Yalla Group Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 20, 2023

There are 9 speakers on the call.

Operator

Good morning and good evening, ladies and gentlemen. Thank you for standing by for Yalla Group Limited's Third Quarter 2023 Earnings Conference Call. At this time, all participants are in listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded.

Operator

I would like to turn the conference over to your host today, Mr. Carrie Gao, IR Management of the company. Please go ahead.

Speaker 1

Hello, everyone, and welcome to Yalla's Q3 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.

Speaker 1

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 information as well as unaudited non GAAP financial measures.

Speaker 1

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. Saphis Ma Yu, the company's President, who will briefly review our recent business developments.

Speaker 1

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 the call to questions. Our COO, Jeff Xu, will also join the QA section. With that said, I'd now like to turn the call over to our Chairman and Chief Executive Officer, Mr.

Speaker 1

Tao Yang. Please go ahead, sir.

Speaker 2

Thank you, Karen. Thank you, everyone, for joining our Q3 2023 earnings conference call. We are pleased to report that we achieved strong Q3 results. Our Q3 revenues reached an all time high of USD 85,200,000 supporting 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.

Speaker 2

And as a result, net income increased by 44% year over year to US35.2 million dollars and net margin further improved to 41.4%. Our robust financial performance reflects excellent execution of our effective high quality development strategy. In the Q3, we continued to refine our operational processes, enhance 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 expect 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.

Speaker 2

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, our region's exciting economic development is not the only asset drawing businesses and the investors to MENA throughout history. The Middle East has been an important hub for cultural and commercial exchanges between this and that. Amid today's changing dynamics across the global landscape, the region is currently gaining increasing strategic We have observed a mounting number of outstanding business, considering MENA as their company's next important growth opportunities this year, a testament to the region's unique synergies with both Eastern and Western Economies as well as its vast potential and market capacity. Moreover, MENA's driving tech ecosystem is fostering entrepreneurship and startups, attracting talent from around the globe.

Speaker 2

This has created a wealth of opportunities for Yalla to iterations and diverse future business initiatives. As the largest media based online social networking and gaming company, Yalla is well positioned to seize this trend 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 development. First, an overview of our Q3 progress with respect to our 2 hardcore games, Merge Kdenhams and Age of Legends, thanks to our consistent game iterations and engagement of our existing Yalla user community. Both games have gained traction in the Middle region.

Speaker 2

Notably, Merge Kingdom 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 clamped to the talks about on Google Play's role playing games category in terms of revenues in Saudi Arabia, UAE and Open. Although compared with our flagship applications, we call it hot ball games are still not making a substantial contribution to our group's revenue. We see immense room for growth in this sector. Turning to our strategy for Yellow Game's future growth. Through the process of developing our 2 hardcore games, we have gained a more comprehensive understanding of the local gaming market as well as operation method and cooperation strategies.

Speaker 2

Our experience with these games has strengthened our determination to engage more deeply in mid call and hardcore games business in MENA. It is worth noting that 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 products and operation 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 presently exploring new game categories and already have various games in our pipeline.

Speaker 2

We expect to accelerate the launch of our new games in the coming year. 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 Niuzu's research, Mina's gaming market currently brings in USD7.2 billion in annual revenue with a growth rate of 6.9% year over year, among the fastest growing markets worldwide. Meanwhile, given the considerable size of the mature gaming market in China, the U. S.

Speaker 2

And Europe, those regions may also offer opportunities for Super League Steam games. We will remain dedicated to the middle market while examining the possibilities and may modify and distribute our games in additional regions as we see fit. Before I conclude, I'd like to mention that in addition to Midgore 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 advancing Mina's digital transformation as well as the potential to serve millions of MENA residents. We will share more details with you when there is meaningful progress.

Speaker 2

In summary, we remain confident in the growth opportunities presented by MENA's increasingly pivotal role on the global stage and the Fujian's rapid digital transformation. And the largest MENA based online 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 sustainable value for all of our stakeholders. Now, I will turn this call over to our President, Mr.

Speaker 2

Saifie Ismail for a closer look at our recent developments.

Speaker 3

Hello, everyone, and thanks for joining us today. Let's take a closer look at our Q3 operations and our products performance. We delivered another robust quarter results as our efforts to improve the gamification of our products continue to bear fruit. As Sal mentioned, our enhancement levels have led to increased user engagement across our platform, with average monthly active users rising by 13.6 percentage year over year to 35,100,000. Dollars Our high value users exhibited great willingness to spend on those enhanced gamification features, driving ARPU up to US7.35 dollars in the 3rd quarter from US6.89 dollars in the same period of last year.

