Tuya Inc.

Good day and thank you for standing by. Welcome to the TUYA Inc. second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to Turn the call over to your first speaker for today, Mr. Reg Chai, Investor Relations Director of Tuya. Please go ahead, sir.

Okay, thank you. Hello, everyone. Welcome to our second quarter 2024 earnings poll. Joining us today are founder and CEO of Tuya, Ms. Jerry Wang, our current CFO, Ms. Tracy Liu, and our co-founder and incoming CFO, Alex Yang. The second quarter 2024 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 IR website in a few hours. Before we continue, I refer you to our safe harbor statement in our earnings press release, which applies to this call, as we will make forward-looking statements. With that, I will now turn the call to our founder and CEO, Mr. Jerry Wang. Jerry will deliver his remarks in Chinese, which will be followed by corresponding English translations.

Hello, everyone. Thank you for attending Tuya's second quarter earnings conference. Hello, everyone. Thank you for joining Tuya's 2024 second quarter earnings conference call. Tuya's second quarter earnings conference call. Tuya's second quarter earnings conference call. to continue to reflect our value proposition and product advantages. Further, we have realized the operating profit of the company's first-ever digital non-GAAP, and achieved an operating profit rate of about 10%. This is a low level of service. Not only does it explain the financial certification of Tuya 3.0 model, but it also emphasizes the great sense of operating value of Tuya's business, The second quarter of 2024 was another milestone for Tuya, with our revenue continuing to meet expectations and achieving a robust year-over-year growth of approximately 29%. Our claim-made business segments maintained a strong

growth margins, further reflecting our value proposition and the product advantages. Moreover, we achieved our first quarterly non-GAAP operational profit in the company's history with an operational profit margin of around 10%. This is an extremely encouraging profit level that not only validates the financial viability of 3S business model, but also highlights our strong operational leverage and our resolute commitment to fulfilling our promises. We have sequentially accomplished our short-term operational targets, and moving forward, we will continue to focus on long-term revenue growth and enhancing profit margins. Today, on the occasion of this milestone, I primarily want to discuss with everyone the real major aspects concerning the company's fundamentals and long-term development.

Firstly, as a leading global cloud platform service provider, Tuya is at the new starting point in the smart technology and industrial landscape. This new beginning includes a better competitive environment and

the evaporation of the smart consumer electronics and the business scenarios. In the second quarter, our LTPaaS business experienced a year-over-year growth of approximately 32%, partly due to the industrial recovery and renewed consumer enthusiasm, affecting the robust export data demand for household appliances and other consumer electronics during the quarter. More importantly, 3L's ability to acquire new clients and advance with the existing customers was amplified by a more favorable competitive landscape.

For example, in Europe, 3L and its leading energy-based group, AX-TECH, worked together to combine the advantages of 2L's AI drive energy technology to increase the political strength and also make 3L a energy market for people living in dry areas. For example, in Europe, Tuya collaborated with France's leading energy integration firm, AX Tech Group, leveraging our TARDIS NAS advantages in AI-driven energy-saving technology

to deeply explore the energy-saving market, which benefits from substantial policy subsidies and is a basic need in people's life. We aim to set industry benchmarks and jointly promote the implementation of sustainable smart solutions. Tuya provided software technologies, including gen-AI, strategic algorithms, and platform capabilities, as well as complete smart device solutions.

At Lamei, we see a strong demand for intelligent transformation and focus on the ISP-3 cooperation opportunities in the class of intelligent transformation. Through CUBE and intelligent device solution services, customer opportunities for smart lighting projects in the field of software scenarios, and other opportunities, relying on the extensive cooperation experience with the head of telecommunications cloud, we begin to replicate the standard project to customer services in the head of countries such as China, the United States, Colombia, and Chile. In Latin America, with strong demand for smart transformation and the focus on opportunities for ISPs,

collaborations in the past sector, servicing operator clients with Q and smart device solutions, and exploring smart street lighting projects in the software domain. Based on our extensive cooperation experience with leading telecom operators, we began replicating benchmark projects with leading service provider clients in countries like Central America, Colombia, and Chile. In terms of consumer electronics brands, A six-year-old Brazilian smart home brand emerged as one of the largest smart home brands in Brazil, doubling its growth year-over-year. Our efforts in Latin America directly reflected in an increased revenue share from this region.

