Yalla Group Ltd (YALA) 2023 Q3 法說會逐字稿

Good morning and good evening, ladies and gentlemen, thank you for standing by for Yalla Group Limited's third-quarter 2023 earnings conference call. (Operator Instructions) Today's conference is being recorded. I would like to turn the conference over to your host today, Mr. Kerry Gao, IR management of the company, please go ahead.

Hello, everyone, and welcome to Yalla's third-quarter 2023 earnings conference call. We released our earnings press release earlier today, and the release is now available on our IR website as well as on Newswire outlets. Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties.

As such, our future results may be materially different from the views expressed today. For the 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 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. 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. Our CEO will also join the Q&A section. With that said, I'd now like to turn the call over to our Chairman and Chief Executive Officer, Mr. Tao Yang. Please go ahead, sir.

Thank you Kerry, thank you everyone, for joining our third-quarter 2023 earnings conference call. We are pleased to report that we achieved strong third quarter results. Our third quarter revenues reached an all-time high of USD85.2 million, surpassing the upper end of our guidance, while year-over-year revenue growth from gaming services exceeded 30% once again.

Our cost efficiency initiatives continued to yield positive outcomes and as a result, net income increased by 44% year over year to USD35.2 million and net margin further improved to 41.4%. Our robust financial performance reflects excellent execution of our effective high-quality development strategy. In the third quarter, we continued to refine our operational processes in our flagship applications, gamification, improve our gaming mechanics and optimize our user acquisition strategies.

These efforts have empowered us to build a more engaged community of users who exhibit high willingness to spend on our content and services, supported by our solid business fundamentals and healthy cash position. We remain proud to capture new business opportunities and fulfill MENA users' evolving online, social networking and entertainment needs in the era of digitalization.

As we have discussed on our last few calls, the MENA region is actively pursuing new initiatives to drive economic growth, and the digital transformation here continues to advance rapidly. However, other regions exciting economic development is not the only assets joining in businesses and the investors to meet throughout history.

The Middle East has been an important hub for cultural and commercial exchanges between east and west. I meet today's changing dynamics across the global landscape, raging is currently gaining increasing strategic importance. We have observed a mounting number of outstanding business considering MENA and their company's next important growth opportunities this year attachment to the ratings unique synergies with both Eastern and Western economies as well as it was potential at a market capacity.

Moreover, MENA's driving time ecosystem is fostering and group and the broad ownership of start-ups attracting talent from around the globe. This has created a wealth of opportunities for Yalla to iterations and divers future business initiatives as the largest MENA based online, social networking and gaming company, Yalla is well positioned to seize this chance to propel the company's development as well as progress across local and global economies.

Now I'd like to share some important updates on Yalla games, recent developments. First, for overview of our third quarter progress with respect to our two hardcore games, Merge Kingdoms and Age of Legends. Thanks to our consistent game iterations and in engagement of our existing Yalla user community. Both games have gained traction in the middle region.

Notably, Merge Kingdoms was ranked in the top 10 strategy games in Gulf countries, including Saudi Arabia and Qatar this quarter in terms of revenues on iOS. While Age of Legends, also come to that talks about our Google play's role-playing games category in terms of revenues in Saudi Arabia, UAE, and Auburn. Although compared with our flagship applications, mid-core and hardcore game, that's still not making substantial contribution to our group's value, we see immense for growth in this sector.

Turning to our strategy for Yalla games future growth. Through the proven process of developing our two hardcore games, we have gained a more comprehensive and attending of the local gaming market as well as operation method matters and cooperation strategy. Our experience with this game has strengthened our determination to engage more deeply in mid-core and hardcore games business in MENA.

It is worth noting that new user game genres and design preferences can differ across regions and are changing rapidly. As such, we will continue to iterate our games based on users' feedback, closely monitor the market and adjust our product and operations strategies accordingly. Moving forward, we will gradually increase our investment in mid-core and hardcore games unleashing our growth potential in this flourishing market.

We are primarily exploring new game categories and already have various games in our pipeline. We expect to accelerate the launch of our new games in the coming years. We will also continue to actively communicate with excellent gaming studios and production teams across the industry and look forward to considering potential partnerships.

