Yalla Group Limited (YALA) Q2 2025 Earnings Report, Transcript and Summary

Good morning and good evening, ladies and gentlemen. Thank you for standing by for Yalla Group Limited's Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. Now I will turn the call over to your speaker host today, Ms. Kerry Gao, IR Director of the company. Please go ahead, ma'am.

Hello, everyone, and welcome to Yalla's Second Quarter 2025 Earnings Conference Call. We issued our earnings press release earlier today, and it 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 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. 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. The last 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. Mr. Jeff Xu, our Chief Operating Officer, will join the 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.

Thank you, everyone, for joining our second quarter 2025 earnings conference call. We delivered another strong set of results in the second quarter of this year. Our total revenues close to USD 84.6 million, once again beating the high end of our guidance. We also made significant strides in improving our operational efficiency by optimizing user acquisition strategies and refining our internal processes which contributed to a year-over-year expansion in our net margin to 43.2%. This impressive performance demonstrates our ability to increase user engagement across our ecosystem and achieve high-quality efficient growth by anticipating and meeting MENA's evolving social networking and entertainment needs. Throughout Yalla's history, the company has been committed to the long-term development of MENA's local Internet industry. We were one of the first to explore online entertainment in the region. And over the past 10 years, our team has grown from 6 people to over 800 employees serving over 40 million MAUs across MENA region. Our product strategy prioritizes creating products with the potential to reach a massive user base while also demonstrating a long-lasting cycle. We strive to develop sustainable business models for long-term growth, and we remain confident that our commitment and patience will pay off as it has over the last decade. This Q2 marks the 9th anniversary of Yalla's launch. For Yalla Ludo, one of our flagship products and MENA's leading casual game platform, we expect its life cycle to reach 10 to 15 years or even beyond. We continue to operate our products with great dedication, fostering a friendly, positive and vibrant online community. Building on our core business, strong fundamentals, we are also strategically expanding into new verticals to capitalize on MENA's digital transformation, leveraging our substantial user base, localized exercise and strong user acquisition capabilities. We have broadened our business footprint with game distribution services. We hope to become indispensable resource for leading global game content providers who are as excited as we are about the MENA market. We are proud to have good games of all kinds launched in MENA efficiently and effectively. Furthermore, as our user scale grows, we are also exploring opportunities to expand into additional online local services to reach even more users across MENA. Moving on to our new gaming pipeline for this year. We have continued to strategically invest in mid-core and hard-core games with a robust product pipeline, featuring multiple new titles scheduled for release in the coming 2 quarters. In the third quarter, we expect to release 2 Match-3 titles targeting distinct user segments. In the fourth quarter, we aim to release another self-developed roguelike game while also preparing for hard-core games distribution in collaboration with a leading game developer. We will continue to refine our gaming business strategy and plan to ramp up external partnerships and our game distribution capabilities going forward to more effectively diversify our product portfolios. This allows us to explore a broader range of game genes and offer users more diverse options while gaining deeper insight into market dynamics and a more precise understanding of user appetite in the MENA region. Technology is another key factor driving our growth. As part of our efforts to propel technology innovation and talent development, we initiated a new round of internship collaborations with Mohamed Bin Zayed University of Artificial Intelligence with a focus on AI application projects by integrating cutting-edge academic research insights with real-world industry practices with partnership among the industry, academia and research institutions injected fresh ideas and intellectual resources into our ongoing technology innovation, while also deepening Yalla's long-term commitment to advancing the development of MENA's AI ecosystem. Before I turn the call over to Saifi, update on our shareholder repurchase plan. In the first quarter, we allocated an additional USD 22 million, bringing our total minimum commitment to USD 50 million for the full year. We continue to execute our share repurchase program, consistently enhancing our shareholder returns. In the first half of this year, we made encouraging progress. As of June 30, 2025, the company had repurchased a total of more than 6.2 million ADS shares to -- totaling USD 41 million this year, completing 82% of our 2025 minimum goal. We will continue with disciplined execution of the share repurchase program through the end of the year and expect to reach or potentially exceed our full year goal. We remain open to further scaling up our execution under the current share repurchase program. Furthermore, as we mentioned on our last call, the company has decided to cancel all shares repurchased this year. As of August 11, 2025, the company has canceled more than 6.2 million ADS. We will consistently place shareholders' interest at the core of our capital allocation decisions and continuously refine our shareholder return strategy to generate long-term value for our shareholders. Overall. Our second quarter performance once again affirmed Yalla's strategic effectiveness and the MENA market's vast potential. We are steadily compounding our advantages in this compelling market where we've cultivated deep roots over many years. Going forward, Yalla Group will continue to unlock monetization opportunities through a diversified gaming lineup while working alongside partners to foster a sustainable digital ecosystem. We are excited to have your support as we have propelled MENA's transformation from a digital hotspot into a true global innovation epicenter. 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 closer look at our second quarter operations and our product performance. First, I would like to share our operational and product performance highlights in the second quarter. We increased our group's average monthly active users by 8.8% year-over-year to 42.4 million. In light of the sharp MAU increase during Ramadan in the first quarter, we adjusted our user acquisition strategy in quarter 2, allocating more resources to acquiring and retaining high engagement, high-quality users and reducing spending on channels, demonstrating less efficient conversion metrics. This approach will allow us to scale our community while ensuring a vibrant and engaged user base. As a result, the group delivered year-over-year and sequential revenue growth this quarter despite a short-term sequential dip in MAU. Starting next quarter, we expect MAU growth to normalize at 2% to 3% quarter-over-quarter with full year MAU growth projected at around 10% year-over-year as we remain focused on consistent user base expansion. Next, I would like to delve into the meaningful strides we made in the second quarter across product operations and brand building. During the quarter, we conducted several strategically designed campaigns and fostered in-depth brand partnership, further solidifying our market position and driving stronger user retention. One highlight was this quarter's co-branded campaign between