Yalla Group Ltd (YALA) 2020 Q3 法說會逐字稿

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

Now I will turn the call over to your speaker host today, Ms. Kerry Gao, IR Direction -- IR Director of the company. Please go ahead, ma'am.

Thanks. Hello, everyone, and welcome Yalla's Third Quarter 2020 Earnings Conference Call. We have released our earnings results earlier today, and it is now available on our IR website as well as on news wire 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 Yalla's IPO ceremony in UAE and the support we received from the local government and media. And he will be followed by Mrs. Karen Hu, our Chief Financial Officer, who will provide additional details on the company's financial results and discuss the 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.

Just want to kindly remind, Yalla's 3Q earnings presentation slides are now available on Yalla's IR website for investors to download.

With that, I would now like to turn the call over to our Chairman and Chief Executive Officer, Mr. Tao Yang. Please go ahead, sir.

Great. Thank you, Kerry. Good morning, and good evening, ladies and gentlemen. Thank you for joining us today on our third quarter 2020 earnings call. This is our first earnings call as a public company following our IPO in September this year. We appreciate having the opportunity to communicate directly to you all and share our insights on our business operations and financial performance.

We are very pleased to announce that in the third quarter of 2020, we delivered robust group performance, further strengthening our position as a pioneering voice-centric mobile social networking and entertainment platform in MENA. And our revenue and non-GAAP net income reached to USD 33.8 million and USD 15.5 million, increasing the 90.4% and 68.3% year-over-year, respectively, driven by the strong growth of Yalla and Yalla Ludo and the proliferation of our highly engaged and interactive user community.

[With that] strategically and operationally, during the quarter, we continued to emphasize our core competitive set as a first mover in developing our voice-centric mobile social networking and entertainment platform in MENA, we have achieved a leading position based on our innovative business model, which focuses on users' interaction and the social networking [scale] on our platform and our deep understanding of the local culture. As we are a pure UGC platform, we encourage users to share and participate actively and bring them a sense of belonging as well as a culture identity, which helps build a healthy and cohesive user community.

Going forward, we will continue to further penetrate into both existing markets and new markets to expand our user base as well as respond to users' involving demand and add new features to optimize the user experience and help their engagement.

We differentiate from other online social networking and entertainment platforms with our superior social [features] experience for users as we provide highly localized and customized product offerings. Our platform interaction and communication features are based on different cultural backgrounds of users, which underpins the foundation for social interactions in MENA.

In addition, none of our products and services companies have any advertising tied to it in order to ensure the highest quality user experience. The uniqueness of our business model and the premium user experience they offer on our platform has contributed to strong monetization capabilities for it.

In the third quarter and the first 9 months of 2020, we adjusted the -- our adjusted net margin was 45.8% and 47%, respectively. Through the sale of virtual items and operated services such as VIP rights or premium membership on our platform, we will further capitalize on the immense market opportunities in MENA, where stable economic development and well-established mobile Internet infrastructure have created a positive environment for the online social networking and entertainment market.

Now let's take a closer look at the third quarter component of our core products, Yalla and Yalla Ludo.

Yalla, primarily features Yalla rooms, which can be viewed as the online version of Majlis or cafes, where people spend their leisure time in casual chats. For Yalla, we maintained a sharp focus on building tight-knit and high-quality user community. In the third quarter, Yalla's average MAUs and paying users both more than doubled year-over-year, exceeding 5.5 million and 1 million, respectively. We will continue to enrich Yalla with new localized features and new mobile social leisure activities tailored to users in MENA in an effort to improve user engagement.

And let's turn to our second flagship mobile application, Yalla Ludo, for which we have been growing the user base and strengthening our monetization capability significantly. Yalla Ludo resemble the family living room where family members and friends play simple board games that are highly popular in MENA, such as ludo and domino. While playing games, the user can web chat and bond with other players as well as engage in social networking through chat room. We also organized various types of tournaments to enrich users' gaming experience on our platform. Since its introduction in the third quarter of 2018, Yalla Ludo has rapidly gained popularity and has become a significant driver of our user community expansion and now also an important contributor of our revenue growth in the third quarter of 2020.

The average MAUs of Yalla Ludo increased by more than 20x to 8.8 million. The rapidly growing popularity of Yalla Ludo, which was recommended by numerous app stores, including Apple Store and Google Store, on their homepages, is a testament to its superior foundation of social features tied to the culture norms of the region, with users able to enjoy real-time voice interaction while playing board games.

