Yalla Group Ltd (YALA) 2021 Q3 法說會逐字稿

Good morning and good afternoon, ladies and gentlemen. Thank you for standing by for Yalla Group Limited's Third Quarter 2021 Earnings Conference Call. (Operator Instructions) Today's conference call is being recorded.

I would now like to turn the call over to Ms. Kerry Gao, Director of IR of the company. Please go ahead.

Hello, everyone, and welcome to Yalla's Third Quarter 2021 Earnings Conference Call. We released our earnings earlier today, and the release is now available on our IR website as well as on 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 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 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 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 2021 third quarter earnings conference call. It has been a year since Yalla's second quarter listing. Before updating you on our business progress during the quarter, I would like to take a moment to elaborate on our mission, vision and strategy.

Yalla was the first UAE technology unicorn to be listed in the U.S. As the company rooted in Middle East and North Africa, our vision is to provide MENA people with localized online social networking and entertainment services. For 5 years, we have been committed to promoting a healthy and ordering industry environment and providing MENA's people with better access to a digital life. MENA's population is among the youngest in the world. And the region's per individual average time spend on apps is also considered the highest globally. Demand for online social networking and entertainment services is high among MENA users. But historically, there have been a few digital products, reflecting local value or customized for local users specific needs when we drafted the prospectus for our IPO.

We affirmed that our vision is to build MENA's most popular destination for online social networking and entertainment activities. After year's time, this vision remains unchanged. We hope to realize this vision, within the next 10 years and will employ 2 important strategies to achieve our goals.

First, as we continue to develop Yalla's ecosystem, we will diversify our business and revenue streams and flexibly develop our business and products through investments, collaboration and other means. Second, Yalla's strong localization capabilities have always been our greatest advantage. We will continue to fortify and refine them with more comprehensive studies on local users' needs and preferences to provide customized, positive and targeted online services.

Yalla is developing rapidly while also facing challenges in an increasingly complex environment. Under such transformative circumstances, we felt it was critical to help our new colleagues better understand the Yalla's DNA and to think and act in Yalla's way. We work with all of our team members to define and refine Yalla's core principles. Multicultural understanding, Users' first, simple and target.

Their initial constitute the smartmemorable acronym "MUST," which embodies Yalla's culture and ethics. These values will guide Yalla's team as we work to achieve our vision.

Now let's take a closer look at some of our recent accomplishments. Last month, we released the YallaChat 0.2 version. We upgraded the app's foundation and improved stability and response rate which elevate the user experience and will allow the product to support a larger user base in the future. We firmly believe that in this digital era an IM product with features tailored to local users preferences is a fundamental need and the MENA region has waited too long for a dedicated product. We feel a strong sense of responsibility to fulfill that critical need for MENA based users. Developing a successful IM product, it's not easy feat, but it is a crucial element of our vision, and we are proud of our great attempt to fill this technological gap.

We will continue to monitor user feedback and YallaChat's new iteration and [refine and] (added by company after the call) perfect and details to -- caters to local users desires. And we are all aware, the metaverse will be the next major revolution in social technology. Long before the metaverse concept began trending this year, our team was researching new types of social networking opportunities to provide users with a higher level of freedom and more immersive social experiences. We see strong potential for development and innovation in this area, and we are happy to share that we are working on the cutting edge social app, which will feature the first-ever social metaverse design for the MENA region. It may be available to our users as early as the first quarter of 2022. We are also building and broadening our capabilities in game distribution. We now have a holding subsidiary, Yalla Games which will focus on the mid-core and hardcore game distribution business in the MENA region.

We will identify and collaborate with game studios with high potential and good content and help distribute their games within MENA and leveraging our strong localization capabilities we plan to gradually open our game distribution platform to more quality content, making Yalla Games the ideal MENA base distribution partners for game developers in the near future.

With respect to our internal initiatives. We officially kicked off our internal ESG program this quarter. We have been communicating intensively with internal and external stakeholders to gather feedback and refine our ESG guidelines. We believe a sustainable growth target is essential for Yalla, our community and our shareholders.

Given the recent policies and initiatives announced by the UAE and Saudi Arabia governments, we understand that building a digital society is becoming a very important topic in this region. Our society is seeking a digital and technological transformation, which aligns with Yalla's vision and mission. As a local company, we support local government initiatives, have strived to work in direction, consistent with their guidelines and priorities.

