Yalla Group Ltd

NYSE:YALA

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, and good evening, ladies and gentlemen. Thank you for standing by for Yalla Group Limited's Third Quarter 2024 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded.

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

[Yuwei Gao, executive]

Hello, everyone, and welcome to Yalla's third quarter 2024 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. 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. Yalla's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

Today, we'll 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. 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. Mr. Jeff Xu, our Chief Operating Officer, will join the Q&A section.

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.

[Tao Yang, executive]

Thank you, everyone, for joining our third quarter 2024 earnings conference call. We are thrilled to report a robust quarter, marked by record high revenues and enhanced profitability. Our third quarter revenues reached USD 88.9 million, exceeding the upper end of our guidance by 8%, while our net income increased by 11.2% year-over-year to USD 39.2 million. Behind this impressive performance was our continued commitment to deepening our localization capabilities, which enabled us to keep rolling out new gamification features and operating events that fulfill MENA users' social and entertainment needs, driving quality revenue growth while improving operating efficiencies has been a key company objective this year. To that end, the team has consistently refined operational procedures and optimized user acquisition strategies over the past several quarters.

Moving forward, we will remain focused on user experience and product excellence, enriching our product ecosystem and pursuing high-quality sustainable development. MENA's digital transformation has progressed rapidly this year, enjoying a surge of global attention, talent and investment to the region. We have seen gaming emerge as one of the critical drivers of this digital transformation. GCC countries are introducing supportive policies and initiatives to facilitate the development of the gaming and esports sectors. This summer, the Esports World Cup put Saudi Arabia in the global spotlight for gamers and industry professionals worldwide with over 1,500 players worldwide competing across multiple games for record-breaking USD 60 million prize. The event showcased key MENA country's policy commitment to the gaming industry and their infrastructure capacity for large-scale events. As a crucial growth market for the global gaming industry, MENA still holds immense potential for further development. which is gradually being unleashed.

Looking at the group's business, gaming services are now a revenue contributor with growing importance within our group. The proportion of revenues attributable to game services has surpassed 30% over the past few years. In addition, our keen insights into MENA's gaming industry dynamics have led to our proactive entry into the mid-core and hard-core game market with Yalla Games. We currently have several staff developed mid-core and hard-core games to -- and expect to begin testing some of them by year-end.

Our product development and release schedules are designed to bring premium polished games to market at optimal time to capture their corresponding user base and market share. And we look forward to seeing this new initiative spur fresh growth in the upcoming years. Expanding from casual games to mid-core and hard-core game is a milestone, not a sprint. We are committed to elevating Yalla Games standing in MENA's mid-core and hard-core game market, capitalizing on our wealth of experience and know-how in casual games to drive success. Guided by Yalla's core organizational values, [ I mean, UST ], especially the last 2 letters for Simple and Target, we will continue to refine every Yalla game product by taking a straightforward and pragmatic approach. We are confident that we can engage our loyal users in the region, whom we served for nearly a decade with high-quality games that align with the Yalla brand while also leveraging these new games to broaden Yalla Group's product ecosystem and market reach.

In conclusion, the phased rollout of digital transformation initiatives across MENA countries is steadily unlocking the market growth potential. As the largest online social networking and gaming platform in MENA, we will seize every opportunity to contribute to this transformation and the economic development of the region. With strong business fundamentals and increasingly robust product ecosystem, we have full confidence in our ability to expand our role in the region's evolution.

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

[Saifi Ismail, executive]

Hello, everyone. Thanks for joining us today. Let's move on to our third quarter operations and the performance of our products. We continued to broaden our user base, thanks to our strong execution of effective user acquisition strategies. Our average monthly active users grew to 40.2 million, up 14.5% year-over-year. As we dedicated to enhancing our product gamification and user experience, our paying users increased to 12.6 million, up 12% year-over-year. During the quarter, our products demonstrated remarkable strength with Yalla Ludo and 101 Okey Yalla, both setting new quarterly revenue records. We were delighted to reach new heights within our casual game metrics and look forward to replicating Yalla Ludo's success with other products.

As we advance the company's development, we continue to identify and create products with deep cultural roots that attract a strong user base in MENA while keeping a close eye on market dynamics and users' changing needs. Our highly skilled team boost a profound understanding of MENA users' preferences, empowering the consistent development of products as well as online and offline events with enduring appeal. For instance, this quarter, we expanded the regional footprint of our Ludo Champion Offline Tournament series. Our team not only hosted 2 tournaments in Abu Dhabi and Egypt, but also teamed up with the UAE Esports Federation to host an additional Yalla Ludo Offline Tournament in Abu Dhabi. This steady stream of offline events has deepened our brand awareness, solidifying Yalla Ludo's industry leadership while also meeting MENA users' entertainment needs.