Looking ahead, we are confident that we are continuing -- we can continue to capitalize on the significant growth potential in MENA's underserved online social networking and entertainment market. With our continued product innovation and our committed vision to [calculating] an online voice-centric social community, we are optimistic we can continue to strengthen and broaden our monetization capabilities.

And now I will turn this call over to our President, Mr. Saifi Ismail, to give you a closer look at Yalla's IPO ceremony in UAE and the support we received from local government and media.

Thanks, Tao. We are proud to be the first UAE-based technology unicorn to go public at the NYSE. Our successful September 30 listing on the New York Stock Exchange this year has attracted immense attention from many new UAE leaders and Royal Family members. The Vice President and Prime Minister of the UAE, his highness Sheikh Mohammed bin Rashid, and the minister of the digital economy congratulated us on our IPO and highlighted Yalla as the first UAE-based technology unicorn to be listed on the New York Stock Exchange in front of the public.

We were also honored to have members of the royal family attended our listing ceremony in Dubai. In addition, more than 100 members of the Dubai media reported on our listing, many of whom had stories that lead their front page headlines, providing further exposure for Yalla. Getting listed in the United States is an important strategic move for Yalla, and we look forward to seeing more local partnership and branding opportunities across the MENA region in the future.

Now I will turn this call over to our CFO, Mrs. Karen Hu, for a closer review of our financial performance in the third quarter.

Thank you, Saifi. Hello, everyone. Thank you for joining us. We are very pleased to report our operating and financial performance for the first time as a public company, where our strong organization capability led to healthy top and bottom line performance in the third quarter.

Our revenue reached USD 33.8 million in the third quarter, while our non-GAAP net income was USD 15.5 million. We were also able to maintain a high non-GAAP net margin of 45.8%. We are confident in our positioning and ability to capture further significant growth in MENA's underserved online social networking and entertainment market.

Now I would like to walk through our financial details for the third quarter of 2020. Our revenues were USD 33.8 million in the third quarter of 2020, a 90.4% increase from USD 17.8 million in the same period last year. The increase was primarily driven by the widening of both Yalla and Yalla Ludo's user base and the robust enhancement in Yalla Ludo's monetization capability.

Our average MAUs increased by 358.9% from 3.1 million in the third quarter of 2019 to 14.3 million in the third quarter of 2020. Besides, another primary contributor to our solid revenue growth was the significant increase in the number of the paying users, which grew from 510,000 in the third quarter of 2019 to 5.1 million in the third quarter of 2020. Our revenues generated from group chatting services were USD 30.3 million in the third quarter of 2020, and our revenues generated from gaming services were USD 3.5 million in the third quarter of 2020.

Now let's look at our costs and expenses. Our cost of revenues were a USD 25.6 million in the third quarter of 2020 compared with USD 5.4 million in the same period last year. Excluding share-based compensation expenses, other components of cost of revenues were USD 11.5 million for the third quarter of 2020, a 112.6% increase from USD 5.4 million for the same quarter last year, which was in line with our revenue growth and primarily due to the -- our expanding business scale. Excluding share-based compensation expenses, cost of revenues as a percentage of our total revenue increased from 30.6% in the third quarter of 2019 to 34.1% in the same period of -- in 2020, primarily due to an increase in commission rate for third-party payment platforms.

Our selling and marketing expenses were USD 8.5 million in the third quarter of 2020, compared with USD 1.7 million in the same period last year. Excluding share-based compensation expenses, our components of selling and marketing expenses were $4 million for the third quarter of 2020, a 131.4% increase from USD 1.7 million for the same quarter last year, which was primarily due to higher advertising and marketing promotion expenses as a result of our continued user acquisition efforts. Excluding share-based compensation expenses, selling and marketing expenses as a percentage of our total revenues increased from 9.9% in the third quarter of 2019 to 12% in the same period in 2020, primarily due to higher spending in marketing activities related to Yalla Ludo, which experienced substantial growth in the year 2020.

Our general and administrative expenses were USD 28.9 million in the third quarter of 2020 compared with USD 1 million in the same period last year. Including share-based compensation expenses, other components of general and administrative expenses were USD 1.8 million for the third quarter of 2020, a 78.4% increase from USD 1 million for the same quarter last year, which was primarily due to: one, an increase in salaries and other benefits for our general and administrative staff, which was in turn driven by an expansion of our general and administrative staff; and two, an increase in professional services fees. Excluding share-based compensation expenses, general and administrative expenses as a percentage of our total revenues remained at a very stable level of 5.3% in the third quarter of 2020.

