Yalla Group Limited (NYSE:YALA) Q3 2022 Earnings Call Transcript

Yalla Group Limited (NYSE:YALA) Q3 2022 Earnings Call Transcript November 14, 2022

Operator: Good morning and good evening, ladies and gentlemen. Thank you for standing by for Yalla Group Limited Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference call is being recorded. Now, I will turn the call over to your speaker host today, Ms. Kerry Gao, IR Director for the company. Please go ahead, ma’am.

Kerry Gao: Hello, everyone, and welcome to Yalla’s third quarter 2022 earnings conference call. We released our earnings earlier today, and the release is now available on our IR website as well as on Newswire services. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provision of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our future results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties is included in our earnings release and our annual report filed with the SEC. Yalla does not assume any obligation to update any forward-looking statements, except as required by law.

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Please also note that Yalla’s earnings press release and this conference call include a discussion of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. Yalla’s press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. Today, you will hear from Mr. Tao Yang, our Chairman and Chief Executive Officer, who will provide an overview of our latest achievements and growth strategies. He will be followed by Mr. Jeff Xu, our Chief Operating Officer, who will give a brief review of our recent developments. Ms. Karen Hu, our Chief Financial Officer, will then provide additional details on the company’s financial results and discuss our financial outlook.

Following management’s prepared remarks, we will open up the call to questions. Mr. Saifi Ismail, the company’s President is unavailable for today’s call due to a personal emergency. With that said, I would now like to turn the call over to our Chairman and Chief Executive Officer, Mr. Tao Yang. Please go ahead, sir.

Tao Yang: Thank you, Kerry, and thank you, everyone, for joining our third quarter 2022 earnings conference call. We are pleased to have delivered another strong quarter with record revenue of US$80.1 million, exceeding the higher end of our guidance by 6.8%. This also represents a third conductive culture of marketing revenue for the company and underscores our unique capability in driving business growth at a solid pace, while continuing to develop our integrated product ecosystem. Such robust quarterly results are underpinned by our continuous efforts to refine our operational projects, optimize user acquisitions and further drive our product monetization. Together, these actions have effectively improved our user experience, thereby for collaborating Yalla’s and Yalla Ludo engagement and users willingness to pay on our platform.

Also, our impressive quarterly results are a testament to our core strategy, as well as our operational improvements. As we further deepen our expertise and building our product portfolio in MENA, we are confident in our future growth potential. Now, let’s take a closer look at our new product update, leveraging our extensive industry-leading experience in social and online entertainment in MENA, we established Yalla again to show the mid-core hard-core game distribution business the complement to our casual game portfolio. For this quarter, Yalla Game has taken a crucial step. We are excited to share with you that after several months of collaboration with the gaming studio we invested in, we have launched the better version of our first hard-core mobile game, Merge Kingdom in a lot of MENA country.

We will soon begin to get our user feedback and actively fine tune the product through the beta stage, paving the way for full-on promotion. We will share more details and metrics with you on our next call. The second hard-core game that we plan to distribute in the region, the RPG game is on track to be launched by the end of this year. Moreover, EMEA is becoming the next popular emerging market and continues to attract attention from more and more gaming studios. We remain open to discovering good gaming content and potential collaborators with whom we can jointly further explore the MENA market. We look forward to sharing more updates with our investors in the near future. We are also very excited to report that we recently launched the YallaChat version 1.3, which we have already developed into instant messaging product with a broad area of localized and customized functions.

In this quarter, we added more engaging functions into the product. And as we shared previously, we are enhancing YallaChat by leveraging a unified login system. Over the past two quarters, we have operated our platform and hosted campaigns to encourage users to log into Yalla and Yalla Ludo using their YallaChat chat account and to motivate more Yalla Group users to register for YallaChat account. In addition, this quarter we launched Yalla Ludo mini program within the YallaChat app. Yalla Ludo is the number one table top game across MENA. Yalla Ludo users now have full access to their game assets and get better in the gaming app when using Yalla Ludo mini program in YallaChat. We believe this is a crucial step to build the product synergies and at the same time, increase user stickiness to our app.