On a related note, according to Zeus research MENA's gaming market currently brings things USD7.2 billion in annual revenue with a growth rate of 6.9% year over year among the fastest growing markets worldwide. Meanwhile, getting the considerable size of them, but pure gaming markets in China, the US and Europe, those regions may also offer opportunities for us just to the same case, we will remain dedicated to the MENA market well examining the possibilities and may modify and distribute our games in additional regions as we see feet.

Before I conclude, I'd like to mention that in addition to mid-core and hardcore games, we are exploring new products and businesses that could bring traditionally offline services online for MENA users as a complement to Yalla's portfolio. These initiatives show great promise in the routing MENA's digital transformation as well as the potential to serve millions of MENA's residents, we will share more details with you when there is meaningful progress.

In summary, we remain confident in the growth opportunities presented by MENA's increasing the pivotal role on the global stage and region's rapid digital transformation. As the largest MENA- based on large social networking and gaming company. We are dedicated to building relationships locally and globally to broaden our business horizons and drive MENA's economic development.

We will continue to assess new growth prospects as we develop compelling digital products tailored to the needs of local users, creating tenable value for all of our stakeholders. Now I will 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 third quarter operations and our product performance. We delivered another robust quarter results as our efforts to improve the gamification of our products continued to bear fruit. As Tao mentioned, our enhancements driven have led to increased user engagement across our platform with average monthly active users driving by 13.6% year over year to 35.1 million.

Our high value users exhibited great willingness to spend on those enhanced gamification features driving ARPPU up to USD7.35 in the third quarter from USD6.89 in the same period of last year. On a related note, one of our third quarter adjustments to our game mechanism was aimed at boosting overall user engagement and delivering better user experiences.

This resulted in lower frequency of certain laws events from consumption on the platform, which in turn led to a slight decrease of 2.6% in our total number of paying users. We are still fine-tuning these adjustments as we seek the right balance. And as such, we expect the fluctuation in paying users will be temporary. We are closely monitoring the impact of this adjustment and we'll adapt accordingly.

For our flagship application, Yalla, we continue to improve gaming features and rolled out a series of operational activities, including an Islamic new year event and national events across several countries, MENA in conjunction with local customers to enhance user engagement activities like these demonstrate Yalla commitment to user satisfaction and strengthen the sense of community on our platform.

With respect to Yalla, we launched a number of operational events, including an Islamic new year event and a mystery store opening event, we also continued to improve the gamification of the app, which drove a significant increase in consumption compared with the total with that of the previous quarter.

Now I would like to share two additional third quarter highlights. At Yalla Group, sustainability has always been integral to our corporate values. In August, Yalla establish a sustainable account for cash management with Standard Chartered, one of the world's leading international bank. Deposits and sustainable accounts our reference against Standard Chartered sustainable projects, addressing some of the awards today with long-term sustainability for it.

As the MENA continues to develop rapidly. We will leverage our strong cash position and local insight on thoroughbred sustainable practices, companywide, ensuring that our cash management procedure contribute to enhancing sustainability throughout the local and international economy, reflects Yalla overall direction, as well as our profound commitment to the MENA region.

Furthermore, we were recently invited to speak at GITEX GLOBAL's Expand North Star 2023, the world's largest technology and startup events held in Dubai in October, inspired by GITEX GLOBAL the world most established and iconic large-scale tech exhibition Expand North Star unites founders, venture capitalists, and tech leaders to facilitate connections among the startup ecosystem and its unparalleled content program featured lively discussions among over 70 unicorn founders including Yalla on 2023's biggest tech stories.

Events like GITEX GLOBAL showcased our regions open and communicative business ecosystem in a global stage, we were honored to recount the Yalla development story, business experience and industry insight at this preeminent event. I'm proud to highlight the unique advantages that the MENA region offers for tech companies and start-ups, as the first UAE based tech unicorns to list on the NYSE, Yalla is deeply committed to driving progress across the tech startup community while broadbands digital developments throughout the MENA.

