Yalla Group Ltd (YALA) 2022 Q3 法說會逐字稿

Good morning and good evening, ladies and gentlemen. Thank you for standing by for Yalla Group Limited Third Quarter 2022 Earnings Conference Call. (Operator Instructions) Today's conference is being recorded. I'll now 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 Third Quarter 2022 Earnings Conference Call. We released our earnings earlier today, and the release is now available on our IR website as well as our 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 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 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. Jeff Xu, our Chief Operating Officer, who will briefly review our recent business development. 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. Mr. Saifi Ismail, the company's President, is unavailable for today's call due to a personal emergency.

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 third quarter 2022 earnings conference call. We are pleased to have delivered another strong quarter with record revenue of USD 80.1 million, exceeding the higher end of our guidance by 6.8%. This also represents a third consecutive quarter of record-breaking revenue for the company and underscores our unique capability in driving business growth at a solid pace while continuing to develop our integrated product ecosystem.

Such robust quarterly results are underpinned by our continuous efforts to refine our operational process, optimize user acquisitions and further drive our product monetization. Together, these actions have effectively improved our user experience, thereby further boosting Yalla's and Yalla Ludo's user engagement and users' willingness to play on our platform. Also, our impressive quarterly results are a testament to our core strategy as well as our operational improvements. As we further deepen our expertise and building our product portfolio in MENA, we are confident in our future growth potential.

Now let's take a closer look at our new product update. Leveraging our extensive industry-leading experience in social and online entertainment in MENA, we established Yalla Game to explore the mid-core and hard-core game distribution business as a complement to our casual game portfolio. For this quarter, Yalla Game has taken a crucial step. We are excited to share with you that after several months of collaboration with the gaming studio we invested in, we have launched the beta version of our first hard-core mobile game, Merge Kingdom, in a number of MENA countries. We will soon begin to gather user feedback and actively fine-tune the product through the beta stage, paving the way for full-on promotion. We will share more details and metrics with you on our next call.

The second hard-core game that we plan to distribute in the region, the RPG game, is on track to be launched by the end of this year. Moreover, as MENA is becoming the next popular emerging market and continues to attract attention from more and more gaming studios, we remain open to discovering good gaming content and potential collaborators with whom we can jointly further grow the MENA market. We look forward to sharing more updates with our investors in the near future.

We are also very excited to report that we recently launched YallaChat version 1.3, which we have already developed into an instant messaging product with a broad area of localized and customized function. For this quarter, we added more engaging functions into the product. And as we shared previously, we are enhancing YallaChat by leveraging a unified log-in system. Over the past 2 quarters, we have upgraded our platform and hosted campaigns to encourage users to log in to Yalla and Yalla Ludo using their YallaChat account and to motivate more Yalla Group users to register for YallaChat account.

In addition, this quarter, we launched Yalla Ludo mini program within the YallaChat app. Yalla Ludo is the #1 tabletop game across MENA. Yalla Ludo users now have full access to their game assets and get data in the game app when using the Yalla Ludo mini program in YallaChat. We believe this is a crucial step to build the product [stimulus] and at the same time, increase user stickiness to our app.

Next, let's take a look at our WAHA product, the first-ever social network designed for the MENA region. In Q3, we rolled out a number of new functions to enhance WAHA's gamification and entertainment features. First, we continue to launch new social scenes in WAHA, including a disco scene, in this quarter in which users can dance and play the role of DJ on stage.

Second, beyond web chatting with friends in WAHA rooms, users can now also play music and videos, creating a virtual theater space for sharing their favorite entertainment while hanging out with their friends. In addition to further build out the product's gamification, our team began to roll out mini games in WAHA [app], encouraging user engagement and boosting user interaction. We will continue to monitor the latest trends and upgrade WAHA accordingly to keep providing our users with fun and cool functions that are tailored to local culture [and change].

Before I wrap up, I am thrilled to share with you that our President, Mr. Saifi Ismail, has been named one of the region's 50 Most Inspiring Business Leaders of 2022 by the prestigious magazine, Arabian Business, which is the Middle East region's top resource for informed news, features and commentary. Its output includes interviews with some of the world's leading business people and long-form features from around the Middle East. Congratulations, Saifi.

