Yalla Group Ltd

NYSE:YALA

Earnings Call Analysis

Yalla Group Reports Solid Growth and Profitability

Yalla Group delivered robust financial results in 2023 with substantial growth supported by an expanding user base and increased efficiency. Full-year revenues hit $318.9 million, up from the previous year, while Q4 net income soared by 79% year-over-year to $29.7 million, resulting in a net margin of 35.5%. The improved performance is attributed to a disciplined approach to advertising and lower costs, with a notable drop in selling, marketing, and general and administrative expenses. The company continues to reinvest in its 'Yalla ecosystem' and predicts Q1 2024 revenues of $72 million to $79 million, reflective of market conditions and customer demand.

Impressive Revenue Growth and Profitability

In a dynamic environment, the company showcased its ability to generate substantial growth, with fourth quarter revenues climbing to $80.9 million, surpassing expectations. This performance signifies a substantial year-over-year increase of 35.2%. The company's full-year revenue also painted a positive picture, reaching $318.9 million, indicating a robust 43% surge compared to the previous year.

Growth in User Engagement and Monetization

The company reported significant strides in user growth, with average monthly active users increasing by 13.3% year-over-year to 36.2 million. This aligns with the company's advancements in user monetization, evidenced by a rise in average revenue per paying user, which spiked to $6.5, marking a 6.2% increase quarter-over-quarter.

Strategic Marketing and Product Innovation

Strategic initiatives have been effective in marketing and user engagement, highlighted by the success of the Yalla Ludo Champion Tournament with more than 150,000 players and the launch of the Yalla Festival Event across the MENA region. These efforts not only boost user numbers but also solidify brand presence in key markets.

Financial Strength and Share Repurchase Program

The company has shown exceptional financial performance with an impressive 79% year-over-year increase in fourth quarter net income, reaching $29.7 million. Full-year net income mirrored this strength, recording a 43% year-over-year rise to $113.1 million. Highlighting confidence in its financial health, the company has bought back 3,972,876 shares under its $150 million share repurchase program.

Noteworthy Improvement in Margins

A commendable reduction in total costs and expenses to $57.6 million for the fourth quarter demonstrates enhanced operational efficiency. This fiscal prudence has led to a substantial improvement in net margin, now at 35.5% compared to 26% last year, reflecting a more profitable operation .

Outlook for the Next Quarter

Looking ahead, the company forecasts its revenues to be in the region of $72 million to $79 million for the first quarter of 2024. This projection is based on current market conditions and reflects the management's expectation for continued growth momentum.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning and good evening, ladies and gentlemen. Thank you for standing by for Yalla Group Limited's Fourth Quarter and Full Year 2023 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 Manager of the company. Please go ahead, ma'am.

[Yuwei Gao, executive]

Hello, everyone, and welcome to Yalla's Fourth Quarter and Full Year 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 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 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 the 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, you will hear from Mr. Tao Yang, our Chairman and Chief Executive Officer, who will provide an overview of our latest achievements and growth strategies. He will be followed by Mr. Saifi Ismail, the company's President, who will briefly review our recent business developments. 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 QA section.With that said, I'd now like to turn the call over to our Chairman and Chief Executive Officer, Mr. Tao Yang. Please go ahead, sir.

[Tao Yang, executive]