Yalla Ludo and the Dubai Department of Economy and Tourism. We embedded Dubai's culture icons and signature landmarks into gameplay and mission design, delighting users with a richly immersive experience. Its dynamic blend of Yalla Ludo's entertaining gameplay and Dubai's tourism appeal garnered highly positive user feedback and sparked substantial organic social media buzz, significantly boosting in-game activity. This quarter also marked the successful conclusion of Yalla's ninth anniversary celebration. We launched a platform-wide event series featuring exclusive missions and generous rewards mechanisms, user engagement reached an all-time high with goldcoin consumption reaching a new record for this event series. This event's performance demonstrated the strongly affinity users have for our platform while also reaffirming our event design capabilities and the vibrancy of our online community. We also leveraged our strength in event design and user engagement to deepen our corporate responsibility efforts. During Eid-ul- Adha 2025, we designed a public welfare initiative with far-reaching impact, inviting users to contribute by participating in online events to accumulate goodwill credits as a gesture reflecting the events share goodwill Yalla Group donated to the UNICEF MENA regional office on behalf of all users. We were delighted to see this campaign enrich users' digital experience while encouraging participation in meaningful social good. On a related note, we released our 2024 ESG report this quarter, marking another key milestone in our journey toward greater transparency and standardization in sustainable development. The report systematically outlines Yalla Group's vision, practices and commitments in driving sustainable growth, fulfilling social responsibilities and strengthening corporate governance, highlighting our concrete actions and positive outcomes in area, including promoting digital inclusion, safeguarding user well-being, supporting community development and advancing responsible governance. In short, we drove notable gains in user engagement and commercial value across our core businesses during the second quarter of 2025. Looking ahead, we remain committed to driving product innovation, deepening strategic partnerships and actively fulfilling our corporate social responsibilities as we advance with firm conviction toward our vision of becoming the most popular platform for online social networking and entertainment activities in MENA. 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, and hello, everyone. Thank you for joining us today. Excellent execution across our operations drove this quarter's strong results, underscored by better-than-expected revenues and enhanced profitability. Our revenues sustained their healthy growth trajectory, up 4.1% year-over-year. We also continue to execute disciplined cost management and improved our overall efficiency, boosting our net income by 16.4% year-over-year to USD 36.5 million with net margin expanding by 4.6 percentage points year-over- year to 43.2%. Bolstered by this success, we continue to accelerate our expanded share buyback program. We remain committed to driving product innovation, optimizing operations and elevating shareholder value as we advance towards our vision of becoming the most popular platform for online social networking and entertainment activities in MENA. Let's move on to our detailed financials for the second quarter of 2025. Our revenues were USD 84.6 million in the second quarter of 2025, a 4.1% increase from USD 81.2 million in the same period last year. The increase was primarily driven by our growing user base and enhanced monetization capability. Turning to our costs and expenses. Our total costs and expenses were USD 53.9 million in the second quarter of 2025, a 4.6% increase from USD 51.6 million in the same period last year. Our cost of revenues was USD 27.9 million in the second quarter of 2025, a 3.7% decrease from USD 29 million in the same period last year, primarily due to lower commission fees paid to third-party payment platforms as a result of diversified payment channels and lower share-based compensation expenses recognized in the second quarter of 2025. Cost of revenues as a percentage of total revenues decreased from (sic) [ to ] 33% in the second quarter of 2025 from 35.7% in the same period last year. Our selling and marketing expenses were USD 8.7 million in the second quarter of 2025, a 2% increase from USD 8.5 million in the same period last year, primarily due to higher advertising and marketing promotion expenses attributable to our continued user acquisition efforts and expanding product portfolio. Selling and marketing expenses as a percentage of total revenue decreased to 10.2% in the second quarter of 2025 from 10.5% in the same period last year. Our general and administrative expenses were USD 9 million in the second quarter of 2025, an 18.8% increase from USD 7.6 million in the same period last year, primarily due to an increase in incentive compensation and higher exchange loss. General and administrative expenses as a percentage of total revenues increased to 10.8% in the second quarter of 2025 from 9.3% in the same period last year. Our technology and product development expenses were USD 8.3 million in the second quarter of 2025, a 28.6% increase from USD 6.5 million in the same period of last year, primarily due to an increase in salaries and benefits for our technology and product development staff driven by an increase in their headcount 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 to 9.9% in the second quarter of 2025 from 8% in the same period last year. As such, our operating income was USD 30.9 million (sic) [ USD 30.6 million ] in the second quarter of 2025, a 3.4% increase from USD 29.6 million in the same period last year. Interest income was USD 6.8 million in the second quarter of 2025 compared with USD 7.1 million in the same period last year. Income tax expense was USD 1.5 million in the second quarter of 2025 compared with USD 5.8 million in the same period last year, primarily due to a decrease in UAE corporate tax. As a result of foregoing, our net income was USD 36.5 million in the second quarter of 2025, a 16.4% increase from USD 31.4 million in the same period last year. And our non-GAAP net income in the second quarter of 2025 was USD 39.4 million, an 11.7% increase from USD 35.2 million in the same period last year. Moving to our liquidity and capital resources. Our cash position remains solid and healthy. As of June 30, 2025, we had cash and cash equivalents, restricted cash, term deposits and short-term investments of USD 704.1 million compared with USD 656.3 million of December 31, 2024. We continue to return value through our share repurchase program pursuant to the company's current share repurchase program beginning on May 21, 2021, with an extended expiration date of May 21, 2026. As of June 30, 2025, the company has cumulatively completed cash repurchases in the open market of 13,535,437 ADS or Class A ordinary shares for an aggregate amount of approximately USD 90.4 million since the inception of the current share repurchase program. The aggregate value of ADS or Class A ordinary shares that remain available for purchase under the current share repurchase program was USD 59.6 million as of June 30, 2025. In addition, the company has canceled 6,230,299 ADS or Class A ordinary shares as of August 11, 2025. Moving to our outlook. For the third quarter of 2025, we expect our revenues to be between USD 78 million and USD 85 million. The above outlook is based on the current market conditions and reflects the company management's current and preliminary estimates of the market and operating conditions and customer demand, which are all subject to change. In the interest of time, please refer to our earnings press release for further details on the second quarter 2025 financial results. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

