustainable growth of the company, reflecting the value of our services and the products we bring to customers and securing our profitability. This margin is the testament to our value proposition, the efficiency of our operations, and our balanced approach between profitability and growth. Let's break down. In the second quarter, our IoT PaaS growth margin increased to 44.2% from 42.5% in the same period last year. This uplift contributed 1.2% points to the year-over-year expansion of our blended growth margin for the quarter and represented a significant rebound of 3.7 percentage points from the first quarter. We are always confident in the value proposition of our IoT PaaS products, distinguished by our unique software capabilities, leading IoT functions as well as effective pricing strategies and management. However, given the macroeconomic downturn and inventory backlog leading to slow-moving issues across many enterprises, our holding in IoT chips was not exempt from this pressure. To address this, we have refined our inventory management strategy, emphasizing prudent control over chip inventory levels and strategic purchasing decisions. Furthermore, we've been guiding our customers in their IoT solution selections and when necessary, utilizing specific pricing strategies to facilitate inventory reductions, therefore alleviating the financial impact of inventory allowance. In the second quarter, we have effectively minimized the impact of these allowances. While it's essential to recognize that inventory management and potential write-downs are dynamic areas influenced by market conditions, we remain confident in our ability to maintain them within reasonable levels. So overall, as our core business, we believe that IoT PaaS will continue to be a stable and a robust contributor to our profitability. The growth margin for our smart device distribution segment in the quarter reached 23%. This segment has evolved from initially facilitating customers in acquiring smart device quickly, easily, and cost effectively to providing logistics value and support for clients with IoT solutions, aiding them in expanding product categories and penetrating new markets. In the second quarter, the smart device distribution segment contributed 1.3% point to the year-over-year growth of our blended growth margin. The growth margin of our SaaS and other segments was at 74.5% in the second quarter, characterized by its diverse composition, including SaaS, 2B and 2C value-added services, apps, and various customer developments, and smart private cloud projects. Notably, as our cloud storage revenue continues to grow, its profit contribution has become even more significant, accounting for approximately 1.8% points of the year-over-year growth of our blended growth margin in the quarter. The consistent financial performance from this high value software value added services coupled with expansion of our device ecosystem further affirmed our strategic direction and the confidence for the future. So I've just detailed profitability of our core business segments for the quarter. We believe that maintaining solid margins at the business segment level is crucial to ensuring the overall margin profit of our company. Moving on to our operating activities and related expenses, we are presenting our operating expenses on a non-GAAP basis by excluding share-based compensation expenses and the credit-related impairment loss from our GAAP members. This credit-related impairment losses stem from our strategic investments in certain IoT-related private companies. Some of these companies have encountered operational difficulties. after facing two years of headwind, leading us to provision for impairments. However, this has no material impact on our operations and the business. Therefore, we've excluded from our GAAP numbers. We believe this provides better clarity on the trend of our operating expenses, aligning with how our management team reviews our performance. In the second quarter of 2023, our non-GAAP total operating expenses decreased by 32.7% to $33 million from $49.1 million in the same period last year. I will break down our costs and expenses to provide additional clarity. Our employee-related costs, excluding share-based compensation, declined by 33.2% year-over-year in Q2. And the costs related to office and property leasing concurrently decreased by 51.6%. Combined, this cost represented about 75% of our total non-GAAP operating expenses in Q2. As of now, our team size has been further streamlined to around 1,500 employees. We continue to explore opportunities for further optimization in both our business and organizational structure. Marketing and promotion expenses decreased by 70% percent year-over-year, highlighting our commitment to budget control. Travel-related expenses were nearly flat year-over-year and decreased sequentially. Cloud infrastructure costs now remained at a stable level, flat year-over-year. Our team remains committed to striking a balance between driving innovation, enhancing our cloud platform, and maintaining a large, stable global operation system, all while focusing on our cost efficiency. Professional fee under G&A expenses dropped by 23.4% from that of Q1 following our annual reporting activities in the U.S. and Hong Kong. Year-over-year, professional fees were down 30.7% compared to the same quarter last year. We are pleased to report that these overheads are now consistently managed and well-contained. The company remains dedicated to ensuring quality corporate compliance and professional services at a cost-effective rate. Next on the income statement is the financial income section. During Q2, we generated approximately $12.1 million in deposit interest income because of our conservative capital strategy. The income was recorded as our financial income for the quarter. We will not elaborate on the remaining types of detailed expenses or income as they are are significant to our overall financial performance. As a result of our consistent efforts over several quarters, our non-GAAP net loss has been steadily narrowing in the past quarters. In Q2, we achieved profitability by reporting a non-GAAP net profit of $1.5 million, translating to a non-GAAP net profit margin of 2.7%. This transition from a loss to a profit is a significant milestone for us, With encouraging indications from our business, evidence from stable growth margins, and our disciplined approach to expense management, we remain optimistic about sustaining and progressing our financial trajectory. Moving on to cash, as of June 30, 2023, our cash balance, comparison cash and cash equivalents, as well as short-term investment, reached $942.3 million. This represents a slight increase from the end of Q1, primarily due to an expansion of operating cash flow of $7.5 million. While cash flow is nominally subject to fluctuations in working capital changes and payment terms, our operating cash flow now stays at a much better level compared to a year ago. Furthermore, our financial position remains strong. Our account receivable turnover is less than a month with the majority of our business collaborations requiring prepayments from customers. Our liability to asset ratio has consistently remained at or below 10% since 2021, and we have always been free from any interest-bearing liabilities or long-term capital commitments. Finally, as articulated in Jerry's strategic outlook, we remain confident in the long-term perspectives of our company. With that, operator, we are now ready to take questions. Thank you.

