Yalla Group Ltd (YALA) 2022 Q1 法說會逐字稿

Good morning, and good evening, ladies and gentlemen. Thank you for standing by for Yalla Group Limited's First 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 First 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 these 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. 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 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.

Thank you, Kerry, and thank you, everyone, for joining our first quarter 2022 earnings conference call. We are pleased to have started 2022 on a strong note with our revenue reaching an all-time high of USD 72.3 million, exceeding the higher end of our guidance. This excellent performance, notwithstanding 2022, is still undoubtedly shaping up to a year full of challenges.

Looking at the macro environment variables such as geopolitical friction among countries as well as pandemic resurgences in various regions are creating fluctuation and ongoing turbulence. Yalla is closely monitoring the macro situation, and we will adjust our company strategy appropriately.

For this year, instead of merely pursuing high user base growth, we will increase our focus on improving return on investment with respect to our user base expansion. To that end, we are carefully testing and effectively adjusting our sales and marketing strategy based on our observations of market dynamics. During the first quarter, we were able to deliver solid top line growth with -- while optimizing the pace of user growth. Thus, sales and marketing expenses as a percentage of our total revenues have decreased compared with the previous quarter. We are encouraged by this progress and aim to further improve our sales and marketing efficiency going forward.

In 2022, we will continue to expand our services and stretch the boundaries of our business, launching innovative social networking and entertainment products to fulfill MENA users' evolving needs and grow our emerging online ecosystem to deliver more memorable experiences to more users while creating future revenue streams for our company.

Now let's take a closer look at our new product update. As the leading player in the online social networking and entertainment industry, Yalla strives to expand its ecosystem and broaden the scope of its product and service offerings to meet MENA users' unique needs. We are happy to share with you that, facilitated by Yalla Game Limited, we will soon launch the better version of our first hard-core mobile game. This is a milestone for Yalla Group. Beyond that, as an important part of our group's strategy, we are also actively looking for diverse investment opportunities to continue to flexibly and efficiently broaden Yalla's ecosystem. We look forward to sharing more updates with you, our investors, on potential opportunities in the near future.

We are also excited to share with you that we recently launched YallaChat version 1.0 and have rolled out several important features with this iteration. First of all, as we have shared previously, a crucial step in building the Yalla ecosystem among our user communities is to build a unified logging system with YallaChat which will allow users to log into any product within the Yalla Group using their YallaChat ID. We have already started marketing this upgrade with Yalla, including incentives such as free coins and special gifts to encourage users to log into Yalla Live with their YallaChat ID. We expect this enhancement to motivate our increasing number of Yalla users to register for YallaChat accounts and take advantage of the united logging system. We see this as an important step to boost product synergies and increase users' loyalty and stickiness to Yalla Group's products.

In addition, in order to encourage users to further engage with YallaChat, we have introduced (inaudible) social game (inaudible) within YallaChat, bringing users new opportunity to share exciting gaming moments and compete with their friends. We believe social games are a good catalyst to increase social interactions while simultaneously promoting YallaChat to a broader range of users.

On top of that, we have also implemented our moment function which will allow users to make record of and share their memorable moment with their friends on YallaChat 1.0 and added more emoji packages designed for Arabic users. We will continue to welcome user feedback, roll out more localized functions and work on perfecting the details with upcoming iterations of YallaChat.

As we reported last quarter, WAHA, the first ever social network designed for the MENA region, plays a critical role in Yalla's efforts to expand the boundaries of existing online social networking product and represent an important step forward in Yalla Group's network application acceleration. After WAHA's launch last quarter, our team focused intently on feedback action and rolled out another iteration at the beginning of May. In the latest iteration, we introduced a new 3D social scene with more interactive features for our users to enjoy in the virtual world as well as additional options for users to build their WAHA avatar. We firmly believe that the metaverse cause tremendous potential for our business. We are closely monitoring industry trends as we explore new possibilities and create unique and more interactive social experiences for our MENA users.

