Yalla Group Ltd Q3 FY2024 Earnings Call

Good morning, and good evening, ladies and gentlemen. Thank you for standing by for Yalla Group Limited Third Quarter 2024 Earnings Conference Call. At this time, all participants are in 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, Kerry Gao, IR Director of the company. Please go ahead.

Hello, everyone, and welcome to Yalla's third quarter 2024 earnings conference call. We released our earnings press release earlier today, and the release is now available on our IR website, as well as our 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 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. 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 third quarter 2024 earnings conference call. We are thrilled to report a robust third quarter marked by record high revenues and enhanced profitability. Our third quarter revenues grew to US$88.9 million, beating the upper end of our guidance by 8%, while our net income increased by 11.2% year-over-year to US$39.2 million. Behind this impressive performance is our continued commitment to deepening our localization capabilities, which enabled us to keep rolling out new gamification features and operating events that fulfill media usage and entertainment needs. Driving quality revenue growth while including operating efficiencies has been a key company objective this year. To that end, the team has consistently refined operational procedures and optimized user acquisition strategies over the past several quarters. Moving forward, we will remain focused on user experience and product excellence in reaching our product ecosystem and pursuing high-quality attainable developments. MENA’s digital transformation has driven a record year this year, drawing a series of global attention, talent, and investment. We have seen gaming emerge as one of the critical drivers of this digital transformation. Countries are introducing supportive policies and initiatives to facilitate this development of the gaming sector. In this summer, the Esports World Cup put Saudi Arabia in the global spotlight for gamers and industry professionals worldwide. With over 1,500 players worldwide competing in multiple games for a record-breaking USD16 million. The event showcased key aspects of the country's policy commitment to the gaming industry and their infrastructure capacity for large-scale events. MENA still holds immense potential for further development, which is gradually being unleashed. Looking at the Group’s business, Gaming Services, now a revenue contributor, has grown in importance within our Group. The proportion of revenues attributable to Gaming Services has surpassed 30% over the past few years. In addition, our keen insight into MENA’s gaming industry dynamics has led to our strategic entry into the mid-core and hard-core game markets with Yalla Games. We currently have several developments in the mid-core and hard-core game space, and expect to begin testing some of them by year-end. Our product development and release schedules are designed to bring premium polished games to markets at optimal times to capture their corresponding user base and market share. We look forward to seeing this new initiative drive growth in the upcoming period. Expanding from casual games to mid-core and hard-core games is a milestone for us. We are committed to elevating Yalla Games' standing in these markets, capitalizing on our world of experience in casual games to drive success. Guided by Yalla’s core organizational principles, we will continue to refine every Yalla Game product by taking a straightforward and pragmatic approach. We are confident that we can engage our loyal users in the region, whom we have served for nearly a decade, with high-quality games along with the Yalla brand, while also leveraging this new game to build Yalla Group’s product ecosystem and market reach. In conclusion, we are pleased to roll out our digital transformation initiatives across many of our countries, unlocking the market’s growth potential. As the largest online social networking and gaming platform in MENA, we will seize every opportunity to contribute to this transformation and the economic developments of the region. With strong business fundamentals and an increasingly robust product ecosystem, we have full confidence in our ability to expand our role in the region's evolution. Now I will turn this call over to our President, Saifi Ismail, for a closer look at our recent developments.

