Yalla Group Ltd Q1 FY2023 Earnings Call

Good morning and good evening, ladies and gentlemen. Thank you for standing by for Yalla Group Limited First Quarter 2023 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. Logan Ye, Investor Relations Manager of the company. Please go ahead.

Hello everyone and welcome to Yalla's first quarter 2023 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. Please also note that Yalla's earnings press release and this conference call include a discussion of unaudited GAAP financial measures, as well as unaudited non-GAAP financial information. 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. 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 the call to questions. 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 first quarter 2023 earnings conference call. We kicked off 2023 with strong operational and financial results in the first quarter. Even with the impact from Ramadan, which started a little earlier than usual this year on March 23rd, our Q1 revenue still reached $73.5 million, landing at the upper end of our guidance and once again demonstrating the remarkable strength of our flagship applications, Yalla and Yalla Ludo. Our businesses continue to exhibit stability and vitality due to our consistent efforts to build out our community and product portfolio over the past seven years. With our solid fundamentals and robust cash position, Yalla is also able to continuously invest in new products and verticals to explore and tap into digital opportunities across the MENA region. 2023 has ushered in a fresh economic start amidst uncertainties around the globe, with new dynamics and growth influencing investments worldwide. As we embrace digitalization, the Middle East is receiving increasing attention from the global technology and investment community. Meanwhile, countries throughout MENA are also working to showcase the region and bring energy and commitment to advancing this new era of development. MENA has long been renowned for its copious natural resources. As a result, traditional industries have long been recognized as the economic backbone of the region. Recently, we have seen a significant shift in this dynamic as numerous countries across MENA have prioritized digital transformation as one of their most important national development strategies, allocating capital and resources to support digital fields, including gaming and media, among others. As MENA's largest online social networking and gaming company, Yalla has been proactively preparing to seize these emerging opportunities. To that end, we have identified two growth engines for Yalla Group's development in 2023. First, we will continue to invest in R&D and our self-developed products, building on our well-established user base and product popularity to enhance our value proposition among MENA markets. Second, we will explore collaborations with global Internet companies that are interested in MENA's emerging opportunities. By leveraging our deep local know-how and extensive operational capabilities, we are confident we can capitalize on global investments and achieve mutually beneficial collaborations. Now, I'd like to share some important updates on Yalla Game's recent developments. As we have mentioned previously, we established Yalla Game as a subsidiary to explore the midcore and hardcore game business in MENA. We are thrilled to announce that Yalla Game has officially launched its first hardcore mobile game, a massively multiplayer online role-playing game entitled Age of Legends. Age of Legends is a self-developed game that our team has created, building a magical world and characters rooted in Arabic culture and fairy tales. Its landscape features oases, snowfields, and deserts for users to explore, leveraging our extensive experience in the MENA market. We will also consistently roll out in-game activities tailored to local holidays and other special events, providing additional localized experiences to our users. We launched Age of Legends at the beginning of May in Turkey with downloads available on Google Play for the first stage. The game will also be distributed to additional regions and made available where we observe demand in the near future. We will continue to monitor Age of Legends' operating and financial performance and look forward to sharing more details with you on our next earnings call. Turning to our casual game portfolio, which includes Yalla Parchis, 101 Okey Yalla, and Yalla Baloot, we will continue to hone and upgrade our casual game products during the first quarter, rolling out new types of rankings and VIP privileges to improve gamification and provide more engaging and entertaining experiences. We also continuously create and introduce themed events tailored to MENA's local culture, improving user engagement and retention. Thanks to these persistent endeavors, all casual games delivered outstanding performances in Q1, with both Parchis and 101 Okey Yalla's quarterly revenue being around $1 million, exemplifying our casual game portfolio's monetization capabilities. We will continue to enhance this product and seek creative ways to increase its penetration in different countries across MENA. To sum up, as the MENA region grows rapidly, countries throughout the region are showing their digital ambitions and striving to address the opportunities and challenges on their digital transformation journey. As this transformation gathers momentum, we are pleased to see MENA attracting investor interest, not only because of its abundant capital and natural resources but also due to its unique local market and digital era businesses with great potential. With an increasing inflow of global talent, capital, technology, and innovative ideas into MENA, we anticipate an acceleration of the region's development over the next five years. As the number one MENA-based online social networking and gaming company, we are fully dedicated to this market and take pride in our holistic understanding of its culture, people, and distinctive advantages, which will empower us to seize opportunities arising from the region's digital transformation. We will embrace channel development, deepening our investments in research and development to enhance our technological capabilities and create extraordinary products and workforce while working with partners around the globe to participate in the local digital transformation. Once again, our vision is to build the most popular destination for online social networking and entertainment in MENA, and we are determined in our pursuit of this goal. Now, I'll turn this call over to our President, Mr. Saifi Ismail, for a closer look at our recent developments.