Before I conclude, I have 1 more important update. It is my pleasure to introduce Yalla Group's inaugural environmental, social and government report showcasing our performance across economic, social, governance and environmental practices for 2021. We sought to identify initiatives that enable sustainable development, not only for our company and our employees, but also for the community, as a society and our environment.

We are proud to share our progress and future goals with you where our first ESG report, which is now available download on our IR and company website. We believe that our status as a leading voice-centric social networking and entertainment platform in MENA comes with the responsibility to create significant social economic value. This is manifested not only by maintaining robust financial performance, but also by providing MENA's people with better access to a digital life while generating value by supporting the region's growth and development growth.

As a company deeply rooted in MENA, we have witnessed exceptional achievements in the digital transformation of this region and remain profoundly inspired by the U.A.E. government unwavering commitment to a sustainable economy. Over the past year, we have continued to make considerable progress in our efforts to align with U.A.E.'s visionary 50-year economic plan and the country's economic strategy, prioritizing digitalization and the environmental responsibility. As we look back on another successful year, we are happy to take this opportunity to renew our invitation to all stakeholders to continue to engage with us in our open and ongoing sustainability conversation. We welcome all feedback.

In closing, I would like to reiterate that our vision is to build the most popular destination for online social networking and entertainment activities in MENA, a vision we hope to realize within the next 10 years. Yalla's (inaudible) values, multicultural understanding, user first, simple and target, have guided our team to prioritize our users, embrace diversity and operate with a simple and pragmatic, pioneering and enterprising approach as we collaborate. Adhering to these principles has been the driver of our past achievement and will ensure that we remain dedicated as we work to achieve our vision.

Looking ahead, we will continue to closely observe MENA's local culture trend 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 development.

Hello, everyone. Thanks for joining us today. Let's take a look at our operations as we'll add our broader performances. Operationally, we -- as we move into 2022, our growth momentum carried on as we expanded our user community and further advanced our monetization capability. As Tao mentioned in his remarks, our experienced marketing team has been adjusting our sales and marketing strategy to boost the return efficiency on our user acquisition investments. We are pleased to report a solid quarter with the Yalla Group's total revenue of USD 72.3 million, beating the higher end of the company's guidance. Our monthly active user increased 55.3 percentage year-over-year, reaching 29.9 million (sic) [29.2 million]. Yalla Group's paying users also increased to 9.4 million, while the sales and marketing expenses as a percentage of our total revenue decreased from last quarter, leaving us more flexibility and budgetary capacity to promote our new products later this year.

We are also happy to share that our cash dual game portfolio, including Yalla Parchis, 101 Okey Yalla and Yalla Baloot, is making good progress. In quarter 1, Yalla Parchis ranked in the top 10 in terms of revenue under the board game category in 9 countries. We have rolled out a new game mode and chatting feature which further increase user retention and user stickiness on the platform. We also hosted events, including our independence day and [Yalla Carnival] to celebrate local holidays in various regions and encourage user engagement on the platform, attracting participation by more than 60% of our daily active users.

During the first quarter, 101 Okey Yalla, for the first time, was ranked among the top 5 in terms of revenue in Turkey in the board game category on Google Play and was ranked among the top 10 in terms of revenue in Turkey in the board game category on iOS. We continue to expand 101 Okey Yalla's user base and have seen user stickiness improve consistently as both the average daily time spent per active user and users' willingness today continue to grow.

Furthermore, we received excellent feedback after the official launch of Yalla Baloot last December, which has already been ranked among the top 5 in terms of downloads on Google Play in Saudi Arabia under the card game category, and we have already received an average rating of 4.7 on Apple Store. We are encouraged by this progress and will continue to expand Yalla Baloot's user base while collecting user feedback.

