Yalla Group Limited (YALA) Q2 2022 Earnings Report, Transcript and Summary

Good morning and good evening, ladies and gentlemen. Thank you for standing by for Yalla Group Limited Second Quarter 2022 Earnings Conference Call. [Operator Instructions] 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.

Hello, everyone, and welcome to Yalla's second 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 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 this and other risks and uncertainties is included in our earnings release and our registration statements 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 recent achievements and growth strategies. He will be followed by Mr. Saifi Ismail, the company's President, 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. Our Chief Operating Officer, Mr. Jeff Xu, will join the call for our Q&A Session. 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.

This is the conference operator. We have temporarily lost connection with the speaker line. Please continue to hold and the conference will resume shortly.

Thank you everyone for joining our second quarter 2022 earnings conference call. We are pleased to have delivered another strong quarter with revenue of US$76.1 million, exceeding the higher end of our guidance by 8.7%. This represents a second consecutive quarter of record high revenue for the company, despite of the Ramadan holiday. Such robust quarterly result is a testament to our operational success in refining our processes, enhancing the communication of our flagship applications, and optimizing user acquisition. Together, these actions have holistically elevated our user experience further boosting Yalla’s and Yalla leader’s user engagement and users’ willingness to pay on our platforms. In short, our core strategy and operational improvement were effective. And their positive impact is growing. We recently celebrated the sixth anniversary of Yalla, our Group's first product and a pioneering application designed to mirror, preserve and MENA's unique social traditions in the digital era. Time has flown by as we have deepened our commitment to MENA, its people and its culture, conceiving new products to meet MENA users’ involving needs and facilitating digitalization throughout this region over the past half-decade. As a tech industry leader in MENA, we will continue to expand our services and stretch the boundaries of our business while further deepening synergies among our different products and services to create brand loyalty among users. Now let's take a closer look at our new product updates. Drawing on our industry-leading experience, social networking and entertainment in MENA. Yalla is now exploring the mid-core and hard-core game distribution business to complement our casual games portfolio. We have already invested in two gaming studios through Yalla Game Limited and are working with them on the mid-core and hard-core mobile games that we will distribute in MENA. We are also open to additional good gaming content and potential collaborators with whom we can further explore the MENA market. Beyond that, as an important part of our group’s strategy, we are actively looking for opportunities to broaden Yalla’s ecosystem flexibly and efficiently. We look forward to sharing more updates on potential opportunities with our investors in the near future. We are also very excited to share that we recently launched YallaChat version 1.1 with a number of important new features. First, I’d like to highlight the Athan Feature, a unique innovation tailored to Arabic users’ traditions and customs. Since praying plays a significant role in Arabic users’ daily lives, we created the Athan feature to enable users to receive reminders for daily prayers. Instant message products are an integral, intimate part of users’ daily lives; thus, we believe targeted hyper-localization of an IM product is a necessity. The Athan feature demonstrates our team’s close attentiveness and insight into MENA users’ needs, as well as their dedication to bringing MENA users a truly customized experience. Athan is just one of many localized features under development – we will roll out additional upgrades in future iterations based on our team’s deep empathetic understanding of MENA users and this unique market. Second, as we shared last quarter, we are building YallaChat with a unified login system, which allow users to log into any products within the Yalla Group using their YallaChat account. We began upgrading Yalla Live last quarter to be compatible with this system and recently commenced Yalla Ludo’s upgrade as well. We expect this enhancement to motivate more Yalla Ludo users to register for YallaChat accounts. In addition, we have set up convenient links within these apps, empowering users to explore YallaChat functions with a single click. We see this as an important step to boost product synergies and increase users’ loyalty and stickiness to Yalla Group’s products. As we reported last quarter, Waha, which represents a significant milestone in Yalla Group’s metaverse application explorations, is the first-ever social metaverse designed for the MENA region. During the second quarter, our team upgraded the product system and the app’s foundation to better prepare the product for future opportunities, including merging with new technologies related to the metaverse, enabling more UGC interactions and supporting a larger user community. As to metaverse, we are focused on analyzing the potential applications and services that the currently available technologies can support while also closely monitoring industry trends. We firmly believe in the tremendous potential of the future metaverse. Although, it will take time, however, for both the hardware and software to develop and reach maturity as a fully-fledged metaverse, but participating in its initial development phase of the metaverse. We are building our capabilities and positioning ourselves to capture the metaverse’s boundless future possibilities. Before I conclude, I have one more important update to share – it is my honor to welcome Mr. Mohamed Al Ghanim to the Board as an Independent Director and a Member of our Nominating and Corporate Governance Committee. Mr. Al Ghanim is a renowned telecommunications expert with an extensive regulatory background. He is the founder and ex-director general of the UAE Telecommunications and Digital Government Regulatory Authority, the TDRA. I believe Mr. Al Ghanim will bring unique and valuable perspectives to Yalla, we are excited to have him join our Board. In conclusion, I am pleased that this quarter represented another solid stride towards our vision of building the most popular destination for online social networking and entertainment activities in MENA. We hope to realize this vision within the next 10 years. Our dedication to the MENA region and our adherence to Yalla’s organizational values, “Multicultural Understanding,” “User First,” “Simple,” and “Target,” has driven our past achievements and will continue to guide our future endeavors. Looking ahead, we will continue closely observing MENA’s local cultural trends and consistently expand Yalla’s ecosystem with diverse products and services tailored to local users’ evolving needs. Now I will turn this call over to our President, Mr. Saifi Ismail, for a closer look at our recent developments.

