Tuya Smart (TUYA.US) – Note 0

I think Tuya’s IoT Cloud is very interesting and might try to do some visualization. This note is for preparation purpose.

[March 19th, 2021]

Tuya Smart is a leading global IoT Cloud Platform that connects the intelligent needs of consumers, manufacturers, brands, OEMs, and retail chains. The platform provides developers with a one-stop IoT PaaS-level solution that contains hardware development tools, global cloud services, and smart business platform development, offering comprehensive ecosystem empowerment from technology to marketing channels to build the world’s leading IoT PaaS.

Tuya’s “About” on Linkedin

Products / Services

Tuya makes things smart and builds IoT developer ecosystem. The company provides a platform that not only connects users (App as UI), devices (powered by a network module) and suppliers/operators (backend) but also covers the supply side value chain such as OS and development tools (the ecosystem) for various verticals – operating system on which software-in-boxes are running and tools to make those software.

Underlying Dynamics – Network Effects

In a consumer facing vertical like Smart Home, the platform has same-side local/global network effects on both demand side and supply side, and cross-side network effect. Supply side is the key to solve cold start problem and demand side can lubricate the loop with assistance from platform holder (e.g. Powered By Tuya to acquire consumers’ mind share and remind them the potential convenience and incremental value in their decision making process).

Typical characteristics of network effect such as lock-in, switching cost, fight for standard, winner-takes-most… will apply, in particular on supply side.


  • Smart Home: the devices powered by a single platform might have high penetration in individual household and supplier’s product lines due to local same side network effect. However, players focusing interoperability across platforms and calculated multihoming among certain suppliers will market viable for several platforms.
  • There is geographic boundary for most players. Localization is the key for player to go global.
  • Few IoT PaaS players share markets in each “geography” (different boundary such as geopolitical…) when markets saturate.

Market & Go-to-Market

IoT – Consumer

The IoT market is estimated to be a fragmented trillion dollar market so there are many players trying to grab land in each vertical and value chain. In consumer-facing scenario, IoT is not a mission critical for consumers so the adoption will be primarily driven by supply side. While the abovementioned networks effect looks very attractive but they are much less powerful than that of social network. Huge market and a very long runway. Ecosystem player should focus on adoption/penetration acceleration.

IoT – Non-consumer

Software platform (maybe tools focusing on workflow along the value chain) and applications that show use cases and incremental value for enterprise customers are needed to penetrate each vertical.

Each suite of software for a vertical has the potential to become standalone enterprise SaaS product. The Go-to-Market might be IoT PaaS with a freemium SaaS. Lock-in of IoT PaaS might make conversion of freemium SaaS make economic sense (for Tuya). A scenario is real estate where devices are deployed in property and management system (software) is installed to operate the property. To go each vertical, the company needs domain knowledge at least to be considered as a player. You can imagine the how crowed each vertical SaaS is.

Revenue Streams

Tuya currently has three revenue streams: IoT PaaS, Smart Device Distribution and SaaS & Others. To understand the nature of each revenue stream, it’s important to review their revenue recognition.

IoT PaaS

The Group’s IoT PaaS combines cloud-based connectivity and basic IoT services, edge capabilities (including modules and IoT operating system embedded), device optimization solutions, and app development. Customers are charged based on the number of IoT PaaS product to be deployed on smart devices. The Group determined there are two distinct performance obligations in the delivery of IoT PaaS including (1) IoT PaaS product with edge capabilities, device optimization solutions and app development and; (2) cloud-based connectivity and basic IoT services provided to customers and end consumers.

For the delivery of IoT PaaS product, revenue is recognized when IoT PaaS products are accepted by customers, which is the point that control of the product is transferred to the customers. A receivable is recognized when the IoT PaaS products are delivered and accepted by customers as this is the point in time that the consideration is unconditional. For cloud-based connectivity and basic IoT services, revenue is deferred and subsequently recognized from the end consumer’s activation to the end of the estimated IoT PaaS product’s life cycle on a straight-line basis. Based on the Group’s historical information, activation occurs, on average, an estimated 6 months after the IoT PaaS products are delivered to customers. The length of life cycle of the IoT PaaS products is estimated based on the historical data in previous years and by referencing the life cycle of different smart devices (e.g. lighting, security and monitoring devices) which ranged from 1.5 to 2 years.

Customers have a general right of return of the unqualified IoT PaaS products. Historically, the rate of return has not been material.

The Group launched a new membership program (the “2020 Membership Program”) in the fourth quarter of 2020 and no longer offered 2019 Membership Program ever since. In the 2020 Membership Program, customers pay a non-refundable fixed fee in exchange for member-exclusive IoT PaaS discounts within the membership period of typically 12 months. The Group records the upfront fixed membership fee as a deferred revenue and recognizes revenue on a straight-line basis typically over the 12-month membership period in which customers entitle to the membership.

