Tuya Inc.

Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to TUYAF Inc.' 's first quarter 2026 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be informed that today's conference is being recorded. I'll now turn the call over to the first speaker today, Ms. Regina Wang, Investor Relations Associate Director of Tuya. Please go ahead.

Thank you. Hello, everyone. To our first quarter 2016 earnings conference call, Sonia Tsai, our founder and CEO, Mr. Jerry Wang, and our co-founder and CFO, Mr. Alex Yang. Our results and webcasts of the 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'd like to 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 over to our founder and CEO, Mr. Jerry Wong. Jerry will give his remarks in Chinese and English translation follows. Jerry, please.

Hello everyone, and thank you for joining Tuya's earnings conference call for the first quarter of 2026.

本季度尽管外部环境持续存在不确定性, 并受到区域性的因素的扰动, 公司依然展现出了稳健的增长动能和自信力, Since the fourth quarter, the demand for downstream continues to warm up, and the company's business scale continues to expand. The total revenue has increased by 8.3%, and the growth rate has improved further in the previous quarter and maintained a positive growth in multiple quarters. The net profit is maintained at a healthy level, which reflects the suggestion of product value and the continued improvement of platform competitiveness.

During the quarter, despite ongoing uncertainties in the external environment and disturbances from certain regional factors, the company delivered solid growth momentum and strong execution capabilities. Benefiting from a continued recovery in downstream demand, our business scale has been expanding moderately since the fourth quarter. Total revenue increased by 8.3% year-over-year. with growth momentum improving quarter on quarter and posting positive growth for multiple consecutive quarters. Growth margin remained at a healthy level, reflecting the continued enhancement of our product value proposition and platform competitiveness.

At the strategic implementation level, we continued to advance the development path driven by AI In terms of extraction of our key strategies,

we continue to advance our AI-driven development strategy. As we have mentioned earlier, AI is shifting from simple feature stacking towards deep integration with hardware devices and vertical industry scenarios. It's gradually evolving from a mere conversational tool into an intelligent agent that interacts and operates in the physical world. This trend has been further validated by a richer portfolio of application offerings and customer scenarios in quarter one, 2026.

At the same time, we are also accelerating the transformation of AI capabilities from platform-based to user-oriented and scenario-oriented products, and achieving a landing in multiple actual scenarios. The company continues to treat developers' tools and platform capabilities to enable global developers

At the same time, we are accelerating the transition of AI capabilities from the platform layer to application layer and scenario-based products, with successful deployment across multiple real-world use cases. We keep upgrading our developer tools and platform capabilities, empowering growth global developers to access and apply cutting-edge AI technologies at lower cost and higher efficiency. The sustained growth in AI-related revenue also reflects steady progress across our commercialization efforts.

This quarter, we have launched AI Life Assistant, Head2Eye, AI security and other applications. The core purpose of these explorations is not in the single product itself, but in verifying the ability of AI Agents to execute from digital tasks to the physical scene and the equipment. We see that AI is gradually having the ability to operate in the cross-digital world and the physical world. This also marks a key step for physical AI to make a difference in the actual scene.

During the quarter, we introduced a range of applications aligned with this direction, including the AI-powered Smart Life Assist and AI Security Guardian. The significance of these initiatives lies not only in single products, but in validating the capabilities of AI agents to move beyond handling digital tasks into physical work execution and device coordination. We are seeing AI gradually develop the ability to operate across both digital and physical worlds, marking a critical step forward in the real-world deployment of physical AI.

In the future, we will focus on deepening the layout in the following directions. First, we will continue to advance the application innovation of AI life, and accelerate the penetration of AI capabilities in consumer scenarios and large-scale applications to promote FIT AI in more daily scenarios. Second, to promote the global expansion of certified AI solutions, especially in the fields of energy and green technology. Third, we continue to strengthen the development of the developer's ecological construction, through the ability of open platforms and tools, to reduce the development threshold of AI applications, and to jointly promote in-depth exploration and commercialization of AI technology with industry partners.