[Operator Instructions] Our first question comes from Chloe Wei with CICC.

Yes. Okay. This is Chloe Wei from CICC Internet. So firstly, congratulations on the solid results. And my question is about the outlook. So regarding the Q3 outlook mentioned in the prepared remarks, we see a potential year-over-year decline in the following quarter. So could you help us understand the thinking behind this? And should we think that this projection is still considered conservative at the early stage? And also, could management please provide commentary on the 2025 guidance, specifically on the expected revenue growth trajectory and margin trends?

Chloe, this is Karen, and thank you for this question. And for the second half of 2025, we are confident of maintaining a solid revenue performance. Excluding contributions for the new products, we expect the full year revenue to be flat and deliver low single-digit growth compared to 2024. Our new game titles may also generate additional revenue growth later this year. We will provide an update to the market after those games are launched, and we have better visibility into this performance. Said about the revenue growth and net margin trends, we believe an estimate of around 40% is reasonable, exclude any potential investments in new products. We've set aside 5% of our full year revenue for selling and marketing expenses for these new products, and we will flexibly adjust the budget according to the users' feedback on these new products. Basically, if we decide to spend more on selling and marketing, we expect to see good growth in our company's revenue. We will update to the market later. Thank you. Thank you for your question.

And our next question today comes from Xueqing Zhang with CICC.

My question about your user strategy. As you mentioned in your prepared remarks, there is a shift in your user acquisition strategy this quarter. Could management share more color on the specific adjustments and the recent [indiscernible].

