Yalla Group Limited (NYSE:YALA) Q3 2023 Earnings Call Transcript

Yalla Group Limited (NYSE:YALA) Q3 2023 Earnings Call Transcript November 21, 2023

Operator: Good morning and good evening, ladies and gentlemen. Thank you for standing by for Yalla Group Limited’s Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After managements’ prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. I would like to turn the conference over to your host today, Ms. Kerry Gao, IR management of the Company. Please go ahead.

Kerry Gao: Hello, everyone, and welcome to Yalla’s Third Quarter 2023 Earnings Conference Call. We released our earnings press release earlier today, and the release is now available on our IR website as well as on Newswire outlets. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provision of the U.S. 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 these 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. 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. Saifi Ismail, the Company’s President, who will briefly review our recent business developments. Mrs. 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 the call to questions. Our COO, Jeff Xu, will also join the Q&A section. With that said, I’d 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. Thank you, everyone, for joining our third quarter 2023 earnings conference call. We are pleased to report that we achieved strong third quarter results. Our third quarter revenues reached an all-time high of $85.2 million, supporting the upper end of our guidance, while year-over-year revenue growth from gaming services exceeded 30% once again. Our cost efficiency initiatives continued to yield positive outcomes. And as a result, net income increased by 44% year-over-year to $35.2 million, and net margin further improved to 41.4%. Our robust financial performance reflects excellent execution of our effective high-quality development strategy. In the third quarter, we continued to refine our operational processes, enhance flagship applications gamification, improve our gaming mechanics and optimize our user acquisition strategies.

These efforts have empowered us to build a more engaged community of users who exhibit high willingness to spend on our content and services. Supported by our solid business fundamentals and healthy cash position, we remain proud to capture new business opportunities and fulfill MENA users’ evolving online social networking and entertainment needs in the era of digitalization. As we have discussed on our last few calls, the MENA region is actively pursuing new initiatives to drive economic growth, and the digital transformation here continues to advance rapidly. However, our region’s exciting economic development is not the only asset drawing businesses and investors to MENA. Throughout its history, the Middle East has been an important hub for cultural and commercial exchanges between the East and West.

Amid today’s changing dynamics across the global landscape, the region is currently gaining increasing strategic importance. We have observed a mounting number of outstanding business considering MENA in their company’s next important growth opportunities this year. A testament to the region’s unique synergies with both Eastern and Western economies as well as its vast potential and market capacity. Moreover, MENA’s thriving ecosystem is fostering entrepreneurship and start-ups, attracting talent from around the globe. This has created a wealth of opportunities for Yalla through iterations and diverse future business initiatives. As the largest MENA-based online social networking and gaming company, Yalla is well positioned to seize this chance to propel the Company’s development as well as progress across local and global economies.

Now I’d like to share some important updates on Yalla Game’s recent developments. First, an overview of our third quarter progress with respect to our two hardcore games, Merge Kingdoms and Age of Legends. Thanks to our consistent game iterations and engagement of our existing Yalla user community, both games have gained traction in the MENA region. Notably, Merge Kingdoms was ranked in the top 10 strategic games in Gulf countries including Saudi Arabia and Qatar this quarter in terms of revenues on iOS, while Age of Legends also climbed to the top spot on Google Play’s role-playing games category in terms of revenues in Saudi Arabia, UAE and Oman. Although compared with our flagship applications midcore and hardcore games are still not yet making a substantial contribution to our group’s revenue, we see immense room for growth in this sector.

Turning to our strategy for Yalla Game’s future growth. Through the process of developing our two hardcore games, we have gained a more comprehensive understanding of the local gaming market as well as operation methods and cooperation strategies. Our experience with this game has strengthened our determination to engage more deeply in midcore and hardcore games business in MENA. It is worth noting that user game genres and design preferences can differ across regions and are changing rapidly. As such, we will continue to iterate our games based on user’s feedback, closely monitor the market and adjust our products and operation strategies accordingly. Moving forward, we will gradually increase our investment in midcore and hardcore games, unleashing our growth potential in this flourishing market.

We are presently exploring new game categories and already have various games in our pipeline. We expect to accelerate the launch of our new games in the coming years. We will also continue to actively communicate with excellent gaming studios and production teams across the industry and look forward to considering potential partnerships. On a related note, according to [News] research, MENA’s gaming market currently brings in $7.2 billion in annual revenue with a growth rate of 6.9% year-over-year, among the fastest-growing markets worldwide. Meanwhile, given the considerable size of the mature gaming market in China, the U.S. and Europe, those regions may also offer opportunities for [indiscernible] games. We will remain dedicated to the MENA market while examining the possibilities and may modify and distribute our games in additional regions as we see fit.

