"…it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us."
-- A Tale of Two Cities, Charles Dickens
The past two years have been very difficult globally, with common challenges faced in all sectors. Affected by the global economic environment, the consumer electronics field is experiencing an extremely severe down cycle. A number of consumer electronics sub-industries, including PCs and mobile phones, have fallen to their lowest points in nearly a decade, or even two decades, and the rapid growth momentum of the IoT industry has also come to an abrupt halt, for the moment.A few years ago, the IoT concept was very popular. Whenever it was during primary market financing or doing a secondary market roadshow, as long as a company had anything to do with "networking", its business plan (BP) or prospectus materials were likely to contain beautiful maps, claiming itself as the "leader of the Internet of Things ("IoT")". Compared with the previous prosperous times, the past two years can be said to be the lowest period of the IoT industry, with these "leaders" gradually exiting the market.
However, things are often full of contradictions. In the best of times, we may make the worst investments, but in the bad times, there is no shortage of opportunities.
Regarding investment in the technology field, there is a view in the market: when the economy rises, the industry is full of opportunities, which will bring a precious investment window. But this is not the actual case. In an industry where demand is booming, excess capital and competitors will pour into every part of the supply chain, greatly damaging the rate of return for all parties.
Similarly, investors will ignore opportunities during periods of declining demand. The decline in demand is actually a catalyst for the restructuring of the industry’s competitive landscape. When the economy is down, a large number of uncompetitive players will quit; while good enterprises will win more market share and future confidence.
Chart: Industry capital cycle
Counter- cyclicality is not as scary as it seems.
Recently, on the earnings conference call of the global cloud-native developer platform Tuya Smart, Jerry Wang, founder and CEO of the Company, also expressed a similar view.
"Our IoT PaaS business has weathered nearly two years of industry downturn," Wang said. "During this challenging period, several competitors, particularly the IoT divisions of large enterprises, exited the market due to the limited competitiveness of their products and uncertain investment returns."
For those companies that continue to move forward during this difficult period, the recovery after the challenge is even more worth looking forward to. We can make our best investments when we are recovering from a trough.
Tuya’s contrarian growth model
"The third quarter of last year was the most severe period of downstream destocking, and Tuya’s growth this quarter has largely benefited from the end of the inventory cycle," said Jessie Liu, board director and CFO of Tuya Smart.
The Company's overall revenue has achieved QoQ growth in each quarter from the third quarter of 2022 to the third quarter of 2023, which verifies that the Company has a strong rebound trend. In the third quarter of 2023, the Company recorded a 35.7% YoY growth in total revenue, and overall gross margin increased to 46.7%, matching the historical high. Non-GAAP net profit was approximately $10.1 million, representing a QoQ increase of 567% and a significant turnaround from loss to profit, year-on-year.
According to the data from market research institutions, as destocking comes to an end, the consumer electronics industry is gradually emerging from hard times. Among them, the recovery of the IoT industry is the most anticipated. IoT Analytics expects the non-IoT device market to stabilize in the long term, while the number of IoT devices is expected to maintain a high growth momentum. There will be more than 29 billion IoT devices in 2027 with a CAGR of more than 15% from 2022 to 2027.
The biggest challenge in the IoT cloud industry may be coming to an end accordingly, and the opportunities after the headwinds are worthy of attention. The market development of competitors began to slow down, and even gradually withdrew from competition. As the peak of IoT cloud entrepreneurship has ended, IoT cloud vendors in the upstream of the industry have collectively withdrawn from related fields, due to decreasing downstream demand. Google Cloud terminated its IoT Core service, Aurora Mobile’s JIoT service has been ended, and UCloud, a leading cloud computing provider in China, also announced the termination of UIoT cloud service. At the same time, some well-known companies such as Ericsson, IBM, Bosch and SAP have announced that they have abandoned their IoT platform business. When the supply side decreases, if the Company can continue to achieve breakthroughs in customers, products, and application scenarios, the Company's success can be doubled with half the effort.
Therefore, in the past two years of adversity, Tuya, as a cloud-native development platform, never gave up and actively adjusted. The growth pattern against the trend consists of three aspects: First: focus and expand the high-quality customer base; Second: continue to improve product strength; Third: enter areas outside the consumer electronics industry to prepare for the full recovery of the IoT cloud industry. Summarized in four words, that is, "going deep, going broad".
Going deeper: focus on core customers and product strengths
"Going deeper" means deepening R&D practices in vertical industries. The efforts of Tuya are divided into two dimensions:
Focus on high-quality customers
Tuya’s latest earnings releases pointed out that the Company is focusing more on providing services to its core customers, which aim to build strong partnerships and to provide more customized and high-value solutions through a deep understanding of customer needs, challenges and goals.
Sometimes it's more efficient to subtract than to add. It is easier to discover greater customer value by focusing on quality customers in a vertical industry rather than all customers (especially when the depth value of the customer far exceeds the breadth value).
Reasons are obvious.
When the economy enters a down cycle, many customers may cut back on spending, but quality customers may still maintain relatively stable or even growing demand. In order to pursue higher efficiency, better profit and cost performance, more leading brand customers tend to try third-party cloud-native platforms. Financial data can clearly show the advantages of large customers: in the third quarter, the average revenue per customer of Tuya reached $20,000, setting a new all-time high since the beginning of 2022.