It's my privilege to share another piece of good news with our investors. We, at Yalla Group, are extremely honored to have been recognized as the GOLD winner in the third annual Middle East & North Africa Stevie Awards, specifically our Yalla Ludo game took gold in the innovation in the entertainment app category. The Middle East & North Africa Stevie Awards are the only business awards program to recognize innovation in the workplace in 17 nations in the Middle East and North Africa. The Stevie Awards are widely considered to be the world's premier business awards, conferring recognition of our achievement in programs such as the international business awards for 20 years. With more than 12,000 entries each year from organizations in more than 17 nations and more than 1,000 executive global professional judges, this award further solidifies Yalla Group's position as one of the MENA region's top companies.

We view this [prestigious] international award as yet another testament to Yalla Group team's excellent work and many accomplishments throughout the past year, and we would like to deeply thank the Stevie Awards organization for this tremendous distinction. We hope that our ongoing efforts and achievements merit many more regional and global awards in the future.

2022 is a year full of promise and potential. In the new year, we remain fully committed to maintaining our position as the leading voice-centric social networking and entertainment platform in MENA and further delivering in -- to our commitment to serving MENA user base evolving needs in this field. To echo Tao once more, our vision is to build the most popular destination for online social networking and entertainment activities in MENA, and we will strive to exceed users' expectations with innovative features and services tailored to the MENA region.

With that, I will now turn the call over to our CFO, Karen, who will discuss key financial and operational results.

Thank you, Saifi. Hello, everyone. Thank you for joining us. We achieved strong top line growth in the first quarter of 2022, recording an increase of 7.1% quarter-on-quarter to achieving USD 72.3 million. This strong performance once again illustrates our group's ability to deliver growth in rapidly evolving environment. Notably, we also reduced selling and marketing expenses by 5.9% quarter-over-quarter amid macro uncertainty as a result of our ROI-based approach to promotion and advertising. Furthermore, we maintained a healthy non-GAAP net margin of 35.9%, impressive by industry standards, as well as ample cash reserves to sustain the ongoing expansion of our Yalla ecosystem.

As we move through 2022, we will focus on growing the group's long-term profitability by further refining our resource allocation to profile product innovation and monetization while boosting sales and marketing efficiency as well as optimizing capital utilization.

Now I would like to walk you through our detailed financials for the fourth quarter of 2022. Our revenues were USD 72.3 million in the fourth quarter of 2022, a 6.9% increase from USD 67.6 million in the same period last year. The increase was primarily driven by the broadening of Yalla Group's user base and enhancements to Yalla Group's monetization capabilities. Our average MAUs increased by 55.3% from 18.8 million in the fourth quarter of 2021 to 29.2 million in the first quarter of 2022.

Now let's look at our costs and expenses. Our cost of revenues was USD 27.5 million in the first quarter of 2022, a 14.7% increase from USD 24 million in the same period last year, primarily due to an increase in technical service phase, resulting from the expansion of our product portfolio and an increase in salaries and benefits, which resulting from the expansion of the operating and maintenance team.

Cost of revenues as a percentage of total revenues increased from 35.5% in the first quarter of 2021 to 38.1% in the first quarter of 2022. Our selling and marketing expenses were USD 12.5 million in the first quarter of 2022, a 49.8% increase from USD 8.4 million in the same period last year, primarily due to higher advertising and market promotion expenses which led by our continued user acquisition efforts and expanding product portfolio.

Selling and marketing expenses as a percentage of our total revenues were 17.3% in the first quarter of 2022, increasing from 12.4% in the first quarter of 2021. The ratio declined from 19.7% in the first quarter of 2021, driven by our more disciplined advertising and promotion approach.

Our general and administrative expenses were USD 8 million in the first quarter of 2022, a 31.5 decrease -- percentage decrease from USD 11.7 million in the same period last year, primarily due to lower share-based compensation expenses recognized during the first quarter of 2022. General and administrative expenses as a percentage of total revenues decreased from 17.3% in the first quarter of 2021 to 11.1%.

