Tuya - Q2 2023

Transcript

Speaker 6

Okay. Good morning. Thank you. Hello, everyone. Welcome to our second quarter 2023 earnings call. Joining us today are Founder and CEO of Tuya, Mr. Jerry Wang, and our CFO, Ms. Jessie Liu. The second quarter 2023 financial results and webcast of this conference call are available at ir.tuya.com. A replay of this call will also be available on our website in a few hours. Before we continue, I refer you to our safe harbor statement in our earnings 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.

Jerry Wang (Founder and CEO)

大家好，感谢大家参加图雅2023年Q2及下半年H2的业绩电话会。

Speaker 6

Overall, everyone, thank you for joining Tuya's Q2 2023 earnings conference call.

Jerry Wang (Founder and CEO)

2023年 Q2 是一个非常重要的里程碑，我们首次实现了季度性的 Non-GAAP 净利润的盈亏平衡，并小规模盈利约 $1.5 million，Non-GAAP 净利润率 2.7% 左右。同时，我们的经营性现金流在本季度取得了约 $7.5 million 的正向流入。Non-GAAP 净利润的转正与正经营性现金流的进一步扩大，标志着我们在整体日常经营上开始体现造血能力。这作为企业经营业务所应该做到的事。达成以上结果，离不开这两年来艰难而坚定的组织和经营策略调整，以及全体成员付出的辛勤努力，我们将继续努力，进一步从组织上、业务上发力，保障稳定的经营结果，并迈向 Non-GAAP 经营性盈亏平衡。

Speaker 6

The second quarter of 2023 marked a significant milestone for us. For the first time in our company's history, we achieved a quarterly break even, and recorded modest profit on Non-GAAP basis of approximately $1.5 million, translating to a Non-GAAP net margin of around 2.7%. Moreover, we achieved the positive operational cash flow for the quarter, bringing in about $7.5 million. The moving to positive Non-GAAP profitability, and the expansion of positive operating cash flow both marked a turning point in our overall day-to-day operations. This signifies our growing capacity to generate value, and essential responsibility for any enterprise, and its business operations. Undoubtedly, these accomplishments attest to the dedication of our team and the strategic operational adjustments we have implemented over the last two years. Each member of our organization has played a crucial role in this milestone.

Going forward, we remain firmly committed to focusing on further refining our operations, both structurally and functionally, taking avenues to enhance efficiency and reduce costs. Our aim is to ensure consistent financial performance and progress towards achieving breaking even at the Non-GAAP operating level.

Jerry Wang (Founder and CEO)

我们的收入在2023年Q2约为$57 million，环比增长约20%，是连续第三个季度保持环比增长。同比方面，总收入下降8.9%，其中汇率波动，特别是人民币对美元走弱，造成约5.6%的同比的跌幅。如果剔除汇率的影响，收入接近同比持平。全球消费尚未充分恢复下游企业的库存周期，形成保守的经营翻增。这两个因素在本季度仍有影响，我们的综合毛利率进一步的结构性的提升至了46.7%的水平。IoT PaaS整体毛利率升至44.2%，智能设备分销业务毛利率在IoT硬件解决方案新战略的良好执行下，继续提升至23%。以及软件和增值服务业务板块整体毛利率74.5%，保持稳定。集中云存储业务，持续贡献良好的现金流和会计收入，已进入规模化的阶段。

Speaker 6

In the second quarter of 2023, our total revenue reached approximately $57 million, representing a sequential growth of around 20%. This marks the third consecutive quarter of sequential growth. Comparing year-over-year, there was an 8.9% decline in our total revenue. A factor in this was the currency fluctuation, particularly the weakening of the RMB against the US dollar, which accounted for around 5.6 % points of the year-over-year decline. Excluding the impact of the current currency fluctuations, our total revenue was close to flat year-over-year. It's worth noting that the resurgence in consumer demand has not yet reached its full potential, and the cautious operating strategies adopted by downstream businesses during the stocking cycle persists, thereby impacting this quarter's results. Our overall gross margin bumped to 46.7%.

Within this figure, the gross margin for IoT PaaS climbed back to 44.2%. Meanwhile, thanks to the successful implementation of our IoT device solution strategy, the gross margin of our smart device distribution segment saw a growth to 23%. Our software, and value-added services maintained a steady gross margin of 74.5%. Of particular note, our cloud storage services have been consistently generating solid cash flows and stable revenues, marking this transition into a period of scalable growth.