Speaker 3

On a related note, one of our 3rd 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 low spend 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 will adapt accordingly.

Speaker 3

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 Day events across several countries in MENA in conjunction with local festivals to enhance user engagement. Activities like these demonstrate Yalla's commitment to user satisfaction and strengthen the sense of community on our platform. With respect to Yarlaludu, 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 2 additional 3rd quarter highlights.

Speaker 3

At Yalla Group, sustainability has always been integral to our corporate value. In August, Yalla established a sustainable account for cash management with Standard Chartered, one of the world's leading international banks. Deposits in sustainable accounts are referenced against standard chartered sustainable projects, addressing some of the world's greatest long term sustainability threats. As Tameena continues to develop rapidly, we will leverage our strong cash position and local insight to incorporate sustainable practices company wide, ensuring that our cash management procedure contributes to enhancing sustainability throughout the local and international economy reflects Ciala's overall direction as well as our profound commitment to the MENA region. Furthermore, we were recently invited to speak at Jitek's Global's XBAN North Star 2023, the world's largest technology and startup event held in Dubai in October, inspired by JITUX Global, the world's most established and iconic last care tech exhibition.

Speaker 3

Expand North Star unites founders, venture capitals and tech leaders to facilitate connections among the startup ecosystem. Its unparalleled content program featured lively discussions among over 70 Unicorn founders, including Yalla, on 2023 Biggest Tech Stories. Events like Jisix Global showcase our region's open and communicative business ecosystem in a global stage. We were honored to recount Yalla's 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 startups.

Speaker 3

As the 1st UAE based tech unicorn to list on the NYSE, Yalla is deeply committed to driving progress across the tech startup community, while broadening digital development throughout the MENA. Yalla is excited to witness and participate in MENA's digital transformation. 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.

Speaker 1

Thank you, Sai Fei. Hello, everyone. Thank you for joining us today. We delivered strong results for the Q3 of 2023, highlighted by our all time high revenues and the impressive net margin expansion, our relentless efforts to streamline costs as well as our enhanced ROI based marketing strategy continue 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.

Speaker 1

As a result, our net margin rose to 41.4%, and the non GAAP net margin rose to 44.9%. As we head into our Q4, 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 Q3 of 2023.

Speaker 1

Our revenues were US85.2 million dollars in the Q3 of 2023, a 6.4% increase from US80.1 million dollars in Q3 of last year. The increase was primarily driven by our broadening of our user base and our enhanced monetization capability. Our solid revenue growth was also partially attributable to a significant increase in ARPU, which grew from US6.89 dollars in the Q3 of 2022 to US7.3 $5 in the Q3 of 2023. Now let's take a look at our costs and expenses. Our cost our total cost and expenses were US52.8 million dollars in Q3 of 2023, 5% decrease from US55.6 million dollars in the same period of last year.

Speaker 1

Our cost of revenues decreased by 6.1 percent to US27.8 million dollars in Q3 of 2023, down from US29.6 million dollars in same period of last year. Cost of revenues as 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 US11 point $3,000,000 in Q3 of 2023, a 5.5% decrease from US12 $1,000,000 in same period of last year, primarily driven by lower share based compensation expenses recognized in Q3 of this year. Selling and marketing expenses as a percentage of total revenues decreased from 14.9% in Q3 of 2022 to 13.3% in the Q3 of 2023. Our general and administrative expenses were US7.3 million dollars in Q3 of 20 23, a 14.5 percent decrease from US8.6 million dollars in the same period of last year, primarily driven by our lower share based compensation expenses recognized in the Q3 of this year.

Speaker 1

General and admin expenses as a percentage of total revenues decreased from 10.7% in the Q3 of 2022 to 8.6% in the Q3 of 2023. Our technology and product development expenses were US6 $400,000 in Q3 of 2023, a 16.6% increase from US5.5 million dollars 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 the expansion of our product portfolio. Technology and product development expenses as a percentage of total revenues increased from 6.9% in the Q3 of 2022 to 7.5% in the Q3 of 2023. As such, our operating income was US32.4 million dollars in Q3 of 2023, a 32.3% increase from US24.5 million dollars in the same period of last year. Excluding share based compensation expenses, our non GAAP operating income in the Q3 of 2023 was US35.4 million dollars up 20.4% year over year.