We will continue to cooperate with local and global industry participants to increase user engagement and facilitate development across MENA's gaming industry. We also upgraded Yalla, our flagship products with a diverse array of fresh features. We were pleased to see Yalla users investing significant time and game currency into our engaging on-trend activities. This quarter, we embedded a crazy soccer game in Yalla's chat room, tapping into this soccer currently sweeping the Middle East, chat room users compete in teams and make plays by sending messages and gifts in the chat room, fostering stronger social ties and deeper user engagement. On a related note, I was honored to be invited for an interview this quarter by [ Pocket Gamer ], a globally recognized media leader in the mobile gaming industry, celebrated for its cutting-edge news and insights. We delved into the emerging trends shaping MENA's social networking and gaming industry during our in-depth exchange with a particular focus on the crucial importance of content localization. We are grateful to Pocket Gamer for this opportunity and its recognition of Yalla Group's leadership in MENA's social networking and gaming industry. As a leading MENA-based Internet company, we remain dedicated to creating social and economic value by enhancing digital lifestyle and advancing the region's digital transformation.

To sum up, as MENA's leader in online social networking and gaming, we will continue delivering high-quality products and services to our users while playing an active role in the region's digital transformation. We are poised to broaden our business horizon and enhance external collaboration, consistently elevating our brand influence. And as always, we will stay true to our vision to become the largest online social networking and entertainment platform in the MENA region.

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

[Yang Hu, executive]

Thank you, Saifi. Hello, everyone. Thank you for joining us today. During the third quarter, we continued to execute high-quality growth strategies leading to our revenues reaching an all-time high. We also continue to boost efficiency and operating leverage. As a result, we enhanced our profitability with expanded net margin of 44.1% and excluding share-based compensation, non-GAAP net margin of 47.9%. Our fundamentals remain solid, strongly supporting our current business operations as well as our investments in further development. We will continue to pursue high-quality, sustainable development, creating long-term value for all our stakeholders.

Let's move on to our detailed financials for third quarter of 2024. Our revenues were USD 88.9 million in the third quarter of 2024, a 4.4% increase from USD 85.2 million in the third quarter of last year. The increase was primarily driven by our growing user base and enhanced monetization capability. This growth was also partially attributable to the significant increase in the number of paying users, which grew to 12.6 million in the third quarter of 2024 from 11.2 million in the third quarter of 2023.

Now let's take a look at our costs and expenses. Our total costs and expenses were USD 56.4 million in the third quarter of 2024, a 6.9% increase from USD 52.8 million in third quarter of last year. Our cost of revenues was USD 31.8 million in the third quarter of 2024, a 14.6% increase from USD 27.8 million in the same period last year, primarily due to higher commission fees paid to third-party payment platforms as a result of increasing revenues generated. Cost of revenues as a percentage of total revenues increased to 35.8% in the third quarter of 2024 from 32.6% in the third quarter of last year. Our selling and marketing expenses were USD 7.4 million in the third quarter of 2024, a 34.9% decrease from USD 11.3 million in the same period last year, primarily driven by our more disciplined advertising and promotion approach.

Selling and marketing expenses as a percentage of total revenues decreased to 8.3% in the third quarter of 2024 from 13.3% in the third quarter of last year. Our general and administrative expenses were USD 10.1 million in the third quarter of 2024, a 38.3% increase from USD 7.3 million in the same period last year, primarily due to an increase in the incentive compensation. G&A expenses as a percentage of our total revenues increased to 11.4% in the third quarter of 2024 from 8.6% in the third quarter of last year. Our technology and product development expenses were USD 7.1 million in the third quarter of 2024, an 11.1% increase from USD 6.4 million in the same period of last year, primarily due to an increase in salaries and benefits for our technology and product development staff.

Technology and product development expenses as a percentage of total revenues increased to 8% in the third quarter of 2024 from 7.5% in the third quarter of last year. As such, our operating income remained relatively stable at USD 32.5 million in the third quarter of 2024. Our interest income was USD 7.8 million in the third quarter of 2024 compared with USD 5.6 million in third quarter of last year, primarily due to an increase in interest rates applicable to the company's bank deposits.

Our income tax expenses was USD 1.29 million in the third quarter of 2024 compared with USD 0.71 million in the third quarter of last year. The increase was primarily due to the introduction and the implementation of UAE Corporate Tax Law, which is effective for the financial year starting on or after June 1, 2023. As a result of foregoing, our net income was USD 39.2 million in the third quarter of 2024, an 11.2% increase from USD 35.2 million in third quarter of last year.

Turning to our liquidity and capital resources. Our cash position remains solid. As of September 30, 2024, we had cash and cash equivalents, restricted cash, term deposits and short-term investments of USD 570.1 million compared with USD 535.7 million as of December 31, 2023. Under our USD 150 million share repurchase program that began May 21, 2021, and has since been extended by our Board through May 21, 2025, we had repurchases 1,736,383 ADS or Class A ordinary shares in open market cash repurchases, totaling approximately USD 7 million in the third quarter of 2024. Cumulatively, we have repurchased 5,709,259 ADS or Class A ordinary shares in open market cash repurchases, totaling approximately USD 42.5 million as of September 30, 2024.

Moving to our outlook. For the fourth quarter of 2024, we expect our revenues to be between USD 77 million and USD 84 million. The above outlook is based on the current market conditions and reflects the company's management's current and preliminary estimates of the market and operating conditions and customer demands, which are all subject to change.