In Asia, our company has made a breakthrough. Two new smart homes have been deployed. One is the largest smart home in Vietnam, and the other is a public-private company. The deployment of Cube will help promote their smart home business quickly.

In Asia Pacific, our operator customer base continues to expand with two additional operators deploying Cube in the second quarter, such as one of the largest telecom operators in Vietnam and the other with the previous customer of Tuya's public cloud. The development of Cube will help accelerate their smart business and open up opportunities for co-operations in smart home solutions and industrial solutions with Tuya. These customer collaborations, in addition to recognizing Tuya's technology and product capabilities as the basis for their initial partnerships, also includes shifts from other platforms or modes of cooperation to Tuya. This demonstrates that companies are considering both efficiency and quality in their investments under the strong demand for smart solutions. In scenarios where there are limited choices for partners with such comprehensive technical service capabilities, Tuya possesses a significant competitive advantage in customer acquisition. Second, as a software technology company with over 80% of its revenue derived from various international regions, Turia remains committed to delivering the best smart technology to global customers and consumers through different product models, ensuring they receive the best smart experience. This particularly includes the integration of GNI technology and the iteration and development of various new products.

Smart Solutions is a smart solution that combines the cloud software capabilities of the NCAI CMOS system to achieve high-value software integrated solutions. In 2023, we developed a product strategy for smart solutions and selected products with high-value, high software thickness to output complete smart products. The income of smart solutions is rapidly growing. In the second quarter, we achieved about 44% of the total growth and a margin rate of nearly 27% from the beginning. Smart solution is our high-value integrated intelligent solution that was developed by combining generated AI, embedded operating systems, and cloud software capabilities.

Since we formulated the product strategy for Smart Solutions in 2023 and selected high-value, software-intensive device categories to deliver complete smart products, revenue from Smart Solutions has been growing rapidly, achieving approximately 44% year-over-year growth this quarter, while maintaining a growth margin of nearly 27%. We believe this growth margin level highlights the value of 3R software and products as it is comparable to, or even exceeds, the overall business growth margin of some leading brands that design, produce, and sell their products.

Our PaaS products and smart solution solutions complement each other, meet the needs of different types of customers, and provide a stronger income. This is also a very efficient business model. There are two main reasons for this. One is the complete The smart device solution will help customers expand their process and help them gain priority in the SCOTUS Market process. In today's stage, the advanced products and smart products are the core needs of every investment customer. In this respect, Tuya has the advantage of surpassing the industry's capabilities, and the smart solution will help Tuya to serve customers better and promote customer connectivity. Secondly, the core of the smart solution is the software capability that has a higher value. Our past products and the smart solution complement each other.

Meeting the personalized needs of different types of customers and providing Tuya with more substantial revenue. This is a highly efficient business model for Tuya for two main reasons. First, the complete smart solutions for device quickly assist the customers in expanding their product categories, helping them accelerate their go-to-market process to gain a competitive edge. At this stage of smartification, a rich productive matrix and a smart product ecosystem are essential for every leading customer's business. In this regard, Turia has a significant capability advantage, and smart solutions will help us better serve customers and enhance customer loyalty. Second, the core of smart solutions lies in generating revenue through products with more high-value software capabilities. and obtaining correspondingly more meaningful gross profit amounts. Software capabilities have always been to our strengths, and through reasonable and controlled R&D investments in complete product solutions, we can achieve more scalable revenue and profits for each smart device.

Currently, most of our new customers have a smart solution. For example, in the second quarter, we have a total of six the collaboration of European brand customers, and more than 500,000 smart solutions collaboration orders. The total amount is about 5 million US dollars. We have also received the total amount of more than 1 million US dollars in the total amount of over 1 million US dollars in the total amount of over 1 million US dollars in the total amount of over 1 million US dollars in the total amount of over 1 million US dollars in the total amount of over 1 million US dollars in the total amount of over 1 million US dollars in the total amount of over 1 million US dollars in the total amount of over 1 million US dollars in the total amount of over 1 million US dollars in the total amount of over 1 million US dollars in the total amount of over 1 million US dollars in the total amount of over 1 million US dollars in the total amount of over 1 million US dollars in the total amount of over 1 million US dollars in the total amount of over 1 million US dollars in the total amount of over 1 million US dollars in the total amount of over 1 million US dollars in the total amount of over 1 million US dollars in the

At present, most of our new customer collaborations involve smart solutions for devices. For example, in the second quarter, we expanded our cooperation with six European brand customers with smart solution orders exceeding 500,000 units, which is approximately $5 million. We also secured orders from temperature control valves, gateways, and other devices from Germany's leading retail chain. with the total value reaching $1 million. Additionally, we signed a multi-million dollar annual smart solution contract with the Dodge company, 5Y, at 3S Global Developer Conference, continuing our deep cultivation of the European commercial lighting market, among others.

