Tuya Inc. (TUYA) Q3 FY2025 Earnings Call Transcript & Summary

Good morning, and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Tuya Inc.'s Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be informed that today's conference is being recorded. I'll now turn the call over to your first speaker today, Ms. Regina Wang, Investor Relations Senior Manager of Tuya. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to Tuya's Third Quarter 2025 Earnings Conference Call. Joining us today are Founder and CEO of Tuya, Mr. Jerry Wang; and our Co-Founder and CFO, Mr. Yi Yang. The third quarter 2021 financial results and website of today's conference call will available on our IR website at ir.tuya.com. And the replay will be posted shortly after our conclude. Before we continue, please note that our safe harbor statement in the earnings press release applied to today's call. As we may make forward-looking statements. With that, let me now turn the call over to our Founder and CEO, Mr. Jerry Wang. Jerry will deliver his remarks in Chinese, which will be followed by a corresponding English translation. Jerry, please?

Hello, everyone. Thank you for joining Tuya's earnings call for the third quarter of 2025. In the third quarter, the external environment remains relative continuing to in since the beginning of the year, the global consumer electronics industry experience and even recovery with customer demand becoming more cautious in the ongoing macro uncertainties. In addition to the high base from the same period last year created added pressure on year-over-year growth. Against the backdrop, our total revenue for the quarter reached approximately USD 82.5 million, marking our ninth consecutive quarter of year-over-year growth and boring the strength of U.S. business model. Gross margin remained above 48%. This result further reflects the resilience of our business structure and the steady improvements we have made in product mix and operating efficiency over recent quarters. In terms of profitability brought by an improved gross margin profile, greater expense efficiency and sustained leverage. Our non-GAAP net margin reached 24.4%, while GAAP net margin were 18.2%. Notably, GAAP net margin expanded by more than 23.6 percentage points year-over-year. Overall, we'll maintain key investments in business development, we have continued to optimize our expense structure, enabling incremental revenue and gross profit to translate more effectively in operating profit. At the same time, on the strategic execution plans, we continue to fully invest AI and deepen its integration across our ecosystem. As of the end of Q3, smart devices equipped with AI capabilities accounted for 93.99% of total shipments and equipment from the previous quarter demonstrating that AI is swiftly becoming the default ratio from smart devices. . On the user side, AR adoption is also scaling quickly. AI has clear moves beyond single category features like AI [indiscernible] to a broader backing of product categories. AI agent service now handled 15 million daily interactions for global users sporting diverse scenarios such as [indiscernible] AI translates, AI Health, AI Energy, a Paccar Air, airings pure car and AI robotics AI continues to penetrate the broader range of daily devices and life scenarios, laying the formation for large-scale product innovation and long-term valuation creation. During the quarter, we also began global beta testing of our new agent app with Tuya ecosystem users live with our smart living mission, we are tensely developing universal AI live assistant global users, which is scheduled for official release at the actual in the United States in just over a month. Now let me turn the call over to our Co-Founder and CFO, Yi Yang, who will share more details about our financial performance and business progress.