Looking ahead, we will further deepen our strategic focus on the following key areas. First, we will continue to advance AI-native application innovation, centering on high engagement categories, such as smart toys. We will accelerate the penetration and large-scale adoption of AI capabilities in consumer scenarios, expanding physical AI into a wider range of everyday use cases. Second, we will scale the global rollout of proven AI solutions, particularly in the energy and green technology sectors. By bringing mature solutions to international markets, we aim to enhance our industry recognition globally. Third, we will continue to strengthen our developer ecosystem through open platforms and enhanced tool capabilities We will lower the barriers to AI application development and work closely with industry partners to drive deeper exploration and commercialization of AI technologies.

接下来我们请我们的CFO为大家带来更多的财务表现和经营进展的介绍

Now, let me turn the call over to our co-founder and CFO, Ali Tian, for a closer look at our financial performance and business progress.

Hello, everyone. This is Ali. I will provide a brief overview of our first quarter results. Please note that, unless otherwise stated, all figures are in US dollars, and all comparisons are on year-over-year basis. In the first quarter of 2016, We generated total revenue of approximately US $80.9 million, representing a year-over-year increase of around 8.3%. Despite ongoing uncertainties in the external environment, the company maintained its steady growth trajectory. Our core platform business remains stable, while AI-graded business continues to demonstrate a strong growth trajectory. Of profitabilities, our operating margin continued to improve. GAAP operating margin reached 9.2%, representing a significant year-over-year increase, while non-GAAP operating margin was 10%. Net margins further improved to 19.5%, reflecting continued optimization in operating efficiency and cost structure. The combination of improvements in revenue mixed and disciplined expense management has driven sustained profitability gains. Before going to segment details, we would like to note that we have adjusted the names of certain business segments this quarter. So the formal SaaS and other segments has been renamed to AI application and others, reflecting our continued push forward AI enables software services and more applications accurately capturing the transition from traditional cloud services to AI application services. Meanwhile, the formal smart solution segments have been renamed to smart home and robotics products. Highlighting our increased focus on AI-powered home products, household robotics, and scenario-driven AI initial devices on the hardware side. We would like to emphasize that these changes are purely presentational and did not affect the revenue composition, recognition methods, or hysterical comparabilities of each segment. Within our segments, the past business generates revenue of $59 million in this quarter. representing a year-over-year increase of approximately 9.8%. As customer demand gradually recovered, we continue to drive steady growth in our core business through ongoing optimization of our customer mix and capabilities. At the end of this first quarter, the number of past premium customers reached 306, reflecting the stability of our core customer base and the structural resilience of the platform business. The AI application and other segments generated revenue of 11.6 million US dollars in this quarter, representing a year-over-year increase of approximately 16.9%, continuing to outpace overall company growth. This growth was primarily driven by increased revenue from the cloud software services and AI application services, including AI cloud storage, energy management and serving, value added services like SMS and voice services, as well as app OEM and SDK offerings. This is reflecting the continuous progress in commercialization of our AI applications as more software products completed their AI driven upgrades. this segment has gradually become a more growth-oriented and software services-centric component of our revenue mix. The smartphone and robot product segment generated revenue of 10.2 million US dollars, representing a year-over-year decrease of approximately 6.9%. The fluctuation in this segment primarily reflects our proactive effort to phase out relatively low value hardware products and optimize the production mix and reallocate resources towards higher value added, especially AI initial hardware terminals. As the segment undergoes structural adjustments, we expect its long-term profitability and scalability to gradually improve within a higher mix of higher value products. From an operational perspective, several vertical headquarters have demonstrated structural opportunities driven by the integration of AI and smart hardware. Like in the security segment, our smart door lock business achieved 73% year-over-year growth, driven by upgrades in the multi-modeling Wi-Fi solutions video intercoms, as well as AI voices and vision capabilities. Past revenue from Wi-Fi-enabled smart door locks increased 75% year-over-year growth. At the same time, the AI revenues from the video-enabled locks increased substantially 500% year-over-year. This demonstrates that AI and multi-modeling capabilities are driving the traditional smart lock vertical to evolve from a standalone hardware model into a higher valuations model of hardware plus software services plus AI capability combined. In the energy sector, related past products, including the EV chargers, metering products, and professional metering solutions are emerging as new growth drivers. We are also continuing to advance in the higher value solutions, such as AI-enabled display gateway and voice capabilities, providing a strong foundation for our customers' product upgrades and the future growth. In the AI energy, demand in the European market for home energy management, energy storage, and AI-driven energy saving solutions continue to grow. During this quarter, we made solid progress in advancing AI energy-related initiatives with key milestones achieved in the commercialization of energy storage and ecosystem accessories. Our customers received very positive feedback and secured multiple channel partnerships and