Closer to mid-2024, generative AI is still on the rise. Not only are listed companies starting a new round of financing for generative AI research and development, but stock prices in the secondary market are also rising on the news.

Recently, as soon as news of Graffiti Smart-W (02391) joining the UN Global Compact came out, US stocks rose about 10% before the market. According to the report, the company will enhance sustainable development initiatives and promote global sustainable development through innovative technologies such as generative AI. Since May, the company's Hong Kong stock price has risen by about 27%, and there is no shortage of incentives for Q1 performance that exceeded expectations.

Q1 results exceeded expectations, but still did not break out of losses

According to the Zhitong Finance App, Graffiti Intelligence is a representative manufacturer on the IoT circuit. It has deep experience in IoT software development and provides comprehensive IoT development solutions for the different technical needs of enterprise customers from large consumer hardware manufacturers to small original equipment manufacturers.

In the first quarter of 2024, the total revenue of Graffiti Intelligence was US$61.7 million, up 29.9% year-on-year, mainly due to the increase in IoT PaaS revenue, SaaS and other revenue and smart solutions; net loss narrowed by 83.2% to US$3.5 million from US$21 million in the same period in 2023.

Since 2021, the company's losses have continued to narrow, with revenue of US$230 million in 2023, up 10.5% year on year; net loss of US$60.3 million, narrowing by 58.7%, and non-GAAP net profit of US$20.4 million, marking the company's first year of profitability to reach balance of income and expenditure under non-GAAP.

As of Q1 2024, Graffiti Intelligence has been making steady profits for four consecutive quarters. It is also the first time in history that it has achieved non-GAAP profits in the first quarter, which has always been a low revenue season due to the Spring Festival. Thanks to the recovery in overseas consumer electronics demand and the steady rise in global demand for smart solutions, the company's core business, the IoT PaaS business, continued to rebound strongly, driving profit margin improvements, and providing a good start to 2024.

However, it is worth mentioning that in 2023, the company's operating expenses fell from 258 million US dollars in the same period last year to 212 million US dollars, of which R&D expenses fell by 43 million US dollars; net loss for the whole year fell from 146 million US dollars to 60 million US dollars. The extent to which the narrowing of the company's losses was due to a reduction in R&D expenses remains open to discussion.

By business, up to now, IoT PaaS still accounts for the main revenue. IoT PaaS revenue for the first quarter was 45.6 million US dollars, up about 36% year on year; SaaS and other revenue was 8.6 million US dollars, up about 1.8% year on year; and revenue from smart solutions was 7.5 million US dollars, up about 37.3% year on year. In the future, a unified revenue structure may affect the company's resilience to risk.

In terms of the core IoT business, the company adopted a strategy of focusing on large customers. The total number of customers decreased over the past year, while high-quality IoT PaaS customers (that is, customers contributing more than 100,000 US dollars in IoT PaaS revenue in the past 1 year up to the reporting period) showed a slight increase.

Specifically, the company's total number of customers dropped from 7,600 at the end of 2022 to 6,100 at the end of 2023. The total number of customers in Q1 2024 was about 3,000, a slight increase compared to 2,800 in the same period last year; IoT PaaS customers also showed the same downward trend, with 1,100 fewer in mid-2023 by about 22%, while Q1 in 2024 remained the same as the same period last year.

For high-quality IoT PaaS customers, the revenue share of this customer group increased from 81.7% in 2022 to 83.4%, reaching 85.1% in Q1 2024. Despite the increase in overall revenue in the IoT business, the company's ability to develop new customers may be a matter of concern for investors.

In contrast, the IoT developer ecosystem is optimistic. By the end of 2023, the number of registered IoT device and software developers increased by 40.3% compared to the same period last year. In Q1 of 2024, the number of registered developers continued to increase by 8.2% to 1.074,000, and the number of registered developers exceeded 1 million.

Furthermore, the global layout has become a highlight in the company's performance. About 83% of total Q1 revenue comes from overseas demand, Europe slightly exceeds 1/3, and the Asia-Pacific region's share of contributions has risen markedly for 3 consecutive years. Currently, the Latin American region's revenue contribution has exceeded 12%.