IoT PaaS that Tuya offers is a bundle of hardware product (edge capabilities…) and software/cloud-based connectivity service (while the company use a different cut in revenue recognition). If a company delivers physical products, it means the company generally has inventory. Two implication of inventory: 1) the gross margin of physical goods is generally less than that of software; 2) inventory generally consumes capital when the business is scaling.

The hardware in the bundle makes margin low but the software makes customers stay. There are few factors that determines the gross margin of IoT PaaS deployment: 1) economics of scale; 2) declining electronic components price; 3) pricing power of IoT PaaS ecosystem lock-in.

I think the membership program is to help fund the working capital need at the expense of gross margin.

This revenue stream is not recurring but reoccurring. In addition, it’s not usage-based. The term “usage” in F/1 is more like “penetration” or “adoption.” Tuya uses number of deployments and dollar-based net expansion rate to monitor the performance of this business.

Smart Device Distribution

In certain circumstances, the Group offers select brands, primarily customers who prefer not to deal with multiple OEMs, an option to purchase directly from the Group finished smart devices where IoT PaaS is deployed. After the brands place purchase orders directly with the Group, the Group then sources the appropriate smart devices from OEMs based on the type of devices, hardware specifications and other metrics. The Group determines that there are two distinct performance obligations for its smart device distribution including the (1) smart devices embedded with IoT PaaS; and (2) cloud-based connectivity and basic IoT services. The transaction price allocation and revenue recognition are the same as the revenue from IoT PaaS.

This revenue stream needs even more working capital and generate lower gross margin. Tuya strategically controls the scale of this business.

SaaS and Others

SaaS and other revenue mainly include industry SaaS, customized software development and configuration, and other VAS to both business customers and the end consumers.

Industry SaaS is a vertical-focused software solution that enables businesses to easily and securely deploy, connect, and manage large numbers of smart devices for which the Group generally charges an annual subscription fee. These services include software authorization and standard SaaS platform maintenances and technical support.

Customized software development and configuration mainly relate to contracts for the specific IT needs of the brands. The contracts generally include fixed milestone payments determined based on expected labor hours to complete the milestone.

VAS primarily includes complementary services that are provided to brands and OEMs such as app launch, AI-powered virtual voice assistants, and data analytics and others. Such arrangements with the customers are short term and the performance obligations are satisfied at one point in time. VAS also include cloud-based services for the end customers such as IoT data storage, push messaging, object detection and digital content.

Industry SaaS is recurring and high margin. The rest revenue streams are high margin but they might not be recurring.

Traction & Metrics

  • IoT PaaS
    • seasonality with revenue concentrating in second half of the year.
    • growth metrics: dollar-based net expansion rate and YoY growth
    • gross margin is improving gradually
    • average revenue per deployment is relatively stable (at least in these two years…)
    • premium customers contribute most of the revenue
  • Smart Device Distribution
    • seems not Tuya’s focus
    • low margin
  • SaaS and Others
    • typical SaaS, high margin
    • gaining traction
    • need more metrics about this revenue stream
  • Margin & Expense Ratios
    • blended gross margin has been growing due to 1) improving gross margin of IoT PaaS; 2) declining contribution from Smart Device Distribution; 3) increasing contribution from SaaS
    • all expense ratio shows operating leverage
    • S&M expense is smaller than normal level because the absolute value only increased by 1% from 2019 to 2020 due to slowdown in marketing efforts through in-person conferences and events
      • the top line still grew 99% so you can argue the value proposition is very strong (or network effect is kicking in at least on the supply side)

Growth Strategy

– IoT PaaS

  • Acquiring new customers (B, supply side)
  • Penetrating existing customers (B, supply side)
  • Penetrating the workflow and value chain and onboarding “developers” (B, supply side)
  • Powered By Tuya to acquire mind share of end consumers (C, demand side)

– SaaS

  • Leverage IoT PaaS and build know-how to penetrate vertical.


Gross margin improves gradually. Operating leverage will kick in but short term S&M exp ratio might increase as business activities will be back to normal. (can we expect even more top line growth because increased marketing dollar should have some positive impact?)

Both IoT PaaS and Smart Device Distribution need working capital to fuel growth. I think Tuya is still in a stage that needs capital to scale. So calculation of runway and burn rate and estimation of capital raising activity are important even after it gets listed.

While the potential contribution from SaaS looks attractive, we don’t know their unit economics. Tuya might need more S&M to scale SaaS business. This is another reason why current S&M expense ratio is too low for this fast growing company.


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