Yalla Group Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 20, 2024

There are 7 speakers on the call.

Operator

Good morning and good evening, ladies and gentlemen. Thank you for standing by for Yalla Group Limited's Q1 2024 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 call is being recorded.

Operator

Now, I would like to turn the call over to your speaker host today, Ms. Carrie Dao, IR Director of the company. Please go ahead, ma'am.

Speaker 1

Hello, everyone, and welcome to Yalla's Q1 2024 earnings conference call. We released our earnings press release earlier today, 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. Cai Fei 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. Mr. Jeff Xu, our Chief Operating Officer, will join the Q and A session.

Speaker 1

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.

Speaker 2

Thank you, everyone, for joining our Q1 2024 earnings conference call. We kicked off 2024 with solid Q1 results, even with the impact of London, which started on March 11 this year. Our Q1 revenue still reached to RMB78.7 million, holding into the upper end of our guidance and once again demonstrating the remarkable strength of our flagship applications, Yalla and Yalla Lido. Our persistent efforts to deliver quality growth and enhance our operating efficiency are also yielding positive results. In Q1, our net margin reached 39.5%.

Speaker 2

Our solid quarterly performance showcases our dedication to refining our operations and our ability to enhance our flagship application, gamification as well as optimize our user acquisition strategy. Thanks to these successes, we ultimately delivered a better experience for our users, further boosting Yalask and Yalaluito users' willingness to pay and pay. In 2024, we anticipated continued advancement in an acceleration of digital transformation across the MENA region. As the largest MENA based online social networking and gaming company, Yalla will continue to enrich our services and expand the boundaries of our business, launching innovative products to fulfill Mina users' evolving needs online. Turning to Yalla Games development and further strategy.

Speaker 2

As we continue to explore and invest in games, our growing expertise and capabilities have strengthened our determination to expand our footprint in MENA's mid core and hardcore games. Looking ahead, we will continue to prepare our team and grow our game pipeline. As we mentioned in our last call, mid call games, which we can leverage our extensive expertise, talented workforce and abundant resources in NES casual gaming sector will be one major focus for the team this year. We look forward to better utilizing our advantages and delivering our exceptional gaming experiences to our users. The Middle East gaming industry is currently booming with one of the world's fastest growth rates.

Speaker 2

Global top tier game developers are increasingly recognizing the near Eastern gaming market's immense potential and the region has emerged as a retail growth market for game companies from around the world. As the largest media based online social networking and gaming companies, Yalla is actively engaged in discussions with renowned gaming studios on this global scale, exploring potential collaborations in the region. I want to highlight that Yalla recently joined the UK Interactive Entertainment Association, UK, the oldest video game and interactive entertainment trade body in the world via invitation from UK's CEO and Web Chairman. UK represents nearly 650 businesses across the UK, including major video game platforms, local and international publishers, independent developers and a vast area of service providers. Our goal is to align ourselves with the game developers worldwide and foster greater connectivity within the industry.

Speaker 2

We aspire to contribute to the near Eastern gaming community by delivering a wide range of high quality game content to players in the region that enhancing the gaming experience and building future gaming options for our users. Next, I'd like to elaborate on AI, which has great significance for our business. We have consistently capped pace with the evolving trend and currently have our dedicated AI team focused on researching algorithm models, especially tailored to the Arab culture and user habits. We're already reaping the rewards of their work, which is helping us to have the company's management and efficiency in areas such as content recommendation, content moderation and customer services. For example, the accuracy rate of our self developed image review system is already leading in the region, outperforming a number of similar tools developed by major service providers.

Speaker 2

We have also accumulated considerable expertise in image models. AI now plays a crucial role in tasks such as image recognition and basic artistic creation, enhancing our team's productivity and efficiency. By harnessing the power of AI, we aim to optimize team resources, save time and money, and ultimately improve our overall operational efficiency. Our commitment to leveraging AI also ensured that we can better understand and cater to the meaningful and the preferences of our users and provide our users with improved services as well as personalized experiences. Before I conclude, a brief ESG update.

Speaker 2

Iyala recently published its 2023 ESG report detailing the company's performance and future goals across 5 major areas, including responsible governance, environment, trust, people and community. ESG has been an essential component of our long term business region and core values since day 1 And we were pleased to share our ongoing progress in terms of sustainability and social responsibility. We look forward to reaching new heights in ESG's performance and sustainably enriching local digital life. In sum, we remain confident in the growth opportunities presented by MENA's increasingly pivotal role on the global stage and the region's rapid digital transformation. As a number 1 MENA based online social networking and gaming company, we are dedicated to building relationships locally and globally to broaden our business horizons and contribute to MENA's economic development.

Speaker 2

With our strong business fundamentals and outstanding product portfolio, we believe we are well positioned to capitalize on potential growth opportunities. Now I will turn the call over to our President, Mr. Saiki Ittmeyer for a closer look at our recent developments.