Yalla is excited to witness and participate in MENA digital transformation for riding this wave of economic development. We will continue to push the boundaries of innovation to offer premium products and services tailored to local users' habits and preferences. As always, we remain dedicated to becoming the number one online social networking and entertainment platform in 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. We delivered strong results for the third quarter of 2023, highlighted by our all-time high revenues and impressive net margin expansion. Our relentless efforts to streamline costs as well as our enhanced ROI based marketing strategy, continued to yield positive outcomes, enabling us to elevate our overall efficiency.

In addition, we continue to strategically leverage high interest rates to achieve higher returns. As a result, our net margin rose to 41.4% and non-GAAP net margin rose to 44.9%. As we head into our fourth quarter, we will continue to execute our high-quality growth strategy with focus on efficiency and profitability enhancement.

We believe our solid fundamentals and strong cash position will support us in capturing future opportunities. As always, we remain dedicated to creating sustainable value for our shareholders in the long run. Now let's move on to our detailed financials for third quarter of 2023. Our revenues for USD85.2 million in the third quarter of 2023, a 6.4% increase from USD80.1 million in third quarter of last year. The increase was primarily driven by our broadening of our user base and our enhanced monetization capabilities.

Our solid revenue growth was also partially attributable to a significant increase in ARPPU, which grew from USD6.89 in the third quarter of 2022 to $7.35 in the third quarter of 2023. Now let's take a look at our costs and expenses. Our total costs and expenses were USD52.8 million in third quarter of 2023, a 5% decrease from USD55.6 million in the same period of last year.

Our cost of revenues decreased by 6.1% to USD27.8 million in third quarter of 2023, down from USD29.6 million the same period of last year. Cost of revenues as a percentage of total revenues decreased from 32.6% in Q3 of 2023 compared with 36.9% in the same period of last year. Our selling and marketing expenses were USD11.3 million in third quarter of 2023, a 5.5% decrease from USD12 million in same period of last year, primarily driven by lower share-based compensation expenses recognized in third quarter of this year.

Selling and marketing expenses as a percentage of total revenues decreased from 14.9% in third quarter of 2022 to 13.3% in the third quarter of 2023. Our general and administrative expenses was USD7.3 million in third quarter of 2023, a 14.5% decrease from USD8.6 million in the same period of last year, primarily driven by our lower share-based compensation expenses recognized in the third quarter of this year.

General and admin expenses as a percentage of total revenues decreased from 10.7% in the third quarter of 2022 to 8.6% in the third quarter of 2023. Our technology and product development expenses was USD6.4 million in third quarter of 2023, a 16.6% increase from USD5.5 million in the same period of last year, primarily due to an increase in salaries and benefits for our technology and product development staff to support our development of new businesses and expansion of our product portfolio.

Technology and product development expenses as a percentage of total revenues increased from 6.9% in the third quarter of 2022 to 7.5% in the third quarter of 2023. As such, our operating income was USD32.4 million in third quarter of 2023, a 32.3% increase from USD24.5 million in the same period of last year. Excluding share-based compensation expenses, our non-GAAP operating income in the third quarter of 2023 was USD35.4 million, up 20.4% year over year.

Our interest income was USD5.6 million in the third quarter of 2023 compared with USD0.8 million in the same period of 2022, primarily due to a significant increase in interest rates applicable to the company's bank deposits and a continued increase in the company's cash position. Our income tax expense was USD710,000 in the third quarter of 2023, a 10.2% decrease from USD790,000 in the same period of last year.

Moving to our bottom line, our net income increased by 44.3% to USD35.2 million in the third quarter of 2023 compared with USD24.4 million in the same period of last year. Next I would like to briefly go through our liquidity and capital resources. Our cash position remains solid as of September 30, 2023, we had cash and cash equivalents, restricted cash term deposits and short-term investments of USD545 million compared with USD453 million as of December 31, 2022.

Under our USD150 million share repurchase program that began May 21, 2021 and has things to be extended by our Board through May 21, 2024, we have repurchased one meaning 1,670,735 ADSs for Class A ordinary shares in open market cash repurchases, totally approximately USD8.5 million in the third quarter of 2023.