Hello, everyone. Thanks for joining us today. Let’s take a look at our operations, as well as our products performances. As Tao mentioned in his remarks, our experience operation team further defined our content and user operations. In particular, during the quarter, they enhanced gamification in the Yalla App, which bolstered our paying ratio and average revenue per paying user, stimulated greater user engagement in our community and further advanced our monetization capabilities. As a result, we are pleased to report a solid quarter with the Yalla Group’s total revenue of US$76.1 million beating the higher end of the company’s guidance. In addition, our monthly active users increased 35.6% year-over-year, reaching 29.9 million. Yalla Group’s paying users also increased to 10.6 million. Our casual game portfolio, including Yalla Parchis, 101 Okey Yalla and Yalla Baloot also performed well during the second quarter. Yalla Parchis ranked in the top three, in terms of revenue in the Board game category in six countries, including Colombia, the Dominican Republic and Spain, thanks to the new VIP and gifting feature we rolled out, user retention and average daily time spent continue to improve. We also hosted events to celebrate local holidays, such as Easter Day, attracting participation by more than 70% of our daily active users. During quarter two, 101 Okey Yalla remained one of the most downloaded apps in the board game category in Turkey and rank among the top five in terms of revenue in the board game category on both Google Play and iOS. Furthermore, user retention, engagement, and willingness today on the platform all improved benefiting from the new VIP subscription and the better path we rolled out this quarter. We also received excellent feedback from Yalla Baloot. We have observed steady user retention improvement as we continue refining the games experience for new users. The event we hosted to celebrate Ramadan also helped boost user engagement on the platform. We will continue to tailor the details of Baloot’s products design while collecting user feedback. Next, it’s my privilege to update you on the progress of our participation in the Coders HQ program, a transformational initiatives launched in January 2022 by the UAE government under the directives of Sheikh Mohammed bin Rashid Al Maktoum, Ruler of Dubai. As we reported previously, Yalla was invited to join the program last year and is proud to be the only UAE Internet company selected to participate. The Coders HQ programs aims to consolidate the UAE’s position as a global hub for Coders and an ecosystem for incubating innovative tech projects and ideas. Yalla Group is honored to advance the program’s goals alongside more than 40 companies in the UAE and worldwide, including a number of global tech giants. Throughout the program, our team has contributed its key insights into MENA’s culture and traditions to shed light on two key factors for the success of any product in the region, localization and quality assurance. We believe Yalla’s role in the Coders HQ program, not only demonstrate the company’s commitment to facilitating the development of MENA’s local digital economy, but also attest to the fact that Yalla is a reliable and trustworthy local partner and representative of the local Internet industry. We wish to sincerely thank the UAE government for their ongoing trust and belief in Yalla Group. We value their support as we remain committed to maintaining our leading position as one of the UAE’s most prominent and thriving technology companies. Another important achievement we would love to share this quarter is the successful expansion of Yalla gift cards, which are now available across the MENA region and worldwide, both online and offline. To better serve our users’ account recharge needs, we continue to collaborate with our partners and have launched a variety of recharge channels, including self-service kiosk, retail stores, mobile wallets, banks, and digital platform with the worldwide distribution across the MENA region. For customers unable to use digital payment channels, our offline self-service kiosk such as MBME, UPay and retail stores, including Cash Plus in Morocco and Virgin Megastores across the MENA region are a great convenience. Customers with easy access to e-payment system can also reload their accounts with gift cards through their mobile banking apps and wallets. The expansion of Yalla’s account recharge channels not only substantially augments Yalla users account recharge options, especially in areas with limited access to credit cards, but also demonstrates our team’s capabilities in cultivating a local channel partner ecosystem across different countries in MENA. We spare no effort to improve our user experience and ensure that our product and services are tailored to MENA’s local needs and references. To echo Tao once more, our vision is to build the most popular destination for online social networking and entertainment activities in MENA within the next 10 years. Over the past six years, we have put down deep roots in MENA rolled out products tailored to local users’ habits and references, expanded our partnerships with local channels and collaborated with local communities to help facilitate the development of the digital economy and the internet industry. Keeping our group vision in mind, we will remain faithful to our core values of prioritizing our user, embracing diversity, and operating with a simple, pragmatic, pioneering and enterprising approach as we work to achieve our goals. With that, I will now turn the call over to our CFO, Karen, who will discuss our key financial and operational results.

