Recently, the question I've been asked the most is: Where will 2024 actually go? Compared to the confusion of the market in previous years, more keywords this year were unavoidable panic. In the field of intelligence, the trend changed at the end of last year. Many major companies shut down part of the IoT platform business. For example, “Late LatePost” reports that at the end of last year, Alibaba Cloud began cutting down the project design business customizing industry solutions for government and enterprise customers, and cut down hardware integration services and related personnel in the IoT business line.

In response to this, the author's answer is more optimistic. Every industry has its maturity curve. The exit news that appeared one after another last year just shows that intelligence is about to enter the next era — the first stage of barbaric growth has passed, and it is inevitable that the bubble will be squeezed.

The beginning of 2024 is full of imagination. At the macro level, technology was concentrated, and AI technology innovations such as Sora and Genimi 1.5 Pro exploded the technology community. With the buzz about new productivity, the development trend of intelligence became more definite; focusing on the micro, the smart industry moved from narrative to commercial value release. For example, Graffiti's 2023 Q4 and full-year earnings reports showed significant year-on-year revenue growth, turning profits into profits.

Next, the author will use graffiti as an example to explain which companies will get more opportunities in the second half of intelligence to clarify the trend of the intelligent market.

01

Intelligent second half:

On the eve of the industry entering a period of rise

According to the graffiti Q4 financial report, the company's revenue increased by 42.2% year on year; comprehensive gross margin set a new record, and net cash flow from operating activities increased to US$31.8 million year over year. Looking at the full-year dimension, annual non-GAAP net profit was achieved for the first time in 2023. The company's performance was ahead of the entire industry to stabilize, and achieved significant growth in 23Q4. As a representative enterprise in the intelligent industry, Graffiti's performance also reflects the development of the entire industry to a certain extent.

The development trajectory of reprocessing technology can be broadly summarized into five stages: technology development period, expected expansion period, bubble disillusionment period, climbing recovery period, and steady growth period. Technology investment has two high-return periods: an expansion period of rapid growth expectations and a period of upward recovery. However, the expected expansion period is an early stage of technological innovation, and the risk is extremely high. However, during the recovery period, new technologies will flourish, industry valuations will rise accordingly, and the performance of leading companies will take the lead in rising.

Back to the field of intelligence: The period before 2021 was viewed by many as a period of expansion of industry expectations. Since then, in the past few years, the industry has entered a period of bubble disillusionment. However, from the end of 2023, the market showed signs of entering a new phase.

Wang Xueji, founder and CEO of Graffiti Intelligence, said during the Q4 performance conference call: “Over the past year, we have witnessed global trends. More and more influential companies around the world are entering the field of intelligent technology due to competition, opportunities in the face of adversity, and the drive and demand of their own business. This trend is particularly evident in emerging markets such as Latin America and the Asia-Pacific region, where awareness and acceptance of intelligence have increased significantly.”

From an investment perspective, the smart industry has gone through a thorough process of digesting expectations, and sector valuations already have sufficient safety pads. From a market perspective, on the one hand, production capacity has been greatly cleared, freeing up development space for competitive players; on the other hand, policy guidelines for new quality productivity and technological innovations such as AI are driving the intelligent industry into a more mature commercialization era. The prelude to the second half of “pan-intelligence” has already begun.

02

Pragmatic and enterprising

Graffiti Strategy Leads to Revenue Growth

Many years ago, graffiti proposed the end of the traditional Internet of Things, which must be the Internet of Everything. From the beginning, graffiti clearly positioned itself on a neutral “pan-intelligent” base. The company does not stand in front of the stage, but has always been behind the scenes, drives the Internet of Everything with innovative technology, and is committed to becoming the best partner for every enterprise with intelligent needs. It provides cutting-edge technologies such as IoT, AI, and cloud computing to help customers build diverse smart business scenarios and spare no effort to help customers succeed. At the same time, graffiti will also share the IoT, AI, and cloud computing technology it excels at with more developers. Therefore, graffiti is inherently a pan-intelligent enabler.

Based on this, graffiti in 2023 did at least two things to seize this opportunity: focus on major customers at home and abroad and enhance products. This means abandoning the extensive commercialization route adopted by the public from graffiti and focusing on deepening the intelligent field of high value and high potential.

The essence of the big customer strategy is to focus on high-potential, high-efficiency customers. It's clear that big customers are often the main players in industry transformation. Graffiti selects refinement to cultivate major customers, thoroughly understand the needs of high-quality customers, and discover higher intelligent value. For example, Graffiti Intelligence and major customers such as Midea and Haier continue to expand diverse fields such as energy and whole homes, explore opportunities for commercial cooperation, and work together at the cutting edge of the market to meet market needs faster.

Furthermore, graffiti itself has global genes, making its customers more resilient to risk. In recent years, Graffiti has been balancing the global customer layout, pioneering customers such as Vivo, the leading operator group in Brazil, and Choppies, one of the largest supermarket chains in Latin America, and using the Cube smart private cloud, which is recognized by global customers, it has won orders from groups such as China Gas, Telecom Indonesia, Thailand's leading telecommunications group, and German Centennial Shipbuilding Company to create intelligent businesses for these giant customers.