orders at the exhibition such as Light Plus Building in Frankfurt and Solar Solutions in the Netherlands. In the Singapore's HTV project, new capabilities, app panels, and the delivery are progressing on schedule, AI energy is gradually involved towards a comprehensive solutions model integrating hardware bundles, software, and AI orchestration, plus channel operations. From a regional and scenario perspective, Europe remains a key deployment market for energy and green technology solutions, with growing demand for AI energy's smart electrical systems, spatial intelligence applications, AI smartphone appliances, and AI safety and security productions. In Asia Pacific region, the Singapore HDB projects continue to moving through implementation and validation, while Southeast Asia and other emerging markets are beginning to generate opportunities in energy management, spatial intelligence, and SME scenarios as well. In China, AI-enabled smart dialogues, AI toy, and AI home products, including AI companion, continue to attract strong customer interest, with some customers already advancing project upgrades and solution integrations. On margins, our blended growth margin for those quarters was 46.9%. with a slightly year-over-year fluctuation primarily due to the change in the product mix and certain upstream cost variations. By segment, gross margin for patch was 46.1%. Gross margin for AI application and others was 71.7%. Remain stable and reflecting the structural advantage of software and AI-driven business. And the gross margin for smartphone and robot products was 23%, maintaining a level of above 20%. While advancing AI applications and high value, we continue to focus on the cost efficiency and product value. Our expenses, we maintain disciplined cost management during the quarter, with total operating expenses of approximately 30.4 million US dollars. We are continually investing in core AI development and platform capability. Improvements driven by AI and digitalization and digitalizing operations enable further operating leverage. In terms of profitability, we recorded profit from operations of about 7.5 million US dollars for this quarter. Non-GAAP profit from operations was approximately $8.1 million. Net profit reached $15.8 million. The improvement was primarily driven by positive contribution from gross profit growth as well as lower share-based composition expenses. Our cash flow net operating cash flow remained positive during this quarter. At the end of this quarter, the company's total cash, cash equipment, time deposits, and treasury securities amount to approximately $1 billion plus. The strong cash positions provide solid support for our continuing investment in long-term AI capability development. ability to navigate external uncertainties and opportunities, and our capacities to enhance shareholders' returns. We will also prudently evaluate and pursue higher-quality strategic investment opportunities. Overall, the company continues to deliver revenue growth and improved profitability in a complex environment. While the accelerated development of AI application business is driven the ongoing evaluation of our revenue mix towards a higher value segments. And next, I will briefly work you through our progress in that AI development ecosystem. Within our development ecosystem, during the first quarter, we continue to advance to the open source capabilities of Tuya Open and further development on our AI agents. So to better address the diverse needs of AI-native developers. We also launched our new offerings, including the Ultra Lightweight Agent Kit for the hardware developers and the Vibe Coding based on the Powered by Tuya hardware applications. So the Vibe Coding will be able to help lower the bar for many new developers as well. Those tools enable developers to build a wide range of AI-native hardware products in a more flexible and agile manner. We remain committed to lower the bar for AI hardware and application developments while enhancing flexibility and openness, allowing developers, brands, solution providers to accelerate the process from ideation and prototyping to product commercialization. At the end of the first quarter of 2026, the number of registered AI developers on our platform exceeded 1.96 million, maintaining steady growth. At the same time, engagement within the 2-year open community continued to increase. Based on our current acquisition data, the 2-year open documentation platform has been accumulated over 340,000 views with more than 16,000 community members. It has accumulated the abundant open source projects, resources, and a launch of standardized demo cases library covering mainstream applications, scenarios, and development needs. Tuya Open is gradually evolving from an open source framework into open ecosystem infrastructures for the AI hardware innovation. For our deployment perspective, AI capabilities are increasingly extending from the platform layer into a broader range of end devices format. Whether in AI-enabled door locks, energy management solutions, sensors, AI companion toys, or AI robots, they all reflect the same underlying trend. AI is evolving from isolated functions towards deep integration with the devices, scenarios, and user needs. This is fully aligned with our previously actuated vision of physical AI, enabling AI to engage in real-world environments and actively participate in sensory decision-making and execution In summary, our first quarter performance further validated the commercial viability of our AI strategy. Our core past business continues to provide a solid growth foundation, while the deep integration of AI application services with physical hardware is emerging as a new driver for the value creation. At the same time, we have achieved meaningful progress in deploying AI solutions across high-value scenarios such as energy, entertainment, and security. Looking ahead, we will remain focused on two key priorities, physical AI scenarios and higher-value added AI products. While maintaining financial discipline, we will accelerate the transition of AI technologies from a two-level capability to products with tangible commercial value creating sustainable long-term returns to our shareholders. Thank you, all operators. We can begin the Q&A right now.