Before I conclude, I’d like to mention that in addition to midcore and hardcore games, we are exploring new products and businesses that could bring traditionally off-line services online for MENA users as a complement to Yalla’s portfolio. These initiatives show great promise in evolving MENA’s digital transformation as well as potential to serve millions of MENA residents. We will share more details with you when there is meaningful progress. In summary, we remain confident in the growth opportunities presented by MENA’s increasingly pivotal role on the global stage and this region’s rapid digital transformation. As the largest MENA-based online social networking and gaming company, we are dedicated to building relationships locally and globally to broaden our business horizon and drive MENA’s economic development.

We will continue to assess new growth prospects as we develop compelling digital products tailored to the needs of local users, creating sustainable value for all of our stakeholders. Now I will turn this call over to our President, Mr. Saifi Ismail, for a closer look at our recent developments.

Saifi Ismail: Hello, everyone, and thanks for joining us today. Let’s take a closer look at our third quarter operations and our product performance. We delivered another robust quarter results as our efforts to improve the unification of our products continue to bear fruit. As Tao mentioned, our enhancement level have led to increased user engagement across our platform with average monthly active users rising by 13.6 percentage year-over-year to 35.1 million. Our high-value users exhibited great willingness to spend on those enhanced gamification features, driving ARPU up to $7.35 in the third quarter from $6.89 in the same period of last year. On a related note, one of our third quarter adjustments to our game mechanism was aimed at boosting overall user engagement and delivering better user experiences.

This resulted in lower frequency of certain low spend consumption on the platform, which in turn led to a slight decrease of 2.6% in our total number of paying users. We are still fine-tuning these adjustments as we seek the right balance, and as such, we expect the fluctuation in paying users will be temporary. We are closely monitoring the impact of this adjustment and will adapt accordingly. For our flagship application, Yalla, we continue to improve gaming features and rolled out a series of operational activity, including an Islamic New Year event and National Day events across several countries in MENA, in conjunction with local festivals to enhance user engagement. Activities like these demonstrate Yalla’s commitment to user satisfaction and strengthen the sense of community on our platform.

With respect to Yalla Ludo, we launched a number of operational events, including an Islamic New Year event and a mystery store opening event. We also continue to improve the gamification of the app, which drove a significant increase in consumption compared with the total — with that of the previous quarter. Now I would like to share two additional third quarter highlights. At Yalla Group, sustainability has always been integral to our corporate values. In August, Yalla established a Sustainable Account for Cash Management with Standard Chartered, one of the world’s leading international bank. Deposits in sustainable accounts are referenced against Standard Chartered sustainable projects, addressing some of the world’s gravest long-term sustainability threats.

As MENA continues to develop rapidly, we will leverage our strong cash position and local insight to incorporate sustainable practices company-wide. Ensuring that our cash management procedure contribute to enhancing sustainability throughout the local and international economy reflects Yalla’s overall direction as well as our profound commitment to the MENA region. Furthermore, we were recently invited to speak at GITEX Global’s Expand North Star 2023, the world’s largest technology and start-up event held in Dubai in October, inspired by GITEX Global, the world’s most established and iconic large-scale tech exhibition. Expand North Star unites founders, venture capitals and tech leaders to facilitate connections among the start-up ecosystem.

Its unparalleled content program features lively discussions among over 70 unicorn founders, including Yalla, on 2023 biggest tech stories. Events like GITEX Global showcase our region’s open and communicative business ecosystem in a global stage. We were honored to recount Yalla’s development story, business experience and industry insights at this prominent event. I’m proud to highlight the unique advantages that the MENA region offers for tech companies and start-ups. As the first UAE-based tech unicorn to list on the NYSE, Yalla is deeply committed to driving progress across the tech start-up community while propelling digital development throughout the MENA. Yalla is excited to witness and participate in MENA’s digital transformation. Riding this wave of economic development, we will continue to push the boundaries of innovation to offer premium products and services tailored to local users’ habits and preferences.

As always, we remain dedicated to becoming the number one online social networking and entertainment platform in MENA region. With that, I will now turn the call over to our CFO, Karen, who will discuss our key financial and operational results.