Jerry Wang (Founder and CEO)

企业运营管理上，除了我们的Non-GAAP经营费用较Q1继续环比下降，各项费用预算严格管控，我们的人均自身收入和人均自身毛利额，在数个季度的上升后，于Q2达到最高水平。

Speaker 6

Regarding our corporate operational management, our Non-GAAP operating expenses for this quarter showed a sequential decrease, a testament to our stringent cost bargaining across all departments. When we speak of efficiency, our revenue supported per headcount, and gross profit supported per headcount reached historical highs in this Q2, following several quarters of continued improvements.

Jerry Wang (Founder and CEO)

接下来谈谈Q2的业务更新。

Speaker 6

Now, let's dive into some business updates from the second quarter.

Jerry Wang (Founder and CEO)

战略方面，我们继续坚定执行用户客户聚焦，提升产品平台，产品增厚策略。

Speaker 6

In terms of our business strategies, our focus remains on three key areas: executing our customer-focused strategy, improving our IoT developer platform, and continual product enhancement.

Jerry Wang (Founder and CEO)

主要IoT平台的价值继续获得重要客户的青睐。六月初，我们与海尔集团旗下的新能源品牌，纳汇新能源进行了合作签约，共同打造家庭能源管理、光储充热泵等智能设备，共建，构建家庭智慧能源管理平台。我们也开始服务一家近CNY 100 billion人民币的上市企业，线缆供应以及家用电器行业的集团，为其提供家用储能EMS管理系统加智能通信版的解决方案。我们获得了一家瑞典头部零售商，其渠道广泛地覆盖北欧地区，业务偏DIY及家居类，他们旗下的智能家居自有品牌将使用涂鸦的平台，以及我们新获得的一家全球工程连接产品和灌溉设备的著名品牌商，亦是欧洲一家工程连接技术的领头上市集团的子公司，主要覆盖北美、欧洲、澳洲等市场，已经付费开始IoT App相关的前期准备工作等等。

Speaker 6

The value of the Tuya IoT platform continues to be favored by top-tier customers. In early June, we held a signing ceremony in collaboration with one of our customers, Haier Group's new energy brand, NAHUI New Energy Technology. Together, we aim to jointly develop smart devices for home energy management, including PV, storage, charging devices, and heat pumps, and to establish a smart home energy management platform. We initiated services for a prominent listed company with a market cap close to CNY 100 billion and the leading player in the electrical and home appliance industry. Tuya will provide them with the residential energy storage EMS management system, combined with the smart communication stick solution. We have secured a partnership with the leading Swedish retailer, whose distribution channel extensively covered the Nordic region and whose business focuses on DIY and home products.

All smart home brands under their umbrella will utilize the Tuya platform. Additionally, we have newly acquired a renowned global brand specializing in engineering joint products, and irrigation equipment, which is also a subsidiary of a European listing leading company in engineering jointing technology. They predominantly cover markets in North America, Europe, and Australia, and have already made payments to commence preliminary preparation related to their IoT app industrial.

Jerry Wang (Founder and CEO)

Cube, as a Private Cloud product, is also continuing to help us acquire large top-tier customers. We recently signed the third private cloud customer in Thailand, belonging to an enterprise under a top Thai real estate group, which has mainly established a relatively good customer base and influence in Thailand. Private cloud cooperation customers cover large groups with influence in three regions, including some comprehensive groups, power operators, and top real estate groups, etc. The experience in the Thailand market, we will also replicate to more countries.

Speaker 6

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

Jerry Wang (Founder and CEO)

在进一步增强IoT服务的体验的同时，我们与开发者、企业一同探寻消费电子之外的机会和价值。例如，如今的节能能源领域，由于其实用和持续性的特性，备受全球企业的关注。对此，我们在AWE上展示了主要的智能互用光伏储能解决方案。同样，我们也将这些智能化能力加入到S解决方案产品中，例如......

中小型商户可以使用涂鸦SMB蓝牙Mesh照明控制解决方案，便捷地实现绿色节能的室内环境。

Speaker 6

As we continue to enhance the IoT developer experience, we're now also exploring opportunities and value beyond consumer electronics with developers and enterprises. For example, the energy saving sector, with its practical and sustainable nature, garnered significant attention from global corporate customers. In light of this, we showcased the Tuya residential PV energy storage solution at AWE. Additionally, these modular proficiencies have been seamlessly integrated into our SaaS offerings. A case in point is Tuya's SMB Bluetooth mesh lighting control solution, empowering small- and medium-sized buildings to easily achieve a green, energy-efficient indoor environment.