In conclusion, I'm happy with our ongoing solid results this quarter. Over the past 6 years, we have shown our strong group results and commitment to MENA, its people and its culture. We strive to explore new products to meet MENA users' evolving needs and remain dedicated to facilitating digital transformation throughout the region. As a top leader in MENA, we will continue to expand our services and stretch the boundaries of our business while further deepening synergies among our different products and services to drive brand loyalty among users and improve our platform's brand influence. Once again, our vision is to build the most popular destination for online social networking and entertainment activities in MENA, and we remain steadfast in our pursuit of this goal.

Now I will turn this call over to our COO, Mr. Jeff Xu, for a closer look at our recent developments.

Hello, everyone. Thanks for joining us today. First of all, I'm pleased to tell you that Yalla was recently invited to attend the 6th Future Investment Initiative in Riyadh titled Investing in Humanity: Enabling a New Global Order, hosted by the Future Investment Initiative Institute. The event brought together the world's foremost CEOs, policymakers, investors and entrepreneurs to discuss and shape the future of international investments and the global economy. Yalla was [invited] to participate as a featured speaker on the From Seed to Unicorn: Empowering Youth Entrepreneurship panel where we discussed the intersection of innovation, entrepreneurship, youth and talent and shared Yalla's story with the local and international investment community.

Yalla Group is proud to contribute to such events throughout MENA, helping to promote our region's talent, potential and unique local perspective to broader audience, demonstrating our commitment to promoting a healthy and well-managed sector environment that facilitates the development of local digital economy.

Next, let's turn to our operations as well as our product performance this quarter. Our team's ongoing efforts to refine our content offerings and user operations further bolster the user engagement as well as our paying ratios and advanced our monetization capabilities. As a result, we are pleased to report another robust quarter with Yalla Group total revenue of USD 80.1 million, beating the higher end of the company's guidance. In addition, our monthly active users increased 19.1% year-over-year, reaching 30.9 million. Yalla Group paying users also increased to 11.5 million.

Now a closer look at our casual game portfolio. Yalla Parchis was ranked in the top 5 in terms of revenue in the board game category in 10 countries, including Colombia, Mexico, Chile and Spain. During Q3, we hosted a number of targeted events to encourage user activity on the platform. For example, our tomato fight event, which was inspired by the traditional Spanish festival La Tomatina, attracted participation by more than 60% of our daily active users and improved the diamond consumption on the platform by more than 20%. We continue to find innovative ways to build the product's user community and strengthen its monetization capability.

For 101 Okey Yalla, after closely monitoring its operations for several [months], we decided to add an expanded (inaudible) or chat room function into the app as the function has been proven effective in boosting our product monetization capabilities. Beyond that, we also decided to increase our sales and marketing spend on this product and to invest more to acquire iOS users. As a result, we have witnessed a decent improvement in both 101 Okey Yalla's number of paying users and paying ratio, while its total revenue improved by more than 100% compared with that of the previous quarter. Although 101 Okey Yalla accounts for only a limited part of the group's revenue, we still see this as an encouraging improvement in products in current stage.

For Yalla Baloot, during the quarter, we continued to upgrade the product and launched several new game modes, fulfilling players' diverse needs and preferences as well as increasing app gamification. Yalla Baloot targets an important market in MENA, and we will continue to tailor the specification of its product design while collecting user feedback.

With respect to monetization, overall, we continue to explore innovative methods and channels across our portfolio. Let's look at Yalla Ludo, one of our flagship products, as an example. Yalla Ludo generally demonstrate great monetization potential thanks to its widespread popularity and its broad appeal. This quarter, we boosted its monetization even further via joint marketing efforts with our channel partner for the distribution of gift cards. This partner has launched a successful promotion campaign for Yalla Ludo in MENA, enabling us to reach more potential paying users.

As a result, the channel sales of Yalla Ludo gift cards grew by more than 30% compared with the sales before the campaign. Interestingly, the majority of the sales came from first-time purchasers of Yalla Ludo gift cards, highlighting certain unfulfilled account [recharging leads] and presenting an opportunity for us to creatively attract new users while improving monetization across our gaming portfolio. We are encouraged by this progress, and we will further expand our payment methods to continuously improve our users' experience while creating more revenue streams for our company.

Before we move on to financials, I'd like to mention that we, at Yalla Group, were extremely honored and privileged to be the growth sponsor of City Talk, a new influencer marketing industry forum which brought together more than 500 social media influencers from a variety of countries in the Arab world in October in Jordan. While Yalla is a user-generated content platform, we have deep relationships in the Arab influencers community, providing a mutually beneficial conduit for sharing ideas, opinions and experience. These connections empower us to keep up with current trends, identify new opportunities and remain part of the conversation online. As MENA's largest online social networking and entertainment platform, we are also a valuable partner to influencers in promoting the development of the digital economy, a mission we all share.