Karen Hu: Thank you, Saifi. Hello, everyone. Thank you for joining us today. We delivered strong results for the third quarter of 2023, highlighted by our all-time high revenues and impressive net margin expansion. Our relentless efforts to streamline costs as well as our enhanced ROI-based marketing strategy continued to yield positive outcomes, enabling us to elevate our overall efficiency. In addition, we continue to strategically leverage high interest rates to achieve higher returns. As a result, our net margin rose to 41.4% and non-GAAP net margin rose to 44.9%. As we head into our fourth quarter, we will continue to execute our high-quality growth strategy with focus on efficiency and profitability enhancement. We believe our solid fundamentals and strong cash position will support us in capturing future opportunities.

As always, we remain dedicated to creating sustainable value for our shareholders in the long run. Now let’s move on to our detailed financials for the third quarter of 2023. Our revenues were $85.2 million in the third quarter of 2023, a 6.4% increase from $80.1 million in the third quarter of last year. The increase was primarily driven by our broadening of our user base and our enhanced monetization capability. Our solid revenue growth was also partially attributable to a significant increase in ARPU, which grew from $6.89 in the third quarter of 2022 to $7.35 in the third quarter of 2023. Now let’s take a look at our costs and expenses. Our cost — our total cost and expenses were $52.8 million in third quarter of 2023, a 5% decrease from $55.6 million in the same period of last year.

Our cost of revenues decreased by 6.1% to $27.8 million in the third quarter of 2023, down from $29.6 million in the same period of last year. Cost of revenues as a percentage of total revenues decreased from 32.6% in third quarter of 2023 compared with 36.9% in the same period of last year. Our selling and marketing expenses were $11.3 million in third quarter of 2023, a 5.5% decrease from $12 million in the same period of last year, primarily driven by lower share-based compensation expenses recognized in the third quarter of this year. Selling and marketing expenses as a percentage of total revenues decreased from 14.9% in the third quarter of 2022 to 13.3% in the third quarter of 2023. Our general and administrative expenses were $7.3 million in third quarter of 2023, a 14.5% decrease from $8.6 million in the same period of last year, primarily driven by our lower share-based compensation expenses recognized in the third quarter of this year.

General and admin expenses as a percentage of total revenues decreased from 10.7% in the third quarter of 2022 to 8.6% in the third quarter of 2023. Our technology and product development expenses were $6.4 million in the third quarter of 2023, a 16.6% increase from $5.5 million in the same period of last year, primarily due to an increase in salaries and benefits for our technology and product development staff to support our development of new businesses and the expansion of our product portfolio. Technology and product development expenses as a percentage of total revenues increased from 6.9% in the third quarter of 2022 to 7.5% in the third quarter of 2023. As such, our operating income was $32.4 million in the third quarter of 2023, a 32.3% increase from $24.5 million in the same period of last year.

Excluding share-based compensation expenses, our non-GAAP operating income in the third quarter of 2023 was $35.4 million, up 20.4% year-over-year. Our interest income was $5.6 million in the third quarter of 2023 compared with $0.8 million in the same period of 2022, primarily due to a significant increase in interest rates applicable to the Company’s bank deposits and the continued increase in the Company’s cash position. Our income tax expense was $710,000 in the third quarter of 2023, a 10.2% decrease from $790,000 in the same period of last year. Moving to our bottom line. Our net income increased by 44.3% to $35.2 million in the third quarter of 2023 compared with $24.4 million in the same period of last year. Next, I would like to briefly go through our liquidity and capital resources.

Our cash position remains solid. As of September 30, 2023, we had cash and cash equivalents, restricted cash, term deposits and short-term investments of $545 million compared with $453 million as of December 31, 2022. Under our $150 million share repurchase program that began May 21, 2021, and has since to be extended by our Board through May 21, 2024, we have repurchased 1,670,735 ADS or Class A ordinary shares in open market cash repurchases, totaling approximately $8.5 million in the third quarter of 2023. Cumulatively, we have repurchased 3,972,876 ADS or Class A ordinary shares in open market cash repurchases, totaling approximately $35.5 million as of December 30, 2023 (sic) [September 30, 2023]. Moving to our outlook. For the fourth quarter of 2023, we expect our revenues to be between $73 million and $80 million.

The above outlook is based on our current market conditions and reflects the Company’s management’s current and preliminary estimates of the marketing 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.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Xueqing Zhang at CICC.