Looking into the future, Yalla will remain dedicated to the development of UAE's digital economy and continue to deliver online social networking and entertainment products tailored to the MENA's culture. We are also proud to have bolstered our leadership and governance this quarter.

It is my honor to welcome Mr. Saeed Hamli to the Board as our independent director. He is a accomplished telecommunications executive with prior roles as CEO of Etisalat Egypt and Etisalat Afghanistan. Among others senior positions, I believe that given his excellent leadership skills and extensive industry experience, Mr. Saeed Hamli will make great contribution to the company as we grow our products ecosystem, expand our footprint and our influence. I really look forward to working with him.

In conclusion, I want to reiterate our vision is to build the most popular destination for online social networking and entertainment activities in MENA, and we will continue to uphold our core value of prioritizing our users, embracing diversity and operating with a simple pragmatic, pioneering and enterprise approach as we work to achieve our goals. Adhering to these principles has been the driver of our past success, and we ensure that we keep succeeding.

Looking ahead. We will continue to closely watch MENA's local cultural trends and develop Yalla's ecosystem with various products and services tailored to meet local user needs.

Now I will turn this call over to our President, Mr. Saifi Ismail, for a closer look at our recent development.

Thanks. Tao. Hello, everyone. Thanks for joining us today. In addition to the accomplished Tao share, we have made impressive progress with our new products 101 Okey, remained one of the most downloaded apps in the board game category in Turkey. We have received very good feedback from users on this product and are seeing an outstanding retention rate. The average daily time spend per active user already exceeds 60 minutes, which also demonstrates the product increasing stickiness among users.

We are dedicated to providing our users with best-in-class user experience. For example, in quarter 3, we released a new version of Yalla Baloot, a card game we designed for Saudi users. We enhance certain features to help new users learn about the games flow and become a more integrated part of the community, which notably improved new users engagement level on the platform.

Along with these new products designed for the MENA market, Yalla Parchis, the South American version of our Ludo app also performed impressively. By the end of quarter 3, Parchis contributed 786,000 of Yalla Group's monthly active users. Parchis is showing outstanding user stickiness and our next step will be to cement our monetization strategy and begin to boost Parchis monetization capabilities taking South American culture differences into consideration.

We are also very excited to share with you that Yalla Group is prominently featured on the official UAE government electronic portals, Invest. AE as highlighted local technology company. The UAE government's recognition of our work inspires an even greater commitment to ensuring that our products and services exceeds our customers' expectations.

Yalla Group is proud to be the one of the top technology companies in the MENA region. We prioritize research and strive to develop innovative features in our existing social and gaming mobile application as well as create brand-new app to give our loyal users more engaging opportunities to express themselves. We believe Yalla Group has received this honor from UAE government due in large part of these efforts. We wish to sincerely thank the UAE government for their ongoing trust and believe in Yalla Group. We remain undeterred in our continuing investment of excellence and our efforts to maintain our leading position as one of the UAE's most prominent and thriving technology companies.

Additionally, we are delighted to have won, a prestigious Middle East Technology Excellence Award in the gaming, media and entertainment category. The Middle East Technology Excellence Award recognized technology companies that have successfully pioneered groundbreaking, IT products and solution in various categories in the Middle East. With recognition from specialized judges, representing key players in the international digital industry, such as PwC, Middle East and Baker Tilly Middle East, this award further solidifies our position as one of the MENA regions top companies. We now join an Illustrious group of past winners, including IBM, LinkedIn and Tencent. We view this distinguish award as yet another testament to Yalla Group's Excellence work, and our team accomplishments throughout the past year.

We are proud to have created an immersive and social ecosystem filled with a variety of mobile applications that provide our users with memorable and cherished experiences. Whether they are talking to friends on Yalla or playing against them on Yalla Ludo. We would like to sincerely thank the Middle East Technology Excellence Awards Committee for this great honor. We hope to win many more regional and global awards over the next few years.

Furthermore, in September 2021, we hosted an Analyst Day to facilitate communications with our investment community, our users, team members and industry experts share their respective experiences with Yalla and the digital economy insights, presenting colorful close-up views of what we do. Our market and its tremendous growth prospects. We would like to thank our expert guests to their valuable imput. The analyst day was a great success, and we look forward to future opportunities to organize similar events.