IoT circuit commercialization dilemmas need to be solved

According to data from CCID Research Institute and Shenzhen Internet of Things Industry Association, the growth rate of the national IoT industry increased by 2 percentage points year-on-year in 2023, reaching a scale of about 3.6 trillion yuan. During the 13th Five-Year Plan period, the compound annual growth rate of the national IoT industry reached 23.4%. During the 14th Five-Year Plan period, it is expected to maintain a high growth rate of 18.9%. The scale of the national IoT industry is expected to exceed 5 trillion dollars in 2025.

Although the Internet of Things is an emerging Chaoyang circuit with broad development prospects, in recent years, the capital market has not paid as much attention to the Internet of Things sector as new energy and big data, and technology giants such as Google and Ericsson have also repeatedly reported that they have shut down their IoT businesses. At its root, the main reason is customer acquisition and commercial monetization problems.

According to the Zhitong Finance App, in 2023, while the number of users and terminal connections in the IoT field continued to grow, the performance of enterprises in the IoT field was “a few happy and a few sad.”

For example, while China Telecom's IoT business revenue rose 48.3% throughout the year, Yiyuan Communications (603236.SH), a leading IoT service provider, declined from profit to loss of 277 million yuan in the same period last year to a loss of 115 million yuan. Furthermore, Guanghetong (300638.SZ), an IoT module leader focusing on automotive, FWA, PC, etc., increased 36.65% and 54.47% respectively. The performance was strong.

Looking at the segmented circuit of the Internet of Things, how to deal with the “downsizing attack” from Internet giants will become a proposition that every company cannot escape. Just as Yiyuan Communications's communication module faces competition from chip manufacturers newly launched integrated chips with built-in wireless communication functions, graffiti intelligence also needs to think about how to deal with the IoT platforms and ecosystems built by Internet giants such as Google and Microsoft. Under these circumstances, Graffiti Intelligence already has a natural disadvantage in terms of brands, and the number of the company's customers is not increasing but decreasing, which also seems to indicate that the company is vaguely lagging behind in terms of market share.

Judging from downstream industry applications, the NEV market is also one of the popular tracks that many IoT companies are betting on. For example, Guanghetong acquired the automotive wireless communication module supplier Ruiling Wireless, and the in-vehicle business became the company's largest business in 2023. In contrast, Graffiti Smart's customers mainly come from smart home, smart commerce, new energy, education, agriculture, outdoor sports and entertainment industries. Measured by the growth rate of downstream demand, there may be limited room for improvement in the company's subsequent performance growth rate.

Can the big AI model “take the lead” in stock prices?

In 2023, the boom in generative AI also hit the IoT industry. Recently, Graffiti Intelligence officially changed the name of the smart device distribution division to Smart Solution Smart Device Solution. The business also recorded revenue of 7.5 million US dollars in 2024 Q1, an increase of 37% over the previous year, and gross margin rose to 28.3% from 21% in Q1 last year.

According to the Zhitong Finance App, the smart device distribution segment of Graffiti Intelligence is mainly smart hardware devices, including Zigbee gateways, central control screens, smart anti-lost devices, smart bird feeders, etc. Specifically, the company's new Smart Solution concept is the ability to connect devices such as smart central controls, smart watches, smart light strips, and smart pets to generative AI-enabled voice capabilities. In application scenarios such as the home, AI capabilities will improve the interactive experience and interaction efficiency, and provide users with functions such as personalized intelligent scenario configuration suggestions, operation status query and alarms, scene analysis conclusions, and linked solutions.

In terms of the developer ecosystem, the company plans to integrate generative AI technology into the development process, so that developers can enter the development process through dialogue and interaction, generate UI interfaces, or check problem logs and return code suggestions through AI.

Recently, Graffiti Intelligence Program launched its first AI spatial model - the net zero carbon model. According to the introduction, the model is based on the huge equipment scale and open source model capabilities of the graffiti ecosystem. It can comprehensively reflect the energy consumption situation in the real world, explore hidden energy saving and emission reduction laws, and provide great value to customers and users in the field of intelligent spatial services.

However, as we all know, training costs for large AI models and computing power infrastructure require a large investment of capital. With the company already cut R&D expenses by nearly 30% last year, it is not yet known how much “gold content” this big AI model has.

Overall, behind Graffiti Intelligence's recent good performance, the reduction in the number of customers and reduction in R&D costs are still factors worth worrying about, and progress in AI may have more meaning in favor of gimmicks. Looking ahead to the future market, the reason for the company's revaluation is more about when performance will be reversed. After all, if it is not possible to achieve its own hematopoiesis, there is no way to talk about many growth stories.