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

[Operator]

[Operator Instructions] Today's first question comes from Xueqing Zhang with CICC.

[Xueqing Zhang, analyst]

Congratulations on another solid quarter. I have 2 questions. The first one is about game business. Could management share more information about your new game products such as testing and launching schedules? And how does management view of the performance of game business in 2025? And my second question is about flagship products. Regarding flagship products, how we have seen some new gameplay attempts on Yalla this year? Could management share your strategies for flagship products moving forward? And what's the trend for flagship products in Q4 and next year?

[Jianfeng Xu, executive]

Thank you, Xueqing, for your question. I'll be taking the first one and leave the second one to our CEO, Mr. Tao Yang. Currently, we have 3 new self-developed mid-core games in our pipeline. Some of these will enter testing in Q4, 2024. After connecting user feedback and then refining the products, we will start promoting them at scale. Looking ahead at the game business in 2025, first of all, we expect Yalla Ludo's performance to remain strong and stable with single-digit percentage growth next year. Besides that, more upside or additional growth will come from our new products, as mentioned, as well as potential external collaborations. We will provide more accurate guidance on that after we get a better sense of their product potential from the testing. Thank you.

[Tao Yang, executive]

Xueqing, this is Tao. Regarding our flagship product, as you mentioned, we upgraded Yalla with a diverse array of fresh features this quarter. We will continue to roll out new features for Yalla during the rest of 2024 and into 2025. For Yalla Ludo, we will also keep launching interactive operational events and maybe even new gameplay to boost user engagement. In terms of revenue growth, we are confident that in 2025, both flagship products will maintain their current scale and have the potential to achieve single-digit growth. I hope this answers your question. Thank you, Xueqing.

[Operator]

The next question comes from Chenghao Li with CICC.

[Chenghao Li, analyst]

Congratulations on another robust quarter. My question is about our game business. Regarding casual game products, we mentioned that Yalla Ludo and 101 Okey Yalla both achieving new quarterly revenue records. Could management elaborate more on drivers of growth on these 2 products?

[Saifi Ismail, executive]

Thank you, Chenghao. This is Saifi. I will answer your question. So overall, our consistent efforts to optimize user experience and refine operational procedures have paid off. In the second half of the quarter, users enthusiastically appreciated Yalla Ludo diverse operational events. Meanwhile, Yalla Ludo once again successfully held 2 offline tournaments, further strengthening our brand's local impact.

Regarding 101 Okey Yalla, it has been deeply involved in the Turkish market for a few years now, and our team has been constantly enhancing the user experience. One of the new features we launched this quarter has gained excellent feedback, which I believe underscores our long-term localization capabilities and deep understanding of our user needs. Thank you.

[Operator]

The next question comes from [ Sarah ] Hu with Haitong International.

[Xiaoyue Hu, analyst]

Congratulations on a solid quarter. So can management give us an update on the shareholder returns?

[Yang Hu, executive]

This is Karen. I will answer your question. Yalla is committed to return value to shareholders through our share repurchase program. This quarter, we repurchased more than 1.7 million ADS in the open market for an aggregate amount of approximately USD 7 million. As of September 30, 2024, we had deployed a total of 45. -- USD 42.5 million for share repurchases. Given our solid fundamentals, we will continue to conduct our share repurchase program while considering cash dividend payments in due course. We will keep you posted if we have more updates. In short, we believe strongly in Yalla's long-term potential and dedicated to generating value for all parties involved. I hope this answers your question. Thank you.

[Operator]

The next question is from Kaifang Jia with CITIC.

[Kaifang Jia, analyst]

Congratulations for [ a strong ] quarter. So could management share about any updates about the external cooperation and the expansion into new areas?

[Tao Yang, executive]

Kaifang, thank you for your question. With MENA's ongoing digital transformation and our company's deep local roots and business development experience in the region, Yalla has begun engaging in more discussions with top-tier overseas Internet companies interested in exploring this market. We will take in -- we will take pride in our localization capabilities and potential perspective, which position us well to assist in the development of localized content as well as game distribution in the MENA region.

In terms of verticals, social networking and gaming remain our core focus areas. To address your second question, while the Middle East market remains our primary focus, as we've consistently emphasized, we have already gained a certain level of users in Europe, South America and Southeast Asia. If in the future, we see new products with suitable content, we may consider conducting global promotions. Thank you, Kaifang.

[Operator]

The next question is from Rachel Guo with Nomura.

[Rachel Guo, analyst]

My question is about your margin. How do we think about the margin trend in the fourth quarter of '24?

[Yang Hu, executive]

Rachel, thanks for your question. Regarding our profitability for Q4 as we continue to improve our operating efficiency, we are confident that we can maintain our net margin of the 40% level and potentially reach around 45%. I hope this answers your question. Thanks.

[Operator]

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

[Yuwei Gao, executive]

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 or Piacente Financial Communications. Both parties' contact information is available in today's press release as well as on our company website. Thank you.

[Operator]

This concludes today's conference call. You may now disconnect your line. Thank you.