As our CEO mentioned, Yalla's vision has never changed. We aspire to become the #1 online social networking and entertainment platform in the MENA region, and we remain focused on that goal.

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. We recorded a remarkable operating and financial performance in the third quarter of 2021 with a rapidly expanding user base, outstanding operating efficiency and abundant cash reserves, underpinned by our unique market positioning.

Our third quarter revenues grew by 110.8% year-over-year to USD 71.3 million while our non-GAAP GAAP net income reached USD 33.2 million with a growth rate of 114.5% year-over-year. Our non-GAAP net margin remained exceptionally high at 46.6%, reflecting our strong monetization capabilities and disciplined SG&A spending.

Now I would like to walk you through our financial details during the third quarter of 2021. Our revenues were USD 71.3 million in the third quarter of 2021. A 110.8% increase from USD 33.8 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 81.9% from 14.3 million in the third quarter of 2020 to 25.9 million in the third quarter of this year.

Yalla's MAU increased by 72.2% to 9.5 million in the third quarter of 2021 from 5.5 million in the same quarter last year. And Yalla Ludo's MAU increased by 79% to [15.7 million] (corrected by company after the call) in the third quarter of 2021 from 8.8 million in the same period of last year. And Yalla Parchis MAU also reached 786,000 in the third quarter of 2021.

Now let's look at our costs and expenses. Our cost of revenues was $23.4 million in the third quarter of 2021 compared with $25.6 million in the third quarter of 2020. The decrease was mainly driven by lower share-based compensation expenses of $1.3 million recognized during the third quarter of 2021, a 91% decrease from $14.1 million in the third quarter of 2020, and partially offset by an increase in commission fees for the third-party payment platforms resulting from our expanding business scale. Excluding share-based compensation expenses, cost of revenues as a percentage of total revenues decreased from 34.1% in the third quarter of 2020 to 31.1% in the same period of 2021, due to continued optimization of our revenue mix, which resulted in less increase in commission fees for the third-party payment platforms.

Our selling and marketing expenses were USD 11 million in the third quarter of 2021 compared with $8.5 million in the same period last year. The increase was mainly driven by higher advertising and marketing promotion expenses led by our continued user acquisition efforts and expanding product portfolio and partially offset by decreased share-based compensation expenses of USD 1.8 million during the third quarter of 2021 compared with USD 4.5 million in the third quarter of 2020.

Excluding share-based compensation expenses, selling and marketing expenses as a percentage of total revenues remained relatively stable at 12.9% in the third quarter of 2021. Our general and administrative expenses were USD 7.3 million in the third quarter of 2021 compared with USD 28.9 million in the same period last year. The decrease was mainly driven by lower share-based compensation expenses of $4.6 million recognized during the third quarter of 2021. 82.9% decrease from USD 27.1 million in the third quarter of 2020 and partially offset by an increase in salaries and other benefits for our general and administrative staff. This, in turn was driven by an expansion of our general and administrative staff.

Excluding share-based compensation expenses, general and administrative expenses as a percentage of total revenue decreased from 5.3% in third quarter 2020 to 3.8% in the third quarter of 2021 due to economies of scale. Our technology and product development expenses were USD 3.9 million in the third quarter of 2021 compared with USD 1.7 million in the same period last year. The increase was mainly driven by an increase in salaries and benefits for our technology and product development staff and partially offset by decreased share-based compensation expenses of USD 0.2 million during the third quarter of 2021, which compared with USD 0.8 million in the third quarter of 2020.

Excluding share-based compensation expenses technology and the product development expenses as a percentage of total revenues also increased from 2.6% in the third quarter of 2020 to 5.1% in the same period of 2021. As such, our operating income was USD 25.7 million in the third quarter of 2021 compared with operating loss of USD 30.9 million in the same period last year.

Excluding share-based compensation, non-GAAP operating income in the third quarter of 2021 was USD 33.6 million, a 116.2% improvement from same quarter last year. Our income tax expenses was USD 0.42 million in the third quarter of 2021 compared with USD 0.11 million in the third quarter of 2020.

Moving to the bottom line. Our net income was USD 25.3 million in the third quarter of 2021 compared with net loss of USD 31 million in the same period last year. Excluding share-based compensation expenses, non-GAAP net income for the third quarter of 2021 was USD 33.2 million, a 114.5% improvement year-over-year.