Since the second quarter, we have continued to support device and HAI to provide customers with better product competitiveness and provide users with more valuable intelligence experiences and functions. We believe that the essence of intelligence should be the innovation of new user experiences through AI, cloud, and other technologies, and the real promotion of the increase in penetration rate. I will give two examples of products. One is a product that we have already shown in the market, the AI will understand the needs of individualized emotions of consumers in different products, and control the color and the atmosphere of the device. The other is the animal camera with GNAI values. We can intelligently capture animals in interesting moments and automatically generate some skill items with suitable BGM effects. When you open the app, you can see such warm moments. We are looking forward to the competitive products of customers who are competitive in this way. On the other hand, we will also introduce GNAI into the smart scene to help users complete some of the new smart scene configurations in a simple way. We have continued to invest in device and edge AI, aiming to significantly enhance the smart product experience through GenAI.

thereby providing customers with better product competitiveness and the users with more valuable smart experience and features. We believe that the sense of intelligence should be the innovation of user experience driven by AI, cloud, and other technologies, and generally promoting the increase in penetration rates. I will give two product examples. The first one is the smart light strip product we have already showcased to the market. Generative AI will understand consumers' personalized emotional needs in different scenarios and control the device to present corresponding colors in the blinking atmospheres. The other one is a pet camera enhanced with GenAI capability, which can intelligently capture interesting moments of pets and automatically generate commemorative videos with suitable BGM and effects, giving users a delightful surprise when they open the app. we see that customers are very eager for such products with differentiated competitiveness. On the other hand, we are also introducing generic capabilities into smart scenarios, helping users configure their desired smart scenarios through simple conversations, significantly lowering usage difficulty and barriers, and promoting the use and popularization of smart technology. Additionally, continuing to build the developer platform through GenAI and improving the developer efficiency and experience is also part of our platform competitiveness. In the second half of 2024, we will successively launch more new products related to GenAI for our customers and the developers.

In the third half of 2021, we will successfully launch more new products related to GenAI for our customers and the developers. Finally, at the third point, Tuya's operating margin and financial leverage structure in the second quarter have fully validated unique value of Tuya's business model. Moving forward, based on our existing experience and the foundation,

We'll continue to strive for further financial improvements and share Tuya's long-term value with all those who support us on our journey, our partners, shareholders, and employees.

本次的特别现金鼓励是 Tuya 的首封筒。 总金额规模大概在 3300 万美金左右。 数字上与 2024 年上半年的 Non-GAAP 净利润金额相当。 Non-GAAP 指标通俗来说,反映的是公司直接业务的方面。 business decision-making results, and other interruption related to the 3M model. Under this basis, this quarter, we achieved the first non-GAAP business profit, and achieved a stable business profit. Considering the company's strong cash flow, from Q2 last year to Q2 this quarter, five consecutive quarters have been in a state of positive cash flow. We feel that it is now a This special cash dividend in Tuya's first distribution totaled approximately $33 million, an amount roughly equivalent to our non-profit for the first half of 2024.

The non-GAAP metric simply reflects the results of the company's direct business decisions at the operational level, excluding other factors unrelated to the business model. Based on this, Tuya achieved non-GAAP operating profitability for the first time this quarter and achieved a solid operating margin. At the same time, considering the company's abundant net cash and the fact that we have already had a positive operating cash flow, for five consecutive quarters from the second quarter, 2023, to this quarter. We believe that right now is an optimum moment with a solid foundation while Tuya is capable of sustaining long-term development on its own to start providing long-term rewards to all those who have supported Tuya, ensuring Tuya's success.

Finally, you may have seen the announcement in the morning that our current CFO Jesse will resign from CFO and CEO position on September 16th due to personal arrangements. In the past five years, Jesse's capital market and financial professional support have been of great importance to the long-term development strategy and growth of digital printing. His efforts to promote business optimization and efficiency management have contributed to the improvement of printing's business and financial profitability. That's all for the business update.