Jerry Wang (Founder and CEO)

智能设备分销业务板块作为软硬增厚策略的一款，自去年中开始战略调整以来，业务主要来自于近一两年的新客户。该板块在本Q2取得了毛利额约$1.49 million，环比增长约30.8%，同比增长约68.2%，整体的毛利率23%。我们的标杆产品解决方案，如Zigbee、网关、中控屏等，在IoT解决方案模式下，贡献健康的智能设备的整、整合、整体的毛利。

Speaker 6

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

Jerry Wang (Founder and CEO)

产品线方面，举例来说，我们的语音中控产品，在 Q2 综合收入贡献同比增长超过了 60%，其中智能设备的解决方案模式同比增长超过 280%。行业上，中控产品作为 IoT 的交互入口，它可以简洁地代替部分产品下的传统面板开关，因而呈现多元化的快速发展趋势，主要在此具有强有力的竞争力。我们的中控产品解决方案，覆盖各类的 OS 系统、面板部件、多媒体可控对象、网关感应走势内容等软件服务能力，并在硬件方案上支持全尺寸适配，全通信协议，各主流主控 IC 等，覆盖了国内外的主流品牌的需求。

Speaker 6

Regarding our product lines, in Q2, the comprehensive revenue from our voice central control product line registered a year-over-year growth passing 60%, with the smart device solution model seeing an impressive year-over-year surge of approximately 280%. From an industry standpoint, central control products act as the entrance for IoT interaction, possessing the capability to replace traditional panel switches in a variety of settings, indicating a dynamic and swift growth trajectory. Tuya boasts robust competitiveness in this sector. Our central control product solution encompass a diverse array of operating systems, panel firmware. This also extends to software service feature like multimedia, visual intercom, gateway, dances, gestures, and content. In terms of hardware, we offer full-size adaptability, support for all communication protocols, and integration with popular controller ICs, meeting the product requirements of mainstream brands worldwide.

Jerry Wang (Founder and CEO)

软硬件增厚带来的IoT PaaS和智能设备解决方案，SaaS模式及高价值让客户们具有更多的选择。有KA客户可以按照自身的个性化的业务需求和组织特性来选择OS云和APP SDK的IoT PaaS的新模式，从而进行更加自主化的业务开发。而同时，部分跨领域的跨国集团等类客户或大型的一些服务商，集成商客户，则可以选择智能设备的整体的硬件解决方案模式，来更简便地快速地切入市场，并进一步地带动软件收入的持续性的增长。

Speaker 6

The dual model of IoT PaaS and smart device solution, underpinned by our software and the hardware enhancement strategy, has provided our customers with the broad spectrum of choices. For instance, KA customers can leverage the IoT PaaS model, incorporating OS, cloud, and app SDK in accordance with their unique business needs and organizational characteristics, enabling them to foster a more autonomous business development environment.

At the same time, some cross-sector multinational corporations, SaaS service providers, and integrators can choose smart device solution for a streamlined and optimized market entry, which in turn further drive the sustained generation of software revenue...

Jerry Wang (Founder and CEO)

SaaS and others的板块的整体在Q2的收入同比增长30.2%，至$9.4 million。其中各主要产品中，前面提到的云存储能力，继续表现出优质的收入特点。在设备规模的稳定增长下，云存储增值服务Q2贡献高质量的$1 million级别的收入，同比金额超2倍以上。SaaS业务方面，如酒店、租住、地产等，在疲软的经济周期中取得了一定的同比增长，而商业照明属于照明领域，受到宏观影响较大，同比有所下滑。

Speaker 6

Our SaaS and other segment reported year-over-year revenue growth of 30.2%, as Q2 revenue reached $9.4 million.

Breaking this down to key products, as previously mentioned, our cloud storage value-added services consistently demonstrated strong revenue characteristics. Amid the steady growth in device scale, these services have continuously delivered high-quality revenues in the $ millions level, more than doubling year-over-year. As for SaaS, sectors such as hotel, rental, and real estate achieved a moderate year-over-year growth, despite the soft economic cycle.