Now -- next, I would like to briefly go through our liquidity and capital resources. As of September 30, 2021, we had cash and cash equivalents of USD 326.3 million as compared to cash and cash equivalents of USD 292.4 million as of June 30, 2021. This improvement demonstrates our commitment to continuously streamlined and refining Yalla Group's operations.

On May 21, 2021, we announced the 2021 share repurchase program. As an update, in the third quarter, we repurchased 1,042,985 American depository shares, representing 1,042,985 Class A ordinary shares from the open market with cash for an aggregate amount of approximately USD 14 million.

In the fourth quarter of 2021, we expect our revenues to be between USD 67 million and USD 72 million. The above outlook is based on the current market conditions and reflects the company's management's current and preliminary estimates of market and operating conditions of customer demand, which are all subject to change.

One more update before I hand the call over to the operator. Starting in the fourth quarter of 2021, as we continue to expand our product portfolio, we will report our MAUs and paying users at the company level instead of by product to better reflect our increasing integrated product ecosystem.

This concludes our prepared remarks for today. Operator, we are now ready to take questions.

(Operator Instructions) The first question comes from Shiqi GE with CICC.

Congrats on your strong quarter. So I have 2 questions. The first question is about YallaChat. So how will you differentiate YallaChat from other IM products? And how will you initiate the products with the users? And my second question is about your margin. So how should we look at the long-term margin for your current business because the products must face growth pressure in the long run? Maybe could you share what the lowest margin might be that the company feels comfortable about?

Thank you for the question. I'll take the first question. Our YallaChat version 0.2 can fulfill users most basic needs for our IM product. As mentioned earlier, this version will enhance the app's foundation and improve the product system. This helps provide users with a richer user experience and allows the app to support a larger user base with future iterations as we continue to upgrade, we plan to add more innovative, entertaining and localized function. Regarding how to initiate the YallaChat with seed users there, we have a significant advantage here that we can leverage our Yalla community. Over the past 5 years, we have built our own Yalla community with over 20 million loyal users. This is an ideal environment from which to introduce YallaChat. So when we think YallaChat is ready, we will further polish and fine-tune the product within our existing community of users. I hope this answers your question.

The second question, I'll hand over to our CFO, Karen.

Thanks, Tao. Thanks, Shiqi. Thank you for your question. About the margin, I think that every company needs to consider and the priority is different, the operating metrics at different stages in this group. For Yalla Group, we continually strive to optimize our monetization model, it's in our genes. But that doesn't mean that margin will always be the only metric we care about. In the future, it's possible that there will be other metrics that we will place higher importance on depending on the needs of company at that time. We are a young Internet company with a lot of potential. There are a lot of things we need and want to do in the MENA region. Some of these include further building our brand, strengthening our market efforts, investing in R&D capabilities, continuing to expand our product portfolio and growing our head counts with right talents. So as we execute initiatives, our margin may fluctuate. We trust that investors understand that all of these investments target the goal of creating a more development robust ecosystem and a more vibrant engaged community, which will, in turn, drive the long-term growth.

Currently, our net margin is about 45%. So we estimate that with just 10% point fluctuation, we'll be able to support the operating needs I just mentioned. Naturally, we do not want to rule out the possibility of bigger moves if business needs arise. But with that said, I believe, compared with our peers, we will be able to maintain our margin at a very competitive level. I hope this answers your questions.

The next question comes from Kaifang Jia with CITIC.

I have 2 questions. First about the new products. So can management share some updates about the YallaChat and any color about the monetization of the new products? The second is that for the first quarter and 2022, we will be more positive on user growth, and I'm just wondering the strategic difference between South America and MENA?

Thank you, Tai Seng. Thanks for your question. I will take the first question and then our COO, Jeff will answer about the user growth. Just as I answered Shiqi for the last question. The monetization will depend on different product types. For social and casual game products, I think that the first priority after launch will be the building and expanding the user base followed by product iterations. Immediately monetization may be not the primary consideration at this stage for these products. But for the mid- to heavy game products, monetization may come faster. I hope this answers your question.