Ladies and gentlemen, if you'd like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask a question, please ensure your phone is muted locally. Additionally, when asking a question, please state your questions in Chinese first and immediately translate them into English for the convenience of everyone on the call. Thank you. Our first question comes from Yang Liu of Morgan Stanley. Please go ahead.

First of all, congratulations to the company for achieving the balance of profit and loss in this quarter. My question is about the demand level. Because I have seen data from the macro level in the past few months, the export numbers in China are not very good. I don't know from the communication between Tuya and customers, especially from the communication of some manufacturing plants, their customer needs. Especially in terms of exports, have they been affected? How do we look forward to the future? The second question is also related to demand. We were also very happy to hear that the management level, compared to the next half of the year, the income will increase and the rate will change. Have we already seen that the customer side, for example, the stock consumption is close to the end? Let me translate my question. First, I congratulate for the non-GAAP breakeven this quarter. And the question is related with demand. In recent few months, we observed the export data in China is pretty weak. And I would like to ask, based on 2F communication with the downstream For example, the OEM based in China, how about their customers' demand outlook and whether it was also impacted by the weak export number. And the second question is customer inventory. We are happy to see that management expects the second quarter year-on-year revenue growth to turn positive. Is it due to the inventory digestion of the customer side is close to the end and they're about to restock inventory? Thank you.

Okay. Thank you for Liu Yang's question. About demand, to start with the conclusion, over the past few months, we actually observed an ongoing improvement in inflation in Europe and the US. The total sellout of IoT products for all our brand customers during the first half of this year showed a modest year-over-year growth. So despite we do notice a recent export number weakness in China, we hold a cautiously optimistic view towards the future demand for end-consumer IoT electronic products. And first, from a macroeconomic perspective, there's been a notably As of July 2023, the inflation rate in the European Union has dropped to 5%, while the U.S. has saw a slight rebound to 3.2% in July, following a decrease to 3% in June. Since peaking in the mid to late last year, the decline has been pronounced, especially in the first half of this year. However, both from the CPI figures and the core CPI indicators, most views suggest that the risk associated with inflation are not completely eliminated, and the prices of some consumer goods remain high, requiring continuous observation by companies in this sector. In China, after a first half year resurgence in travel-related spending, retail sales of consumer goods in the middle of the year dropped to a lower single-digit year-over-year growth rate, but stabilized in July. Reasonably speaking, our perception is that the overall trend is similar across the regions, but with differences in details. For example, in the United States, even though the overall consumer electronics market was sluggish in Q2, there was still decent demand for home appliances, followed by a relatively stable year-over-year growth for safety products and an improving situation for electrical In Europe, primary countries remained a good rebound in consumer spending with a strong demand for energy efficiency-related products. We've observed a strong resurgence in categories like gateway controls, safety sensors, and some home appliances, electrical products. In China, based on official data given the revenge spending on travel, tourism, and food during the first half of the year, consumer electronics like cell phones exhibited weak performance. However, echoing Europe, due to people's demand for safety and energy efficiency, certain categories stood out, even amidst overall weak electronic demand. Other emerging global markets for smart products, such as Southeast Asia, Middle East, Latin America have rebounded pretty well. However, the lighting segment continues to face substantial pressure, as seen from the performance of leading global lighting companies that have reported their result. Overall, we believe the long-term development trend for the IoT consumer electronics sector should be steady and consistent. Both enterprises and the consumers will continue to explore and focus on realizing the value of IoT. Against the backdrop, as the world's leading IoT cloud platform with a high market value, we overall growth pattern should align with overall brands and use the sell-out growth trend in the industry. And then come to the inventory question from Liu Yang. By the middle of this year, we observed our downstream inventory has markedly improved. And we expect it will return to a healthy level by the end of this year. At the end of last year, we devised a method to estimate downstream inventory levels by comparing the total IoT devices activation with our sales. This downstream includes OEMs, brands, retail channels, and all other entities between us and the consumer. We previously anticipated that downstream inventory would continue to be digested throughout 2023 and by the end of this year. It would return to a healthy level seen in 2019 to 2020. Current downstream inventory progress aligns with our expectations. Our recent surveys of top customers worldwide also indicate varying paces due to individual business plan strategies. However, the general feedback suggests that inventory management has returned to a controllable state. Two years ago, the consumer electronics supply chain built excessive inventory during 2 to 3 quarters due to chip shortages and the price hikes. This was followed by an almost two years inventory destocking cycle. We believe that moving forward, business on the value chain of consumer electronics will plan and operate more rationally and learn the lesson, and overall inventory management will return to a steady state. So considering the positive inflation trend and the nearing the end of a two-year de-stocking inventory cycle, we're confident that after a lieu of six quarters, our revenue will show a year-over-year growth in the second half of the year. So this is my answer to the questions. Operator can go to the next question.