The essence of product thickening is to expand high-value intelligent software and hardware integrated solutions. By building a stronger and more focused product matrix, all three of Graffiti's business divisions received strong revenue growth. Among them, the Q4 “smart device distribution” sector achieved revenue of about 7.8 million US dollars, an increase of 64.6% over the previous year. At the same time, gross margin has gradually increased from about 10-15% in 2022 to about 30%. The revenue of this sector until 2023 mainly came from providing customers with supply chain services for the smart device business, but in 2023, it was successfully transformed into a software and hardware integrated intelligent solution that provides higher value under the strategy of product enhancement. Revenue from the IoT PaaS business and SaaS and other businesses was 47.2 million US dollars and 9.5 million US dollars, respectively, with year-on-year increases of 44.6% and 19.3%, respectively, and gross margins of 44.8% and 74.2%, respectively, which remained steady. Revenue growth and steady growth in gross margin in each of the above sectors continued to push graffiti's comprehensive gross margin to 47.3% in Q4, setting a record high for the second consecutive quarter.

With the above strategy of focusing on “high value,” Graffiti ended the past year with strong, continuous quarterly growth.

Morgan Stanley released a report saying that Graffiti's revenue and profit margin for the fourth quarter of 2023 significantly exceeded expectations, reaffirmed Graffiti's purchase (OW) rating, and raised the target price to $3 again, with room for an increase of about 50-60% from the current price. Following a year-on-year revenue growth rate of 35.7% in the 3rd quarter of 2023, graffiti's revenue reached US$64.4 million in the fourth quarter, up 42.2% year on year. This is the fifth consecutive quarter of a month-on-month improvement in revenue. After the industry's severe inventory removal and high inflation were mitigated, it entered a relatively normal seasonal business cycle. At the same time, the company's operating efficiency continued to improve. The overall gross margin in Q4 increased 2.7 percentage points year on year to 47.3%, and the overall gross margin for the whole of 2023 increased to 46.4%, an increase of 3.4 percentage points year on year. The full year's non-GAAP net profit margin was 8.9%, and the company achieved a positive annual profit for the first time.

The company's hematopoiesis also increased significantly, and cash flow continued to improve significantly. The net operating cash inflow in Q4 reached approximately US$31.8 million. By the end of Q4, the company's total net cash reached US$984.3 million. Recently, the total market value of the company was only about US$1.1 billion. The safety cushion in the middle goes without saying. Morgan Stanley pointed out that the current transaction price of graffiti is only 12% higher than its net cash, which means that the price-earnings ratio other than cash in 2024 is at a low single-digit level.

This shows that at this stage, graffiti has been significantly underestimated, both in terms of growth potential and market price.

03

Next Era Graffiti

Business going backwards, customers moving forward

Judging from the short cycle, inventory removal is coming to an end. Beginning in the 3rd quarter of last year, downstream inventories began to normalize, and inventory levels have returned to healthy levels. Graffiti director and CFO Liu Yao pointed out that the fourth quarter marked a shift in graffiti from recovery to growth, efficiency improvements and profit expansion. Considering that graffiti focuses on operating efficiency and that the inventory backlog problem is a thing of the past, the company's fundamental transformation has an opportunity to resonate with the macroeconomic environment, and the near future prospects are worth looking forward to.

Looking at the longer cycle, the global pan-intelligence process has entered the second half, and this is a better and larger world. AI, 5G, and IoT are integrated into every aspect of life as infrastructure, and more and more AI will migrate or combine to IoT devices, providing new and unprecedented opportunities. Morgan Stanley pointed out that the diversification of graffiti's global customers and product distribution, as well as increased competitiveness, forms the cornerstone of its positive outlook for the future.

Looking back at the previous era, graffiti grew at an unprecedented rate and gained a leading competitive position in the market among the giants. Graffiti is one of the first players on this track to pass the test.

In the new stage, with leading ABC (artificial intelligence, big data, cloud) technology and software and hardware capabilities such as rich smart device product matrices, as well as the world's leading platform ecosystem, graffiti is also jumping into a broad field other than consumer electronics, continuously breaking through the boundaries of pan-intelligent imagination.

For example, for the ESG energy sector, which has been very popular in recent years, Graffiti has efficiently launched diversified solutions such as household energy management, which has received a good market response in Europe and Asia Pacific. In the fourth quarter, Graffiti further created innovative products in terms of intelligent heating and ventilation temperature control use cases, and achieved good customer progress; Graffiti further strengthened energy-saving applets and intelligent temperature control valve solutions, combined energy saving algorithms in heating applications with Graffiti's advanced cloud algorithm capabilities, and paired them with more intelligent and accurate temperature control devices.

As an intelligent platform, Graffiti will continue to silently stand behind customers and partners around the world, helping them achieve their intelligent business layout in a highly efficient and valuable manner. Ultimately, more and more global customers are gaining commercial success in the field of graffiti intelligence, which will also feed back the continued growth in graffiti value.

04

epilogue

So far, there are relatively accurate conclusions about where 2024 is headed. With the development of technologies such as AI, IoT, and cloud computing, as well as policy guidelines such as new quality productivity, intelligence is a definitive development path.

Intelligence has also gradually entered a mature period, and the market is beginning to see results. Staying steady during the ups and downs of the past few years, graffiti showing profitability when an optimistic outlook arrives let us see the path to an intelligent future — platform-based enterprises will become the ballast stone of the intelligent industry.

At the same time, the path chosen by graffiti is also worthy of everyone's attention: becoming a soil for customer innovation, fully supporting more customers to enter the intelligent era, achieving commercial success, lowering the threshold of intelligence, allowing everyone to enter and innovate, and promote the popularization of intelligent application scenarios such as killer apps.

The prosperity of the intelligent industry requires the continuous efforts of intelligent platforms such as graffiti to make intelligence from complex construction to popularization and simplification, and give more enterprises the opportunity to integrate into the AI intelligent business era. The intelligent second half is open to everyone, and the platform's value-added potential is clearly visible.