Thank you. We will now begin the question and answer session. To ask the questions on the phone, please press star 1 and 1 and wait for a name to be announced. To cancel your request, please press star 1 and 1 again. One moment for the first question. As a reminder, to ask questions, please press star 1 and 1 on your telephone.

First question, we have Yan Lu from Morgan Stanley. Please go ahead.

Thank you for the opportunity to ask questions and congratulations on the solid results. I would like to ask about the value chain because a lot of the sectors are suffering from the chipset shortage globally. So could management update us in terms of 2 years situation in value chain, especially the chipset sourcing, and also update us the pricing strategy if there's any shortage or constraint from the value chain, how to pass through the inflationary cost to the downstream. Thank you.

Thank you, Liu. Yes, we're very notice those kind of fluctuations around one and a half quarters ago. So that's why we give a heads up of that type of trend around end of last year. And so the things we're doing is the first one is that considering of a large buyers of some of the major chips that in the industry we are. And so the fluctuations we maintain as an eminent has been queued because of the buying power. In the same time that for those costs that inevitably we have to increase, so we'll pass through those costs to the downstream side. So that would be the basic idea and how we've been doing. And so you can notice that there are several reactions where we've been doing. The first one is that in Q1, where we do some strategic purchasing. before any cost change. So you can notice that in our balance sheet that our inventory increased slightly. So that's majorly is that it's kind of the procurement. We do that before the cost increased. And so that reflected to my inventory level and including my net cash as well. So that's the first one. So we try to use our larger inventories to buy more times to working through the fluctuations. The second one is that you already noticed that, especially on the past side, so the change or those kind of difference of the gross margin of the past reflects that we're really starting to pass through the cost. But we didn't add the margin on the cost change because we don't want to bring more burden for my downstream side. So that reduced slightly on my gross margin on the past as well. We'll continue to keep focused on that and to working along with my customers and through those fluctuations. So no matter using our scalability to manage the cost difference at the least level as we could in the same time that we're using our inventories to try to bring more balance coming through with the time. That would be the basic idea there. But we found that the shortage and the density of the momentum continued to increase in Q2, in the beginning of Q2.

Thank you. Thank you for the question. Our next questions will come from the line of Goldman Sachs, Ms. Timothy Chow. Please go ahead.

Thank you, management, for taking my question, and congrats on the solid results. I think my question is on the revenue front. I noticed that this quarter you achieved a pretty solid sequential acceleration on the revenue growth. However, given the very dynamic geopolitical and macro environment globally right now, I'm just wondering, what is your latest thoughts on the demand outlook and revenue growth outlook for the rest of this year? And what measures have you taken to stabilize or further boost the demand? And my second question is I noticed, as you mentioned, you changed the reporting line or changed the reporting name of the two of the segments that you report. Could you further elaborate on the rationale behind and the specific applications and robotic products? Just wondering if you can share more color on your plan regarding these two specific sub-segments. Thank you.