Conversely, commercial lighting, falling within the broader lighting industry, registered a year-over-year decline, attributable to microeconomic challenges.

Jerry Wang (Founder and CEO)

另外值得一提的是，今年五月，Tuya成为全球唯一同时提供支持VID及Non-VID scope PAA的Matter认证解决方案的公司，能够为任意满足要求的联盟的成员的VID签署PAI。自此，Tuya不仅能为开发者降低Matter设备认证成本，实现自主可控的认证，还能助力开发者缩短产品上市时间。此外，还能 - Tuya还能提供PAI认证的全生命周期的管理，助力开发者专注设备开发，享受极致流畅的一些体验。

Speaker 6

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

Jerry Wang (Founder and CEO)

Overall, during Q2 and the first half of 2023, consumer electronics continued to face pressure from the ongoing impacts of still high inflation and inventory effects. However, globally we also see positive signs, for example Europe's and America's inflation continuing to decline to new lows in more than two years, some IoT smart device categories' terminal sales beginning to recover year-over-year growth. We from our own operating conditions and external positive some signals, felt that the most difficult times have passed. We expect the second half to resume revenue's year-over-year growth, while a more efficient focused operating model, uh, mode, gives us more sufficient some confidence, pursuing sustained progress's financial performance. We are full of expectations for a stable developing future.

Speaker 6

Overall, during Q2 and the first half of 2023, the consumer electronics segment continued to face the residual, uh, pressures of high inflation and the associated inventory, uh, implications. However, there are encouraging signs globally. For example, inflation rates in Europe, and the United States have descended to their lowest level in over two years. Anticipated sales for several IoT smart device categories are trending towards positive year-over-year growth. Drawing from these external trends and our internal metrics, we believe that we have navigated through the toughest times, and we expect to return to year-over-year revenue growth in the second half of the year. Our leaner and more streamlined operational structure also give us the confidence to pursue ongoing improvements in our financial performance. As we look ahead, we are looking forward to a future of sustained and steady growth.

Jerry Wang (Founder and CEO)

有关财务方面的其他数据，由我们CFO Jessie跟大家介绍。

Speaker 6

With that, I will now turn the call over to our CFO, Jessie, to provide everyone with a closer look at our financial performance.

Jessie Liu (CFO)

That concludes the remarks by Jerry. As I review our results, please note that all amounts are in US dollars, and all comparisons are on a year-over-year basis, unless otherwise stated. In the second quarter of 2023, our total revenue reached $57 million, and our gross profit was $26.6 million. Both metrics have shown sequential improvements over the past three consecutive quarters. However, both metrics recorded a decline on a year-over-year basis. When we excluded the impact of the depreciation of the RMB against the USD, which now has an exchange rate surpassing 7.2, our revenue essentially remained stable compared to the same period last year, while our gross margin showed a 6% increase from the same period last year. Considering the currency rates, we anticipate facing ongoing challenges related to currency exchange in the third quarter.

The global consumer electronic sector is grappling with the pervasive impact of heightened inflation. However, our forward-thinking, and strategic interventions have yielded encouraging results. By adopting a customer-focused strategy, our average revenue per customer increased sequentially. Additionally, we've reported a significant uptick in revenue, and a gross profit per employee basis, and have noted a more equitable distribution in geography revenue contribution, fortifying our position against the market headwinds. Our blended growth margin for the second quarter expanded to 46.7% from 42.8%, achieving a historically high level since our inception. I'd like to emphasize, the growth margin is pivotal for the long-term sustainable growth of the company, reflecting the value of our services and the products bring to customers and securing our profitability.

This margin is a testament to our value proposition, the efficiency of our operations, and our balanced approach between profitability, and growth. Let's break down. In the second quarter, our IoT PaaS gross margin increased to 44.2% from 42.5% in the same period last year. This uplift contributed 1.2 percentage points to the year-over-year expansion of our blended gross margin for the quarter, and represented a significant rebound of 3.7 % points from the first quarter. We are always confident in the value proposition of our IoT PaaS products, distinguished by our unique software capabilities, leading IoT functions, as well as effective pricing strategies and management. However, given the macroeconomic downturn and inventory backlog leading to slow-moving issues across many enterprises, our holding in IoT chips was not exempt from this pressure.