As we reiterate every quarter, Yalla aspires to become the #1 online social networking and entertainment platform in the MENA region. We have always been committed to providing the people of MENA with better access to a digital life, and we consistently enrich our product and [assist] service offerings and strengthen our partnerships with local channels to support the netizen communities throughout the Arab world. We are well positioned to capitalize on potential growth opportunities in the MENA region and look forward to delivering value to all of our stakeholders as we strive to achieve our mission.

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

Thank you, Jeff. Hello, everyone. Thank you for joining us. We delivered another outstanding set of financial results in the third quarter of 2022 with group revenues reaching a record USD 80.1 million, up 12.3% year-over-year. Thanks to our enhanced gamification and entertainment features, we also saw robust growth in paying users, driving our group's paying ratio to 37.4%. Furthermore, we maintained healthy profitability with a GAAP net margin of 30.5% and excluding share based compensation, a non-GAAP net margin of 36.7%, all the while investing in innovation across our portfolio and strategically boosting our marketing spend. Going forward, we will continue to expand and integrate our Yalla ecosystem, optimizing operational efficiency and explore new monetization avenues to propel our long-term growth and support sustainable returns to shareholders.

Now I would like to walk you through our detailed financials for the third quarter of 2022. Our revenues were USD 80.1 million in the third quarter of 2022, a 12.3% increase from USD 71.3 million in the same period last year. The increase was primarily driven by the broadening of Yalla Group's user base and enhancement to Yalla Group's monetization capabilities. Our average MAUs increased by 19.1% from 25.9 million in the third quarter of 2021 to 30.9 million in the third quarter of 2022.

Now let's look at our costs and expenses. Our cost of revenues was USD 29.6 million in the third quarter of 2022, a 26.3% increase from USD 23.4 million in the same period last year, primarily due to an increase in technical service fees resulting from the expansion of our product portfolio and the increase in salaries and benefits resulting from the expansion of our operation and the maintenance team. Cost of revenues as a percentage of our total revenues increased from 32.8% in the third quarter of 2021 to 36.9% in the third quarter of 2022.

Our selling and marketing expenses were USD 12 million in the third quarter of 2022, a 9% increase from USD 11 million in the same period last year, primarily due to higher advertising and marketing promotion expenses led by our continued user acquisition efforts and expanding product portfolio. Selling and marketing expenses as a percentage of our total revenues were 14.9% in the third quarter of 2022, decreasing from 15.4% in the same period last year.

Our general and administrative expenses were USD 8.6 million in the third quarter of 2022, a 16.9% increase from USD 7.3 million in the same period last year, primarily due to an increase in performance-based incentive compensation and an increase in professional service fees. General and administrative expenses as a percentage of total revenues increased from 10.3% in the third quarter of 2021 to 10.7% in the third quarter of 2022.

Our technology and product development expenses were USD 5.5 million in the third quarter of 2022, a 42.2% increase from USD 3.9 million in the same period last year. This was primarily due to an increase in salaries and benefits for our technology and product development staff driven by an increase in the headcount of our technology and product development staff to support all the -- the development of new businesses and expansion of our product portfolio. Technology and product development expenses as a percentage of total revenues increased from 5.4% in the third quarter of 2021 to 6.9% in the third quarter of 2022.

As such, our operating income was USD 24.5 million in the third quarter of 2022 compared with USD 25.7 million in the same period last year. Excluding share-based compensation, non-GAAP operating income in the third quarter of 2022 was USD 29.5 million. Our operating tax expense was USD 0.79 million in the third quarter of 2022 compared with USD 0.42 million in the same period last year.

Moving to the bottom line. Our net income was USD 24.4 million in the third quarter of 2022 compared with USD 25.3 million in the third quarter -- in the same period last year. Excluding share-based compensation expenses, non-GAAP net income for the third quarter of 2022 was USD 29.4 million.

Next, I would like to briefly go through our liquidity and capital resources. As of September 30, 2022, we had cash and cash equivalents of USD 391.2 million as compared with cash and cash equivalents of USD 384.9 million as of June 30, 2022. This improvement demonstrates our ongoing commitment to streamlining and refining Yalla Group's operations. On May 21, 2021, we announced the 2021 share repurchase program. As of September 30, 2022, we have repurchased 2,302,141 American depository shares, representing 2,302,141 Class A ordinary shares from the open market with cash for an aggregate amount of approximately USD 27 million.