Yeah, thank you for that. So first of all, on the market environment, we already noticed that as we showed the colors when we released our Q4 results, we found that while the international trading environment becomes stable after the November of last year, so the momentum is starting to recover and the customer is starting to return to a growing plan on the business side. So it's not that... So starting from December, we already see that it's starting to recover. It's not overnight, so they're doing that gradually. And even though in March, we'll know that there will be a new fluctuation coming home. But overall speaking, the downstream side is recovering. But we have to break down into different sectors. So what we see here is that the appliances, the energy, like the innovative devices including the securities or the locks, we found that the growth momentum is more positive and almost for sure. So because the matter is that we found a more solid in mind of pinpoints on the user side and those sectors, those companies are doing better. But in some other sectors, like the lighting, we don't see significant recovery. So it's kind of still doing what we call is into an evaluating stage on the lighting side. And some sectors that those chipset cost variations, not from our side, but from their own side, like the cameras, or like the some control panels with a screen so the memory chip cost variations will bring a more significant cost difference for the finish part for the device side and the factories and the brands they can do less to change that directions so that price increase might be significant for them. Like the camera for business, the entry-level cameras, usually the FOB price or the retail price will be like the 20 US dollars and FOB will be below 10. But during those kind of memory chip and then the non-chip increase, we noticed that the FOB price might be able to hit above 15. dollars, which means that the retail price has to increase around to $35. So that significant increase on the retail price might influence the consumer's buying decision. So we notice some sectors might be more sensitive or will be impacted more on the cost increase. will be more resilient. So that will be on the product sector side. And on the region side, so combined with that is that still for the energy that the Europe and the Southeast Asia has a strong demand for the, including Australia, is a very strong demand for the energy management solution. Especially in this year, while people are starting to notice that the energy become more and more, how can I say, energy become more and more crucial and on the cost sustainability side. So they have to pre-invest, they have more willing to pre-invest on any energy efficiency. So for that part. But for some other regions like the Latin America, they're more price sensitive. So like I mentioned that some sectors like the cameras for this market consider that they have a lower buying power based on the macroeconomy in that region. So for them, some sectors will meet some challenges out there. So for us, it's still that we're trying to use our very comprehensive hardware category mixed and combined with multi-region mix to going against a different type of fluctuations. We're always looking for opportunity in some regions that to balance the CISO on the other side. So that's overall for the macro environment. And the second one is for the AI transition. Yeah, the minor is the AI application or the home and robot products. So both sides that we're looking forward to give the market the signal is that we're doing so hard to re-adapt our resources since 2023 that to transit our previous, we'll call it the first version of Smart Devices offering into the AI initial offering. So starting from the end of the 2023, we're ready upgrade our entire platform architectures into large language model, which means that since end of 2023 and all those decision making on the platform side for the device and the software applications can be based on the different large language model or the mainstream one. And in 2024, May of 2024, we'll really launch our hardware agent platform. that enable our customer to design an agent on top of the devices, so make the devices be more smart and run doing some things autonomously. But even no customers understand what it is, what is an agent. And in last year, we launched our new AI platform as a new AI foundation, including the multi-modeling offerings, including the open source projects to open some new doors for the new innovative ideas for those customers and then give them a bridge, giving a path that's how they can combine technology into innovative ideas and make it come true. And in April, that in our new developer summit, we launch our new offerings including the agent kit that allow the hardware designers to do things more freely and including our vibe coding tools that right now they can design any software, including apps, including the firmware on the hardware side, including the cloud services. They can do that all through vibe coding. So all the things we're doing is to show that we are kind of an initial AI user and AI enabler. And so for that thing, we're trying to upgrade our offering in those two segments. So take the AI application, for example. We're really starting to provide that for all the cloud storage on the camera side that right now contain with AI capability. So customer will be able to customize the event. So it's not just the dummy detect any movement on the picture and give you the alarm. And you can find that you've got so many force alarms. and then you have to turn down the notification because the camera cannot tell whether it's something you should pay attention to or not. Any like the delivery boys come by that anyone come from the door that you get RNOM and start from there that you can build an event that so if it's a package so don't give me notification and if someone stay at my front door like over 10 minutes a day and notice. If someone showed up every day and seemed like very suspicious, give me a notice. So people are starting to be able to create their own event and then have the camera to watch out for them. So that thing will provide a significant more values and getting more annoying pain point for the end user side. So that kind of thin is the upgrade on those kind of offerings it's a natural upgrade for our previous SaaS offering. So we think that right now we're starting to provide more and more AI capabilities seamlessly to the previous SaaS. And then we'll show that more and more users are starting to subscribe to that service because of the AI offering. And then we're doing the upgrade to other AI applications. And that's the merit of the scale. agent or it's purely services on the recurring model and for the home products and robotics so some scenarios is including like the companion that's when we're offering the to that toy when AI toy for some customers that some customers they have their own brands they have their own very good toy design capabilities and channel distributions, but they don't have the capability to design things from scratch. Especially, they don't know anything about coding, they don't know anything about the circle boards, about the microphone array design. So, for some of that part, we're starting to offer a lean-touch solution. And through that, we'll put more focus on some what we call is the first generation of smart devices. We're trying to focus more on the AI, what we call AI initial devices. So like the toy. They need the multi-modeling capability. They need the very huge noise cancelling and the microphone array design engine. And they need the screen projection and technologies to reflect different type of reactions from the toy side. So for that part, And that's how we allocated the resources since last year. And so right now, for this segment, the directions is that we guide the entire department to put focus on all those kind of AI enabled and AI initial devices. And usually those devices will come naturally with not only the AI feature, but combined larger opportunity for the AI application business. So that's how we're driving forward to do that. So not a kind of connected devices segment anymore. It's become a more AI initial offering for those customers by helping them do that. So that would be the typical use cases.