Hello, everyone, and thanks for joining us today. Let's take a closer look at our Q1 operations as well as the performance of our products. We are pleased to deliver solid Q1 results, with our total revenue of $73.5 million landing at the high end of the company's guidance. As Tao mentioned, Ramadan started earlier than usual this year and partly fell into Q1. However, its impact is seasonal and limited to our products and was in line with our expectations. Our monthly active users increased by 12.9% year-over-year, reaching 33 million. Yalla Group's paying users also increased to 13.5 million, demonstrating users' increasing willingness to pay on our platform. Our team will continue to refine our user acquisition and operational strategies to further improve operating efficiency. Before we move on to financials, I would like to mention that Yalla Group was extremely honored to receive the Golden Award for the Most Innovative Social App for our flagship voice-centric group chatting app Yalla Life at the prestigious Middle East and North Africa Stevie Awards 2023. The Stevie Awards Organization was founded in 2002 and is considered one of the most prestigious global awards in the business world, with participants from 70 countries and an adjudication team of more than 1,000 executives worldwide. This year's event received more than 800 nominations from organizations across 18 countries in the MENA region. We view this distinguished award as yet another testament to our team's dedication to product excellence and their accomplishments throughout the past year, boasting detailed features and localized appeal that deeply resonate with users. Yalla's mobile application delivers an unparalleled user experience that fosters a loyal sense of belonging, creating a highly devoted and engaged user community. Yalla Group strives to exceed user expectations with innovative features and services tailored to the MENA region, and this award is a full commendation of those efforts. We sincerely thank the Stevie Award Organization for this esteemed international award, and we look forward to achieving greater success and cementing our position as the largest online social networking and gaming platform in the MENA region. I would also like to share that during the holy month of Ramadan, we hosted a suhoor gathering in Dubai, bringing together more than 100 governmental officials, business partners, industry experts, and local media leaders for a celebration and discussion of the technology industry's latest trends. The event sparked a fascinating exchange of innovative ideas among our guests, building new relationships across the region and industry. We were privileged to host this distinguished group and have the opportunity to express our sincere gratitude to our partners for their unwavering trust and support. As the largest local online social networking and gaming company in the MENA region, we firmly believe that strong relationships and extensive cooperation among our stakeholders can accelerate our company's development and industry progress, providing better experiences for users while boosting regional economic development. We will continue to build and maintain our friendships with local communities, business partners, and media to jointly promote the development of MENA's digital economy while preserving and enjoying our unique local culture and tradition. In conclusion, 2023 is poised to be full of opportunities. The MENA region has been investing heavily in many sectors, including infrastructure, technology, and innovation, which has led to a surge in economic development. The entire region is set to embark on a new era of growth. As the largest MENA-based online social networking and gaming company, Yalla will closely monitor trends, maintain open communication with global companies exploring the MENA market, and strive to seize the changes and opportunities brought about by this growth. With our solid business fundamentals, deep local know-how, the strong connections we have built over the past seven years, and our diversified and evolving product portfolios across social networking and gaming, we are well-positioned to capitalize on potential growth opportunities. As always, we remain steadfast in our commitment to serving MENA users' evolving needs in online social networking and gaming. With that, I would 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 were pleased to sustain our year-over-year revenue growth momentum in the first quarter as we continue to strive for high-quality development and user growth. During the quarter, we also actively refined our cost management operations and processes to improve overall efficiency. Our ROI-based marketing strategies remained effective, evidenced by decreased sales and marketing expenses and solid growth in both MAUs and paying users for the quarter. As a result, we maintained healthy levels of profitability during this quarter, recording a net margin of 27.1%, and excluding share-based compensation, a non-GAAP net margin of 34.7%. Looking ahead, we see our improved cash position and proven execution capabilities empowering us to capitalize on future opportunities, drive sustainable growth, and create value for all our shareholders. Now, I would like to walk you through our detailed financials for the first quarter of 2023. Our revenue was $73.5 million in the first quarter of 2023, a 1.6% increase from $72.3 million in the same period last year. The increase was primarily driven by broadening our user base and enhancing our monetization capabilities. Our average MAUs increased by 12.9% from 29.2 million in the fourth quarter of 2022 to 33 million in the first quarter of 2023. Now, let's take a look at our costs and expenses. Our cost of revenues was $27.9 million in the first quarter of 2023, a 1.2% increase from $27.5 million in the same period last year, primarily due to an increase in salaries and benefits resulting from the expansion of our operations and maintenance team, as well as an increase in technical service fees resulting from the expansion of our product portfolio. Cost of revenues as a percentage of total revenues remained relatively stable at 37.9% in the first quarter of 2023, compared with 38.1% in the same period last year. Our selling and marketing expenses were $11.4 million in the first quarter of 2023, a 9.4% decrease from $12.5 million in the same period last year, primarily due to our more disciplined advertising and promotion approach. Selling and marketing expenses as a percentage of total revenues were 15.4% in the first quarter of 2023, decreasing from 17.3% in the same period last year. Our general and administrative expenses were $10.2 million in the first quarter of 2023, a 26.6% increase from $6 million in the same period last year, primarily due to an increase in incentive compensation and an increase in professional service fees. G&A expenses as a percentage of total revenues increased from 11.1% in the fourth quarter of 2022 to 13.8% in the first quarter of 2023. Our technology and product development expenses were $7.4 million in the first quarter of 2023, a 23.8% increase from $6 million in the same period last year, primarily due to an increase in salaries and benefits for our technology and product development staff, driven by an increase in 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 from 8.3% in the fourth quarter of 2022 to 10.1% in the first quarter of 2023. As such, our operating income was $16.7 million in the first quarter of 2023 compared with $18.3 million in the same period last year. Excluding share-based compensation, non-GAAP operating income in the first quarter of 2023 was $22.3 million. We strategically leveraged the high interest rate with a strong cash position, resulting in a substantial increase in interest income of $3.1 million during this quarter. Our income tax expense was $0.62 million in the first quarter of 2023 compared with $0.61 million in the same period last year. Moving to the bottom line, our net income was $19.9 million in the first quarter of 2023 compared with $17.7 million in the same period last year. Excluding share-based compensation expenses, non-GAAP net income for the first quarter of 2023 was $25.5 million. Next, I would like to briefly go through our liquidity and capital resources. As of March 31, 2023, we had cash and cash equivalents of $435.6 million as compared with cash and cash equivalents of $407.3 million as of December 31, 2022. This improvement demonstrates our ongoing commitment to refining Yalla Group's operations. On May 21, 2021, we announced the 2021 share repurchase program. As of March 31, 2023, we have repurchased 2,302,141 ADS or Class A ordinary shares from the open market with cash, totaling approximately $27 million. The total value of ADS or Class A ordinary shares that may still be purchased under the share repurchase program was $123 million as of March 31, 2023. Our Board of Directors has approved an extension of the expiration date of the share repurchase program to May 21, 2024. Moving to our outlook for the second quarter of 2023, we expect our revenues to be between $68 million and $75 million. The above outlook is based on current market conditions and reflects the company's management's current and preliminary estimates of the market and operational 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.