Speaker 1

Our interest income was US5.6 million dollars in the Q3 of 2023 compared with US0.8 million dollars 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 US710000 dollars in the Q3 of 2023, a 10.2% decrease from US790,000 dollars in the same period of last year. Moving to our bottom line. Our net income increased by 44.3 percent to US35.2 million dollars in the Q3 of 2023 compared with US24.4 million dollars in the same period of last year. Next, I would like to briefly go through our liquidity and capital resources.

Speaker 1

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 US545 $1,000,000 compared with US450 $1,000,000 as of December 31, 2022. Under our US150 $1,000,000 share repurchase program that began May 21, 2021, and has since to be extended by our Board, Through May 21, 2024, we have repurchased 1,670,000 735 ADS or Class A ordinary shares in open market cash repurchases, totaling approximately US8.5 million dollars in the Q3 of 2023. Accumulatively, we have repurchased 3,972,876 ADS or Class A ordinary shares in open market cash repurchases, totaling approximately US35.5 million dollars as of December 30, 2023. Moving to our outlook.

Speaker 1

For the Q4 of 2023, we expect our revenues to be between US73 $1,000,000 US18 $1,000,000 The above outlook is based on our current market conditions and reflects the company's management's current and preliminary estimates of the 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.

Operator

Our first question comes from Keating Zhang at CICC.

Speaker 4

Thanks management for taking my question and congratulations on the strong quarter. I have 2. The first one is about the car apps. We have seen a strong performance by Yalla and Yalla Ludo this year. So how should we think about the growth potential of these 2 flagship products in the future?

Speaker 4

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 color on the revenue growth and net profit margin trend next year? Thank you.

Speaker 2

Hi, Shijin. Good morning. Thank you for the 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 7 years.

Speaker 2

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 products will enjoy especially long life cycles. Another aspect I would like to emphasize is that our efforts to insist on quality growth effectively support our platform's development and monetization capability. Looking at 2024, we will continue to work on product iteration and explore more new features to serve users' evolving needs. And we are confident that Yalla and Yalla Ludo can at least maintain performances similar to this year?

Speaker 2

Thank you.

Speaker 1

Hi, Xueqing. Thank you. Thank you for your question. And in terms of 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, Mina has now become the next destination for many leading companies to explore growth opportunities.

Speaker 1

We will keep monitoring this trend for promising partnership and acquisition opportunities. All these potential contributions are not included in the Group's guidance I have just provided. We will update our guidance later if necessary. In terms of margin, taking the potential investments in new products into account, an annual margin of 35%, I think is fair. This year, we will continue to implement measures through dedicated cost control.

Speaker 1

Of course, each quarter's performance may vary depending on how and when we invest in different products. Thank you. Thank you for your question again.

Operator

The next question comes from Cheng Hao Lee at CICC.

Speaker 5

Hi, management. Thanks for taking my question and congratulations on a solid quarter. I have some questions related to the gaming business. First, could management share about how does the company evaluate the performance of the 2 recently launched mid and hardcore games? And could the management share more color about the game pipeline and launch schedule in the future?

Speaker 5

And lastly, are there any updates on the company's strategy for the gaming business? Thanks.

Speaker 2

Good morning, Chen Hao. Thank you very much for your concern. As I shared earlier in the management's remarks section, if we look at the rankings, both hardcore games were among top 10 in their categories in certain sub countries. Although compared with our flagship applications, they are still not making substantial contribution to our group's revenue. Through this process, we have gained the important experience regarding our operation and the collaboration strategies, and we see immense room for growth in the Midco and hardcore games business.

Speaker 2

We are committed to developing our Midco and Argo games, and we'll continue to invest in this sector. In terms of the game pipeline, we have several new products and we will disclose more details later after we receive further feedback on the beta versions. In terms of strategy, we expect to accelerate the launch of our new games in the coming year. 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 more potential partnerships.

Speaker 2

Thank you, Chen Lau.

Operator

The next question comes from Kaifang Jia at CITIC.

Speaker 5

Thanks for taking my question and congratulations on the strong quarter. My question is how do we view the recent competitive trend in the Middle East market? Thank you.

Speaker 3

Hi, Kevin. Thank you very much. This is Feifei. As we highlighted in our management remarks, MENA's environment is very favorable and is attracting now more and more resources, including businesses, talent 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.