In the fourth quarter of 2022, we expect our revenues to be between USD 70 million and USD 76 million. The above outlook is based on the current market conditions and reflects the company management's current and preliminary estimates of market and operating 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) First question will be from Kaifang Jia of Citic.

Can you hear me?

Yes.

I have two. The first is can management provide some details about new business like gaming and chat? And will you have a monetization plan in the next year? And my second question is how does the management see the margin and OpEx moving over the next several quarters?

Thank you very much, Kaifang. I will take the first question, and I think the second question will be taken by our CFO. Our new instant message product, YallaChat, reflects our observations respecting local MENA users' social habits and preferences. And we have continued to roll out various localized entertaining features to [cater] users' diverse needs with the IM product. We launched a marketing campaign for YallaChat in November, and some of you may have already seen YallaChat [app] among on the top 3 on the App Store download ranking in certain regions. We are excited about the strong performance. But it's still in a very early stage, and we will need more time to test the market. We strongly believe that our dedicated IM product, with features customized for MENA users, is the next thing, and we will strive to achieve this goal.

In the short run, or at least in 2023, we don't expect to start monetization on YallaChat. The focus for the product in this stage will still be on expanding the user community. Our expectations for our gaming distribution business are different. Gaming does account for part of our revenue expectations for next year. But since we just recently launched the SLG game, it will take some time to collect user feedback and give an estimate on the scale of its revenue. We will share more details with you next quarter. I think Karen will take the second question.

Thank you, Mr. Yang. Thank you very much, Kaifang. This is Karen. About the margin and the OpEx moving, I think that with the current pace of our development, the non-GAAP net margin can be maintained around 35% this year. However, since we just launched the marketing campaign for YallaChat in November and we may need to invest more in sales and marketing during Q4, we will continue to adjust our campaign strategy for YallaChat according to the market feedback. Therefore, the budget for these campaigns is not a fixed number. It is subject to change.

In past years, we focused on the development of our 2 successful flagship applications, and the year of 2022 is a year for our adjustment as we aim to add more applications to our prospective portfolio. We have invested more to successfully complete this portfolio expansion with the goal of diversifying our future revenue streams and building Yalla into a larger Internet platform. During this process, some of our new products like YallaChat and the game distribution business are not contributing to our current revenue because we still need to invest in their R&D and sales and marketing.

Given all that, as we mentioned in the last quarter, I would say that it's fair to expect our non-GAAP net margin to remain around the 30% in next few quarters. The target remains unchanged, and we think this will significantly benefit the company's long-term goals. Thank you, Kaifang. I hope I answered your questions.

Thomas Shen, please go ahead with your question, please.

I have a couple of questions. The first one is could management elaborate more on the company's marketing strategies going forward? I also have another question on games. Could management share more details on the game pipeline for next year?

Thank you very much Thomas Shen for your question. This is Jeff. You asked a very good question. So for the first question, the marketing strategy is an issue that our team thinks about and discuss constantly. First, I want to highlight again that the dynamic market environment is an important factor, and we may adjust our marketing strategy accordingly anytime. So now, if you ask my view on next year's user acquisition plan, I would say the pace will be pretty similar to this year's. We will maintain our disciplined sales and marketing strategy and focus on the ROI of our spending.

For the second question regarding the game pipeline, beyond the SLG game and the RPG game that we are working on, we have also started to explore mid-core games. We may look for some good studios to collaborate with, or we may also invest in some as we did previously with our hard-core games. We are still in an early stage, so I will share with you more details in the future. Thank you for your question again.

The next question will be from [Edward Wong] of Credit Suisse.

Appreciate for the presentation and congratulations on the robust quarterly results. So I would like to follow up on questions about YallaChat. YallaChat has launched several mini program functions in the past 2 or 2 quarters. What will be the positioning of mini programs in the future?

[Edward], thank you very much for your questions. Yes, we continue to roll out mini programs to provide diverse functions to fulfill our users' various needs. We see significant potential in mini programs. It is a flexible and efficient way to expand the services that we can provide with our YallaChat. Our team rolled out mini social games like [hop up] and then the [attend] feature and now the Yalla Ludo mini program. It's still in early stage. So I think there is a lot more we can do with mini program. We will keep you posted on the progress. Thank you.