Thank you. Your first question comes from Thomas Shen from Nomura. Please go ahead.

Hi. Good morning, management. Thank you for taking my question. I have one question. Could you share more color on Yalla's monetization strategies going forward? Thank you.

Hi Thomas. Good morning. This is Tao Yang, and I will take this question. Regarding the monetization strategy for the flagship applications, Yalla and Yalla Ludo, we don't expect big changes. We continue to work on product iterations and roll out new events, but the key monetization model will not change. For our new casual games, such as Parchis and 101 Okey, its monetization capability continued to improve over the past two quarters as we continued testing the best ways to monetize it, and we will continue to roll out new functions and features for midcore and hardcore games. I would say in-app purchases will still be the major way to monetize. At the same time, our strategic department is also actively looking for external opportunities for investments and collaborations. If there are more concrete plans, we will keep you updated on the potential monetization of these new businesses. Thank you, Thomas.

Thank you.

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

Good morning, management, and thank you for taking my questions. I have two. The first one is related to the cost and OpEx. According to a guidance in the prepared remarks, will the absolute dollar value of cost and R&D expense remain relatively stable? And the second one is, will you promote self-development against raising its own products such as Yalla and Ludo, but this means that the company adopts advertising as the commercial approach. How should the company balance commercialization and user experience? Thank you.

Thank you, Xueqing. Glad to see you here. This is Karen. I will take your first question and leave the second strategic one to Mr. Tao Yang. Looking ahead to the rest of 2023, if there are no large-scale investments in new initiatives, I believe our R&D and G&A expenses will be maintained at a relatively stable level. As we mentioned last quarter, we think for 2023, taking the potential sales and marketing expenses for our midcore to hardcore games into account, we can maintain our non-GAAP net margin above 30% for the full year. Each quarter's performance may vary depending on how and when we invest in different products. Hope I answered your question. Thank you.