Our technology and product development expenses were USD 1.7 million in the third quarter of 2020 compared with USD 0.4 million in the same period last year. Excluding share-based compensation expenses, other components of technology and product investment expenses were USD 0.9 million for the third quarter of 2020, a 105.6% increase from USD 0.4 million for the same quarter last year, which was primarily due to an increase in salaries and benefits for our technology and product development staff. Excluding share-based compensation expenses, technology and product development expenses as a percentage of our total revenues slightly increased from 2.4% in the third quarter of 2019 to 2.6% in the same period of 2020.

As such, our operating loss was USD 30.9 million in the third quarter of 2020, compared with operating income of USD 9.1 million in the same period last year. Excluding shared-based compensation expenses, non-GAAP operating income for the third quarter of 2020 was USD 15.6 million, a 70% increase from the same quarter last year. Our income tax expenses was USD 0.11 million in the same quarter of 2020.

As a result of foregoing, our net loss was USD 31 million in the third quarter of 2020, a 436.9% decrease from USD 9.2 million in the same period last year. Excluding shared-based compensation expenses, non-GAAP net income for the third quarter of 2020 was USD 15.5 million, a 68.3% increase from USD 9.2 million for the same quarter last year.

Next, I would like to briefly look at our cash and cash equivalents. As of September 30, 2020, we have cash and had cash equivalents of USD 75.7 million as compared to cash and cash equivalents of USD 58.5 million of June 30, 2020.

For the fourth quarter of 2020, we expect our revenues to be between USD 35 million and USD 36 million. The above outlook is based on 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)

(Operator Instructions) Our first question will come from Eli Leong (sic) [Billy Leung] with Hato International (sic) [Haitong International]. Please go ahead.

Can you hear me?

Yes, yes, clear.

Congratulations on a good set of results since your listing. I have a few questions. The first question is just to do with our outlook. We've got very strong growth in quarter 3, and we're also expecting strong growth in quarter 4. So my first question is, do we have any revenue target for 2021 or maybe user target for 2021? That's my first question.

In terms of the second question, I was wondering if management can share any details on the time spent for Yalla and Yalla Ludo during quarter 3.

And my final question, my third question, is whether we can share any color on maybe new apps or functions or features for 2021 or for the next 12 months.

Thanks, Mr. Leung. The first question is based on the company's current estimates. Our revenue for the year 2021 will exceed USD 200 million.

And for the next question, I will transfer to Tao Yang to give you answer.

Yes. For the update on the time spent, the average daily time spent for Yalla was 4.5 hours in Q2. And we have this number included in Q3. However, we hope investors understand that Yalla's daily average time spent is already very high compared with the peer average. And we hope we can be more rationale when we look at the growth of this metric.

And for Yalla Ludo, the average daily time spent reached to 105 minutes, and we think there are still ample room to grow. This is update for the time spent.

And for the pipeline of the new app, we have our Yalla Baloot for the Gulf countries launched recently. And we are still under optimization. And hopefully, we will start our campaign from early of next year for Yalla Baloot.

And we have another casual game for Turkish people. It's called [101 Okey]. It's still under development. I think we will launch it in Apple and Google in December this year. And for the pipeline, app pipeline in next year, we do have our plans, but we prefer not to disclose at this moment. I hope you can understand. Thank you, Billy.

That was very helpful and congratulations again.

Thank you very much, Billy. Thank you.

Our next question comes from Alex Poon with Morgan Stanley.

Congratulations on the very strong results. I have a question on the use of cash. Can you tell us what's your plan for the use of cash, especially the IPO proceeds in the remaining of the year and also next year, the plan of cash?

And my second question is regarding -- if I look at the sequential growth, is there anything to do with the normalization of COVID-19? Because there was more severe lockdown during the second quarter period. How does it affect the user engagement in third quarter compared to second quarter?

Thanks, Alex. For the first question, the use of proceeds. To (inaudible) our group strategy, our key purchases to continue to expand our user base and new product development. As a result, we see ourselves investing more into technology and marketing and then seek for chances on partnership. We believe that we will spend around 30% to 40% on marketing and 20% to 30% on R&D. And we are very cautious at spending the remaining 30% on M&A or strategic collaborations or some projects. At the moment, I would think that (inaudible) [pay rate] for the company to grow and develop, where will continue to be our key focus in terms of region to capture users.