Thank you. Thank you. We now have our next question from Timothy Zhou of Goldman Sachs. Please go ahead.

Okay. Thank you for accepting my question. Congratulations on the very strong income and profit performance. I have two questions for you. The first one is that I see that in this quarter, our interest rate actually has a very obvious recovery, whether it is from the same ratio or the same ratio. Because the company also mentioned that the overall income in the second half of the year is a trend of increase in the same ratio. I don't know if I can ask the management to share more colors about the trend of interest rate in the second half of the year. The second one is about our raw material AI. Thank you, Benjamin, for taking my question and congrats on the strong results. I have two questions. One is on the growth margin trend into the second half of this year as you already got it that the revenue will improve on a young year basis. And secondly, it's regarding the generative AI topic. I do note that I think you already launched certain products and shared certain strategies a few months ago. Could Madeline share further color on your thoughts on how to meet the generative AI demand and how that will impact your business model? Thank you.

Okay. Thanks for Timothy's question. Firstly, let me address the question about gross margin. So beyond promising signals in revenue, we are particularly inspired by our growth margin. Since Q1 of 2019, our growth margin has consistently improved from initial 24% to almost 47% this quarter, despite challenges like the pandemic, inflation, and inventory issues. Several reasons contribute to this steady improvement of growth margins. Firstly, the proportion of high margin products in IoT path business has been increasing. Secondly, the overall high margin SaaS sectors, the revenue contribution to the total revenue has been continuously grow, reaching to about 16% in 2023 Q2. Lastly, the transformation of the business model of the smart device distribution business has made pretty big progress. improvement to the growth margin. That segment, the growth margin improved from about 10% to now 23%. Looking forward, our expectation, we are likely to maintain a steady growth margin. We are now also focused on the growth of the company. We are looking for new directions of growth and with some new business try out initially, usually we will make the growth margin more aggressive to attract new customers. So balance that, we expect a steady growth margin for the near future. And then come to Timothy's second question about AI. In the midst of the AI boom during Q1 this year, we shared our insights and directions. We are optimistic about upgrades and efficiency that AI and AIGC can bring to IoT developers and end users. Our perspective remains consistent, and we're currently working on various AIGC-related projects. Firstly, a common approach in IoT industry is the utilization of AI in customer services. We are leveraging AI to empower 2YAR's customer support, enabling more intelligent and flexible conversation with users, thereby providing more personalized and high-quality services. Additionally, by training on 2YAR's documentation, we can pinpoint end-user issues with more precision and automated responses and interactions. This not only enhances the user experiences, but also significantly boosts efficiency for end users, enterprise developers, and the 2YAS internal R&D team. The second direction is to empower developers. For instance, 2YAS SaaS development framework now allows for the auto-generation of general service codes based on described requirements, such as device inquiries, scenario inquiries, This ensures that developers, when creating their IoT device management platforms or similar needs, can significantly improve efficiency, reduce development costs and entry barriers, and maintain code quality and consistency. It enables developers to concentrate more on the development and innovation of business logic. The third direction is AI Assistant, We're not referring to speakers, but mobile apps or central control panels with interactive screens. This AI assistance enables end users to seamlessly set up and enjoy IoT scenario setting, bridging the gap between various fragmented intermediate links. For example, when a user says, help me analyze energy consumption from August 3 to 12, They can instantly view the corresponding analysis results on the AI Assistant interface, followed by personalized recommendations for energy saving or other usage scenarios and so forth. Besides the broader directions just mentioned, let's delve into a specific case related to enterprise-level projects. We assisted clients in generating device management strategies using AI. Specifically, we begin by customer training several popular language models based on industrial verticals, creating professional models that understand device operation and energy saving requirements. Users can then state their needs, such as maximum energy saving or utmost comfort in the model, considering historical data predicts device usage under different strategies. It weighs the cost and impact of strategy implementation, presenting users with several optimization options. The entire process eliminates the need for intricate parameter configurations and is carried out through interactive dialogues with the primary goal being to enhance user energy efficiency and comfort. Finally, it's crucial to emphasize that one of AIGC's most notable features is to transformation of human-machine interaction methods, whether the output results meet expectations, whether they are commercially viable, and how cost-effective AIGC is in various scenarios intricate industry-wide questions that are still being explored. It's currently in our segment. It's still the early stage of AI journey. Thank you. The operator can move to next question.