Thank you, Saifi. Hello, everyone. Thank you for joining us. We delivered a strong financial performance in the second quarter of 2022, which group revenues reaching a record of US$76.1 million, up 14.2% year-over-year, accelerating from the first quarter. With the implementation of our operational refinements, we saw robust growth in paying users, driving our Group’s paying ratio to 35.4%. While we continue to invest in initiatives to expand our Yalla ecosystem, with a disciplined approach to managing expenses and ROI based sales and marketing strategy. We also maintained our healthy profitability level with a non-GAAP net margin of 37.6%. Going forward, we will continue making efforts to expand our user base, improving operational efficiency and optimize our resource allocations for quality investment, to drive long-term growth while delivering sustainable returns to our partners. Now, I would like to walk you through our detailed financials for the second quarter of 2022. Our revenues were US$76.1 million in the second quarter of 2022, a 14.2% increase from US$66.6 million in the same period last year. The increase was primary driven by the broadening of Yalla Group’s user base and enhancements to Yalla Group’s monetization capabilities. Our average MAUs increased by 35.6% from 22.1 million in the second quarter of 2021 to 29.9 million in the second quarter of 2022. Now let’s look at our costs and expenses. Our cost of revenues was US$29.3 million in the second quarter of 2022, a 23% increase from US$23.8 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 operation and maintenance team. Cost of revenues as percentage of total revenues increased from 35.7% in the second quarter of 2021 to 38.5% in the second quarter of 2022. Our selling and marketing expenses were US$11.2 million in the second quarter of 2022, a 14.8% increase from US$9.8 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 percent of total revenues were 14.7% in the second quarter of 2022, increasing slightly from 14.6% in the second quarter of 2021, the ratio declined from 17.3% in the first quarter of 2022 driven by our more disciplined advertising and promotion approach. Our general and administrative expenses were US$6.9 million in the second quarter of 2022, a 37.4% decrease from US$11.1 million in the same period last year, primarily due to lower share-based compensation expenses recognized during the second quarter of 2022. General and administrative expenses as percentage of total revenues decreased from 16.7% in the second quarter of 2021 to 9.1%. Our technology and product development expenses were US$7.7 million in the second quarter of 2022, a 144% increase from US$3.2 million in the same period last year. This 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 the development of new businesses and expansion of our product portfolio. Technology and product development expenses as a percentage of total revenues increased from 4.8% in the second quarter of 2021 to 10.2% in the second quarter of 2022. As such, our operating income was US$20.9 million in the second quarter of 2022, compared with operating income of US$18.8 million in the same period last year. Excluding share-based compensation, non-GAAP operating income in the second quarter of 2022 was US$29.2 million. Our income tax expense was US$0.78 million in the second quarter of 2022, compared with US$0.38 million in the second quarter of last year. Moving to the bottom line. Our net income was US$20.4 million in the second quarter of 2022, compared with net income of US$18.4 million in the same period last year. Excluding share-based compensation expenses non-GAAP net income for the second quarter of 2022 was US$28.6 million. Next, I would like to briefly go through our liquidity and capital resources. As of June 30, 2022 we had cash and cash equivalents of US$384.9 million as compared with cash and cash equivalents of US$367.5 million as of March 31, 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 June 30, 2022, we have repurchased 1,903,205 American depositary shares, representing 1,903,205 Class A ordinary shares from the open market with cash for an aggregate amount of approximately US$25.4 million. In the third quarter of 2022, we expect our revenues to be between US$70 million and US$75 million. The above outlook is based on the current market conditions and reflects the company’s management current and preliminary aspects of market and operation conditions and customer demand, which are all subjects to change. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Thank you. [Operator Instructions] Your first question today comes from Yulin Zhong with Haitong International. Please go ahead.