Speaker 3

Hello, everyone. Thanks for joining us today. I would like to start with a closer look at our operations and our products performances for quarter 1. Our average monthly active users increased by 14.6% year over year to $37,800,000 Our average revenue per paying user also increased to US6.03 dollars in the first quarter from US5.39 dollars in the same period last year. Furthermore, our ongoing adjustments to our game mechanism aimed at improving user engagement and experience have proven effective.

Speaker 3

Paying users increased by 7.3% quarter over quarter, demonstrating users growing willingness to pay on our platform. Following our successful offline yellow ludo tournament in Riyadh in quarter 4 last year, we hosted a 2nd offline tournament in Baghdad in quarter 1. Over 10,000 players registered and impressive response, 128 outstanding finalists competed in the live final round. The success and popularity of these events reflects Yalaludu's growing influence and appeal in the mobile gaming world. Conducting offline tournaments and other regional events also strengthen our partnerships with local channels, deepen our product penetration among local gamer communities and enhances our brand awareness.

Speaker 3

We are excited to bring more thrilling experiences to our users, continually pushing the boundaries of mobile gaming and ensuring that yellow Ludo remains an industry leader. Now for a few highlights from our industry activities this quarter. We are very proud to announce that for the 4th consecutive year, Yalla Group was recognized by Data dot ai's Annual Top Publisher Award as one of the top 30 publishers headquarters in the Europe, the Middle East and Africa region. Datadog dotai is the premier global platform, offering unified data analytics for the mobile app market. Since 2012, the Top Publisher Award have acknowledged outstanding mobile publishers worldwide.

Speaker 3

We extend our heartfelt gratitude to data dotai for this distinguished award and remain committed to delivering high quality tailored digital products that cater to the evolving needs of MENA users in the online social networking and gaming sector. Next, Yalla hosted a Sohool gathering in Dubai during the holy months of Ramadan, bringing together more than 100 governmental officials, business partners, industry experts and local media leaders to discuss the latest technology industry trends. This activity also allowed us to thank and celebrate our partners who have always trusted and supported Yalla Group. As the largest local online social networking and gaming company in the MENA region, we strongly believe that good friendship and extensive cooperation among our stakeholders can accelerate our companies and the industry's development, bring better experiences to users and invigorate regional economic development. We will maintain our strong relationships with local governments, business partners and media to jointly promote the development of the digital economy in the MENA region and promote and preserve our unique local culture traditions.

Speaker 3

Finally, Yalla was invited to share our success story at the WN Conference 2024 in Abu Dhabi, a hallmark of the global gaming industry since 2012. The WN Conference spanned nearly 10 cities worldwide. This year's event in Abu Dhabi drew over 800 attendees, primarily from the GCC video game market and featured leading international players. It was a phenomenal platform for discovering new partners and exploring diverse topics within the gaming sphere. From game analytics to AI integration, as a pioneering local Internet company in EMEA, events like this provide us with vast opportunities to contribute to the region's digital transformation goals.

Speaker 3

We remain committed to enhancing our socioeconomic value by improving digital access and advancing the digital lifestyle throughout MENA. In conclusion, we are poised to drive progress in MENA's digital transformation as the region's leader in online, social networking and gaming, we will continue to deepen our partnership locally and globally to broaden our business horizon and embrace opportunities brought by the transformation. As always, our vision is to become number 1 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.

Speaker 4

Thank you, Saffei. Hello, everyone. Thank you for joining us today. Our financial performance remained robust throughout the Q1 of 2024. Our ongoing efforts to deliver high quality growth and enhance our operating efficiency resulted in meaningful profitability improvements with net income increasing 56.2 percent year over year to US31.1 million dollars and net margin expanding from 27.1 percent to 39.5 percent.

Speaker 4

Looking ahead, we are confident that our strong cash position and excellent execution will empower us to capitalize on future opportunities, driving sustainable growth and creating value for all our stakeholders. Let's move on to our detailed financials for the Q1 of 2024. Our revenues were US78.7 million dollars in the Q1 of 2024, a 7.1% increase from US73.5 million dollars in the Q1 of last year. The increase was primarily driven by our broadening user base and enhanced monetization capability. Our solid revenue growth was also partially attributable to the significant increase in ARPU, which grew from US5.39 dollars in the Q4 of 2023 to US6.03 dollars in the Q1 of 2024.