Hello, everyone. Thanks for joining us today. Let's move on to our third quarter operations and the performance of our products. We continued to broaden our user base thanks to our strong execution of effective user acquisition strategies. Our average monthly active users grew to 40.2 million, up 14.5% year-over-year. As we dedicated ourselves to enhancing our products' gamification and user experience, our paying users increased to 12.6 million, up 12% year-over-year. During the quarter, our products demonstrated remarkable strength, with Yalla Ludo and 101 Okey Yalla both setting new quarterly revenue records. We were delighted to reach new heights within our casual game metrics and look forward to replicating Yalla Ludo's success with other products. As we advance the company's developments, we continue to identify and create products with deep cultural roots that attract a strong user base in MENA while keeping a close eye on market dynamics and users' changing needs. Our highly skilled team has a profound understanding of MENA users and their preferences, empowering the consistent development of products and online and offline events with enduring appeal. For instance, this quarter we expanded the regional footprint of our Ludo Champion Offline Tournament Series. Our team not only hosted two tournaments in Abu Dhabi and Egypt but also teamed up with the UAE Esports Federation to host an additional Yalla Ludo Offline Tournament in Abu Dhabi. This steady stream of offline events has deepened our brand awareness, solidifying Yalla Ludo’s industry leadership while also meeting MENA users’ entertainment needs. We will continue to cooperate with local and global industry participants to increase user engagement and facilitate development across MENA’s gaming industry. We also upgraded Yalla, our flagship product, with a diverse array of fresh features. We were pleased to see Yalla users investing significant time and game currency into our engaging on-trend activities. This quarter, we embedded a Crazy Soccer game in Yalla’s chat room, tapping into the soccer frenzy currently sweeping the Middle East. Chat room users compete in teams and make plays by sending messages and gifts in the chat room, fostering stronger social ties and deeper user engagement. On a related note, I was honored to be invited for an interview this quarter by Pocket Gamer, a globally recognized media leader in the mobile gaming industry celebrated for its cutting-edge news and insights. We delved into the emerging trends shaping MENA’s social networking and gaming industry during our in-depth exchange, focusing particularly on the crucial importance of content localization. We are grateful for this opportunity and the recognition of Yalla Group’s leadership in MENA’s social networking and gaming industry. As a leading MENA-based Internet company, we remain dedicated to creating social and economic value by enhancing digital lifestyle and advancing the region's digital transformation. To sum up, as MENA’s leader in online social networking and gaming, we will continue delivering high-quality products and services to our users while playing an active role in the region's digital transformation. We are poised to broaden our business horizon and enhance external collaboration, consistently elevating our brand’s influence. And as always, we will stay true to our vision of becoming the largest online social networking and entertainment platform in the MENA region. 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 today. During the third quarter, we continued to execute high-quality growth strategies, leading to our revenues reaching an all-time high. We also boosted efficiency and operating leverage. As a result, we enhanced our profitability with an expanded net margin of 44.1%, and excluding share-based compensation, a non-GAAP net margin of 47.9%. Our fundamentals remain solid, strongly supporting our current business operations, as well as our investments in further developments. Let's move on to our detailed financials for the third quarter of 2024. Our revenues were US$88.9 million in the third quarter of 2024, a 4.4% increase from US$85.2 million in the third quarter of last year. The increase was primarily driven by our broadening user base and enhanced monetization capabilities. This growth was also partially attributable to the significant increase in the number of paying users, which grew to US$12.6 million in the third quarter of 2024 from US$11.2 million in the third quarter of 2023. Now let's take a look at our costs and expenses. Our total costs and expenses were US$56.4 million in the third quarter of 2024, a 6.9% increase from US$52.8 million in the third quarter of last year. Our cost of revenues was US$31.8 million in the third quarter of 2024, a 14.6% increase from US$27.8 million in the same period last year, primarily due to higher commission fees paid to third-party payment platforms as a result of increasing revenues generated. Cost of revenues as a percentage of total revenues increased to 35.8% in the third quarter of 2024 from 32.6% in the third quarter of last year. Our selling and marketing expenses were US$7.4 million in the third quarter of 2024, a 34.9% decrease from US$11.3 million in the same period last year, primarily driven by our more disciplined advertising and promotional approach. Selling and marketing expenses as a percentage of total revenue decreased to 8.3% in the third quarter of 2024 from 13.3% in the third quarter of last year. Our general and administrative expenses were US$10.1 million in the third quarter of 2024, a 38.3% increase from US$7.3 million in the same period last year, primarily due to an increase in incentive compensation. General and administrative expenses as a percentage of our total revenues increased to 11.4% in the third quarter of 2024 from 8.6% in the third quarter of last year. Our technology and product development expenses were US$7.1 million in the third quarter of 2024, an 11.1% increase from US$6.4 million in the same period of last year, primarily due to an increase in salaries and benefits for our technology and product development staff. Technology and product development expenses as a percentage of total revenues increased to 8% in the third quarter of 2024 from 7.5% in the third quarter of last year. As such, our operating income remained relatively stable at US$32.5 million in the third quarter of 2024. Our interest income was US$7.8 million in the third quarter of 2024, compared with US$5.6 million in the third quarter of last year, primarily due to an increase in interest rates applicable to the company's bank deposits. Our income tax expenses were US$1.29 million in the third quarter of 2024, compared with US$0.71 million in the third quarter of last year. The increase was primarily due to the introduction and implementation of UAE's Corporate Tax Law, which is effective for the financial years starting on or after June 1, 2023. As a result, our net income was US$39.2 million in the third quarter of 2024, an 11.2% increase from US$35.2 million in the third quarter of last year. Turning to our liquidity and capital resources, our cash position remains solid. As of September 30, 2024, we had cash and cash equivalents, restricted cash, term deposits, and short-term investments of US$570.1 million, compared with US$535.7 million as of December 31, 2023. Under our US$150 million share repurchase program that began May 21, 2021, and has since been extended by our Board through May 21, 2025, we repurchased 1,736,383 ADS or Class A ordinary shares in the open market for total cash repurchases of approximately US$7 million in the third quarter of 2024. Cumulatively, we have repurchased US$5,709,259 ADS or Class A ordinary shares in the open market with total cash repurchases of approximately US$42.5 million as of September 30, 2024. Moving to our outlook, for the fourth quarter of 2024, we expect our revenues to be between US$77 million and US$84 million. The above outlook is based on current market conditions and reflects the Company’s management’s current and preliminary estimates of market and operating conditions and customer demands, which are all subject to change. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Thank you very much. We will now begin our question and answer session. Today's first question comes from Xueqing Zhang with CICC. Please go ahead.