Undoubtedly, Tuya’s high-quality customers have huge growth potential, so the strategy of focusing on core customers is clearly working. This approach has two obvious results.
First of all, Tuya’s customer development has become more efficient, achieving a faster expansion rate, which accelerates Tuya’s global growth. As of the third quarter, Tuya continued to win the cooperation of leading enterprises, such as Midea's overseas home appliance business, Haier and Bull's new energy products IoT cloud platform, and Bosch's smart door lock business.
In addition, the Company’s operating efficiency improved significantly. Non-GAAP operating expenses decreased 26.2% year-over-year in the third quarter from $43.4 million to $32 million. Revenue per employee reached $39,000, an increase of nearly 100% from the previous year.
Enhance product strength
While focusing on quality customer groups, the Company continues to focus on product innovation.
Tuya has been able to stand out and become a global leader, largely thanks to its competitive one-stop cloud-native solution. Especially in lightweight applications, such as smart homes and smart business scenarios, Tuya shows its unique strength.
The Company further consolidated the advantages of its traditional strength categories and carried out product upgrade iterations. In the global-connected smart home and smart business devices market, the appliances and lighting electricians segment accounts for the largest proportion (according to CIC data). In the third quarter, Tuya continued to lead the innovation in the smart electrical solutions, launched a smart socket solution with dual-band routing, significantly improving the network pairing success rate and experience of users. The Eightree brand has become one of the top 10 sellers on Amazon, further demonstrating the Company’s product strength in the market.
In addition, the Company has not only made substantial progress in laser sweeper and smart door lock solutions, but also launched a number of innovative products in overseas and domestic markets.
In the long term, the to-consumer market is still a track with ample development potential. According to Mordor Intelligence, the global consumer IoT device market is expected to grow from $128.97 billion in 2023 to $191 billion in 2028, an increase of more than 50%.
Although the consumer market is still under pressure, the inflection point is clearly visible. Downstream demand for lightweight utility smart devices continues its recovery, and Tuya is committed to helping customers seize the opportunity.
Through the comprehensive extension of product strengths, the Company maintains a strong market position in various fields. High gross profit margin indicates that an enterprise has higher bargaining power in pricing and can obtain more favorable prices in the market, so it is usually regarded as one of the key indicators of the competitiveness and value proposition of an enterprise's products or services.
In the third quarter, gross margin of the Company increased to 46.7% from 43.6% in the same period last year; IoT PaaS gross margin was 44.6%, compared to 37.2% in the same period last year. Smart device distribution gross margin was 26.9%, compared to 12.9% in the same period last year.
The above data confirm that the Company has high competitiveness in various fields. Overall, Tuya further consolidated its leading position in the industry in the third quarter, laying a solid foundation for the recovery.
Going broad: Using an open concept to constantly make more breakthroughs
While deeply cultivating vertical industries, Tuya taps into more fields to realize more application scenarios.
For example, the Company is rapidly making progress in the new energy sector, taking IoT beyond the realm of consumer electronics and towards broader sectors.
With rapidly growing global demand for new energy, Tuya responds quickly, positioning home energy management systems (HEMS) as the key to future development. Tuya has comprehensively upgraded the HEMS program. In Q3, Tuya released an integrated APP supporting "solar, storage, charge, and use", completing the energy management scenario from "energy monitoring" to "energy load linked scheduling. In the domestic HEMS market, Tuya has also formed a leading trend. Global leading photovoltaic brands like Aiko Solar and DMEGC (Hengdian Dong Ci Group) have chosen Tuya's IoT PaaS for their new energy storage businesses.
In the context of dual-carbon, ESG has evolved from a marginal concern to a key component of global business strategy. The forward-looking layout of Tuya closely combines its cloud-native ecological construction with ESG practice, making Tuya the best partner for many enterprises in realizing ESG.
Chart: U.S. HEMS market has grown 35-fold in 10 years
Source: U.S. Department of Energy, Smart Grid System Report, cited by Navigant
In addition to the world's popular new energy sector, Tuya also continues to achieve breakthroughs in other fields, including promoting the Company's 4G cellular VCU central control products to apply on E-bike products, and continuing to meet the needs of large groups to form Cube smart private cloud comprehensive solution.
Tuya paints a bright blueprint for the future of cloud-native development platform in each sector with excellent performance.
In the past decade, the IoT market has achieved unprecedented prosperity, driven by the strong demand for consumer electronics. In the next decade, IoT will develop beyond consumer electronics to play an important role in digital economy. Although the overall industry is still rising from the trough, in the long run, under the strong demand for intelligence and interconnection, IoT, as an important base, is enabling more industries and application scenarios to complete a higher degree of self-development.
Conclusion
Tuya's strategic focus on core customers and product innovation has led to a 'deeper' level of development within its established market sectors. Concurrently, the Company is broadening its scope, transitioning from consumer electronics to burgeoning fields like new energy, thus achieving a 'broader' brand development. This expansion isn't merely additive; it's creating a synergistic 'multiplication effect' that significantly enhances outcomes.
Tuya's business scope is expansive and continues to advance steadily on the right path. The Company's accumulation of positive internal changes has not only buffered it against external adversities but also positioned it strongly for upcoming recovery phases. The accumulation of positive internal changes not only enabled the Company to better eliminate the negative impact of the outside world and hand over a satisfactory report card, but also made the Company fully prepared for the recovery period.