Our technology and product development expenses were USD 6 million in the first quarter of 2022, a 79% increase from USD 3.3 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 the development of our new business and the expansion of our product portfolio. Technology and product development expenses as a percentage of total revenues increased from 4.9% in the first quarter of 2021 to 8.3% in the first quarter of 2022.

As such, our operating income was USD 18.3 million in the first quarter of 2022, compared with operating income of USD 20.2 million in the same period last year. Excluding share-based compensation, non-GAAP operating income in the first quarter of 2022 was USD 26.5 million. Our income tax expense was USD 0.61 million in the first quarter of 2022, compared with USD 0.43 million in the first quarter of 2021.

Moving to the bottom line. Our net income was -- sorry, USD 17.7 million in the first quarter of 2022 compared with net income of USD 19.8 million in the same period last year. Excluding share-based compensation expenses, non-GAAP net income for the first quarter of 2022 was USD 26 million.

Next, I would like to briefly go through our liquidity and capital resources. As of March 31, 2022, we had cash and cash equivalents of USD 367.5 million as compared with cash and cash equivalents of USD 351.5 million as of December 31, 2021. This improvement demonstrates our commitment to continuing, streamlining and refining Yalla Group's operations.

On May 21, 2021, we announced the 2021 share repurchase program. As of March 31, 2022, we have repurchased 1,903,205 American depository shares, representing 1,903,205 Class A ordinary shares from the open market with cash for an aggregate amount of approximately USD 25.4 million. Furthermore, our Board of Directors has approved an extension of the repurchase program through May 21, 2023.

In the second quarter of 2022, we expect our revenues to be between USD 66 million and USD 70 million. The above outlook is based on the current market conditions and reflects company's management's current and preliminary estimates of market and operation 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.

(Operator Instructions) Our first question comes from [Ming Kun] with CICC.

This is [Ming Kun] from CICC. I'll be asking questions on behalf of Xueqing. First, I'd like to congratulate the company for a very impressive set of first quarter results. We have 2 questions today. First, we'd like to ask about YallaChat. We're curious about what the company thinks is the significance of the app to the company's product metrics. For example, does the company expected to connect the company's various products and even drive traffic among them?

Our second question would be on Yalla and Yalla Ludo. Given that they're the more mature product that the company has, we'd like to know what's the company's current strategy for their user operation going forward.

Thank you very much for your question. And I'll be answering your questions. The first one about the YallaChat. YallaChat plays a distinct role in our ecosystem. As we mentioned earlier in our prepared remarks, starting this quarter, we will gradually build a unified login system with YallaChat, and we have already started marketing this upgrade with Yalla. We think this is a crucial step in building the Yalla ecosystem among our diverse user communities to better introduce various products to all of them. We hope this will help boost (inaudible) between different products in our Yalla ecosystem and further improve our brand user stickiness.

And for the second question about the strategy for Yalla and Yalla Ludo. Actually, we are committed to serving the MENA market. Our vision is to become the largest online social networking and entertainment platform in MENA. And for the past 5 years, we have strived to improve and gather experiences in our product design and operations. This is also for why, in our corporate culture, user-first and multicultural understanding are the 2 top priorities to remind our team to stick with our values and strategy and be dedicated to achieving our goal. In our community, users enjoy a healthy, relaxing social entertainment experience with mutual respect. This unique experience is how we differentiate our product from others. It is also why we've achieved such rapid [investment] over the past years.

Our next question comes from Shiqi Ge with CICC.

Congrats on another strong quarter. I have 2 questions. The first is, given that the group is growing and that the management has mentioned that YallaChat will soon allow the users to log into any Yalla product with their YallaChat ID, will each product be operated separately and have separate ROI? And are you prioritizing any products over others?

And my second question is about the margin. I think the gross margin in 1Q 2020 has declined by several percentage points. Does the company have a steady margin guidance for the long run?