Tai Seng, so I will be answering your second question regarding the user growth and the strategy. Our expectation for MAU growth for fourth quarter is still 10% to 15% quarter-over-quarter. And for next year, since the user base will be larger, we expect each quarter, our MAU to grow by around 10% quarter-over-quarter. Regarding the user acquisition strategy for South American market, yes, it's different growth from the MENA market for sure. We need to consider many region-specific characteristics, including local cultures, consumption patterns and levels, social traditions and the competitive landscape among other things. So we have different strategies and adjust them quarterly based on the dynamics of the marketplace, paying a watchful eye to such factors as our user acquisition pace our monthly budget and the actions of competitors just to name a few. In summary, our acquisition strategy needs to be always evolving. Otherwise, we will see a decrease in efficiency. I hope that answers your question, Kaifang.

The next question comes from Yulin Zhong with Haitong International.

I was wondering have you had any new monetization initiatives such as do you have any plan on adding live streaming hard-core games. And if you have any, could you elaborate a little bit about your new monetization plan and when should we expect these new initiatives to contribute to revenue?

Okay. Yulin, this is Yang. This is a topic we have been active discussing internally with our team. We have looked into and examined the possibility in advertising, e-commerce and others and among all of these option, we believe at this stage, gaming is the next area for us to develop as a monetization channel.

The next question comes from Thomas Shen with Nomura.

Management, this is Thomas Shen from Nomura. I have a question on our user acquisition costs. As we have seen some peers adjusting the overseas marketing strategy, could management share more color on the trend of our user acquisition cost?

Thomas, I'll be answering this question. So for the user acquisition cost, we believe that it will gradually trend upward. That's for sure. And that's true not just for Yalla Group but for all Internet product companies around the world. All companies are competing for users, and we're one of them. However, compared with our peers, we have shown very strong ability in managing our user acquisition cost, and we will continue to do so. We're confident that we will be able to keep our user acquisition cost at a competitive level among all the peers.

The next question comes from Yuchen Yang with TF Securities.

Congratulations on the strong results for the quarter. So could you please just share your plan in developing heavy game in-house? And are we going to see increase in R&D expense related to them this year and next year? And the second is there are many more and more voice-centric social networking and entertainment companies joining this market, could you please introduce Yalla's advantage and how to maintain your leading position in the MENA market?

Okay. Yuchen, I will take your question. The first one about the game. Our previous experience are more related to casual games. So we will be cautious as we move into the realm of heavy games. At this stage, we plan to collaborate with external studios that have high-quality content assets instead of developing heavy games in-house. Through this collaboration, we will gradually grow our experience base and build our team. It's going to be a process. So we don't expect to see a immediate jump in our R&D expenses related to heavy games.

And about the second question, the competition. Yes. They are an increasing number of voice-centric social apps available in the market now. But what we want to emphasize is that Yalla was a pure voice-centric social networking and entertainment application in the MENA market. And for the past 5 years, we have always been the largest in the region. And we are always growing and innovating. 2 years ago, we launched Yalla Ludo in the market. And at that time, we were the first company to combine heavy game and voice chatting together. And now Yalla Ludo has become the #1 board game in MENA and lead the trend in the market. Yes, more and more companies are trying to replicate the success of Yalla and Yalla Ludo. But so far, we haven't seen any of that can even come closer to challenging our position in the market. Yalla Group has always been the trend leader in this market.

Looking into the future, as a leading Internet company in MENA, we understand the importance of innovation and are continuously uncovering new opportunities. As we just mentioned, we are going to launch the first metaverse social app designed for avid users. We believe in the metaverse concept opens the door to new and exciting potential for voice chatting in others to be realized. We will continue to invest in our R&D, encourage innovation among our team. Build out our team with the right talent and better prepare ourselves for future opportunities.

Another thing I will love to mention, if we look at Yalla Group's current ecosystem, we now have a more diversified product portfolio extending beyond voice-centric social or entertainment app. On our pipeline, we have casual games, a heavy game distribution business, a messenger product and metaverse social app, and we may also look into other verticals with good potential.

What I'm trying to say is that Yalla Group is not going to only focus on the work-related business. Our vision is larger than that. We intend to build the largest online social networking and entertainment platform in MENA. Thank you very much.

As there are no further questions, I would like to turn the conference back over to Ms. Kerry Gao for any closing remarks.

Thank you once again for joining us today. We look forward to speaking with you in the next quarter. If you have any 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. Thanks.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.