Xueqing Zhang: Congratulations on the strong quarter. I have two. The first one is about — we have seen a strong performance by Yalla and Yalla Ludo this year. So how should we think about the growth potential of these two flagship products in the future? And the second one is about financial outlook. You have recorded all-time high revenues and strong profit margin this quarter. So can management share more color on the revenue growth and net profit margin trend next year?

Tao Yang: Thank you for the question. I will take the first one, and our CFO, Karen, will take the second one. Regarding our flagship applications, Yalla and Yalla Ludo, we believe our strategies have proven successful over the past seven years. Yalla and Yalla Ludo now have impressive levels of influence among their users who have shown considerable loyalty to the platform, and we anticipate both products will enjoy especially long life cycles. Another aspect I would like to — love to emphasize is that we — our efforts to invest on quality growth effectively support our platform’s development and monetization capability. Looking at 2024, we will continue to work on product iteration and explore more new features to serve users’ evolving needs. And we are confident that Yalla and Yalla Ludo can at least maintain performances similar to this year. Thank you.

Karen Hu: Xueqing, thank you for your question. And in terms of revenue growth for the next year, if we consider our current businesses, we are confident that in 2024, our revenue will maintain similar levels of — as 2023 while we progress with expanding our business and exploring new growth opportunities. On the other hand, as we have mentioned many times, MENA has now become the next destination for many leading companies for explore growth opportunities. We will keep monitoring this trend for providing partnership and acquisition opportunities. All these potential contributions are not included in the group’s guidance I have just provided. We will update our guidance later if necessary. In terms of margin, taking the potential investments in new products into account, an annual margin of 35%, I think, is fair.

This year, we will continue to implement measures through dedicated cost control. Across, each quarter’s performance may vary depending on how and when we invest in different products. Thank you. Thank you for your question again.

Operator: The next question comes from Chenghao Li at CICC.

Chenghao Li: Congratulations on a solid quarter. I have some questions related to the gaming business. First, could management share about how that the Company evaluates the performance of the two recently launched mid and hardcore games? And could the management share more color about the game pipeline and launch schedule in the future? And lastly, are there any updates on the Company’s strategy for the gaming business?

Tao Yang: Chenghao, thank you very much for your questions. As I shared earlier in the management’s remarks section, if we look at the rankings, both hardcore games were more top 10 in their categories in certain Gulf countries, although compared with our flagship applications, they are still not making a substantial contribution to our group’s revenue. Through this process, we have gained the important experience regarding our operation and cooperation strategies, and we see immense room for growth in the midcore and hardcore games business. We are committed to developing our midcore and hardcore games, and we’ll continue to invest in this sector. In terms of the game pipeline, we have several new products, and we will disclose more details later after we receive further feedback on the beta versions.

In terms of strategy, we expect to accelerate the launch of our new games in the coming year. Besides developing the games in-house, we will also continue to actively communicate with excellent gaming studios and production teams across the industry. And we look forward to considering more potential partnerships. Thank you, Chenghao.

Operator: The next question comes from Kaifang Jia at Citic.

Kaifang Jia: Congratulations on the strong quarter. My question is, how do we view the recent competitive trends in the Middle East market?

Saifi Ismail: Kaifang, thank you very much. This is Saifi. As we highlighted at our management remarks, MENA’s macro environment is very favorable and is attracting now more and more resources, including businesses, talent and investments, to this market. One significant aspect we have noticed is that since the second half of last year, we have been invited more frequently to discuss opportunities in the MENA market with our industry peers. More conversations are happening, and through this process, we are able to learn more from each party’s insights and intentions on what they have and what they need at this point and discuss ways also to collaborate that are naturally beneficial. With all these creative minds and resources, it’s not hard to see that the market is going to go from strength to strength in the next three to five years.

In terms of the competitive landscape, the most significant change over the last two years is still TikTok. The rest of the major players in the MENA market have been in the region for many years. If we look at the gaming sector, some mobile gaming apps from China are performing very well in MENA. However, what I would love to share is that the traffic acquisition expense now in the MENA market is much more expensive than what we bid seven years ago when we first entered the market. So for some small-sized companies, that could be a challenge if they plan to explore this market on their own. I want to reiterate also that competition is never a bad thing. It inspires us to build better and serve our users, research new technologies and industry trends and drive also collaboration and innovation.