Shiqi, I'll be answering the first question. We have our efficient internal management system. Each one of our product has operated separately with independent accounting. They also have different KPIs, depending on their development stage, and ROI is just 1 KPI. So for example, our current task for certain products is to expand the user base and increase user stickiness. Once the product reaches a certain stage, monetization subsequently becomes our target. Yalla has always done a good job in the monetization stage if we look at the company's past performances, which shows Yalla's monetization capability is impressive by industry standards.

As product characteristic differ in each phase, we will adjust our priorities accordingly. These priorities are fluid rather than static. So we can't say that a given product is not important, only which product is more important in the current stage and can contribute more to our ultimate goal. YallaChat is unlike other products that follows a different budget, which also means we have different expectations [for it]. We are not looking to monetize YallaChat in the medium to long term, but want to utilize it to connect all of our products.

It is also an IM product that meets the unique cultural needs of avid users. YallaChat plays an important role in our long-term plan. And it is a very challenging project. We adjust the strategy based on the product's performance and the changing situation.

And I think the second question will be answered by Karen.

Thank you, Yang. Thank you, Shiqi. Allow me to answer this question. Our cost structure is quite stable. For the past 8 quarters, we have maintained our gross margin level above 65%. So the majority of our costs coming from the commission fees for third-party payment platforms, which were stable in Q1. The change in our costs during Q1 was mainly due to the increase in technical service fees, which attribute to the expansion of our new products and increase in salaries driven by the expansion of our operations and maintenance team.

So with our new product expansion, we are looking for a new balance. And we think that any fluctuations between 6% to 5% are expected. So given our current cost structure, we think that our cost and gross margin will remain relatively stable this year, which above -- which at about 60%. I hope we can answer this question.

Our next question comes from Kaifang with CITIC.

Congratulations for strong quarter. I have 2 questions. The first is about your investment direction. So under the current complex market environment, what are your main investment directions? And what are the most -- what are the key products will you invest?

And my second question about unit growth. So in terms of unit growth, how the management build the natural decline of the growth rate? And will you adjust your future growth strategy in the next several quarters?

Thank you, Kaifang, for the questions. I'll be answering the first one. The macro environment is becoming volatile due to geopolitical friction and the pandemic resurgences. And if we look at the capital markets, there are also pressures with stock valuations changing drastically. Hence, we will be more prudent in making investment decisions during this uncertain time.

If we look at the projects that we have invested so far, all of them generate synergies with our existing products and services. There are 2 reasons for this. First, we have more experience with this type of business. And second, this complementary process may be able to support Yalla in maintaining its leading position in the MENA market by leveraging its localization advantages.

In 2022, we will continue to look at new opportunities and verticals. The MENA market is unique with its own regulations as well as its own local economic development needs. We will continue to look for opportunities related to our business and share our progress with our investors when we have any meaningful updates.

And for the next question about user growth, I think our COO, Mr. Jeff, will be answering it.

Thank you. Thank you, Kaifang, for your questions. So I'll be taking the second question. As Mr. Yang mentioned in the remarks section, we have adjusted our user positioning strategy. As a result, we saw in Q1 that we were able to reduce our sales and marketing expenses Q-on-Q. We are still delivering robust growth in our top line, which reached an all-time high. This demonstrates the improvement in our sales and marketing strategy and is consistent with our goal of delivering quality growth amid the challenging macro environment.

The pace of user growth is well under control. This year, we are focused on delivering quality growth and increase our focus on improving the ROI of our user base expansion. As we mentioned last quarter, we will continue to expand our marketing investment in Gulf countries to better penetrate users here and at the same time, seize potential opportunities, efficiency, gain users in the pan-Arab region, too. We expect in 2022 that the group will deliver single-digit growth Q-on-Q in terms of user base growth.

Our next question comes from Zhong Yulin with Haitong International.

Actually, I have 2 questions. Number one is regarding your new products. You just mentioned some kind about the YallaChat. In addition to YallaChat, could you just give us an overall update on the progress and achievements of your new initiatives? And as the company now is adopting the quality growth strategy, then how should we expect the financial contributions from those new initiatives this year? That's the first 2 question.