Thank you. Thank you everyone for joining our fourth quarter and full year 2023 earnings conference call. 2023 was a year filled with changes and opportunities. As a global enterprise, Yalla faced a complex and dynamic international environment with many moving parts. Nevertheless, we forged ahead with our core business strategies and capped the year with robust results. I will begin with a brief overview of our pivotal achievement and financial performance in 2023.We continued to grow our 2 flagship applications Yalla and Yalla Ludo. We also deepened our engagement in the mid-core and hard-core game business, building relationships with global players who are drawn to the surge of development in the MENA region. Meanwhile, we continued to improve our operating efficiency by optimizing costs and expenses through more rigorous vendor selection and management, user acquisition strategy requirements and greater talent utilization. We sustained our robust financial momentum as a result of this effort, ending the year with strong growth across our revenues from gaming services as well as net income.Our fourth quarter revenue were USD 80.9 million, exceeding the upper end of our guidance, while revenues from gaming services in the fourth quarter reached USD 28.5 million, representing year-over-year growth of 35.2%. For full year 2023, our revenue were USD 318.9 million while our net income reached USD 113.1 million, representing a significant year-over-year growth of 43%.Our strong financial performance reflects the excellent execution of our effective quality growth strategy. Supported by our solid business fundamentals and healthy cash position, we will continue to expand our services and stretch the boundaries of our business, launching innovative social networking and entertainment products to fulfill MENA users' evolving needs online.I'm also proud to share that, thanks for our robust and consistent financial performance, Yalla Group was recognized by Fortune magazine as one of the 2023 top 500 Arab companies according to the Fortune 500 Arabia list. The Fortune 500 is a distinguished list showcasing the 500 largest companies in a specific region based on revenues. This year marked the inception of the Fortune 500 Arabia highlighting companies in the MENA region. We'd like to extend our heartfelt gratitude to Fortune 500 Arabia for recognizing the Yalla Group's contributions and achievements with inclusion in this esteemed list.Next, let's turn to Yalla Game's development and future strategy. Yalla Game made several crucial moves this year, including the launch of our first 2 hard-core games. In the process of developing and operating these games, we gained vast experiences across key aspects of MENA gaming market, including product selection, product design and user acquisition among others. Our comprehensive understanding of this market has proven invaluable as we continue to organize and train our professional team for this specific region. In turn, our growing expertise and capabilities strengthen our determination to expand our footprint in the mid-core and hard-core games business in MENA.Moving forward, we will continue investing in mid-core and hard-core games and enriching our game pipeline. Mid-core games will be a particular focus as we believe they will optimally leverage our enormous pool of experience, talent and resources related to casual games in the region. Additionally, we are actively communicating with global top tier gaming cities to explore potential joint monetization opportunities in the region. We will keep you posted on our progress.Notably, we also plan to enhance our social networking products this year. Iterations, including innovative new functions and a host of creative design upgrades, will allow us to explore monetization while better serving MENA users' diverse and evolving needs. In fact, we captured and capitalized area of growing opportunities in 2023 as MENA's role on the global stage and its digital transformation grow and advanced. We are pleased to see more and more visionary industry professionals and investors from around the world allocating more resources to MENA and participating in its surging development, propelling progress across the region.As the #1 MENA-based online social networking and gaming company, we are deeply committed to this market and surely understand its unique advantages and specific user needs. We will continue to leverage our profound local insights to broaden our business horizons as we build the most popular destination for online social networking and entertainment in MENA.Now I will turn this call over to our President, Mr. Saifi Ismail, for a closer look at our recent developments.

[Saifi Ismail, executive]