Hello, everyone. This is Alex. I will now provide more details on my third quarter's results. Please note that all the figures are in U.S. dollar based and all the comparisons are year-over-year based. And we delivered total revenue of approximately USD 82.5 million in the third quarter, representing a 1.1% year-over-year increase. Despite a strong person base last year and continued caution in external demand, we achieved our ninth consecutive quarter of year-over-year growth. underscoring our reserves and scalability in our business. With the total revenue, our past business delivered strong results, generating USD 59.2 million, a 2.4% year-over-year increase driven prevalently by our strategic focus on the customer demand and product optimization. In Q3, the number of past premium customers reached 280 further strengthening our core customer base. In addition, fueled by growth in the cloud software products revenue, the SaaS and others business show consistent expansion, generating USD 11.5 million this quarter, a 15.4% increase year-over-year. Momentum was driven by continued rise in devices and a high proportion of recurring revenue [Audio Gap] Revenue from Smart Solutions reached USD 11.8 million during this quarter, we strategically scaled by lower efficiency projects and prioritize scalable, high-value solutions such as AI energy management solution and spatial AI solution to further improve overall gross margin and cash recovery efficiency. For a regional perspective, in China market, AI toy continued to show healthy growth in the third quarter, more than 50 customers, including brands, channel partners and solution providers. They launched the products part back to -- and key products' capabilities also continue to advance, such as multimodel interactions, long-term memory and emotion expressions with several connectivity versions coming soon as well. These improvements further strengthen the foundation of expanding into new product categories and regional markets. In the European market, demand from AI power solutions such as AI cloud storage and AI energy-saving solutions continue to rise. At the same time, we added several new industrial clients in energy and HVAC sectors during this quarter. In Asia Pacific, the point of cube, the privatized platforms for several Southeast Asian telecom operators are scaling rapidly with additional cities entering the delivery phase, the Singapore HTB housing deployment sports of Singapore projects also progressed into implementation with the first branch of the hardware and software solutions delivered and in stores in this quarter. In North America, AI-enabled products such as smart bird feeders continue to record healthy growth, the strong adoption validates the commercial potential of niche that integrates emotional values, frequent content interactions and nonterm subscription model. and underscores the structural growth opportunities for AI products in mature consumer markets. In summary, despite pressure in the global consumer environment, Tuya leverage its diversified product portfolios and strong software capabilities to achieve a structural growth. Those trends further strengthen our resilience against external macro volatilities and uncertainties. Moving to gross margin. Our blended gross margins for Q3 in 2025 was 48.3%. Total gross profit reached approximately USD 39.8 million, representing a 6.1% year-over-year increase. This growth was primarily driven by concurrent improvement in both our revenue mix and cost restructuring. By segment, the past growth rose to 48.8%, continued to upward strength from the second quarter of 2025. SaaS and others maintained a strong gross margin of 70.8%, remaining above 70% level. Smart Solutions posted a gross margin of 23.8%, slightly higher than last year's 23.5%. Overall, our Q3 performance in line with our expectations and continue to reinforce the profitability foundation at this stage. On the expense side, we continue to maintain prudent and disciplined financial management. Even as both our scale and profitability expanded, total operating expenses declined to $36 million. down 34.1% year-over-year. GAAP operating margins improved significantly to 4.6%, and GAAP net margins increased to 23.6 percentage points year-over-year to 18.2%, while ensuring that R&D investment in key AI initiatives and platform development remain intact and we continue to exercise strategic cost control to balance growth, quality and profitability. On the cash flow front, operating net cash flow continued to grow steadily this quarter. reaching USD 30 million, a 25.7% increase year-over-year. Our cash collection cycles remain stable and the cash flow quantity materially improved. At the end of the Q3, our net cash balance stayed above USD 1 billion, giving us ample flexibility to balance shareholders' returns manage external uncertainties and support long-term strategic investment. Next, I'd like to briefly highlight some recent progress in our AI capabilities and developer ecosystem, which serves as a crucial foundation for 2-year long-term growth. At the end of the Q3, Tuya's platform had 1.62 million registered developers representing a 23% year-over-year increase. AI adoption across smart devices also continue to accelerate. Commercial AI developers have collectively create more than 12,000 AI agents on the Tuya platform, covering a broad range of smart products categories, including toys and pet products, electronical, home appliances, IP cameras and wearables. Meanwhile, we continue to deepen and strengthen our AI developer ecosystem, anchored by Tuya OS, Tuya open and T-Series AI developer Board. On the open source front, Tuya Open has seen steady growth in both documentation and code engagement. Since the beginning of this year, the GitHub repulsor store count has increased by about 80%. To date, over 2.3 million of codes have been contributed to open source projects. Beyond the rise of the Tuya developer participation, the overall quantity of the ecosystem is also improving significantly. In summary, despite the prevailing external uncertainties, we still demonstrate strong resilience and operational agility. achieving solid financial growth and impressive profitabilities, which steadily advance in the AI plus IoT developer ecosystem across our core business segments. Thank you all, operator. we can begin Q&A session right now.

[Operator Instructions] Our first question comes from the line of Yang Liu from Morgan Stanley.

I have one question regarding the business outlook with more and more state deals that in down in the international trade market, what is the business outlook going into fourth quarter this year, which is a big season. And also what is your early look for customers' demand going into 2026?

Thanks, Liu. I have to share 3 points. So the first 1 is that this year, we still see that will be the kind of the soften demand on the growth side. And because of the uncertainties on the global macro economy situations this year. And so this year, the Q4, we'll see that the regular promotion season will be kind of the softer versus the dose. So we will keep closing on to review that while we already have the stable -- kind of the stable turns across multiple countries, that's whether the demand will begin to return steady on December. So that will be the short term. And for 2026, what we see here is that because like Jerry shared earlier before that all those kind of AI features and smart home portfolios become more and more inevitable trend for the entire sector so which means that more and more animal consumers are already starting to familiar with this type of products that really become the beginning users of these type of things. And all the major brands and the players, manufacturers in industries already starting to enter these sectors and bring that into their the growth factors. So those type of trend will never stop. So for 2026, we'll have a very positive outlook about the growth -- keep growing the entire business sectors. And the third 1 I'd like to show is that by reviewing all the technology improvements in the past decade, And -- we'll review AI will be 1 booster that bring the IoT experience into NextNav -- because in the past, the smart home experience, it's majorly focused on the connectivities, some automation and control. But while coming out with the AI capabilities, the user experience will come into a next level to more friendly, more easy to use and more smart. And so that's why we decided to provide a new AI system for Life, which is connecting the all the home scenarios and to ordinary people and have more people be able to enjoy the smart devices experience. So that will lower another bar for the entry user. So combine that 3 together, the short times, we'll see that 2025, there's still some uncertainty and pressure on that. But it's become more and more inevitable and become a default options for major brands and players there. And we're trying to bring the [indiscernible] for more users who are not become the smart devices user as well. So I think that will be the overall. It's very positive in the long term and constant in short term.