Thank you for the question, Xueqing. We delivered outstanding MAU growth during Ramadan in the first quarter. In light of that, in the second quarter, we adjusted our user acquisition strategy by refining our evaluation standards for user acquisition channels and optimizing our channel mix. We also allocated more resources towards acquiring and retaining highly engaged users. We believe this will result in vibrant, deeply engaged community as we expand our user base over the long term despite a slight short-term fluctuation in MAU during the quarter. Starting next quarter, we expect our MAU growth to return to 2% to 3% quarter-over-quarter, and we target around 10% year-over-year growth in MAU for the full year. Furthermore, if our new initiatives perform well in the second half of the year, this should drive even stronger user acquisition. We'll continue to provide updates on our user growth strategy as it evolves. Thank you.

And our next question today comes from [indiscernible] with CITIC.

This is Alex from Citic Securities. And I have a follow-up on the gaming pipeline. Could the management share the progress on your mid-core and hard-core games and provide more details on the pipeline?

Alex, thank you for your continued interest in Yalla's gaming business. We've been efficiently advancing our new game pipeline as planned. This quarter, we released 2 Match-3 titles targeting different user segments, both of which are in the final stages of fine- tuning. We also plan to release our first roguelike mobile game in Q4. Additionally, we are working closely with a leading game developer in preparation for hard-core game distribution and expect to get it done this year. Overall, our pipeline for the next 2 quarters is very robust. And at the same time, we're also looking for opportunities to ramp up our pipeline more efficiently through collaboration on game distribution. We'll keep you updated on the progress of this new initiative. Thank you, Alex.

And our next question comes from Xiaoyue Hu with Haitong.

So could management provide an update on the execution of the share repurchase program and share any future plans for shareholder returns?

Thank you, Xiaoyue. This is Karen. I will answer this question. Thank you for your question about the shareholder returns. We continue to efficiently execute our buyback program with progress in line with our expectations. With the additional USD 22 million we announced last quarter, the minimum share repurchase commitment for the full year has reached USD 50 million. As of June 30, 2025, we have repurchased over 6.2 million shares for approximately USD 41 million so far this year. Additionally, we completed the cancellation of these shares, which repurchased in this year. For the remaining 4 months of this year, we will continue to execute our share repurchase program and plan to complete or potentially exceed our committed amount. We will provide a further update on our repurchase plans next quarter. Thank you.

And our next question comes from Lincoln Kong with Goldman Sachs.

So my question is about the game business. Can management share your game distribution strategy for the new mid-core and hard- core titles?

Sure, Lincoln. Thank you for your question. Our strategy for new mid-core and hard-core game distribution is anchored on our 3 core competitive advantages. First, deep localization. With a decade of experience in the Middle East, our dedicated in-market team has extensive local know-how, allowing us to accurately grasp user preferences in both aesthetics and content. This ranges from incorporating Arabic design principles to weaving in narrative to ensure meaningful cultural resonance. Second, efficient user acquisition. Our marketing team is highly experienced with user acquisition in MENA. In addition to acquiring users from external online channels, we will also leverage our existing user base from our product ecosystem for precise targeting, creating a unique low-cost, high conversion acquisition channel. Third, strong community operations. Our local operations team creates tailored in-game events where our large-scale customer service team provides dedicated user care. This combination builds strong community ties and high emotional engagement among our users. These advantages position us well to expand our influence in the MENA market. Thank you.

And our next question comes from Jenny Yuan with UBS.

So my question is regarding our long-term growth strategy. So how does management set the long-term potential of the MENA market? And what is our growth strategy going forward?

Thanks for the question, Jenny. The MENA region has a young population of 500 million and remarkably high mobile Internet penetration, placing it at a pivotal moment in its digital transformation. We believe several Internet verticals in the Middle East are still in their early stages with substantial untapped opportunity to bring off-line activities online, there is still considerable room for growth in both users' online spending habits and overall size of the addressable market. From Yalla perspective, our legacy businesses have relatively long life cycles and currently deliver solid revenue, providing us with a strong business foundation. Building on this, we are committed to investing in the development and distribution of mid-core and hard-core games over the long term. In many parts of the world, gaming has been a key sector since the early days of the Internet, driving deeper thought around user acquisition, Internet monetization, talent development and technological innovation. We are committed to continuously refining our team and products with this in mind. On the social networking front, we will also continue to explore new opportunities to expand our service offerings to a broader user base. Beyond online entertainment, we are also evaluating potential opportunities in local lifestyle services. We will actively explore new areas to capitalize on the opportunities presented by the MENA's digital transformation. Thank you.

This concludes the question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Thank you once again for joining us today. We look forward to speaking with you in the next quarter. If you have further questions, please feel free to contact Yalla's Investor Relations or Piacente Financial Communications. Both parties' contact information is available in today's press release as well as on our company website. Thank you.

This concludes today's conference call. You may now disconnect your lines, and have a wonderful day.