Lastly, as some of you may have seen in this morning's announcement, our current CFO, Jessie, will be stepping down from her role as CFO and Executive Director on September 16th due to personal endeavors. Over the past five years, Jessie's expertise in capital markets and finance has been crucial in shaping Tuya's long-term development strategy and growth. Her efforts in driving operational optimization and efficiency management have made outstanding contributions to improving Tuya's business and financial profitability. I would like to take this opportunity during this call to express our best wishes to Jessie and thank her for her significant contributions to the company over the past five years.

Next, Jessie will share some additional financial data with everyone.

Thank you, Jerry, for sharing the company's growth strategies and the long-term development philosophy. And also, thanks for your kind words. Now, I will discuss our financial results and provide more detail on the numbers not covered by Jerry. Please note that all figures are in US dollars, and all comparisons are on a year-over-year basis, unless otherwise stated. In the second quarter of 2024, our total revenue reached $73.3 million, up 28.6% year-over-year, excluding the adverse impact of exchange rates between the US dollar and IMB. Our year-over-year growth would have been 31%. Most importantly, we achieved non-GAAP operational profitability for the first time this quarter, with a solid profit margin of 10%. These core financial figures demonstrate that Tuya's strategies and efforts are yielding positive results. As Jerry mentioned, we're encouraged by the fact that Tuya is in a stronger financial and operational position. Our IoT PaaS revenue in the second quarter was $54.3 million, representing a year-over-year growth of 32%. Regarding product categories, we saw robust demand growth across all product categories, with home appliances experiencing the highest year-over-year growth of about 65% due to our efforts on delivering high-value products to our customers. And the lightening and electrical achieved an approximately 30% of year-over-year growth due to the normalization of downstream inventory compared to the same period last year. From a regional revenue demand perspective, Europe continues to be our largest market, accounting for about one-third of the total revenue demand. The Asia-Pacific region and Latin America have seen a continuously accelerated demand growth, with contributions rising clearly compared to last year. The Asia-Pacific region accounted for around one-third of the total revenue demand, while Latin America's demand contribution increased nearly 10%. nearly 10% to 15% in the second quarter. The structure of original revenue contribution is similar to Q1, which is a state we are pleased to see and aim to maintain. On the customer front, we served approximately 3,000 customers in the second quarter of 2024, a slight decrease from the same period last year. The fluctuation in the number of customers in a single quarter is partly related to downstream customers' order placements and their own operational turnovers. Overall, however, our key account customer strategy has built a larger top-tier customer pyramid, with increased customer efficiencies serving as the best evidence. In Q2, our per capita revenue and the per capita growth profit continued to see significant year-over-year increase of about 53% and 57%, respectively. Additionally, our 12-month DB&R has sequentially rebounded for three quarters, returning to 127% at the end of this quarter. The growth margin of IoT PaaS was 47.6% this quarter, remaining at a stable and healthy level, with an improvement of around 3 percentage points year over year. This improvement was driven by a higher proportion of high-margin products in our portfolio, such as home appliances, including smart kitchens and test devices. Our smart solution segment recorded revenue of $9.4 million in Q2, an increase of approximately 44.2% year-over-year. During the quarter, we continue to achieve strong results in outdoor, central control, and energy-saving device solutions, such as smart temperature control devices. The transformation of the smart solution business has served as an important tool for us to increase customer thickness amid their demand for competitiveness in device intelligence. As Jerry mentioned earlier, strategically, smart solutions complement our PaaS products by providing customers with the smart devices they need in the form they desire, whether for the retail market or commercial projects. For Tuya, PaaS leverages our established PPT ecosystem