Accumulatively, we have repurchased 3,972,876 ADS or Class A ordinary shares in open market cash repurchases totaling approximately USD35.5 million as of December 30, 2023. Moving to our outlook for the first quarter of 2023, we expect our revenues to be between USD73 million and USD18 million. The above outlook is based on our current market conditions and reflects the company's management's current and preliminary estimates of marketing 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.

Thank you. (Operator Instructions) Xuequing Zhang, CICC.

Thank you for taking my question and congratulations on this third- quarter. I have two- the first is about apps, which I think, seen a strong performance of Yalla and Yalla Ludo and other year. So how should we think about the growth potential of these two flagship products in the future.

And the second one is about financial outlook, you have recorded all-time high revenues and the strong profit margin, this quarter, so can management share more cash on the revenue growth and net profit margin trend next year. Thank you.

Hello Xuequing, good morning, thank you for question. I will take the first one and our CFO Karen will take the second one. Regarding our flagship applications, Yalla and Yalla Ludo, we believe our strategies have proven successful over the past seven years. Yalla and Yalla Ludo now have impressive levels of influence among their users, who have shown considerable loyalty to the platform, and we anticipate both for products we'll enjoy especially long life cycles.

For another aspect I'd like to love to emphasize is that we our efforts to innovate on quality growth, effectively support our platform's development and monetization capability. Looking at 2024, we will continue to work on projects, iteration and explore more new features to serve users' evolving needs and we are confident that Yalla and Yalla Ludo can at least maintain performance is similar to this. Thank you.

Hi, Xuequing, thank you for your question. And in terms of group revenue growth for the next year, if we consider our current businesses. We are confident that in 2024, our revenue will maintain similar levels of as 2023, while we progress with expanding our business and exploring new growth opportunities. On the other hand, as we have mentioned many times, MENA has now become the next destination for many leading companies will explore growth opportunities.

We will keep monitoring this trend for promising quality, partnership and acquisition opportunities. All of these potential contributions and not include in the group guidance I have just to prove [why did], we will update our guidance later if necessary. In terms of margin, taking the potential investments in new products into account, our annual margin of 35%, I think is fair.

This year we will continue to implement measures to dedicated cost control across each quarter's performance may vary depending on how and when we invest in different products. Thank you. Thank you for your question, again.

[Chenghao Li], [CICC].

Hi, thank you taking my question and congratulations on another solid quarter. I have some questions related to the gaming business. First, could management issue about how does the company evaluate the performance of the two recently announced and hardcore games? And you could imagine and share more color about the game pipeline and the launch schedule in the insurance and then lastly, are there any updates on the company's strategy for the gaming business? Thanks.

Good morning Chenghao, thank you very much for your questions. As I shared earlier, that my last section. If we look at the rankings of our hard core games were lower to 10 in their categorized in certain countries. I would now compare with our flagship applications. They are still not making a substantial contribution to our group's revenue through this process, we have gained important experience regarding our operation and the corporation strategies and we see the best fuel for growth in the mid-core and hard core games business.

We are committed to developing our mid core and hard core games, and we will continue to invest in this sector. In terms of the deal, the game pipeline, we have several new products and we will disclose more details later after we receive for their feedback on a better version. In terms of strategy, we expect to accelerate the launch of our new games in the coming years. Besides developing the games in house, we will also continue to actively communicate with excellent gaming studios and production teams across the industry, and we look forward to considering all potential partnerships. Thank you, Chenghao.

[Kaifang Jia], [CITIC].

Taking for taking my question and congratulation on the strong corporate. I'm not questioning, how can we review relation comparison in the Middle Eastern markets. Thank you.

Hello Kaifang, thank you very much. His is Saifi. As we highlighted in our management remarks. I mean, as macro environment is very favorable and that's affecting now more and more resources, including businesses that and investments to this market.

One significant aspect we have noticed is that since the second half of last year, we have been invited more frequently to discuss opportunities in the MENA market with our industry peers. Both of interventions are happening and when it does and through this process, we are able to learn more from each party's insight and intentions and what they have, what they need at this point and discuss ways to prepare that are much more beneficial.