Thanks for taking my question. Congratulations on the strong second quarter results. Actually I got two questions and the number one is regarding your competitive landscape. Could management operates more on the competitive landscape across your multiple products. And number two, the same question is regarding your margin change. We saw some savings in your G&A and OpEx, but considering that the company will be investing in your new products. How should we see your margin trend going forward? Thanks.

Thank you very much, Yulin. I’ll take the first question. MENA is an emerging market with great potential we saw opportunities here six years ago. And as a leading company in the region, we have made certain achievements that were also recognized by the industry and following that a number of strong internet peers have entered the market. And also following that, they also achieved great success, for example, TikTok and Bigo, and some mobile gaming apps. We think this somehow demonstrates the region’s market potential as well as show the energy in this market. In addition facilitated by this market potential, more and more investors and analyst are now studying this market. And as a result, they are allocating more resources and attention to this region. And that’s very important. Competition is never bad. It inspires us to continue studying our users, new technologies and industry trends and to drive innovation. As a leading player in this region, facing any competition, we will take corrective actions and continue to strengthen our advantages. We are very confident in our capabilities after all these years. And the second question about the margin expansion, I think Karen will be answering it. Thank you.

Thank you very much, Yulin for bringing up this question. If we follow our current pace of development, we know that it’s not very difficult for us to achieve 35% for the non-GAAP net margin. But however, during the second half of this year, we may launch various marketing campaigns on Yalla Chat or Waha. So, we may invest more in sales and marketing. We will adjust our strategy based on the market feedback. So although we do have a budget for these campaigns, it could face some changes. If you really want the number, I would see that’s fair to expect our non-GAAP net margin for remain above 30%. But of course, that will benefit the company’s long-term goals. For the MENA areas of investment strategy, we think that we will all – we now have our Chief Strategy Officer, and the way still thinking seeking some opportunities in this region. We think that we may – when we build some ecosystem based on our portfolio, we may can find some invest, good investor opportunities to make some synergies. We think that we keep doing this on this way. So if we have some updates, we would love to share with you. Thank you.

Thank you.