To adjust this, we have refined our inventory management strategy, emphasizing prudent control over chip inventory levels and strategic purchasing decisions. Furthermore, we've been guiding our customers in their IoT solution selections, and when necessary, utilizing specific pricing strategies to facilitate inventory reductions, therefore alleviating the financial impact of inventory allowance. In the second quarter, we have effectively minimized the impact of these allowances. While it's essential to recognize that inventory management and potential write-downs are dynamic areas influenced by market conditions, we remain confident in our ability to maintain them within reasonable levels. Overall, as our core business, we believe that IoT PaaS will continue to be a stable and a robust contributor to our profitability. The growth margin for our smart device distribution segment in the quarter reached 23%.

This segment has evolved from initially facilitating customers in acquiring smart device quickly, easily, and cost-effectively, to providing logistics value and support for clients with IoT solutions, aiding them in expanding product categories, and penetrating new markets. In the second quarter, the smart device distribution segment contributed 1.3 % points to the year-over-year growth of our blended growth margin. The growth margin of our SaaS and other segments was at 74.5% in the second quarter, characterized by its diverse composition, including SaaS, to B and to C value-added services, apps, and various customer developments, and smart private cloud projects. Notably, as our cloud storage revenue continues to grow, its profit contribution has become even more significant, accounting for approximately 1.8 % points of the year-over-year growth of our blended growth margin in the quarter.

The consistent financial performance from this high-value software value-added services, coupled with expansion of our device ecosystem, further affirmed our strategic direction and confidence for the future. So I've just detailed profitability of our core business segments for the quarter. We believe that maintaining solid margins at the business segment level is crucial to ensuring the overall margin profit of our company. Moving on to our operating activities and related expenses. We are presenting our operating expenses on a Non-GAAP basis by excluding share-based compensation expenses and the credit-related impairment loss from our GAAP numbers. This credit-related impairment losses stem from our strategic investments in certain IoT-related private companies. Some of these companies have encountered operational difficulties after facing two years of headwinds, leading us to provision for impairments. However, this has no material impact on our operations and the business. Therefore, we've excluded from our GAAP numbers.

We believe this provides better clarity on the trend of our operating expenses, aligning with how our management team reviews our performance. In the second quarter of 2023, our non-GAAP total operating expenses decreased by 32.7% to $33 million from $49.1 million in the same period last year. I will break down our costs and expenses to provide additional clarity. Our employee-related costs, excluding share-based compensation, declined by 33.2% year-over-year in Q2, and the costs related to office and property leasing concurrently decreased by 51.6%. Combined, this cost represented about 75% of our total non-GAAP operating expenses in Q2. As of now, our team size has been further streamlined to around 1,500 employees. We continue to explore opportunities for further optimization in both our business and organizational structure.

Marketing and promotion expenses decreased by 70.1% year-over-year, highlighting our commitment to budget control. Travel-related expenses were nearly flat year-over-year and decreased sequentially. Cloud infrastructure costs now remained at a stable level, flat year-over-year. Our team remains committed to striking a balance between driving innovation, enhancing our cloud platform and maintaining a large, stable global operation system, all while focusing on our cost efficiency. Professional fee, and the G&A expenses dropped by 23.4% from that of Q1, following our annual reporting activities in the U.S. and Hong Kong. Year-over-year, professional fees were down 13.7% compared to the same quarter last year. We are pleased to report that these overheads are now consistently managed and well-contained. The company remains dedicated to ensuring quality, corporate compliance, and professional services at a cost-effective rate. Next on the income statement is the financial income section.

During Q2, we generated approximately $12.1 million in deposit interest income because of our conservative capital strategy. The income was recorded as our financial income for the quarter. We will not elaborate on the remaining types of detailed expenses or income as they are not as significant to our overall financial performance. As a result of our consistent efforts over several quarters, our non-GAAP net loss has been steadily narrowing in the past quarters. In Q2, we achieved profitability by recording a non-GAAP net profit of $1.5 million, translating to a non-GAAP net profit margin of 2.7%. This transition from a loss to a profit is a significant milestone for us. With encouraging indications from our business, evident from stable growth margins and our disciplined approach to expense management, we remain optimistic about sustaining and progressing our financial trajectory.