Speaker 4

Now let's take a look at our costs and expenses. Our total costs and expenses were US49.6 million dollars in the Q1 of 2024, a 12.7% decrease from US56.8 million dollars in the same period of last year. Our cost of revenues increased by 2.6 percent to US28.6 million dollars in the Q4 of 2024 from US27.9 million dollars in the same period of last year, primarily due to higher commission fees paid to third party payment platforms as a result of increasing revenue generated. Cost of revenues as a percentage of total revenues decreased to 36 point 3% in the Q4 of 2024 compared with 37.9% in the same period of last year. Our selling and marketing expenses were US8.1 million dollars in the Q4 of 2024, a 28.7% decrease from US11.4 million dollars in the same period of last year, primarily driven by our more disciplined advertising and promotion approach and the lower share based compensation expenses recognized in the Q1 of 2024.

Speaker 4

Selling and marketing expenses as a percentage of total revenues decreased from 15.4% in the Q4 of 2023 to 10.3% in the Q4 of 2024. Our general and administrative expenses were US6.6 million dollars in the Q4 of 2024, a 13 4.6 percent decrease from US10.2 million dollars in the same period of last year, primarily driven by lower share based compensation expenses recognized in the Q1 of 2024 and a decrease in professional service fees. General and administrative expenses as a percentage of our total revenues decreased from 13.8% in the Q4 of 2023 to 8.4% in the Q4 of 2024. Our technology and product development expenses was US6.3 million dollars in the Q4 of 2024, a 15.5% decrease from US7.4 million dollars in the same period of last year, primarily due to a lower amount in performance based bonuses recognized during this quarter. Technology and product development expenses as a percentage of total revenue decreased from 10.1% in the Q4 to 2023 to 8% in the Q4 of 2024.

Speaker 4

As such, our operating income was US29.1 million dollars in the Q4 of 2024, a 74.2% increase from US16.7 million dollars in the same period of last year. Excluding share based compensation expenses, our non GAAP operating income in the Q1 of 2024 was US33.3 million dollars up 49.3 percent year over year. Our interest income was US6.6 million dollars in the Q4 of 2024 compared with US3.1 million dollars in the same period of 2023, primarily due to an increase in the interest rates applicable to the company's bank deposits. Our income tax expense was US3.5 million dollars in the Q1 of 2024 compared with US0.6 million dollars in the same period of last year. The increase was primarily due to the introduction and the implementation of the UAE corporate tax law, which is effective for the financial years starting on or after June 1, 2023.

Speaker 4

Moving to our bottom line. Our net income increased by 50 6.2 percent to US31.1 million dollars in the Q4 of 2024 compared with US19.9 million dollars in the same period of last year. Next, I would like to briefly review our liquidity and the capital resources. Our cash position remains solid. As of March 31, 2024, we had cash and cash equivalents, restricted cash, term deposits and short term investments of US482.7 million dollars compared with US535.7 million dollars as of December 31, 2023.

Speaker 4

The decrease was primarily due to the reallocation of some of the company's cash reserves to long term investments in the Q4 of 2024. Under our USD150 1,000,000 share repurchase program that began on May 21, 2021, and has since been extended by our Board. Through May 21, 2024, we have accumulatively repurchased 3,972,876 ADS, all Class A ordinary shares, in open market cash repurchases, totaling approximately US35.5 million dollars as of March 31, 2024. On May 16, 2024, our Board of Directors approved an extension of expiration date of the share repurchase program to May 21, 2025. Moving to our outlook.

Speaker 4

For the Q2 of 2024, we expect our revenues to be between US72 $1,000,000 US79 $1,000,000 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 demand, which are all subject to change. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Operator

Thank you. We will now begin the question and answer Our first question today will come from Shikun Zhang of CICC. Please go ahead.

Speaker 5

Thanks management for taking my question and congratulations on the strong results. I have two questions. The first one is about flagship products. Can management share some color on the recent progress of the 2 flagship products, Yala and Yala Lido and the main strategy this year? And the second one is about financial outlook.

Speaker 5

Can management update on the revenue growth and the net profit margin

Operator

change this year? Thank you.

Speaker 3

Hi, Shao Shing. This is Saifi, and I will answer your first question. Yalla's and Yalaruba performances are currently remaining stable. Over the years, we have gradually cultivated a loyal user community that loves the Mezgelitz culture and is highly vibrant and engaged on the platform. Of course, this year, we will continue working on upgrades and roll out more fresh features and functions for our users to enjoy.

Speaker 3

Additionally, as I just mentioned, for Riala Ludo, the team is actively organizing more offline tournament to strengthen our brand local impact and to better penetrate the market through offline channels. We will also continue to look for growth opportunities for both legacy products.

Speaker 4

Hi, Shuxin. This is Karen, and I will take you the second question. For 2024, we are very confident of maintaining our current stable top line performance for our existing product portfolio. Our new products may also contribute to revenue growth later this year. We will update the market on our progress when we have a clear picture after our product launches.

Speaker 4

Regarding the net margin, we think it's fair to expect around 40%, the new products' potential impact, our margin may end up in the 35% range. Thank you. Thank you for your question.

