Yalla Group Limited (YALA) CEO Tao Yang On Q3 2021 Results - Earnings Call Transcript

Nov. 10, 2021 12:46 AM ETYalla Group Limited (YALA)
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Yalla Group Limited (NYSE:YALA)

Q3 2021 Earnings Conference Call

November 9, 2021, 08:00 PM ET

Company Participants

Kerry Gao - IR, Director

Tao Yang - Chairman & CEO

Saifi Ismail - President

Karen Hu - CFO

Jeff Xu - COO

Conference Call Participants

Shiqi Ge - CICC

Kaifang Jia - CITIC Securities

Yulin Zhong - Haitong International

Thomas Shen - Nomura

Presentation

Operator

Good morning and good afternoon, ladies and gentlemen. Thank you for standing by for Yalla Group Limited’s Third Quarter 2021 Earnings Conference Call.

At this time, all participants are in a listen-only mode. After Management’s prepared remarks, there will be a question-and-answer session. Today’s conference call is being recorded.

I would turn the call over to Ms. Kerry Gao, Director of IR of the company. Please go ahead, ma'am.

Kerry Gao

Hello, everyone, and welcome to Yalla's third quarter 2021 earnings conference call. We released our earnings 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 earning release and our registration statements filed with the SEC. Yalla does not assume any obligation to update any forward-looking statements, except as required by law.

Please also note that Yalla's earnings press release and this conference call include discussion of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Yalla's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

Today, you'll hear from Mr. Tao Yang, our Chairman and Chief Executive Officer, who will provide an overview of our recent achievements and growth strategies. He'll be followed by Mr. Saifi Ismail, the company's President, who will give a brief review of our recent developments. Ms. Karen Hu, our Chief Financial Officer, will then provide additional details on the company's financial results and discuss financial outlook. Following management's prepared remarks, we'll open up the call to questions. Our Chief Operating Officer, Mr. Jeff Xu will join the call for our Q&A session.

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

Thank you, Kerry, and thank you everyone for joining our 2021 third quarter earnings conference call.

It has been a year since Yalla’s NYSE listing. Before updating you on our business progress during this quarter, I would like to take a moment to elaborate on our mission, vision and strategy.

Yalla was the first UAE technology unicorn to be listed in the United States. As a company rooted in the Middle East and in North Africa, our mission is to provide MENA users with localized online social networking and entertainment services. For five years, we have been committed to promoting a healthy and orderly industry environment and providing MENA’s people with better access to a digital life. MENA’s population is among the youngest in the world, and the region’s per-individual average time spent on apps is also considered the highest globally.

Demand for online social networking and entertainment services is high among MENA users, but historically there have been few digital products reflecting local values or customized for local users’ specific needs. When we drafted the prospectus for our IPO, we affirmed that our vision is to build MENA’s most popular destination for online social networking and entertainment activities. After a year’s time, this vision remains unchanged.

We hope to realize this vision within the next 10 years and will employ two important strategies to achieve our goals. First, as we continue to develop Yalla’s ecosystem, we will diversify our business and revenue streams and flexibly develop our business and products through investment, collaboration and other means.

Second, Yalla’s strong localization capabilities have always been our greatest advantage. We will continue to fortify and refine them with more comprehensive studies on local users’ needs and preferences to provide customized, targeted and trendy online services.

Yalla is developing rapidly while also facing challenges in an increasingly complex environment. Under such transformative circumstances, we felt it was critical to help our new colleagues better understand Yalla's DNA and to think and act in Yalla's way. We worked with all of our team members to define and refine Yalla’s core principles, Multicultural Understanding, Users First, Simple, and Target.

Their initials constitute the memorable acronym M-U-S-T, MUST, which embodies Yalla’s culture and ethics. These values will guide Yalla’s team as we work to achieve our vision.

Now let’s take a closer look at some of our recent accomplishments. Last month, we released the YallaChat 0.2 version. We upgraded the app’s foundation and improved stability and response rate, which elevate the user experience and will allow the product to support a larger user base in the future. We firmly believe that in the digital era, an IM product with features tailored to local users’ preferences is a fundamental need, and the MENA region has waited too long for a dedicated product.

We feel a strong sense of responsibility to fulfill that critical need for MENA-based users. Developing a successful IM product is no easy feat, but it is a crucial element of our vision and we are proud of our brave attempt to fill this technological gap. We will continue to monitor user feedback on YallaChat’s new iteration and refine and perfect the details to cater to local users’ desires.

As we are all aware, the metaverse will be the next major revolution in social technology. Long before the metaverse concept began trending this year, our team was researching new types of social networking opportunities to provide users with a higher level of freedom and more immersive social experiences. We see strong potential for development and innovation in this area and we are happy to share that we are working on a cutting-edge social app, which will feature the first-ever social metaverse designed for the MENA region. It may be available to our users as early as the first quarter of next year.

We are also building and broadening our capabilities in game distribution. We now have a holding subsidiary, Yalla Game, which will focus on the mid-core and hard-core game distribution business in the MENA region. We will identify and collaborate with game studios with high potential and good content and to help distribute their games within MENA, leveraging our strong localization capabilities. We plan to gradually open our game distribution platform to more quality content, making Yalla Game the ideal MENA-based distribution partner for game developers in the near future.

With respect to our internal initiatives, we officially kicked off our internal ESG program this quarter. We have been communicating intensively with internal and external stakeholders to gather feedback and refine our ESG guidelines. We believe a sustainable growth target is essential for Yalla, our community and our shareholders.