Your next question comes from Edward Wang with Credit Suisse. Please go ahead.

Hi management, thanks for the presentations, and congratulations on the robust quarterly result. So my question is that it has been a few quarters since the Yalla Parchis was consolidated. Dose the company have any new initiative on globalization? Thank you.

Hi Edward. Thank you very much for joining our call. Regarding the company strategy, I think the one key aspect with this, the problem is to continue focusing on MENA market. We have built a dedicated and experienced team terminals and MENA is undoubtedly the most important market for us from all perspectives. With that said, we also stay tuned to opportunities from all emerging markets. For example, in South America, as you just mentioned, and maybe Southeast Asia, which is another popular destination for the internet companies, our strategy department will continue monitoring and opportunities in different markets and verticals that synergize with our business. Of course, we will make prudent decisions when we decided to explore a new market. Hope this answers you question well. Thank you, Edward.

Thank you.

Your next question comes from Thomas Shen with Nomura. Please go ahead.

Hi. good morning management. Thank you for taking my question. I have a question on game business, could management team provide more details on the pipeline for Yalla Game for the remainder of the year and for next year? Thank you.

Hi, Thomas. This is Jeff, and I will take this question. Regarding Yalla Games, pipeline for this year and next year, firstly, the two hard-core games we have invested in, one SLG game and one average game, we have already officially launched in the market by then. And I think by the end of this year, we’ll have the beta version launched. Secondly, we are also talking to some gaming studios interested in exploring overseas, especially the MENA market, and we may collaborate on distribution. Thirdly, we are starting some mid-core games as well, and next year we may have some new initiatives in this area too. I will keep you posted once we have more concrete plans. Thank you, Thomas.

Thank you.

Your next question comes from Xueqing Zhang with CICC. Please go ahead.

Hey, good morning management. Thanks for taking my questions, and congratulations on strong quarter. I have two questions. Firstly, we have achieved solid revenue this Ramadan holiday. So just wondering, could you share more observation of the MENA market in terms of online activities either Ramadan holidays. And my second questions is a follow up question about game business. Can management talk more about its progress in releasing the two Can management talk more about its progress in releasing the two mid-to-heavy games? Thank you.

Hi, Good morning. This is Tao. Thank you very much for joining our call. According to our experience, Ramadan is usually significant seasonality factor for this market. During the past quarter, we have observed a slowdown in the first several days after the start of Ramadan. And if you check the third-party data, you will find that money entertainment product saw the same trend. However. later as we rolled out our online events and further refined our content and user operations. We saw a solid recovery in users engagement and willingness to pay on our platform. Thus, you can find from third-party data that Ramadan’s negative impact on our revenue is one of the least among our peers. In fact, our revenue also reached all-time high for the second constructive quarter despite the impact of lockdown, which is clearly not easy. I believe this demonstrates the successful implementations of various requirements in our operations. And the second question about the hard-core game, so I will hand it over to Mr. Jeff.

Thank you. Hi, Xueqing, this is Jeff, and I'll be answering your second question. So, we expect the launch of the SLG games, better version by the end of Q3 and the launch of the RPG games, better version in before the end of Q4. For heavy games, it usually takes a few months to test and refine the better versions of the products. And there, we will start the official marketing campaigns for them. So that's our current plan and then we will keep you posted it and progress. Thank you.

Thank you.

Your next question comes [indiscernible] from CICC. Please go ahead.

Thanks the management for taking my question. Congratulations on a strong quarter. I have two questions today. First, my question is about the game investment strategy. I know that the company has invested in two games studios last year, so for the changing external competition environment, how should we think of the Company’s pace in investing in game studios in the future? And my second question is on the paying ratio and ARPPU of its product. Recently we noticed that the macro environment in the MENA region has been improving, and the impact of the COVID-19 is gradually easing. So will the company share some details about the improvement on the paying ratio and ARPPU of its product? Thank you.