Hello, everyone. Thanks for joining us today. Let's take a closer look at our fourth quarter operations and our product performance. We delivered another solid quarter with average monthly active user rising by 13.3% year-over-year to 36.2 million. Our average revenue per paying user also increased to USD 6.5 in the fourth quarter from USD 6.01 in the same period of last year. Additionally, our ongoing adjustments to our game mechanism aimed at boosting overall user engagement and delivering better user experiences have proven effective. Paying user increased by 6.2% quarter-over-quarter, demonstrating users' growing willingness to pay on our platform.For our flagship application Yalla, we continued to improve gaming features in the fourth quarter. We also rolled out a series of operational activities, including the Football Carnival event, which was recommended by the App Store. With respect to Yalla Ludo, I am pleased to announce the resounding success of our Yalla Ludo Champion Tournament. More than 150,000 players registered to participate in an intense series of over 1.8 million preliminary matches online, an overwhelming response that ultimately produced 32 exceptional finalists. These skilled players engaged in a highly competitive offline final at Saudi Arabia's Riyadh VOV Gaming Center on December [ 12 ], 2023, where 3 top winners emerged amid enthusiastic live audience participation.The Yalla Ludo Champion Tournament was more than just a competition. It was a celebration of the Yalla Ludo community. Events like these not only enhance our brand impact, but also underscore our commitment to creating memorable, engaging experience and bolstering a sense of comradery and connection.Next, 2 additional highlights. First, we launched the Yalla Festival Event on the App Store across 13 countries in the MENA region this February, a milestone achievement in our development that further strengthened our brand awareness. This collaborative effort with the App Store featuring 5 of our flagship products not only underscores Apple's recognition of Yalla products' popularity in the region, but also validates our efforts to meet MENA user growing entertainment demand.Moving forward, we will remain dedicated to developing more social networking and gaming applications tailored specifically for MENA users. Moreover, we will keep nurturing strong relationship with global channels to ensure that we continue to reach users effectively and provide them with the best possible experience.Last but not least, we are honored to announce that Yalla Group has been invited for an interview with Dubai's Department of Economy and Tourism, DET. With the ultimate vision of making Dubai the world's leading destination for commerce, investment and tourism, DET supports the government in positioning the Emirates as a major hub for global economic activity and tourism as well as in boosting the city's economic and tourism competitiveness indication. Notably, DET is committed to transforming Dubai into original gaming hub as evidenced by the 2022 launch of the Dubai Esports & Games Festival.As the first Dubai-based technology unicorn listed on the NYSE, Yalla Group serves as the key contributor to Dubai's dynamic landscape and is poised to propel the government's vision for the area. We are dedicated to leveraging Dubai's strategic location as a business hub and its exceptional infrastructure to further develop our Yalla gaming products, facilitating the gaming sector's development while driving the city's growth. We are profoundly grateful for DET's invitation to this interview and for recognizing Yalla Group's leading role in the social networking and gaming industry in the MENA region.As we reiterate every quarter, Yalla aspires to become the #1 online social networking and entertainment platform in the MENA region. We continue to build relationships locally and globally to broaden our business horizon and embrace the opportunities brought by MENA's digital transformation. With the entire region set to embark on a new era of growth, we are more committed than ever to providing the people of MENA with better access to a digital life. We believe we are well-positioned to capture the potential growth opportunities in the MENA region, and we look forward to delivering value to all of our stakeholders as we strive to achieve our mission.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. We delivered a robust financial performance in 2023 with full-year revenues rising to USD 318.9 million, another testament to our ability to drive growth in a rapidly evolving environment. In the past year, we continued to actively optimize costs and expenses and improve our overall efficiency. As a result, we greatly enhanced our profitability, recording significant growth for both the fourth quarter and the full year. Specifically, fourth quarter net income increased by 79% year-over-year to USD 29.7 million, while full-year net income increased by 43% year-over-year to USD 113.1 million with a net margin of 35.5% compared with 26% last year.As we head into 2024, we will continue to pursue quality growth, improve operational efficiency and invest in our Yalla ecosystem. We believe our solid business fundamentals and healthy cash position will empower us to capitalize on future opportunities, driving sustainable and long-term growth.Let's move on to our detailed financials for the fourth quarter of 2023. Our revenues were USD 80.9 million in the fourth quarter of 2023, a 7.7% increase from USD 75.1 million in the fourth quarter of last year. The increase was primarily driven by the broadening of our user base and our enhanced monetization capability. Our solid revenue growth has also partially attributable to the significant increase in ARPPU, which grew from USD 6.01 in the fourth quarter of 2022 to USD 6.58 in the fourth quarter of 2023.Now let's take a look at our costs and expenses. Our total costs and expenses were USD 57.6 million in the fourth quarter of 2023, a 4.1% decrease from USD 60.1 million in the same period of last year. Our cost of revenues increased by 11.4% to USD 30.6 million in the fourth quarter of 2023 from USD 27.4 million in the same period of last year, primarily due to an increase in incentive compensation and a one-time game cost related to UI design fees. Cost of revenues as a percentage of total revenues increased to 37.8% in the fourth quarter of 2023 compared with 36.5% in the same period of last year.Our selling and marketing expenses were USD 10.4 million in the fourth quarter of 2023, a 27.3% decrease from USD 14.3 million in the same period of last year, primarily driven by our more disciplined advertising and promotion approach and lower share-based compensation expenses recognized in the fourth quarter of 2023. Selling and marketing expenses as a percentage of total revenues decreased from 19% in the fourth quarter of 2022 to 12.8% in the fourth quarter of 2023.Our general and administrative expenses were USD 11.3 million in the fourth quarter of 2023, a 13.3% decrease from USD 13 million in the same period of last year, primarily driven by lower share-based compensation expenses recognized in the fourth quarter of 2023. General and administrative expenses as a percentage of total revenues decreased from 17.4% in the fourth quarter of 2022 to 14% in the fourth quarter of 2023.Our technology and product development expenses remained stable at USD 5.4 million in the fourth quarter of 2023 and in the same period of last year. Technology and product development expenses as a percentage of our total revenues decreased from 7.2% in the fourth quarter of 2022 to 6.7% in the fourth quarter of 2023. As such, our operating income was USD 23.3 million in the fourth quarter of 2023, a 55.2% increase from USD 15 million in the same period of last year. Excluding share-based compensation expenses, our non-GAAP operating income in the fourth quarter of 2023 was USD 27.1 million, up 34.1% year-over-year.Our interest income was USD 6.5 million in the fourth quarter of 2023 compared with USD 2.3 million in the same period of 2022, primarily due to an increase in interest rates applicable to company's bank deposits and the continued increase in the company's cash position. Our income tax expense was USD 539,000 in the fourth quarter of 2023, compared with USD 416,000 in the same period of last year.Moving to our bottom line. Our net income increased by 79% to USD 29.7 million in the fourth quarter of 2023 compared with USD 16.6 million in the same period of last year. Next, I would like to briefly review our liquidity and capital resources. Our cash position remains solid. As of December 31, 2023, we had cash and cash equivalents, restricted cash, term deposits and short-term investments of USD 535.7 million compared with USD 453 million as of December 31, 2022.Under our USD 150 million share repurchase program that began on May 21, 2021 and has since been extended by our Board through May 21, 2024, we have cumulatively repurchased 3,972,876 ADS or Class A ordinary shares in open market cash repurchases, totaling approximately USD 35.5 million as December 31, 2023.Moving to our outlook, for the first quarter of 2024, we expect our revenues to be between USD 72 million and USD 79 million. The above outlook is based on current market conditions and reflects the company's management's current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change. In the interest of time, please refer to our earnings press release for further details on our fourth quarter and full year 2023 financial results.This concludes our prepared remarks for today. Operator, we are ready to take questions.