Moving on to cash. As of June 30, 2023, our cash balance, cash and cash equivalents, as well as short-term investments, reached $942.3 million. This represents a slight increase from the end of Q1, primarily due to an expansion of operating cash flow of $7.5 million. While cash flow is nominally subject to fluctuations in working capital changes and payment terms, our operating cash flow now stays at a much better level compared to a year ago. Furthermore, our financial position remains strong. Our accounts receivable turnover days is less than a month, with the majority of our business collaborations requiring prepayments from customers. Our liability to asset ratio has consistently remained at or below 10% since 2021, and we have always been free from any interest-bearing liabilities or long-term capital commitments.

Finally, as articulated in Jerry's strategic outlook, we remain confident in the long-term perspectives of our company. With that, operator, we are now ready to take questions. Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. 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. Thank you. Our first question comes from Yang Liu of Morgan Stanley. Please go ahead.

Yang Liu (Research Associate)

Let me translate my question. First, I congratulate for the Non-GAAP breakeven this quarter, and the question is related with demand. In recent few months, we observed the export data in China is pretty weak. And I would like to ask, based on two years communication with the downstream, for example, the OEM based in China, how about their customers' demand outlook and whether it was also impacted by the weak export number? And the second question is customer inventory. We are happy to see that management expects the second quarter year-on-year revenue growth to turn positive.

Is it due to the inventory digestion of the customer side is close to the end, and they are about to restock inventory? Thank you.

Jessie Liu (CFO)

Okay. Thank you for Yang Liu's question. About demand, to start with the conclusion, over the past few months, we actually observed an ongoing improvement in inflation in Europe and the U.S. The total sellout of IoT products for all our brand customers during the first half of this year showed a modest year-over-year growth. So, despite we do noticed a recent export number weakness in China, we hold a cautiously optimistic view towards the future demand for end consumer IoT electronic products. And first, from a macroeconomic perspective, there's been a notably easing inflation. As of July 2023, the inflation rate in the European Union has dropped to 5%, while the U.S. has saw a slight rebound to 3.2% in July, following a decrease to 3% in June.

Since peaking in the mid to late last year, the decline has been pronounced, especially in the first half of this year. However, both from the CPI figures and the core CPI indicators, most views suggest that the risk associated with inflation are not completely eliminated, and the prices of some consumer goods remain high, requiring continuous observation by companies in this sector. In China, after a first half year resurgence in travel-related spending, retail sales of consumer goods in the middle of the year dropped to a lower single digit year-over-year growth rate, but stabilized in July. Regionally speaking, our perception is that the overall trend is similar across the regions, but with differences in details.

For example, in the United States, even though the overall consumer electronics market was sluggish in Q2, there was still decent demand for home appliances, followed by a relatively stable year-over-year growth for safety products, and an improving situation for electrical products. In Europe, primary countries remained a good rebound in consumer spending, with a strong demand for energy efficiency-related products. We've observed a strong resurgence in categories like gateway controls, safety sensors, and some home appliances, electrical products. In China, based on official data, given the revenge spending on travel, tourism, and food during the first half of the year, consumer electronics like cell phones exhibited weak performance.

However, in Europe, due to people's demand for safety and energy efficiency, certain categories stood out, even amidst the overall weak electronics demand. Other emerging global markets for smart products such as Southeast Asia, Middle East, Latin America, have rebounded pretty well. However, the lighting segment continues to face substantial pressure, as seen from the performance of leading global lighting companies that have reported their results. Overall, we believe the long-term development trend for the IoT consumer electronics sector should be steady and consistent. Both enterprises and the consumers will continue to explore and focus on realizing the value of IoT.

Against the backdrop as the world's leading IoT cloud platform with a high market value, the overall growth pattern should align with overall brands and user sellout growth trend in the industry. Then come to the inventory question from Yang Liu. By the middle of this year, we observed our downstream inventory has markedly improved, and we expect it will return to a healthy level by the end of this year. At the end of last year, we devised a method to estimate downstream inventory levels by comparing the total IoT devices activation with our sales. This downstream includes OEMs, brands, retail channels, and all other entities between us and the consumer.

We previously anticipated that downstream inventory would continue to be digested throughout 2023, and by the end of this year, it would return to a healthy level seen in 2019 to 2020. Current downstream inventory progress aligns with our expectations. Our recent surveys of top customers worldwide also indicate varying paces due to individual business plan or strategies. However, the general feedback suggests that inventory management has returned to a controllable state. Two years ago, the consumer electronics supply chain built excessive inventory during two to three quarters due to chip shortages and the price hikes. This was followed by an almost two years inventory destocking cycle. We believe that moving forward, business on the value chain of consumer electronics will plan, and operate more rationally and learn the lesson and overall inventory management will return to a steady state.