Hi, Chenghao, this is Jeff. Thank you for joining our conference call. I’ll be taking your first question. So, investing in gaming studios is not the only way we collaborate with the content providers. We’re also talking to a number of studios, which we cooperate with us only on the distribution business. We’re quite flexible about this. We can provide cash, experience in all resources. We don't exist on investing all the games we help distribute. It really depends on the needs and negotiation, as you are probably already aware recently, increasing amount of gaming studios have been hoping to explore the MENA market, leveraging our experience serving MENA users, choosing the right products and continue distributing mid core and hard games to the MENA market. The second question, I'm handling over to Mr. Saifi.

Hi this is Saifi. For your second question, I think MENA’s macro environment is improving compared to the previous two years, COVID is easing, oil prices are also rising. I think consumers in MENA are becoming more confident and maybe increasingly willing to pay for entertainment. You can find on social media that shopping in MENA are getting crowded during the Eid holidays, prices for flights and hotel search too. That's for the macro. And in terms of the immediate impact on our products, paying ratio and average revenue being user, I think other important factors are our operation requirement and our adjustments to our more efficient user acquisition strategy. If you look at the operation metrics is for quarter two, I would say the improvement in our bank ratio mainly resulted from our efforts in these two areas. Thank you.

Your next question comes from Kaifang Jia from CITIC. Please go ahead.

Hi, management, thanks for taking my questions and a congratulations on strong quarter. I have a question on the order growth. How does management see the user growth in the next several quarters and will you pay more attention of users engagement. Thank you.

Hi, Kaifang. Thank you very much for your question. So last quarter, we mentioned that we had adjusted our user acquisition strategy. As a result, we were able to reduce our sales and marketing expenses, Q-on-Q for both Q1 and Q2. While still delivering robust growth in our top line. This quarter, our revenue reached an all-time high for second consecutive quarter, demonstrating an improvements in the Yalla sales and marketing strategy. For the second half of this year, we will continue with this strategy and we expect our MAU growth to remain at the similar pace as Q1 and Q2 of this year. But of course, MENA users are of great potential and we will not always keep our user acquisition at this pace. After our official launch of YallaChat and WAHA, which may boost the synergies among our product is possible that we will have improved our IM user acquisition investments. And at that time we may accelerate our user acquisition again. And in terms of user engagement, yes, of course, what make significant efforts to improve user engagement now on platform. As our CEO, Mr. Yang just mentioned, operational refinement has played a important role in this quarter and boosting the growth of our paying users. Our experienced operation team has rolled out events that included preparations more elaborate than ever before and we will carry on refining our content and user operations to encourage more users to interact our platform. Thank you, Kaifang.

Thank you. That’s helpful.

Your next question comes from Zemin Chen with Huafu Securities. Please go ahead.

Hello management, thank you for accepting my question and thank you for outstanding performance. Can management share how the traffic is connected and covered across the different apps? Thank you.

Hi, Zemin Chen. Thank you very much for your question. As you know, our structure is something we really care about and for a very long time, Yalla doesn't include any advertisements. When we launched the Yalla Ludo, we didn't even drive traffic from Yalla to Ludo. We promoted Ludo independently. But now as we are expanding our product portfolio and building a connected the Yalla ecosystem, it may be necessity. As it will help users learn more about the new services, Yalla provides and better utilize our platform. As I just introduced in my remarks, we just started the upgrade and now we are encouraging Yalla and Ludo's users to register YallaChat, log into Yalla Ludo where there are YallaChat account. They will then be directed to the YallaChat download page, via one simple click in Yalla and Ludo. This is an important move we are making at this stage and we will keep you posted if we make any of these types of upgrades with our other products. Thank you very much.

Thank you. As there are no further questions. Now I'd like to turn the call back over to management for closing remarks.

Thank you, once again for joining us today. We look forward to speaking with you in the next quarter. If you have any further questions, please feel free to contact Yalla's Investor Relations through the contact information provided on our website or The Piacente Group Investor Relations.

This concludes this conference call. You may now disconnect your line.