[Operator]

[Operator Instructions] Today's first question comes from Chenghao Li with CICC.

[Chenghao Li, analyst]

Congratulations on another solid quarter. I have 2 questions. First, what have we learned from the operation of the 2 mid to hard-core games? And how should we consider strategy of the game business in this year? And secondly, how should we see the development trend of the 2 flagship titles, Yalla and Yalla Ludo in this year? And are there any changes in the competitive landscape in the MENA region?

[Tao Yang, executive]

Chenghao, thanks for your question. I will take your first question. I'll leave the second one to Saifi. The 2 mid to hard-core games as our initial offerings have shouldered significant responsibilities. They've allowed us to gain valuable insights into local user preferences and successfully recruit and train a local operations team, paving the way for our further development in this field. At this stage, we believe they have completed their main goals and we realize that these 2 products are projected to fall short of the company's revenue expectations despite several rounds of optimization. So after careful evaluation going forward, we will shift more of our focus to new products in our development pipeline.Regarding our game strategy, firstly, we're looking to collaborate with more mature gaming studios or those with successful game publishing. We will carefully select game content that is more suitable for the MENA market, leveraging our localized expertise. Secondly, we plan to look for opportunities to collaborate with global players who are interested in the MENA market to capitalize on our monetization strategies and our expertise in community engagement.Lastly, we are committed to our in-house development team's continuous enhancement and professional growth. We expect to introduce a series of new self-developed mid-core games this year. I'll keep you updated if we have any further progress. Thank you.

[Saifi Ismail, executive]

Chenghao, I will take your second question. The performances of Yalla and Yalla Ludo currently remain very stable. We have cultivated a vibrant, highly engaged community with a loyal user base and both products are exhibiting long life cycles. We are confident that both products will continue to develop well and maintain their momentum. We are also actively working on improvement as well as making some bold experiments, hopeful of even better performances from these 2 products.In terms of competition, every quarter, we address questions about the competition, reflecting the fact that competition in the MENA region is always present and constantly evolving. During the past quarter, no significant new competitors have entered the market. Of course, we are aware of an increasing number of companies exploring overseas expansion with the Middle East emerging as a popular destination. This trend may introduce multiple new variables. However, at present, we see that the competitive landscape seems stable, even with big names like TikTok, which have been in the Middle East market for a while. Nevertheless, our team have been monitoring the trend closely for emerging opportunities and we will share with new observations, if any. Thank you.

[Operator]

And our next question today comes from Xueqing Zhang with CICC.

[Xueqing Zhang, analyst]

Congratulations on a solid quarter. My first question is about financial outlook. How should we think about your revenue growth and margin trend this year? And my second question is about shareholder return. And can management share some details on the share buyback and the dividend plan in the future?