Next, let’s take a look at our Waha product, the first-ever social metaverse designed for the MENA region. In Q3, we rolled out a number of new functions to enhance Waha’s communication and entertainment features. First, we continue to launch new social scenes in Waha, including disco scene in this quarter, in which users can dance and play the role of DJ on stage. Second, beyond just chatting with friends in Waha scenes, users can now also play music and video, creating a virtual theater space for sharing their favorite entertainment, while hiring out with their . In addition, to further build out the product , our team began to roll out mini games in Waha Ludo, encouraging user engagement and boosting user interactions. We will continue to monitor the latest trend and upgrade Waha accordingly to keep providing our users with firm and true functions that are tailored to local culture and chat.

Before I wrap up, like to share with you that our President, Mr. Saifi Ismail has been named one of the regions 50 multi-bearing business leaders of 2022. By the prestigious magazine Arabian Business which is the Middle East region’s top resource for informed news, features and commentary. Its output includes interviews with some of the world’s leading business people and long-form features from around the Middle East. Congratulations, Saifi. In conclusion, I’m happy with our ongoing solid results this quarter. Over the past six years, we have shown our strong focus on and commitment to MENA, its people and its culture. We strive to explore new products to meet MENA users evolving needs and remain dedicated to facilitating digital information throughout the region.

As a cap rate in MENA, we will continue to expand our services and stretch the boundaries of our business, while further deepening synergies from our different products and services to drive brand loyalty module service and improve our platform’s brand business. Once again, our region is to build the most popular destination for online social networking and entertainment activities in MENA and we remain with path in our pursuit of this call. Now I will turn this call over to our COO, Mr. Jeff Xu for a closer look at our recent divestments.

Jeff Xu: Hello, everyone. Thanks for joining us today. First of all, I’m pleased to tell you that Yalla was recently invited to attend the 6th Future Investment Initiative in Riyadh, titled Investing in Humanity, enabling a new global order posted by the Future Investment Initiative Institute. The event brought together the world’s foremost CEOs, policymakers, investors and entrepreneurs to discuss and shape the future of international investments and the global economy. Yalla was only to participate as a featured speaker on the From Seed to Unicorn Empowering Youth Entrepreneurship panel, where we discussed the intersection of innovation, entrepreneurship, youth and talent and shared Yalla’s story with the local and international investment community.

Yalla group is proud to contribute to such events throughout MENA, helping to promote our various talent, potential and unique local perspective to broader audience. demonstrating our commitment to promoting a healthy and a well-managed sector environment that participate the development of local digital economies. Next, let’s turn to our operations as well as our product performance in this quarter, our team’s ongoing efforts to refine our content offerings and user operations, further bolstered user engagement as well as our paying ratio and advanced our monetization capability. As a result, we are pleased to report another robust quarter with Yalla Group total revenue of US$80.1 million, beating the higher end of the company’s guidance.

In addition, our monthly active users increased 19.1% year-over-year, reaching $30.9 million. Yalla Group paying users also increased to $11.5 million. Now a closer look at our casual game portfolio. Yalla Parchis ramped in the top five in terms of revenue in the Board game category in 10 countries, including Colombia, Mexico, Chile and Spain. During Q3, we hosted a number of hosted events to encourage user activity on the platform. For example, our tomato fight events, which was inspired by the traditional Spanish Festival, La Tomatina, attractive participation by more than 60% of our daily active users and improved the diamond consumption on the platform by more than 20%. We will continue to find innovative ways to build the products use the community and strengthen its monetization capability.

For 101 Okey Yalla, after closing monitoring its operations for several months, we decided to add an expanded messages or chatting function to the app as the function has been proving effective in boosting our product monetization capability. Beyond that, we also decided to increase our sales and marketing spend on this product and to invest more to acquire OUS users. As a result, we have witnessed a decent improvement in both 101 Okey Yalla’s number of paying users and paying ratio, while its total revenue improved by more than 100% compared with that of the previous quarter. Although 101 Okey Yalla accounts for only a limited part of the group’s revenue, we still see this as an encouraging improvement in products in current stage. For Yalla Baloot, during the quarter, we continued to upgrade the product and launched several new game modes for fueling players diversity and preferences as well as increasing app gamification.