to win with volume, while smart solutions win with pricing through the quality and the value embedded in our software. The synergy between the two has driven growth in both revenue and profit, as well as improving revenue efficiency. Our SaaS and other sector recorded revenue of $9.6 million in the second quarter of 2024. This was a stable quarter due to adjustments in revenue restructuring. Revenue of high-value software value-added services, such as cloud storage and the KubeSmart private cloud solution, remained substantial. The overall growth margin for SaaS and others was 71% in Q2. consistent with our expectations based on the mix of services. Regarding the operating activities and expenses, I will provide a detailed view on a non-GAAP basis, which excludes certain items to give a clearer picture of our operational efficiency. We continue to present our operating expenses primarily on a non-GAAP basis. In Q2 2024, our non-GAAP total operating expenses decreased by 15.6% to $27.8 million from $33 million a year ago, largely due to reduced employee-related costs in R&D, sales and marketing, and G&A expenses. As we now maintain a more streamlined team compared to the second quarter of last year, these results were achieved not only through internal organization and the team management optimization, but also through our continuous efforts to improve efficiency by embracing new technologies. Under our comprehensive strategy of embracing GenAI, we are applying GenAI to improve our internal development, operations, marketing, and logistic efficiencies. Our workforce is expected to remain relatively stable this year. Regarding sales and marketing activities, we continue to adopt a strategy of appropriately increasing market activities in line with revenue growth and the market activity needs. For example, in the second quarter, we received significant attention by hosting the Global Developer Conference in Shenzhen at the end of May. One of our next major events will be participating in the IFA in Berlin in early September, where we will showcase the new experiences GenAI can bring to the industry and developers. On the other hand, by co-marketing with customers and hosting exhibitions, we help reduce our own costs while also assisting customers in increasing their industry influence. Driven by strong revenue growth, enhanced efficiency, a stable growth margin supported by our product's strong value proposition, and excellent control over expenses and the cost, the second quarter market Tuya's first ever non-GAAP operational profitability. We are confident in this achievement because Tuya's business model allows for profit growth at the top line without requiring significant additional expenses. As a result, this profit will largely translate into profit increments for the company, which is why our non-GAAP operating profit margin directly reached around 10% in the second quarter as the first time achieving a break-even. This milestone also indicates that Tuya has entered a new phase of business operations, one that is self-sustaining. Finally, in the second quarter, We continue to record approximately $12.5 million in interest income, providing additional capital for our daily operations. We continue to follow a consistent capital strategy, prioritizing the protection of our principal while maximizing fund supplements. As a result, our non-GAAP net profit reached $20.8 million, setting a new quarterly record. Operating cash flow continued to exceed $10 million. and our net cash reached over $1 billion by the end of the second quarter. Overall, we are thrilled about qualitative changes in our financial performance in the second quarter and believe that Tuya now has a solid financial and operational foundation, allowing us to reward our supporters with cash dividends. Looking ahead, we are committed to continue driving top-line growth, operating leverage, healthy cash flow, and shareholders' return. This concludes my presentation on the company's financial performance. Over the past five years, Tuya has experienced significant growth and transformation. And I'm proud to say that Tuya today has become a public company with strong competitive advantages, sustainable financial growth, healthy profitability, and ample capital reserve. Alex, a co-founder and a colleague I deeply respect, will be succeeding me as CFO. Alex played a key role in early stage fundraising for Tuya before I joined, and he was also a key member during our IPO roadshows. Post-IPO, Alex also attended a lot of investor communications, and he has a lot of capital market experiences. So he will join us for the Q&A session.