[Yang Hu, executive]

Xueqing, glad to have you here. Thanks for your questions. For 2024, regarding our current product portfolio, we are so confident that we can at least maintain our top line at current stable level. At the same time, we're looking forward to revenue contributors from new products and business collaborations in the coming year. We expect our margin to be around 40% for the year, excluding potential investments in new products. Factoring in new products, our margin may fluctuate around 35%.For your second question about the share repurchase and dividend, Yalla is dedicated to return value to shareholders through our share repurchase program. As of December 31, 2023, we have repurchased a total of USD 35.5 million. Given our solid fundamentals, we will continue to conduct our share repurchase program while considering cash dividend payments in due case. We will keep you posted, if you -- if there are any updates. In short, we are confident in Yalla's long-term prospects and committed to creating value for all stakeholders. I hope that answers your questions. Thanks, Xueqing.

[Operator]

And our next question comes from Kaifang Jia with Citic.

[Kaifang Jia, analyst]

And I have a question about your strategy in 2024. Can management share what is the company's keen focus in 2024?

[Tao Yang, executive]

Hi, Kaifang, this is Tao. Thanks for the question. As a first mover in this market, we focus our attention on the stability and growth of our flagship applications. To maintain our leading position in the market, we will enhance the 2 products and drive through -- and drive growth in this year by adopting a more innovative approach and undertaking further experimentation. We do not doubt Yalla and Yalla Ludo's competitiveness, and the long-tailed growth momentum in the Middle East market. Meanwhile, we also assume more responsibility for new product development and we will allocate our important resources to the planning and the implementation of our revenue growth products. Thank you.

[Operator]

And our next question today comes from Xiaoyue Hu with Haitong International.

[Xiaoyue Hu, analyst]

So my question is that since the Middle East has become a go-to market for a lot of investors in the past year, so what is Yalla's plan for potential cooperation?

[Tao Yang, executive]

Xiaoyue, thank you for the question. As MENA's role on the global stage has grown, we have seen growing opportunities with increasing attention and resources from around the world, participating in its surging development. As a company rooted in MENA, we believe its vibrant market will drive our further development. The MENA market has its own characteristics, which can be very different from other markets. We are continuously navigating the market dynamics while actively exploring opportunities and potential collaborations. We will keep you posted on the progress. Thank you.

[Operator]

And our next question today comes from Lincoln Kong with Goldman Sachs.

[Lincoln Kong, analyst]

My first question is on the gaming business. So can the management give us some updates in terms of the game publishing strategy and also the game pipeline in the next few years? And the second question is in terms of what are the growth driver for 2024 when you're thinking about the overall business growth?

[Jianfeng Xu, executive]

Thanks, Lincoln. Thanks for your question. I will take your first one. We are actually proactively speaking with global top-tier gaming studios to explore potential cooperation, and we now have a clearer roadmap and some potential options. In the process of exploring the sector, we are gaining experience, which empowers us to better move forward and achieve positive outcomes. We also have some new self-developed mid-core games in our pipeline. We will share more details when we have made further meaningful progress. Thank you.

[Tao Yang, executive]

Lincoln, this is Tao. I will take the second question. For the year 2024, we will still be dedicated to enhancing and developing our flagship products. We are proud of Yalla and Yalla Ludo's results and good performance, and we do expect the 2 products to unlock more growth potential this year. We see the potential to further penetrate the market. Also, as we earlier introduced, we anticipate the launch of new mid-core and hard-core games as an important potential growth driver. Thank you, Lincoln.

[Operator]

And our next question comes from Rachel Guo with Nomura.

[Rachel Guo, analyst]

My question is about your business expansion. Would your company consider expanding your business to more regions globally besides the Middle East?

[Tao Yang, executive]

Rachel, thank you for the question. This is Tao. So first of all, we will remain dedicated to the Middle East market, while also keeping our eye on opportunities in other markets, especially for some of our new products in our portfolio. If we see their potential to be distributed not only in the MENA market, but also in other markets, we may consider conducting global promotions. Our main focus is undoubtedly on the Middle East market where we have unique advantages and we will continue to leverage our core capabilities to unlock our growth potential. Thank you, Rachel.

[Operator]

Thank you. As there are no further questions now, I'd 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 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]

Thank you. This concludes the conference call. You may now disconnect your line and thank you.