Thanks management for taking my question. Congratulations on another solid quarter. I have two questions. The first one is about the game business. Can management share more information about your new game products, such as testing and launching schedules, and how does management see the performance of the game business in 2025? And my second question is about flagship products. Regarding flagship products, how have we seen some new gameplay attempts on Yalla this year? Can management share your strategies for our flagship products moving forward? And what's the change for flagship products in Q4 and next year? Thank you.

Thank you, Xueqing, for your question. I'll be taking the first one and leave the second to our CEO Mr. Tao Yang. Currently, we have three new self-developed mid-core games in our pipeline. Some of these will enter testing in Q4 2024. After collecting user feedback and then refining the products, we will start promoting them at scale. Looking ahead at the game business in 2025, we expect Yalla Ludo’s performance to remain strong and stable with single-digit percentage growth next year. Besides that, more upsides, or additional growth, will come from our new products as mentioned, as well as potential external collaborations. We will provide more accurate guidance on that after we get a better sense of their product potential from the testing. Thank you.

Good morning, Xueqing. This is Tao. Regarding our flagship products, as you mentioned, we upgraded Yalla with various fresh features and projects. We will continue to roll out new features for Yalla during the latter part of 2024 and into 2025. We will also keep launching interactive operational events and potentially even new gameplay to boost user engagements. In terms of our revenue growth, we are confident that in 2025, both flagship products will maintain their current scale and have the potential to achieve single-digit growth. Hope this answers your question. Thank you, Xueqing.

Thank you. The next question comes from Chenghao Li with CICC. Please go ahead.

Hi management. Thanks for taking my question, and congratulations on a robust quarter. My question is about our game business regarding casual game products. We mentioned that Yalla Ludo and 101 Okey Yalla both achieved new quarterly revenue records. Could management elaborate more on the drivers of growth for these two products? Thank you.

Thank you, Chenghao. This is Saifi. I will answer your question. Overall, our consistent efforts to optimize user experience and refine operational procedures have paid off. In the second half of the quarter, users statistically appreciated the diverse operational events for Yalla Ludo. Meanwhile, Yalla Ludo once again successfully held two offline tournaments, further strengthening our brand's local impact. Regarding 101 Okey Yalla, it has been deeply involved in the Turkish market for a few years now, and our team has been constantly enhancing the user experience. One of the new features we launched this quarter has gained excellent feedback, which underscores our long-term localization capability and deep understanding of our user needs. Thank you.

Thank you. The next question comes from Sarah Hu with Haitong International. Please go ahead.

Hello, management. Thank you for taking my questions, and congratulations on a solid quarter. So, can management give us an update on the shareholder return? Thank you.

Hello, Sarah. Morning. This is Karen. I will answer your question. Yalla is committed to returning value to shareholders through our share repurchase program. This quarter, we repurchased more than 1.7 million ADS in the open market for an aggregate amount of approximately US$7 million. As of September 30, 2024, we had deployed a total of US$42.5 million for share repurchases. Given our solid fundamentals, we will continue to conduct our share repurchase program while considering cash dividend payments in due course. We will keep you posted if we have more updates. In short, we strongly believe in Yalla’s long-term potential and are dedicated to generating value for all parties involved. I hope this answers your question. Thank you.

Thank you. The next question is from Kaifang Jia with CITIC. Please go ahead.

Hi management. Thanks for taking my question, and congratulations on a solid quarter. Could management share any updates about external cooperation and expansion into new areas? Thank you.

Good morning, Kaifang. Thank you for the question. With MENA’s ongoing digital transformation and our company’s local rules and business development experience in the region, Yalla has begun engaging in more discussions with top-tier overseas Internet companies interested in exploring this market. We will take pride in our localization capabilities and potential productivity, which position us well to assist in the development of localized content, as well as game distribution in the MENA region. In terms of our focus, social networking and gaming remain our core areas. While the Middle East market remains our primary focus, we have already gained a certain level of users in Europe, South America, and Southeast Asia. If in the future we see new products with suitable content, we may consider conducting global promotions. Thank you, Kaifang.

Thank you. The next question is from Rachel Guo with Nomura. Please go ahead.

Hi, hello. Thanks to management for giving me this opportunity to ask the question. My question is about your margin. How do we think about your margin trend in the fourth quarter of 2024? Thank you.

Hi, Rachel. Thanks for your question. Regarding our profitability for Q4, as we continue to improve our operating efficiency, we are confident that we can maintain our net margin at the 40% level and potentially reach around 45%. Hope this answers your question. Thanks.

As there are no further questions now, I would 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’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. Thank you.