Hello, everyone. I'm excited to engage in many discussions with you in the future.

With that, operator, we are ready to take questions. Thank you.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. 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. Please stand by for our first question. And our first question is going to come from the line of Yang Lu with Morgan Stanley. Your line is open. Please go ahead.

非常感谢提问的机会。 首先恭喜公司非常强劲的业绩和Long App经营利润的首次转正。 Let me translate my question. My question is about the future demand outlook. Given we'll be facing a relatively high base starting from second half last year, what will be the expected top line growth and whether the almost 30% growth in first half can be sustained in second half? Thank you.

Thanks for the question. This is Alex. So I'd like to address this question from both external and to a specific perspective. As a company embedded within its industry and this current era, 2L's strategy is to seize right opportunities and take actions that align with our capabilities and vision. Thus, the macroeconomy environment is crucial, as it has been demonstrated over the past three years. However, what's even more critical is how the company position itself to capitalize on opportunity and expand revenue in the face of competition and market dynamics. So externally, we observe that after a recover in the first half of this year, the macroeconomy environment has stabilized. You might have closely followed China expert data for the first half and second quarter, which serve as a significant indicator of global demand within the global supply chain. For example, driven by factors like inventory replenishment in Europe and the US, a new demand from emerging markets like Southeast Asia. The number of household appliances exported from China will grow by approximately 25% year on year in the first half of this year, according to Chinese custom data. So this is a robust result. Of course, Smart devices extend beyond just home appliances, and we've seen similar trends in other categories, such as strong recovery and growth in smart lighting in the first half, with consumer security products also performing solidly. Additionally, in the observable market, we've noted that some downstream companies in non-smart sectors of consumer electronics have also shown quite good performance. with their market positioning and value chain stages being similar to these who are customers in consumer electronics sectors. Of course, you might have noticed by Junai data, although household appliances export in Junai still achieved a year-on-year growth of 16% in value and 23% in volume, there was slightly slowdown in momentum. on a month-on-month basis. This is a normal phenomenon due to the seasonal and cyclical nature of the consumer electronics, with peak and off-peak seasons. Generally, Q3 is a relatively off-season, while Q4 is a peak season due to the promotional preparation before Christmas and Black Friday. Taking these factors into account, we believe the industry is in a positive state of development. The next key question is what Tuya will do and should do. In this context, Jerry's earlier presentation has also outlined Tuya's strategy and focus area quite clearly. Currently, Tuya operates a cubic model comprehensively covering the intelligence needs of the enterprises. So the X axis represents the diverse needs of customers. For instance, some customers possess strong supply chain capability, but a lack of cloud and software intelligence, where 2S PaaS products come into play. Others need complete end-to-end smart device and business capabilities, which is where 2S Smart Device Solutions and KubeSmart Private Cloud products meet their needs. Some other customers require operational functions So Tuya offers SaaS software products like cloud storage. So that's for X. And the Y axis represents industry diversity, covering everything from single smart consumer electronics, retail products, to a multiple categories ecosystem of smart homes, commercial scenarios, and specific industry attributes like the space saving energy efficiency, all fully supported by Tuya platform. So lastly, the Z axis represents the geographical diversity. As a global smart cloud platform service providers, our customers, developers, and ecosystem partners span the globe, providing a solid foundation of our overall business and performance to tackle regional challenges and seize opportunities. You've seen that our European business remains steady But the growth rate in Latin America and Southeast Asia are even more impressive. So this has contributed significantly to the 29% year-on-year revenue growth in the first half and the 10% non-GAAP operation margin achieved in Q2. So looking ahead to the second half of this year, it's well known that due to the ordering pattern of the downstream smart consumer electronics industries, and high base of year-on-year revenue growth in Q3 on 2023 as comparable period. It's challenging to provide an accurate year-on-year number today. However, considering all the above characteristics and competitive advantages together, we remain optimistic about continuing year-on-year growth in our core business in the second half of this year. Thank you. Thank you.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Timothy Zhao with Goldman Sachs. Your line is open. Please go ahead.

Thank you. Thank you for taking my question. I have two questions here. The first question is regarding the OPEX and the operating profit trend into the second half of this year. And secondly, after a special dividend announcement of the measuring sheet about the longer-term

Okay, thanks, Timothy. I think your first question is about our forward-looking of operating probability, and the second question is about our long-term view of cash dividends. So I will take on this first question, and Alex will take on the second question. So achieving probability is not something that can be decided one quarter and accomplished next. It is fundamentally about the business model and the strategic direction, followed by the collective execution efforts of the entire organization. Reaching non-GAF operating breakeven this quarter is a significant milestone, and achieving a 10% margin on our first attempt is something we considered to be a strong outcome. Moving forward, we will continue to balance growth with profitability. with the next goal being to expand our scale of revenue so that the margin and profit figures become more meaningful. To this end, we have a solid foundation and experiences that we can share. First, Tuya's income statement has a rather clear financial logic. Thanks to our business model, our enterprise services developer community and the platform we do not need to make significant incremental investments to acquire customers to generate revenue. So this means that the additional growth profit generated will, under effective cost control, translate directly into profit by a significant portion. Our overall growth margin is a structural result of the combined growth margins across our three major business segments. which themselves reflect market competition and product value. While there will be quarterly fluctuations, the margins remain stable overall. From a gross profit perspective, our gross profits have seen considerable and efficient growth over the past year, alongside the revenue and the current size of our team. This growth in gross profit is our source of profitability. Second, our cost control measures have seen have been evident to everyone. Since the end of 2021, we have consistently maintained a downward trend in expenses, with non-GAAP operating expenses remaining slightly over $30 million over the past several quarters. Admittedly, the return to revenue growth has given us the confidence to modestly increase market and sales investments as needed, but we will rigorously control costs overall. balancing the need for operating leverage and profitability, and ensuring that every dollar is spent wisely. Overall, on the operational side, we hope and are willing to see non-GAAP quarterly operating margins maintaining a similar level to Q2. Regarding net profit and net profit margin, due to the expectation of interest rate cuts and considering market volatility beyond 2-yard control, We will strive to secure supplementary financial gains while ensuring capital protection. As for GAAP operating profit or loss in the net profit, they may experience quarterly fluctuations due to some non-operational factors, such as share-based compensation expenses and the class action litigation costs, et cetera. However, we believe this doesn't affect the judgment of 2YA's fundamental business operations. And next we'll go for the big dividend question.