Thank you. Our next question comes from Mingren Li of CICC. Please go ahead.

Thank you for your question. I have two questions to ask. First of all, about the growth trend of different categories, we see that in PATH, there are some categories that have relatively better productivity in the lower part of the SASS, which can support a full-time growth under this relative value system. The second question is about the balance of profit and loss. We see that this company has achieved the level of non-GAAP. Let me translate myself. Thanks for taking my questions. My first question is that what kind of products impact and which downstream scenario things that you're saying will be more resilient to support our full year growth on the relatively weak demand? And my second question is that we see this quarter is the first time that you achieved breakeven profitability on non-government income faster than our expectation. So could you please give us more color about the future trends of breakeven?

Thank you for the question. Let me first address the growth patterns of different categories. So differences in our different categories of business are quite noticeable. Our performance aligns well with the trends highlighted earlier for each region. However, between two years and the final consumer, the business operations and the decisions of downstream companies also play a significant role. So this quarter, our performance was significantly hampered by the lighting sector. But most non-lighting sectors have already achieved a modest year-over-year growth. For example, the safety sensor sector this quarter has almost This can be attributed to the fact that during a volatile period, the fundamental demand for safety and protection remains stable. The Home Alliance sector has shown year-over-year growth since the first quarter of last year, with an impressive growth exceeding 20 percent of the Q2 quarter. It's a very positive sign. Furthermore, we remain bullish on the renewable energy segment itself, as well as the value generated from integrating renewable devices with other IoT home devices. While we're just starting, we believe we are among the global competitive enterprises when it comes to integrating home alliance IoT with new energy products. Our residential PV energy storage IoT solution displayed at AWE this year not only managed traditional household electricity consumption, but also visualizes real-time energy flow from solar power generation, the energy storage batteries, distribution, and the consumptions to electrical vehicle charging. It can optimize energy usage strategies and assist homeowners in managing household energy efficiently, especially like Europe, Australia. In terms of fast and other segments and smart scenarios, we've discussed Scenarios like cloud storage and intelligent business areas earlier, there are distinct differences in business models and products. For instance, software services addressing end-user rigid demands have a more pronounced advantage. SaaS being a direct B2B offering is greatly influenced by corporate budget decisions and business development efforts. However, we remain resilient in this area. The pandemic disrupted our global promotion of SaaS offerings years ago. But as restrictions eased toward the end of last year, we restarted our efforts, focusing mainly on China market and Southeast Asia regions. We have been making steady progress. In Thailand, we secured a project where groups. Furthermore, replicating our benchmark project in Spanish student apartments, we secured another project in the UK. And now we'll go to the second question about the profitability. So we will continue to prioritize achieving a non-GAAP operating break-even as a key goal. While maintaining quality business operations, we will explore new avenues for growth. Our main operation focuses include, first, we will rigorously maintain an efficient organizational scale and continue to seek areas for adjustments and optimization. Second, we will persistently identify methods to reduce costs and improve efficiency within our operations, including refining our business models. Thirdly, as we explore new growth directions, we will remain rational in our capital expenditure, always keeping an eye on the return on investments. So in summary, we are committed to pushing our top line revenue return to a growth trend. Furthermore, to the basis of sustain our gross profit margin. Furthermore, we aim to maintain or reduce non-gap operating expenses. We hope to achieve our non-gap operating break even within the next next few quarters, and we aim to maintain non-debt net profit in the future. So that's all my answers. Thank you.

Thank you. There are no additional questions at this time. I'll now hand back to the management team for any closing remarks.

Okay. So thank you all again for joining our call. If you have 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 course. Have a good day.

This concludes today's call. Thank you for joining. You may now disconnect.