Thank you very much for the question. Thank you for the very detailed explanation.

Thank you. Now, next questions will come from the line of Kai Xiao of CICC. Please go ahead.

Thank you, Benjamin. This is Kai, and I have two questions. First one is computation. So, following the emergence of agents, on-device agent deployment has become an industry trend. So could you share how has the competitive landscape evolved in Q1, and how do you view Tuya's advantage in this field? And my second question is on R&D. So could you share how is the company applying AI tools like agent coding tools in internal R&D, and what's the potential impact on margins and profitability. Thank you.

Yeah, so the first one already covers some of the parts in the market environment side. So as we see here is that two things. The first one, since the customer is trying to kind of escape from over conservative momentum in our shares, they're starting to get back into the growth path. So what we're doing is that we just identify the right roadmap along with them and to fulfill that and help them to providing a better product, better offering on their shelf, on their own channels, and to catch the customers, catch their own end users, what I mean. And in the same time, we really see that end users' thickness on AI are growing very, very healthy. So, which means that more and more users are trying whatever AI features and AI offerings. And I believe that it's not that significant right now, but in the near future and the consumers, when they're sourcing the smart devices, AI features or what type of AI features will be kind of the key differentiations or key factors for them to make the decision. And so we are very happy to see that since the second half of last year that our penetration among my ecosystem to integrate the AI capabilities we offer to their new products design and becomes significant and improved. So that will help us capture the trend. So that's for this part. So what we see that will always be kind of the early adapter and to notice the trend for the industry maybe two or three quarters ahead. Is that because I can see that what type of technology my customer is trying to pre-study, starting to try, and when they're starting to implement that into their new product. roadmap and produce that. So what we see that Inashi will consider as early education for the entire industry or in most of the sectors we cover that to give them type of the right educational coach that AI will be considered as the next generation of key differentiations for any new things they built and to the market. And so they need to try that or need to try to understand to learn that. Starting from the second half of last year, that the customers majority of the new products or the new projects that they kicked off, they try that. And so then the new products they start to offer maybe at the end of the last year or at the second of this year, bring that into market, going through a long procedure into the development manufacturing, logistics, and to the interior design. So that's what we see here. And so it will be a very positive trend. And on the second part, for the AI usage, I'd like to share some things. First one is that at the end of last year, the front end, which means that those ones designed the user interface and the UX user experience are using most of our R&D side overall. And so at the end of last year, around 40% of the codes we designed for UI side are doing through AI. So that's the first one. And we're improving that as well. Considering that in this year, in this Q1, the AI coding capability improved a lot. So we found that we can use more AI to do more terminals, including the agent kit I mentioned for the hardware designers. The agent kit, a significant part of that is doing by AI. And while we orphan that kit, we also combine with the vibe coding tool for that kit as well, which means that not us design the kit for AI, the customer will do that through the AI coding more freely as well. and very quickly to turn that into a hardware prototype. Also, at the same time, the AI usage is not only used for the R&D. All our departments, including the financial, including the human resources, including the legal department, would be using heavy-duty AI. No matter it's improving our efficiencies on some office processing, office work processing, or also including the data analytics, the BI, and decision makings, et cetera. So we consider that AI to improve efficiency in two parts. The first one is that to release some of my labors to focus more on higher value works. That's the first one. And the second one is that for the, even on the coding side, on the development side, that is to enlarge our capacity that to meet the future demand growth. Because we've already noticed that While more and more AI initial developers are coming in, that trend is a very good one. In this year, we noticed more and more new developers. They do not come from the hardware industry, which means that people are starting to identify that the AI capability might be a new opportunity for new teams. to engage in the new smart devices business sectors that only come in the new idea and something that didn't happen in the hardware world before. So especially one is like the toy companion ones that many of my very fast-growing customers in the toy sectors, they are not toy players, are they? And right now we're seeing, including some of the, what do you call, the youth market, like they do the batch, is animation batch, is the focus on the cartoon. And those batch players, they don't have that business before. So that type of industry breakthrough or crossover players, they require more on the, they rely more on the AI capabilities. usage themselves and also they are more come with the AI initial ideas or native ideas. So not only to reduce the cost but also use the same level of cost to improve the capacity to capture those demands and that's where we'll have more priority to check out to. So like I mentioned that so the net cash flow consider as a strategic strength for the company not only for the future competition, but also for the future opportunity. I think that's even more important is that while the industry is growing faster and some breakthrough happened, especially like the crash over happened, that we're not hesitant to increase the investment to capture those demands. So I think that will be the overall momentum and show how we use the AI and we empower customers with AI. What we see that we need to be the... a very powerful AI user, and until then, we'll be able to empower customers.

