2Q24 Revenue and adjusted net profit exceeded our expectations

Graffiti Intelligence announced 2Q24 results: revenue of 73.28 million US dollars, up 28.6% year on year, exceeding our previous expectations, mainly due to IoT PaaS revenue growth exceeding expectations; adjusted net profit of 20.83 million US dollars, corresponding to an adjusted net profit margin of 28.4%, which exceeded our previous expectations, mainly due to the company's strict control of expenses and scale effects. On August 26, 2024, Graffiti's board approved a special dividend plan of $0.0589/common share (or ADS), amounting to approximately $33 million.

Development trends

IoT PaaS continues to recover, and smart solutions are growing strongly. 2Q24 Graffiti IoT PaaS business revenue increased 32.0% year over year to $54.29 million, mainly due to downstream inventory replenishment demand and overseas distribution of home appliances. In the past 12 months up to June 30, 2024, the net expansion rate of the IoT PaaS business rose to 127% (58% in the same period last year), the number of IoT PaaS developers increased 20.1% to 1.192 million, the number of high-end customers increased from 251 in the same period last year to 280, and high-end customers increased their share of IoT PaaS revenue to 84.8% (79.8% in the same period last year), and the major customer focus strategy continued to advance. From a geographical perspective, demand growth in Europe, Latin America and other regions was strong in 2Q24.

2Q24 SaaS and other business revenue increased 2.4% year over year to 9.58 million US dollars, and the company continued to focus on the sector; revenue from smart solutions increased 44.2% year over year to 9.4 million US dollars. Benefiting from the deep integration of the company's intelligent software capabilities, 2Q24 received more than 0.5 million orders in Europe. At the same time, the company continues to be deeply involved in GenAI, covering various categories such as smartwatches and AI headsets. Some categories will be pre-produced by the end of the year, and management publicly stated that related revenue is expected to gradually appear starting next year.

Gross profit margin is progressing steadily, and cash flow continues to improve. The overall gross margin of 2Q24 graffiti increased 1.3 percentage points year-on-year to 48.0%. The gross margin of IoT PaaS/SaaS and other/smart device solutions was 47.6%/71.0%/26.8%, respectively, +3.4/-3.5/+3.8ppt. Benefiting from scale effects and cost control, the company's adjusted operating profit turned a loss into a profit for the first time in 2Q24 and recorded 7.35 million US dollars, corresponding to an adjusted operating profit margin of 10.0% (-11.2% for the same period last year). The 2Q24 company's operating cash flow was USD 11.83 million, and cash on hand (including long-term and short-term investments) was approximately USD 1 billion as of the end of the quarter.

Profit forecasting and valuation

The 2024 and 2025 revenue forecasts remained unchanged, and adjusted net profit forecasts for 2024 and 2025 were raised by 5.3% and 9.2% to $49.22 million and $54.31 million, taking into account scale effects and cost controls. Maintain the outperforming industry rating and reduce the target price by 26% to $2 (based on 4 times the 2024 P/S valuation), taking into account the decline in the industry's valuation center. The company is currently trading 3 times the 2024 P/S, and our target price has 28% upside compared to the current stock price.

risks

Downstream demand is weak, and customer growth falls short of expectations.