Considering the positive inflation trend and nearing the end of a two-year inventory de-stocking inventory cycle, we're confident that after a lull of six quarters, our revenue will show a year-over-year growth in the second half of the year. So this is my answer to the questions. Operator, can go to next question.

Operator (participant)

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

Timothy Zhao (Equity Research Analyst)

Hello.

语通，感谢管理层接受我的提问，也恭喜非常强劲的这个收入和利润端的这个业绩。那我这边有两个问题想要请教一下管理层。第一个的话是我看到在这个季度我们的毛利率其实是有一个非常明显的复苏，不管是从同比还是环比，那因为公司也提到下半年整体的收入是一个同比增长的一个趋势，那我不知道可不可以请管理层再分享一些，多的color，关于下半年的一个毛利率的一个趋势。那第二个是关于我们的这个生成式AI，那我也看到这个公司其实在几个月前也有一些，生成式AI的一些新产品，或者是一些新的策略，那可不可以请公司再更加详细地分享一下我们在这边的一些思考。那我很快翻译一下。Thank you, management, for taking my question, and congrats on the strong results.

I have two questions. One is on the growth margin trend, into the second half of this year, as you already guided, that the revenue will improve on year-on-year basis. And secondly, is regarding the generative AI topic. I do notice that, I think you already launched certain products and shared certain strategies, a few months ago. Could management share further color on your thoughts on how to meet the generative AI demand and how that will impact your business model? Thank you.

Jessie Liu (CFO)

Okay. Thanks for Timothy's question. Firstly, let me address the question about gross margin. So beyond promising signals in revenue, we are particularly inspired by our gross margin. Since Q1 of 2019, our gross margin has consistently improved from initial 24% to almost 47%, this quarter, despite challenges like the pandemic, inflation, and inventory issues. Several reasons contribute to this steady improvement of gross margin. Firstly, the proportion of high-margin products in the IoT PaaS business has been increasing. Secondly, the overall high-margin SaaS sectors, the revenue contribution to the total revenue has been continuously growing, reaching to about 16% in 2023 Q2.

Lastly, the transformation of the business model of the smart device distribution business has made pretty big improvement to the growth margin. That segment, the growth margin improved from about 10% to now 23%. Looking forward, our expectation, we are likely to maintain a steady growth margin. We are now also focused on the growth of the company. We are looking for new directions of growth and with some new business try out initially, usually we will make the growth margin more aggressive to attract new customers. So balance that, we expect a steady growth margin for the near future.

And then come to Timothy's second question about AI. In the midst of the AI boom during Q1 this year, we shared our insights and the direction. We are optimistic about upgrades and efficiency that AI and AIGC can bring to IoT developers and end users. Our perspective remains consistent, and we're currently working on various AIGC-related projects. Firstly, a common approach in IoT industry is the utilization of AI in customer services. We are leveraging AI to empower Tuya's customer support, enabling more intelligent and flexible conversations with users, thereby providing more personalized and high-quality services. Additionally, by training on Tuya's documentation, we can pinpoint end users user issues with more precision and automate responses and interactions.

This not only enhances the user experiences, but also significantly boosts efficiency for end users, enterprise developers, and the Tuya's internal R&D team. The second direction is to empower developers. For instance, Tuya's fast development framework now allows for the auto generation of general service codes based on described requirements, such as device inquiries, scenario inquiries. This ensures that developers, when creating their IoT device management platforms or similar needs, can significantly improve efficiency, reduce development costs and entry barriers, and maintain code quality and consistency. It enables developers to concentrate more on the development and innovation of business logic....The third direction is AI assistant. We're not referring to speakers, but mobile apps or central control panels with interactive screens. This AI assistants enable end users to seamlessly set up and enjoy IoT scenario setting, bridging the gap between various fragmented intermediate links.

For example, when a user says, "Help me analyze energy consumption from August third to twelfth," they can instantly view the corresponding analysis result on the AI assistant interface, followed by personalized recommendations for energy saving or other usage scenarios, and so forth. Besides the broader directions just mentioned, let's delve into a specific case related to enterprise-level projects. We assisted clients in generating device management strategies using AI. Specifically, we begin by custom training several popular language models based on industry verticals, creating professional models that understand device operation and energy saving requirements. Users can then state their needs, such as maximum energy saving or utmost comfort. The model, considering historical data, predicts device usage under different strategies. It weighs the costs and impact of strategy implementation, presenting users with several optimization options.