Thank you. That's all. Thank you. Thank you for the questions. Our last questions will now come from the line of Matt Ma of Jefferies. Please go ahead. Hey, good morning, Benjamin.

Thank you for taking my question. I have two questions. So the number one is on the smart home and robot product segment. I would like to know how do we think about the growth trajectory of this segment in 2026? Should we expect a growth recovery in the coming quarters? And my second question is on the AI application segment. We are seeing that the gross margin of this segment has declined by 2.7% each point year-on-year in the first quarter. Are there any specific reasons behind that? That's all. Thank you.

Yeah, so the first one is for the Bayer Home and the Roebuck products that we're looking forward to have the recovery in the coming quarter or in the coming two quarters. And because these are structural changes, we have to make the hard decisions. You can see that even to maintain the revenue and the gross profit growth, but in the same time we cut off some of the products. Even we got the orders, we decided we're not to do that anymore because we don't like the model out there for the long term. So there is a structural hard decisions, even we'll meet some not that good numbers, but we're looking to speed up, to catch it up. So we have the new offerings starting to taking places. and in Q2, and we're looking forward to capturing orders and to deliver that to make it up. So either it's end of the Q2 or it's Q3, we're looking for to get that recovery. So that's the first one for the home and robot production. And for the AI applications, yes, we found a seasonal difference. It's very interesting. We found that the key part is that the AI applications is relying on the usage of the end users based on the devices that are running. And the typical thing that we found that maybe is that in the Q1, the usage is always kind of the lower seasons for the entire year. So that's why the usage is kind of low. So the service basis revenue has become lower for fast. Maybe one of the reasons is that The Q1, many of the users are kind of the new users and will have the new devices for the Christmas, for the holiday season promotions. And while they start to try the products, usually combined with some of the vacations, the use is starting to drop. We're looking forward to see that the natural recovery and on the usage side will start to take place on Q2. So that will be the stuff. So it's kind of very interesting one.

Got it. Thank you.

Thank you for the questions. I'll now hand the call back to Management Tim for closing remarks.

There are no more questions from the line. Allow me to sign the call back. Thank you.

Okay. Thank you all for here, and thank you all once again for joining us today. If you have any further questions, please feel free to contact 3S IR team. Goodbye and see you next quarter.

Let us conclude today's conference call. Thank you for your patience. You may now disconnect your lines.