Our next question comes from the line of Timothy Zhao from Goldman Sachs.

Congrats on the solid results. I have 2 questions here. One is regarding the AI home agent that you just mentioned. Just wondering if you can share more color on the detailed specs and the use case of these AI agents that you are going to officially released at CES next month? And how do you think about the impact on the overall business of Tuya with this new product? Secondly, it's about the AI overall impact on your PAT and [ SatSolution ] business. Just wondering, for example, for the segment growth this quarter, would you please break down in terms of by volume and by pricing? Has AI brought any positive impact on the pricing of your product and services and also on the impact on the gross profit margin.

Okay. Thank you, Timothy. So the first 1 is that so we'll define this as an AR system, so it's bigger than an agent. And because we think that if we review the life scenarios. Even only for home, that you find that you have a multiple since you want someone to help you with. So this is AI Assistant to come with multiple agents that can help you to do almost everything you need in a home. So that's the first one. That's how we designed this new assistant. And the key value for that part will be in 2 things. The first 1 is that while coming on with the adoption of the [ Gimi ] an app, including the GPT, including China, et cetera, that you found that the air can help you to do a lot of things, a lot of tasks on the software side. But there is no assistant focus on home. That's what you need for your home and how you on taking a of the home. So for us, is that we design the different type of agents and capabilities focus on those scenarios, people want to interact and people want to have a better life quality or easier life experience in home. That's the first one. And the second 1 is that the key differentiation of this assistance among any generic assistant is that this assistant will naturally be able to interact with the physical scenarios through the hundreds of millions of the [indiscernible] devices. So which means that we're trying to bring kind of science fiction to come true, like the drivers in Ironman's house, every people appreciate that. Every people, I mean, admire that. but there is no that type of jobs yet. So we want to create that type of experience for the global people. So that's how we define the key features and value for the user side. And I think the -- what does it mean for the ordinary users. I think the key part is that right now, we found the smart devices is still kind of complicated is it become way more easier than 10 years before, but still kind of communicated to -- I mean, to [indiscernible] to use, to interact with by many nonuser. I mean, for those beginnings. So those parts still there. But coming out with the assistance, so you don't have to learn to use the app anymore. And you don't even -- you know how to speak, right? Like how you can tell the housekeeper to do something, how -- to servant to do something. It's a similar like the assistant will be to take the orders and due to all those complicated operation for you. So we believe that will lower the bar significantly to the -- for the new users for home. And when we see that while the penetration of even smart home is still in a low no digit. And by [indiscernible] the entry bar we'll be able to open more doors for those new users while they found that the smart devices will be accessible for them to use. So that's for the AI system part. And the second question is for the AI. And so first 1 is that this year, we consider at the beginning of the year of the AI device. So we are very happy to see that finally, our execution to the market, to the developers, to the customers or really starting to offer some feedback. So like the numbers we shared before by end of the Q3, over 93% of the products we shipped this year already been turned on some AI capability. So which means that my customers, my developers already very actively to try whatever AI features or capabilities they can provide through their devices, even their existing devices. So that's the first one. So we really have a lot of innovative developers tying to try the ideas and try to educate end users and test end users' feedback. And will be that will be up very, very typical strong point for any new technology adoption. And so we really have that kind of scale test build to complete it. And the second 1 is that we still provide the AI seamlessly through our 3 business models. So including the past, including the solution, including the SaaS, right now, we have different type of AI offerings in different business model as well. So which means that for my customer side, on the procurement perspective. So they don't have to learn how they will be able to put something from differently. It's a similar like offering, but come with different features. And maybe it comes with a different pricing, maybe not. So for that part, is that we try to open -- have almost all my customers [indiscernible] be able to try to bring AI into their existing products and solutions. And through that seamless integrations into my existing business models, we believe that, that will help in 2 things. The first 1 is that coming on with the new feature set, any new feature set will win new demand. So that will be able to speed up the penetration and adoption of the entire market. And we long for to have the AA coming as a booster. And the second 1 is that with some really new feature sets that we reprice that and that improve our GP as well. But we're looking forward to have the GPM impact coming very soon because it's just in the beginning. So we try to promote the market. We try to incubate in the market in the beginning but not running really aggressively on the profitability side on that type of niche sector. So that's the overall outlook, Timothy.

Our next question comes from the line of Mingran Li from CICC.