For the COVID-19 influences, we do think that COVID-19 is -- influenced us as a positive effect. But now, Yalla and Yalla Ludo still keep the pace for the group always under our control. So we can -- we think that in the next quarter, we will still -- can beat our expectations, and then we will see. Thank you.

Our next question comes from Bo Pei with Oppenheimer.

Congrats on the solid results and the recent IPO. So I have 2 questions, if I may. So the first is about our 2 product, very successful in MENA. So I was just wondering what are the most of our products in MENA. Is that user scale? Or is there something else?

And then the second question is you talked about a little bit the new product launch plans. And then I'm just wondering of the rationales and the strategies behind this product launch. How do we decide what kind of products to develop? How do we determine the market opportunities? And then related to that.

Thank you. Thank you, Mr. Pei. I will answer the 2 questions. And for the first question, I think, first of all, we have already built a highly interactive and engaged user community. And our unique business model differs from the traditional live broadcast whose interaction is mostly one way. There is no host in any of our chat rooms, and all content are user generated. This allows all users in Yalla and Yalla Ludo to participate actively, further stimulate their creativity and strengthen our user loyalty to our platform. Besides, we have a very strong local team. The management has a deep understanding to the MENA market. MENA is a market with high barriers. Without local know-how, it's very difficult to succeed here. A team with years of experience and living in this area and expertise in the CMT industry is also very important. I think that's the most for our products in MENA.

And for the second question, Jeff and I already replied to Mr. Alex about our product pipeline, which is Yalla Baloot and [101 Okey] for Turkish people and that we are not restricted to these 2. We have other plans, but we prefer not to disclose it at this moment.

We -- but for the -- I can tell you what -- how we decide what kind of products we plan to develop, how -- what's the decision chain in our company. We have a very strong local team, and the management has deep understanding to the MENA market, as mentioned just now. We will make our decision based on the management's local know-how, combined with insight we gain from user surveys we conducted. We have already over 1 -- over 15 million MAUs with both Yalla and Yalla Ludo. So we will have our users of these. They -- what they like, what they like to have in the future, we know that. At this stage, we already identified popular social networking and entertainment activities offline and replicated them online to fulfill the MENA local [user's daily] needs that has existed for a long time. That's -- thank you, Mr. Pei. That is our answer.

(Operator Instructions) Our next question comes from Eli Leung (sic) [Billy Leung] with Hato International (sic) [Haitong International].

Management, it's Billy from Haitong again. Just wanted to follow up with 1 question and it's to do with competition. Can management maybe share their view or maybe the outlook of what they -- of what you see in terms of voice social networking or maybe just in terms of social networking competition in MENA region? Just to share with us in terms of the competitive environment.

I would like to answer that question. So they are well-established online social network and entertainment company that are trying to get into MENA like YY, who have developed apps like Bigo, HAGO or Hello Yo. If you look at the MAU numbers of Bigo or HAGO, they have around 10 million to 12 million monthly active users in MENA in the quarter 2 of 2020 at most. They have been in the market since 2018. And they are still just of the same or if not smaller than our company. Therefore, we would like to emphasize that it's not that we have never faced any competition. The competition do exist in MENA and we are able to compete effectively due to a couple of reasons. Number one is our ability of understanding what the MENA user really hates, as Mr. Yang explained before. Second is the design of our products according -- versus just replicating a product from the West or East to MENA. We have very effective marketing effort and user acquisition strategy, which is reflected in our [PAT] and sales and marketing expenses.

The third reason, most importantly, the community we have established is the strong barrier to entry. Users is very sticky to our platform. More than 5 hours, they spent on the daily average. So in that case, I think MENA is a very highly underdeserved market. Even if there are enough apps coming into the market, why can't we co-exist just like China and U.S. We serve the different needs of online users and the other competitors, like Bigo, live streaming, as we do voice chat and casual games, it does also share short videos. We will all have our own position in MENA.

That was very, very helpful. And just to follow up on that. Is it possible to share maybe some engagement data for quarter 3 against quarter 2? Are we seeing better engagement in the last quarter?

In terms of engagement, the same users' behavior. We have seen the users engaging on our Yalla Live platform. They are socializing, talking, singing, running music, sharing moments, upload photos, texting each other. And the [gifting] nature is still strong as we go on.

And Yalla Ludo experience also the same behavior after we integrated the online messages, plus the users are still enjoying and also playing the games of ludo and domino. So the users are still having the same level of engagement, if not more, and this is proven by the incremental of the time spent on our platform.

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.

Okay. Thank you, all, gentlemen -- ladies and gentlemen.

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