With all these creative mind and resources it's not hard to see that the market is going to go from strength to strength in the next three to five years. In terms of the competitive landscape, the most significant change over the last two years is still fixed up the rest of the major players in the MENA market in the region for many years before we look at the gaming sector, some mobile gaming apps from China are performing very well in MENA.

However, what I would love to share that the traffic acquisition expense now in the MENA market is much more expensive and what we made seven years ago when we first entered the market . So for some small size company, that would be a challenge, if they plans to grow this market on their own.

I want to reiterate also that competition is never a bad thing that inspired us to build, better and serve our users, research and new technologies and invested trend and drive also collaboration and innovation. As the leading player in the region, we see this unfolding development as an opportunity. We are taking proactive steps to cement our leadership position and remain confident in our capabilities of course for this year. Thank you.

Lincoln Kong, Goldman Sachs.

Hi and thank you management for taking my questions. So I have two questions. First one is on how does the company foresee the balance between maintaining high profitability and to continue our business investment, especially the new business? The second one, our commencement and also provide some insight in terms of the development of shoplace in overseas markets.

So customers have a strategy or plans in this area, either through our distribution or our asset platform for a terrific acquisition? Thank you.

Hello Lincoln, this is Karen and I will take the first question about the margin and the second question to Saifi. As we just mentioned that for the next year, we can still keep our net margin at 35% or above a very decent level. However, the company still actively looking for some growth opportunities. We maintain a prudent approach to investing to focus on pursuing high quality investments.

And of course, if there are good opportunities that we manage the company's long-term development. We are also ready to increase our investments to save these opportunities. Our strong cash position supports us to exploring more opportunities and unleashing our growth potential. I hope I can help you. Thank you.

Hi Lincoln, for your second question. Thank you very much for the question regarding shoplace, we observed that the business model is becoming very mature in China and we see potential there. If we look at the global market, for example, the United States and Southeast Asia are the most popular destination for shoplace.

We saw some products already a growing global opportunity, that's compared with China, these markets are still at very early stage concerning the new region, short rates are also new for users, and it takes time to get it by market. Furthermore, to better shares usual need, I believe content tailored to Arabic culture is very essential.

We are conducting research to evaluate the market and also talking some production company. If you are not decide to move into this sector, I believe utilization might be a better way to commoditize on our extensive understanding of lean of local culture and market insights. Thank you.

[Rachel Clarke], [Nomura].

Hello everyone. Thank you for taking my question and congratulate on your third quarter (technical difficulty) this project. My question is given the company has a very strong cash position of the company (technical difficulty)

Hi, [Rachel], thank you very much for your question. Cash funding supports up as a provision of new opportunities to drive further growth, as I stated, among the global markets, many popular and we are seeing emerging acquisitions and investment opportunities. So having cash reserves is strategically important for our company.

In addition, we are actively carrying out our share repurchase program in the third quarter, we repurchased approximately 1.7 million shares, totaling around USD8.5 million. This reflects our confidence in our share price, and we will continue to conduct our repurchase program and return value to shareholders. Thank you.

Natalie Wu, Haitong International.

Thank you for taking my question. Just want the management provide some color on the competition, this Yalla and Yalla Ludo and (technical difficulty)

Thank you very much for the question. So as we mentioned earlier, more and more global companies are now looking for opportunity, for example TikTok moved fast and is performing very well in the market people in terms of competition picked up has a great impact on live streaming of short, maybe products, which we look at third-party data.

Some of them are moving their market share because of TikTok, of course, our product hasn't seen producers time and attention. However, taking a closer look at our performance over the past two years, I would say our flagship application have done a good job with two generating record high revenues from time to time.

Probably our product strategy focused on keeping utilization always generally needs for Arabic users. We have shown stronger loyalty to our platform. We're very confident in the mentality of our flagship applications and as Ms Karen just mentioned, I expected enjoy a long life cycle. In terms of Jaco with also a live streaming platform, I don't think we compete directly. There are many live streaming platforms that have entered the market in recent years.

And as we just discussed, it took as the biggest one. Nice to meet with my repetition with each other. Thank you.

Thank you. As there are no further questions, I would like to turn the call back over to management for closing remarks.

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

This concludes today's conference call. You now disconnect your lines.