Yalla Baloot targeting important market in MENA, and we will continue to tailor the specification of its product design while collecting user feedback. With respect to monetization overall, we continue to explore innovative methods and channels across our portfolio. Let’s look at Yalla Ludo, one of our flagship products, as an example. Yalla Ludo generally demonstrate great monetization potential, thanks to its widespread, popularity and sport appeal. This product, we boostered its monetization even further the joint marketing efforts with our channel partner for the distribution of gift cards. This partner has launched a successful promotion campaign for Yalla Ludo in MENA, enabling us to reach more potential paying users. As a result, the channel sales of Yalla Ludo gift cards grew by more than 30%, compared with the sales before the campaign.

Interestingly, the majority of the sales came from first-time purchasers of Yalla Ludo gift cards, and I certain unfulfilled account recharging lease and presenting an opportunity for us to creatively attract new users while improving monetization across our gaming portfolio. We are encouraged by this progress and will further expand our payment methods to continuously improve our users’ experience while creating more revenue streams for our company. Before we move on to financials, I’d like to mention that we at Yalla Group, extremely honored and privileged to be the growth sponsor of City Talk, a new influencer marketing industry core, which brought together more than 500 social media influencers from varied countries in the Yalla board games in October in Jordan.

Yalla is a user-generated content platform. We have deep relationships in Yalla investors community, providing a mutually beneficial conjugate for sharing ideas, opinions and experience. These connections empower to keep up with current trends, identify new opportunities and remain part of the conversation online. As MENA’s largest online social networking and entertainment platform, we are also a valuable partner to influencers in promoting the development of the digital economy, a mission we all share. As we reiterate every quarter, Yalla asset become the number one online social networking and entertainment platform in the MENA region. We have always been committed to providing the people of MENA with better access to a digital life and we consistently enrich our product and assist service offerings and strengthen our partnerships with local channels to post and medicine communities throughout the Yalla board.

We are well positioned to capitalize on potential growth opportunities in the MENA region and look forward to delivering value to all of our stakeholders as we try to achieve our mission. With that, I will now turn the call over to our CFO, Karen, who will discuss our key financial and operational results.

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Karen Hu: Thank you, Jeff. Hello, everyone. Thank you for joining us. We delivered another outstanding set of financial results in the third quarter of 2022 with group revenues reaching a record US$80.1 million, up 12.3% year-over-year. Thanks to our enhanced communication and entertainment features, we also saw robust growth in paying users, driving our group’s paying ratio to 37.4%. Furthermore, we maintained healthy profitability with a GAAP net margin of 30.5%. And excluding share-based compensation, a non-GAAP net margin of 36.7% all the while investing in innovation across our portfolio and strategically both in our marketing spend. Going forward, we will continue to expand and integrate our Yalla ecosystem, optimizing operational efficiency and explore new monetization avenues to propel our long-term growth and support sustainable returns to shareholders.

Now, I would like to walk you through our detailed financials for the third quarter of 2022. Our revenues were US$8.1 million in the third quarter of 2022, a 12.3% increase from US$71.3 million in the same period last year. The increase was primarily driven by the broadening of Yalla Group’s user base and enhancement to Yalla Group’s monetization capabilities. Our average MAUs increased by 19.1% from 25.9 million in the third quarter of 2021 to 30.9 million in the third quarter of 2022. Now, let’s look at our costs and expenses. Our cost of revenues was US$29.6 million in the third quarter of 2022, a 26.3% increase from US$23.4 million in the same period last year, primarily due to an increase in technical service fees resulting from the expansion of our product portfolio and the increase in salaries and benefits resulting from the expansion of our operation and the maintenance team.

Cost of revenues as a percentage of our total revenues increased from 32.8% in the third quarter of 2021 to 36.9% in the third quarter of 2022. Our selling and marketing expenses were $12 million in the third quarter of 2022, a 9% increase from $11 million in the same period last year, primarily due to higher advertising and marketing promotion expenses led by our continued user acquisition efforts and expanding product portfolio. Selling and marketing expenses as a percentage of our total revenues were 14.9% in the third quarter of 2022, decreasing from 15.4% in the same period last year. Our general and administrative expenses were $8.6 million in the third quarter of 2022, a 16.9% increase from $7.3 million in the same period last year, primarily due to an increase in performance-based incentive compensation and an increase in professional service fees.