Operator

Our next question today will come from Sunghui Li of CICC. Please go ahead.

Speaker 2

Hi, management. Thanks for taking my question and congratulations on a solid quarter. My question is related to our external cooperation. Can we expect more external cooperation to settle this year and management share more color about the strategy of future cooperation direction? Thank you.

Speaker 2

Hi, Chunghao. This is Tao Yang. Thank you very much for your question. At MENA's digital transformation continues to advance rapidly. We are being approached by many companies from Europe, the States and China to discuss potential opportunities in the region, mostly in the gaming and social networking sectors.

Speaker 2

We are open to this discussion and our strategic team is consistently exploring these opportunities. In terms of strategy, we consider the synergies with our current businesses, the teams' expertise or the fundamental quality of the assets and lastly, the ROI of course. In terms of the timeline, we will keep you updated once there is anything we can share with the public. Thank you, Chen Lau.

Operator

Our next question will come from Xiaoyu Hu of Hifeng. Please go ahead.

Speaker 4

Hello, management. Thank you for taking my question. Can I please ask what management think about the TikTok ban in the U? S? What would be the impact on us?

Speaker 4

Thank you.

Speaker 3

Hi, sir. Thank you for your questions. Livestock entered the MENA market around 20 21 and 2022. It's a very strong player that had a big impact on the live streaming landscape in MENA upon entry. Now that PixTok has been in the Middle East market for a while, we believe the competitive landscape has restabilized.

Speaker 3

I would like also to remind you that we don't compete with TikTok directly since we are not a live streaming platform. We meet a different set of needs for our users. Unlike TikTok's global strategy, Jellla is rooted deeply in the MENA tradition and serves a group of loyal MENA users who love the Nesli's culture, love voice chatting and love the pure and equal social networking atmosphere our platform offers. Our team has been monitoring the situation closely, but nothing significant has happened recently. So we will share new observations, if any, on future calls.

Speaker 3

Thank you.

Operator

Our next question will come from Pye Fong Xia of Citi. Please go ahead.

Speaker 1

Hi, management. Thanks for taking my question. And I have a question about your regional strategy. So does the company have any plan to expand into other regions outside of MENA? Thank you.

Speaker 2

Hi, Kaifeng. Good morning. This is Tal Yan and I will answer your questions. As we always emphasize, our primary focus will continue to be the Middle East. Of course, at the same time, we will remain a large and open to opportunities in overseas markets.

Speaker 2

With our current products, we have already gained access to certain user groups from overseas markets, including South America and Southeast Asia. For certain new products in our pipeline, we may conduct global promotional activities to realize greater potential and enhance our lives, we identify solid opportunities for distribution beyond the near market. However, our primary practices unquestionably lies in near where we present distinct advantages and can best utilize our core capabilities to drive growth. Thank you, Kaifeng.

Operator

Our next question will come from Linqing Kang of Goldman Sachs. Please go ahead.

Speaker 6

Thank you, management, for taking my question. My question is, one is, can I just share some color on Yalla Games outlook and publishing strategy? And what about the strategy to expand in those gaming business? And my follow-up is on, are there any updates in terms of, I'd say, Hayuten, can you imagine, sir? Thank you.

Speaker 6

Hi, Lincoln. Thank you for the question. This is Jeff. I will take your first two questions and leave the last one to Karen. So we are working on the better version of 1 of our new products and optimizing its design before the official launch.

Speaker 6

For the other new products in our pipeline, we will keep you posted on their progress. Regarding our game strategy, first, going forward, we will look to collaborate with more mature gaming studios or those with successful track records in gaming publishing. We will also carefully select game content that is suitable for the MENA market, leveraging our localized expertise. 2nd, we plan to explore collaborations with global players who are interested in the MENA market, utilizing our expertise in community engagement and our deep local know how to drive win win outcomes. Finally, we are committed to growing our in house development team and expect to introduce a series of new self development core games this year.

Speaker 6

Thank you.

Speaker 4

Hi, Lincoln. Glad you're here. Yalla is dedicated to return value to shareholders throughout our share repurchase program. As of March 31, 2024, we have deployed a total of US35.5 million dollars for share repurchases. Also, as we mentioned in our prepared remarks, we have extended our share repurchase program for another year to ensure that the company can repurchase shares from market at any time during the next 12 years or months.

Speaker 4

Given our solid fundamentals, we will continue to conduct our share repurchase while considering cash dividend payments in due course. We will keep you posted if we have any more updates. In short, we believe strongly in Yalla's long term potential and are dedicated to generating value for all parties involved. I hope this answer will make you feel satisfied. Thank you.

Speaker 6

Thank you.

Operator

As there are no further questions now, I'd 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 to speaking with you in the next quarter. If you have any further questions, please feel free to contact Yara'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.

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