Congrats on the solid readout, and 2 questions from my side. First is following adjustments of racing global tariff policy, could management share more color on the downstream or the recovery programs in the overseas markets, especially North America. My second 1 is that could management share the latest progress on the AI technology, particularly in terms of commercialization?

Yes. So the first 1 is that a couple of weeks ago that we get a temporary 1-year turns between China and U.S., right? And so which means that all the merchants in portals right now, they have they stable cost levels at a specific timing. And so that will be good things, at least we get some certainty. But the promotion for the issue will be pretty locked in. So those kind of new terms will be able to impact for next year's demand. So we're looking forward to have -- to be a positive impact. And right now, the customers and importer size, this deal kind of review, okay, what will be the time for next years and we'd like to review what will be the turns out sell-throughs for this promotion season starting from this week, right, we'll have the Black Friday this week. So we're looking forward to have more feedback on December, like I described. And while people already know that what cost they can get for next year over a year, and what will be the demand looks like? And then how they set the teams for the new projects and the new sell-in reordering. So that's the first one. So it's still under review. And the second 1 is for the AI. I think that I already answered part of that to Timothy earlier for the earlier questions. So the first 1 is that right now, we're offering AI across almost all my categories have some generic capabilities, works on anything. And we also have some differentiated vertical AI capability for a specific type of the product. But all those kind of orphans are seamlessly into my existing 3 services, the past, the solution and the SaaS. That's the first one. And in this year on the new device side, including the past and solutions, we really see -- happy to see some breakthroughs into some new sectors like the toys, and we shared that earlier last quarter as well. So this will be a totally new vertical categories come with a large total addressable market size and that we don't touch before, and the IoT never get to be able to enter the sectors. But coming on with AI. So right will open the door. And in this year only, we run in 3 quarters only. That's many of the key players in the industry, starting from China, in the toy industry and already started to cooperate with us. And in Q3, we really helped the customer to launch a lot of the use cases to test the demand. And it turns out that the end users love it. And so I would say the trial calls for many of the customers works out. So we're looking forward to continuous to improve the experience and also, the customer start to be ordering and running a new type of promotion classes or sales channels to scale it. So that's what we see that AI open new doors. So that's the second one. And the third 1 is that not only upgrades kind of upgrades on existing categories and open new categories. So the third 1 we try to open is the 2C experience. So we use -- we were looking forward to using the new AI assistant to open all the new home user stores, especially for those ones who still don't have any smart devices, they still consider that type of devices will be kind of complicated for them. So we're using assistant to have up -- that's it.

Our next question comes from the line of Matt Ma from Jefferies.

So I just have 1 question regarding Smart Solutions. So the Smart Solutions revenue declined by around 14% in third quarter, just wondering what is the reason behind it? And then could management provide any growth outlook for the segment in 2026? And also, any thoughts on product category expansion going forward?

Yes. So I think the first 1 is that in 2026, we're looking to have a better year versus 2025 because we should have less turbulence for the economy side on the global basis. And so like I described that the customers right now in many vertical sectors, the customers already think that the AI features or ALT features will become more and more default for them. So like some categories that every single new projects they've been doing, they have to come down with the IoT. So we become to take a larger portion in their pie. So that's the first one. So we will see that the penetration will grow. I mean for the overall industries, we continue to grow steadily, no matter what. It's only a matter of of speed, which year will be the tipping point. And so that's the first one. 2026 and we keep closing on. We think that we can share more colors around the second half of December, while the customers have more feedback on the end demand side. And while they're starting to have the tubes for 2026 because they don't like to run it in a very conservative operation and base for a long time. They really run in for 2025. So that's I think for the first one. And the second 1?

Yes, it's also regarding Smart Solutions. So I just want to understand what is our thoughts on product category expansion for Smart Solutions going forward?

Sorry, I missed 1 part. And so I think that for smart solutions, and we're very carefully to looking for the expansion to new categories because we're really learning that business model for over 2 years. So I think that for Smart Solutions, we're still kind of focused on strategically highly value categories. And for those ones that the AI can bring to difference, like bring some innovative ideas to come true without AI. It never exists and also to some categories that we're really helping customers to do a differentiation to have them out. So really, the solutions is the 1 we design for the customers for their flagship model. So that's what we put out. So right now, the solutions, the major categories will be the video and related market modeling capabilities, the control panels that's super comprehensive interactions on the touch panel side and including the gateways, focused on specific scenarios and energy. So I think that's for the middle term that we continue to put focus on scale of those kind of verticals. Unless we see some opportunities with scalabilities in some new vertical categories.

There are no further questions at this time. I will now hand the conference back to the management team for closing remarks.

Thank you, operator, and thank you all for participating on today's call and for your thoughts. If you have any further questions, please feel free to reach out to our IR team. We look forward to speaking with you at our upcoming investor events. Thank you, everyone, and have a great day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect your lines.