Number one, a question on a high level. You mentioned several times about the macro impact. And could you elaborate a little bit on this front and how the geopolitical context as the inflation impact your business specifically?

Thank you, Yulin. Thanks for the question. For the first question, quickly progress of newly-launched products. We are making good progress actually on our new product. We are working on localization, and we will introduce the better version of our first hard-core mobile game.

As for our social metaverse product, WAHA. We recently launched a new iteration business in 3D social scene with more interactive features. And you can find some of the screenshots in our earnings activity. We also launched a new iteration of YallaChat. And as I mentioned earlier, it is a unique logging system, will be an important development to fulfill MENA users' needs regarding our IM products. We will continue to work on adding more localization and the [user plans] to be featured into YallaChat.

Regarding our casual game apps, they're all focusing on building their user base as well as online communities as they are in that current space. Our team continues to receive user feedback and work on iterations to refine this product. We will let you know any update next quarter.

And for the second question about the macro economy and the situation, the geopolitical situation. As a player in the global economy, the Middle East is also impacted by the global macroeconomic environment. However, so far, we haven't seen any significant negative effect. At least in MENA, we -- there have been no major political conflicts in recent months. COVID-19's impact are beginning to fade, and rising oil prices are not bad news for us. So on the whole, the macro environment is positive for the MENA region.

But if we look at the rest of the world, there is tension. And as we mentioned earlier, stock valuations are also changing drastically. And capital raising may not be as easy as it were in the past 2, 3 years. So for many companies, that may be a problem. Cash becomes more and more important. For Yalla, we have a better position as our cash flow is strong and healthy, but still, we need to be more cautious amid the changing, challenging environment when making decisions regarding our spending and investment. We will keep everyone informed if there are any new development.

And as for the competition, no doubt, it is intensifying across the world. Many companies need to go beyond their borders and explore markets. So they are coming to the Middle East, and they have come. This trend is not new. It has existed for many years. And it is also exactly why we are expanding our product metrics and promoting localization. At the moment, we don't see anything that may impact us in this regard. We will leverage our localization capabilities and our experience in the Middle East to make full use of our advantages.

Our next question comes from Thomas Shen with Nomura.

I have 2 questions. The first one is could management share the revenue growth outlook for the company's games business in the second quarter and the second half of this year? And also, what is the company's marketing and promotional strategy going forward?

Thank you, Thomas. I'll take this, the first question. So if you said about our revenues coming from the game business, our revenue generated from the game services are contribute -- contributed by the different products. In the third quarter of 2020, when we reported our revenue, which generated from the game services for the first time, our revenues were USD 3.5 million. And after 2 years, our revenues generated from the game services increased more than 5x to USD 20 million in Q2 this year. So all of our gaming revenues were generated by casual games, and we think that we will continue to grow stably in the near future. Moreover, we will soon have revenue from our hard-core game distribution business, too.

Different gaming products have different pieces of development. So if you are referring to the revenue outlook for our hard-core game distribution business, it's probably a little too early to talk about the monetization for Q2. This is our first time exploring the hard-core game distribution business. Also, the pandemic resurgence in China will bring some changes to our time line and affects our R&D team. So to be honest, there are uncertainties, but we may see some revenue in Q4. Thank you. And next question will be answered by Jeff.

Yes. Thank you, Karen. And Thomas, this is Jeff. I will take the second question. Our sales and marketing strategy is really very dynamic. It depends on the type of product and the face of that product development. For flagship applications, we continue to adjust our strategy based on our experience over the past 5 years to improve user acquisition efficiency. For some of our new products, we may try some new approaches. It really depends on the characteristics of different products and the user basis. Thank you, Thomas. Hope we answered your question.

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's Investor Relations through the contact information provided on our website or The Piacente Group Investor Relations.

This concludes the conference call. You may now disconnect your lines. Thank you.