General and administrative expenses as a percentage of total revenues increased from 10.3% in the third quarter to 10.7% in the quarter of 2022. Our technology and product development expenses were $5.5 million in the third quarter of 2022, a 42.2% increase from $3.9 million in the same period last year. This was primarily due to an increase in salaries and benefits for our technology and product development staff, driven by an increase in the headcount of our technology and product development staff to support all the development of new businesses and expansion of our product portfolio. Technology and product development expenses as a percentage of total revenues increased from 5.4% in third quarter of 2021 to 6.9% in the third quarter of 2022.

As such, our operating income was $24.5 million in third quarter of 2022 compared with $25.7 million in the same period last year. Excluding share-based compensation, non-GAAP operating income in the third quarter of 2022 was $29.5 million. Our operating tax expense was $0.79 million in the third quarter of 2022 compared with $0.42 million in the same period last year. Moving to the bottom-line, our net income was $24.4 million in the third quarter of 2022 compared with $25.3 million in the third quarter in the same period last year. Excluding share-based compensation expenses, non-GAAP net income for the third quarter of 2022 was $29.4 million. Next, I would like to briefly go through our liquidity and capital resources. As of September 30, 2022, we had cash and cash equivalents of $390.2 million as compared with cash and cash equivalents of $384.9 million as of June 30, 2022.

This improvement demonstrates our ongoing commitment to streamlining and refining Yalla Group’s operations. On May 21, 2021, we announced the 2021 share repurchase program. As of September 30, 2022, we have repurchased 2,302,141 American depository shares, representing 2,302,141 Class A ordinary shares from the open market with cash for an aggregate amount of approximately US$27 million. In the fourth quarter of 2022, we expect our revenues to be between US$70 million and US$76 million. The above outlook is based on the current market conditions and reflects the company’s management current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change. This concludes our prepared remarks for today.

Operator, we are now ready to take questions.

Q&A Session

Operator: Thank you. We’ll now begin the question and answer section. First question will be from Kaifang Jia of CITIC. Please go ahead.

Kaifang Jia: Hi, management, can you hear me?

Kerry Gao: Yes.

Kaifang Jia: Okay. Thanks for taking my question and I have two. The first is can management provide some details about new business like gaming and chatting, and will you have a monetization plan in the next year? And my second question is, how does the management see the margin and OpEx moving over the next several quarters?

Tao Yang: Hey, good morning. Thank you very much, Kaifang. Good morning. I will take the first question and I think the second question will be taken by our CFO. Our new instant message product YallaChat has lacked our observations accepting local MENA users social habit and new preferences. And we have continued to roll out various localized and entertaining features to users, diverse needs with the IM products. We launched a marketing campaign for YallaChat in November, and some of you may have already seen YallaChat ramped among the top three on the app store, download ranking in certain regions. We are excited about the strong performance. But it’s still in a very early stage, and we will need more time to test in market.

We strongly believe that a dedicated IM product with features customized for MENA users is the listing, and we will strive to achieve this goal. In the short run, or at least in 2023, we don’t expect to start monetization on YallaChat. The focus for the product in this stage will still be expanding the user community. Our expectations for our gaming distribution business are different. Gaming does account for part of our revenue expectations for next year, but I think we just recently launched the in, it will take some time to collect user feedback and give an estimate on the scale of its revenue. We will share more details with you next quarter. Thank you. Karen will take the second question.

Karen Hu: Thank you, Mr. Yang. Thank you very much, Kaifang. This is Karen. About the margin and the OpEx moving, I think that with the current pace of our development, the non-GAAP net margin can be maintained around 35% this year. However, since we just launched the marketing campaign for YallaChat in November, and we may need to invest more in sales and marketing during Q4. We will continue to adjust our campaign strategy for YallaChat according to the market feedback. Therefore, the budget for these campaigns is not a fixed number. It is subject to change. In past years, we focus on the development of our two successful flagship applications. And the year of 2022 is a year of — for our adjustment as we aim to add more applications to our product portfolio.

We have invested more to successfully complete this portfolio expansion with the goal of diversifying our future revenue streams and building Yalla into a larger Internet platform. During this process, some of our new products like YallaChat and the game distribution business are not contributing to our current revenue, because we still need to invest in their R&D and the sales and marketing. Giving all that, as we mentioned in the last quarter, I would say that, it’s fair to expect our non-GAAP net margin to remain around 30% in next few quarters. The target remains unchanged, and we think this will significantly benefit the company’s long-term goals. Thank you, Kaifang. I hope I answer your questions.