Yeah, so the dividend is a topic of great interest to everyone. So let me take the opportunity to explain the special dividend announced. So first of all, it's called special dividend because there is no legal definition of non-GAAP earnings. Under GAAP, so Tuya has not achieved a full-year profitability due to relatively large non-cash share-based compensation expenses, which make it difficult to issue a final or annual dividend from a compliance or presence standpoint. However, the actual dividend amount of approximately $33 million corresponds to 2 years non-GAAP net profit for the first half of this year. We base this decision on our current non-GAAP operating profit level, cash flow, net cash position, and other relevant core financial indicators. planning the dividend amount and timing based on all these considerations, including actual net profits. We believe that it is the right approach to prioritize performance first and then build a long-term and sustainable shareholder return model while ensuring the company can invest and grow according to its strategic needs. Thank you.

Operator can go for the next question.

One moment, please. And our next question is going to come from the line of Kaizhou with CICC. Your line is open. Please go ahead.

Hi, everyone. Good morning, everyone. I'm Xiao Kai, a member of the center. Congratulations to the company for a very good performance. My question is about the production AI aspect. We can see that AI is an important strategy for AI management. It has been mentioned many times in different occasions. I would like to ask you about the latest progress in AI. I would like to ask the leaders to share more about it, including a function that is currently being focused on, such as customer satisfaction, customer loss, and future capital investment budget, and so on. In terms of AI commercialization transformation, Thanks, Benjamin. This is Ben from ZS Research, and congratulations for the strong quarter. My question is regarding the GenAI. As you mentioned, GenAI is an important strategy for Suya. Could you further share some of your progress in GenAI, such as key AI functions, typical customer case, customer feedback, and your further AI investment budget as well, and some color on the GM AI monetization progress would be great. Thank you.

Yes, so currently we are actively developing several smart devices products based on GM AI technology, so which covers the various categories such as smart watches, smart greens, AI headphones and smart speakers and AI glasses. Each product aims to further integrate large model capability on top of their existing functions to provide a more personalized and intelligent user experience. For example, smart watches and rings will be able to generate more personalized AI reports to users, enhancing interactivity through AI watch faces or GPT voice assistance. So AI headphones currently support transcription and summarization. And we plan to expand to the capability to include real-time transcription and translation in the future. So those categories complement Tuya's smart ecosystem well. which is why they have gained popularity in emerging markets like the APAC and Japan. So an additional of a GM AI capability will significantly enhance the competitiveness of 2S solutions, creating better customer engagement and user experience. So those products are currently under intensive redevelopment within ourselves. So with many projects expected to enter trial productions, in the fourth quarter this year. For example, we plan to launch smart speaker products with the GM AI capability, including a Chinese version in Q4, and gradually introduce this AI capability into our past offering for developers. So overall revenue from AI smart devices and software products may begin to manifest gradually starting next year. So regarding the monetization of GMAI, we believe there are two relevant feasible approaches. So the first is to integrate those capabilities into products for customers and developers to use as their C-feet. This way, the products they create will inherently process GMAI capability, which can be sold to downstream end users, such as consumers, who can subscribe to GMAF features through their smartphone on a pay-per-user basis. So this is classic SaaS model, so which has the advantage of no imposing additional cost on our customers, thereby helping to differentiate products, gain market shares, with a stable revenue generated through value turning payment at the end user level we have. The second approach is including GMI capability as an additional and a profit price within our products, such as a path or smart solution model. So the benefit of it is allow us to precisely target customers who have real competitive need and a strong desire to excel into the smart business. So we will select the most suitable and business driving charging model for different category and scenarios. Thank you.

Thank you. We've reached the end of the call, and I would now like to hand it back to the management team for any closing remarks.

OK, thank you again for joining us 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 early call. Have a good day today. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.