Speaker 3

More conversations are happening and through this process, we are able to learn more from each party's insights and intentions on what they have and what they need at this point and discuss ways also to collaborate that are mutually beneficial. With all these creative minds and resources, it's not hard to see that the market is going to go from strength to strength in the next 3 to 5 years. In terms of the competitive landscape, the most significant change over the last 2 years is still TikTok. The rest of the major players in the MENA market have been in the region for many years. If we look at the gaming sector, some mobile gaming apps from China are performing very well in MENA.

Speaker 3

However, what I would love to share is that the traffic acquisition expense now in the MENA market is much more expensive than what we paid 7 years ago when we first entered the market. So for some small sized companies, that could be a challenge if they plan to explore this market on their own. I want to reiterate also that competition is never a bad thing. It inspires us to build better and serve our users, research new technologies and industry trends, and drive also collaboration and innovation. As a leading player in this region, we see these unfolding developments as an opportunity.

Speaker 3

We are taking proactive steps to cement our leadership position and remain confident in our capabilities after all this year. Thank you.

Operator

Next question comes from Lincoln Kang at Goldman Sachs.

Speaker 6

Hi. Thank you, management for taking my question. So I have two questions. First one is, how does the company sort of foresee the balance between maintaining high profitability and the continued business investment, especially in the new business? And second one, could management also provide some insights in terms of the development of short plays in overseas market.

Speaker 6

So, does Yihana has a strategy or plans in this area either through distribution or as a platform for traffic acquisition? Thank you.

Speaker 1

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

Speaker 1

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

Speaker 3

Hi, Lincoln. For your second question, thank you very much for your question. Regarding short plays, 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 short plays. We saw some products already exploring global opportunities, but compared with China, these markets are still at very early stage.

Speaker 3

Concerning the MENA region, short plays are also new for users, and it takes time to educate the market. Furthermore, to better serve users' needs, I believe content tailored to Arabic culture is very essential. We are conducting research to evaluate the market and also talking to some production companies. If Yalla decides to move into this sector, I believe localization might be a better way to capitalize on our extensive understanding of MENA's local culture and market insights. Thank you.

Operator

The next question comes from Rachel Guo from Nomura.

Speaker 7

Hello, everyone. I thank management for taking my question and I congratulate on the solid quarter. And my question is like, given the company has a very strong cash position, does the company has IMEI plans for that?

Speaker 1

That. Hi, Rachel. Thank you very much for your question. Cash strongly supports us a proliferation of new opportunities to drive further growth. As I stated, among the global markets, Mina is popular, and we are seeing emerging acquisitions and the investment opportunities.

Speaker 1

So Henley's cash reserves is strategically important for our company. In addition, we are actively carrying out our share repurchase program. In the Q3, we repurchased approximately 1,700,000 shares, totally around US8.5 million dollars This reflects our confidence in our share price, and we will continue to conduct our repurchase program and return value to shareholders. Thank you.

Operator

The next question comes from Natalie Wu at Haitong International.

Speaker 7

Hi, thanks for taking my question. Just wondering could management provide some color on the competition faced by Yala and Yala Ludo, maybe from TikTok and Jackal? Thank you.

Speaker 8

Hi, Larry. Thank you very much for the question. So as we mentioned earlier, more and more global companies are now looking for opportunities in the MENA region. For example, TikTok, it moved fast and is performing very well in the market so far. In terms of competition, TikTok has a greater impact on live streaming or short video products.

Speaker 8

If you look at third party data, some of them are losing their market share because of TikTok. Of course, our products are competing for users' time and attention. However, taking a closer look at our performance over the past 2 years, I would say our flagship applications have done a good job. We are still generating record high revenues from time to time, probably because our product strategy focus on digital localization. There are always genuine needs for Arabic users who have shown stronger loyalty to our platform.

Speaker 8

We are very confident in the reality of our 2 flagship applications. And as Mr. Tao Yang just mentioned, I expect that we will enjoy a long lifecycle. In terms of Jackal, it's also a live streaming platform. I don't think we compete directly.

Speaker 8

There are many live streaming platforms that have entered the middle market in recent years. And as we just discussed, TikTok is the biggest one. Live streaming platforms face more direct competition with each other. Thank you.

Operator

There are no further questions now, I would like to turn the call back over to management for closing remarks.

Speaker 1

Thank you once again for joining us today. We look forward Both parties' contact information is available Both parties' contact information is available in today's press release as well as on our company website.

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