The entire process eliminates the need for intricate parameter configurations, and it's carried out through interactive dialogue, with the primary goal being to enhance user energy efficiency and comfort. Finally, it's crucial to emphasize that one of AIGC's most notable features is the transformation of human-machine interaction methods. Whether the output results meet expectations, whether they are commercially viable, and how cost-effective AIGC is in various scenarios are intricate industry-wide questions that are still being explored. It's currently in our segment; it's still the early stage of the AI journey. Thank you. The operator can move to the next question.

Operator (participant)

Thank you. Our next question comes from Ming Ren Lee of CICC. Please go ahead.

Ming Ren Lee (Analyst)

Okay. Let me translate myself. Thanks for taking my questions. My first question is that what kind of products in PaaS and which downstream scenarios means that you're saying will be more resilient to support our full year growth under relatively weak demand? And my second question is that we see this quarter is the first time that you achieved breakeven profitability on non-GAAP net income faster than our expectations for change. So could you please give us more color about the future trends of breakeven? Thanks.

Jessie Liu (CFO)

Okay. Thank you for the CICC's question. Let me first address the growth patterns of different categories. So the differences in our different categories business are quite noticeable. Our performance aligns well with the trends highlighted earlier for each region. However, between Tuya's and the final consumer, the business operations and the decisions of downstream companies also play a significant role. So this quarter, our performance was significantly hampered by the lighting sector, but most non-lighting sectors have already achieved a modest year-over-year growth. For example, the safety sensor sector, this quarter, has almost leveled year-over-year. This can be attributed to the fact that during a volatile period, the fundamental demand for safety and protection remained stable.

The home alliance sector has shown year-over-year growth since the first quarter of last year, with an impressive growth exceeding 20% of this Q2 quarter. It's a very positive sign. Furthermore, we remain bullish on the renewable energy segment itself, as well as the value generated from integrating renewables devices with other IoT home devices. While we're just at starting, we believe we are among the global competitive enterprises when it comes to integrating home alliance IoT with new energy products. Our residential PV energy storage IoT solution displayed at AWE this year not only manage traditional household electricity consumption, but also visualizes real-time energy flow from solar power generation, the energy storage batteries, distribution and the consumptions to electric vehicle charging.

It can optimize energy usage strategies, and assist homeowners in managing household energy efficiently, especially like Europe, Australia. In terms of SaaS and other segments and end smart scenarios, we've discussed scenarios like cloud storage and intelligent business earlier areas earlier. There are distinct differences in business models and the products. For instance, software services addressing end user rigid demands have a more pronounced advantage. SaaS, being a direct B2B offering, is greatly influenced by corporate budget decisions and business development efforts. However, we remain resilient in this area. The pandemic disrupted our global promotion of SaaS offerings years ago, but as restrictions eased toward the end of last year, we restarted our efforts, focusing mainly on China market and Southeast Asia regions. We have been making steady progress. In Thailand, we secured a project with Riset Groups.

Furthermore, replicating our benchmark project in Spanish student apartments, we secured another project in the UK. And now go to the second question about the profitability. So we will continue to prioritize achieving a non-GAAP operating breakeven as a key goal while maintaining quality business operations, we will explore new avenue for growth. Our main operation focuses include, first, we will rigorously maintain an efficient organizational scale, and continue to seek areas for adjustments and optimization. Second, we will persistently identify methods to reduce costs and improve efficiency within our operations, including refining our business models. Thirdly, as we explore new growth directions, we will remain rational in our capital expenditure, always keeping an eye on the return on investment.

In summary, we are committed to pushing our top-line revenue return to a growth trend. Furthermore, at the basis of sustain our gross profit margin. Furthermore, we aim to maintain or reduce non-operating non-GAAP operating expenses. We hope to achieve our non-GAAP operating breakeven within the next few quarters. And we aim to maintain non-GAAP net profit in the future. So, that's all my answers. Thank you.

Operator (participant)

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

Jessie Liu (CFO)

Okay. So thank you all again for joining our call. If you have further questions, please feel free to contact us or request through our IR website. We look forward to speaking with everyone in our next earnings calls. Have a good day.

Operator (participant)

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