Hi, Xueqing, for your second question, I'd say last year we started to drive traffic from Yalla and Yalla Ludo to our new products, for example, YallaChat and some of our casual game products as well. So, we are well prepared to promote our hardcore games within our communities where users are highly engaged, and many of them are also game lovers. We saw an outstanding conversion rate from our past experiences. That’s one of the important advantages we have, which supported us to start our game distribution business in MENA. However, it doesn't necessarily mean that we will adopt advertising as a commercial approach immediately. So far, we haven't collaborated with any external platforms yet. We only share traffic with our own products within the Yalla ecosystem. At the same time, we are also trying our best to seek the right balance to protect our user experience. Every time when we decide to promote a new product in our community, we will first evaluate its impact. Regarding our hardcore game marketing strategy, despite leveraging our own user community, we will also purchase traffic from external channels, which will help us evaluate the efficiency or value of our Yalla community from a commercial perspective. Thank you, Xueqing.

Thank you, Karen. Thank you, Tao.

Thank you. Your next question comes from an unidentified analyst from CICC. Please go ahead.

Hey, good morning management. Thanks for taking my question. I have a follow-up question about the progress of the company's two hardcore games. Could management share about how the testing is going for its two new games? Are there any comparable products in the Middle East market that can help us understand their potential? Additionally, could the management share about the company's expectations for these new games? Thanks.

Hi, thank you very much for your question. This is Jeff, and I will take this question. We have actually received positive feedback from users for both new games during the testing, and we continue to work on optimizing the design of the games based on user feedback. If you check the ranking on the App Store or Google Play, you will find a number of popular SLG games. It's one of the most popular genres of games in MENA. For our SLG game, Merge Kingdom, we hope to deliver more localized gaming experiences to many users. For the RPG game, currently, there's no iconic product in the region yet, but we think it's a genre worth pursuing, especially for Turkey, where RPG games have the largest share of the market. Since we just launched our RPG game, AOL, it will take some time to get a more concrete evaluation of the game's performance, so we'll keep monitoring and hope we can have an update to share with you very soon.

Thank you.

Thank you. Your next question comes from an unidentified analyst from Haitong. Please go ahead.

Hi, management. Thank you for taking my question. My question is about the company's casual products. Could management help provide a growth outlook for the casual games portfolio, especially Yalla Parchis and 101 Okey Yalla? Thanks.

Morning, thank you very much for the question. For the casual games, Yalla Parchis and 101 Okey Yalla have delivered good performances over the past few quarters. For Parchis, we do expect a relatively big upgrade to the app during the second half of this year. Now, it is still in its early stage, and we will keep our investors focused, once there is more concrete information. For 101 Okey Yalla, we mentioned that its quarterly revenue was around $1 million, and we think there is still ample room to grow. We are confident in the product's monetization capabilities. Thank you very much.

Thank you.

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

Hi management. Thanks for taking my question. I have two. The first is about the users. So, can management give some color about the user growth strategy for different apps, especially the business? And my second question is with regards to OpEx. So, how does management plan the trends for sales expenses in the next several quarters?

Thank you, Kaifang, for your question. Regarding the user growth strategy for our flagship application, we maintain a similar pace as the past several quarters, as we don't expect any big changes. For the hardcore game strategy, there are two key parts that we care the most about. Firstly, when we promote a new game, thinking about how to build a community with good dynamics is significant. To achieve that, we need to be very accurate on the pace of marketing. Secondly, as ROI is a key metric we monitor when promoting games, we are checking our performance daily to drive the best results possible. As for your second question, the promotion of midcore and hardcore games has its own pace and pattern. At the launch of the game, usually, there’s an investment period, and the company will need to invest in promoting the game first, but revenue may not come in immediately. The investment period may last for three to several months, depending on different types of games according to our industry experience. Thus, this may influence our sales and marketing expenses in the short run. However, as Karen just mentioned, we have already included the potential impact in our current financial model. Regarding the trend or level of sales and marketing expenses, it may take longer for us to get a more concrete evaluation. The trend for mid and hardcore games is different from that of casual games. We need to monitor the feedback and optimize the amount spent during this cycle and will keep you updated. Thank you.

Thank you. That's very helpful.

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

Hi management. Thanks for the presentations and congratulations on the robust results. I have a follow-up question about the game. What are the company's expectations towards the new game pipeline in terms of launch time and potential revenue contribution? Thanks.

Hi Edward. Thank you for your question. In terms of revenue, since we just launched AOL, it's still hard to give an accurate projection at this point. It may take at least a couple more weeks before we can share more insights with you on our next earnings call. Regarding the launch time, we launched the RPG game, AOL, at the beginning of May, and for the SLG game, we plan to officially launch it before the end of May. So, it's going to be very soon. Thank you.

Thanks.

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 further questions, please feel free to contact Yalla Investor Relations through the contact information provided on our website.

This concludes our conference call for today. You may now disconnect your line. Thank you.