The next question will be from Xueqing Zhang of CICC.

I have two questions. The first one is that your company's revenue in the third quarter beat company's guidance and the market expectations. So just wondering what's the driver -- driving Yalla or Ludo [and it's dominated] by paying user or by ARPU? And my second question is related to Yalla Parchis. Just a mention in your prepared remarks, a number of targeted events (inaudible) user community. So could management share with us the [current level] and how we improve its monetization capabilities?

Xueqing, thank you for your 2 questions. Our products have been making good progress over the past quarter, as you can see. In Q3, the growth was mainly driven by the increase in paying users, but it's hard to determine whether paying users or ARPU will determine the growth in the future. We dynamically adjust our operational strategy and sales and marketing strategy according to the market situation and user feedback. So it varies every quarter.

And for Parchis, we currently only disclose MAUs at a group level. But in general, our user acquisition strategy is focused more on the ROI of our investment in sales and marketing. Our group MAU growth rate remained at around 3% quarter-over-quarter. And in terms of monetization, Parchis performance is encouraging as the product is now generating not only revenue but also gross profit. That's an excellent sign, and we are doing more work on boosting the monetization of this product. We look forward to sharing more details with you in next quarter.

Our next question will be from [Changai Lee] of CICC.

Congratulations on another solid quarter. I have 2 questions. Could management please share some color or change on the competitive landscape in the MENA region? And secondly, we can see the paying ratio continues to improve in recent quarters. So how should we expect Yalla's paying ratio and ARPU to change in the future?

Thank you, [Changai]. As we mentioned last quarter, MENA is an emerging market with great potential. We started our business here 6 years ago. And as a leading company in the region, we have achieved certain milestones that have been also recognized by the industry. In recent years, many strong Internet peers have entered the market, such as (inaudible) and some mobile gaming app. So it's exciting, and it's also a testament to the region's market potential. In fact, (inaudible) growing business in MENA. More and more investors are now studying this market, which is very important for the industry prosperity. And I want to reiterate that competition is never bad [and it's expected] to refine our product design, learning from our users [by studying] new technologies and industry change and to drive innovation. As a leading player in this region, we will take proactive steps to cement our position, and we remain confident in our capabilities after all these years.

The next question will be from Billy Leung of Haitong International.

I have 2 questions. Number one, could you share more color on the macro impacts in MENA area and how could that impact your fundamentals going forward? And number two, [we saw some] very encouraging results in your recent operational strategy. So could you elaborate more about your [user metrics stream] and operating strategy in the (inaudible) core products, such as Yalla and YallaChat?

And I will take these 2 questions. Last quarter, we mentioned that MENA's macro environment is improving compared to the previous year. COVID is [dipping], and oil prices are also rising. After another quarter, we are still not seeing big changes. I think consumers in MENA remain confident. If you look at our product performance, we delivered another quarter of record high revenues. Our momentum is strong so far. Also, we are seeing government paying more attention to facilitating the development of the digital economy. Sectors such as gaming, eSports, (inaudible) are hot topics and are getting more attention and resources than before. I believe these are good signs.

And about our user metrics and operation strategy in our products, Yalla and Yalla Ludo, our flagship applications, so they are our group's main revenue contributors, and their operations and development are of significant importance to the company's performance every quarter. For Q4 and next year, we will continue with our operational refinement strategy. In terms of our user acquisition strategy, as Jeff just mentioned, the pace will be similar to that of this year. Yalla and Yalla Ludo will still play crucial roles in Yalla Group's development next year. Thank you, Billy.

The next question will be from [Zemin Chen of Huafu Securities].

Thank you for good performance. I have a question about the traffic in our ecosystem. And can management share how traffic is connected and encouraged across the different apps?

Thank you for your question. So actually, the conversion effectiveness between our apps is very encouraging. We are seeing promising feedback and data. Also, we think that the conversion positively impact our users' long-term -- LTV. We have built a product ecosystem that provides diverse services to fulfill MENA users' various online social networking and entertainment needs. When we decide to convert users from one app to another, usually, these 2 products represent different sectors and provide distinct services, largely facilitating the improvement of users' total LTV on the Yalla whole platform. Thank you. I hope I answered your question well.

That concludes our prepared remarks. Our question-and-answer session is now over. There are no further questions. I'd now like to turn the call back over to management for their closing statements.

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.

The conference is now concluded. You may now disconnect. Thank you.

Thank you.