Given the recent policies and initiatives announced by the UAE and Saudi Arabia governments, we understand that building a digital society is becoming a very important topic in this region. Our society is seeking a digital and technological transformation, which aligns with Yalla’s vision and mission. As a local company, we support local governments’ initiatives and strive to work in a direction consistent with their guidelines and priorities.

Looking into the future, Yalla will remain dedicated to the development of UAE’s digital economy and continue to deliver online social and entertainment products tailored to MENA’s culture. We are also proud to have bolstered our leadership and governance this quarter. It is my honor to welcome Mr. Saeed Hamli to the Board as our Independent Director. He is an accomplished telecommunications executive with prior roles as CEO of Etisalat Egypt and Etisalat Afghanistan, among other senior positions.

I believe that given his excellent leadership skills and extensive industry experience, Mr. Saeed Hamli will make great contributions to the company as we grow our product ecosystem, expand our footprint and our influence. I really look forward to working with him.

In conclusion, I want to reiterate that our vision is to build the most popular destination for online social networking and entertainment activities in MENA, and we will continue to uphold our core values of prioritizing our users, embracing diversity, and operating with a simple, pragmatic, pioneering and enterprising approach as we work to achieve our goals. Adhering to these principals has been the driver of our past success and will ensure that we keep succeeding.

Looking ahead, we will continue to closely watch MENA’s local cultural trends and develop Yalla’s ecosystem with various products and services tailored to meet local users’ needs.

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

Saifi Ismail

Thanks Tao. Hello, everyone. Thanks for joining us today.

In addition to the accomplishments Tao shared, we have made impressive progress with our new product, 101 Okey, remained one of the most downloaded app in the board game category in Turkey. We have received very good feedback from users on this product and are seeing an outstanding retention rate. The average daily time spent per active user already exceeds 60 minutes, which also demonstrates the product’s increasing stickiness among users.

We are dedicated to providing our users with best-in-class user experiences. For example, in quarter three we released a new version of Yalla Baloot, a card game we designed for Saudi users. We enhanced certain features to help new users learn about the game’s flow and become a more integrated part of the community, which notably improved new users’ engagement level on the platform.

Along with these new products designed for the MENA market, Yalla Parchis, the South American version of our Ludo app, also performed impressively. By the end of quarter three, Parchis’ contributed 786,000 of Yalla Group’s monthly active users. Parchis is showing outstanding user stickiness, and our next step will be to cement our monetization strategy and begin to boost Parchis’ monetization capabilities, taking South American cultural differences into consideration.

We are also very excited to share with you that Yalla Group is prominently featured on the official UAE government electronic portal, Invest.ae, as a highlighted local tech company. The UAE government’s recognition of our work inspires an even greater commitment to ensuring that our products and services exceed our customers’ expectations. Yalla Group is proud to be one of the top technology companies in the MENA region.

We prioritize research and strive to develop innovative features in our existing social and gaming mobile applications, as well as create brand-new apps to give our loyal users more engaging opportunities to express themselves. We believe Yalla Group has received this honor from UAE’s government due in large part to these efforts. We wish to sincerely thank the UAE government for their ongoing trust and belief in Yalla Group. We remain undeterred in our continuing pursuit of excellence and our efforts to maintain our leading position as one of the UAE’s most prominent and thriving technology companies.

Additionally, we are delighted to have won a prestigious Middle East Technology Excellence award in the Gaming, Media & Entertainment category. The Middle East Technology Excellence Award recognizes technology companies that have successfully pioneered ground-breaking IT products and solutions in various categories in the Middle East. With recognition from specialized judges representing key players in the international digital industry such as PwC Middle East and Baker Tilly Middle East, this award further solidifies our position as one of the MENA region’s top companies. We now join an illustrious group of past winners including IBM, LinkedIn and Tencent.

We view this distinguished award as yet another testament to Yalla Group’s excellent work and our team’s accomplishments throughout the past year. We are proud to have created an immersive and social ecosystem filled with a variety of mobile applications that provide our users with memorable and treasured experiences, whether they are talking to friends on Yalla or playing against them on Yalla Ludo. We would like to sincerely thank the Middle East Technology Excellence Awards Committee for this great honor. We hope to win many more regional and global awards over the next few years.

Furthermore, in September 2021 we hosted an Analyst Day to facilitate communications with our investment community. Our users, team members and industry experts shared their respective experiences with Yalla and digital economy insights, presenting colorful, close-up views of what we do, our market and its tremendous growth prospects. We would like to thank our expert guests for their valuable input. Analyst Day was a great success, and we look forward to future opportunities to organize similar events.

As our CEO mentioned, Yalla’s vision has never changed. We aspire to become the No. 1 online social networking and entertainment platform in the MENA region and we remain focused on that goal.

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

Karen Hu

Thank you, Saifi. Hello, everyone. Thank you for joining us. We recorded remarkable operating and financial performance in the third quarter of 2021, with a rapidly expanding user base, outstanding operating efficiency and abundant cash reserves, underpinned by our unique market positioning. Our third quarter revenues grew by 110.8% year-over-year to $71.3 million while our non-GAAP net income reached $33.2 million with a growth rate of 114.5% year-over-year. Our non-GAAP net margin remained exceptionally high at 46.6%, reflecting our strong monetization capabilities and disciplined SG&A spending.

Now I would like to walk you through our financial details during the third quarter of 2021.

Our revenues were $71.3 million in the third quarter of 2021, a 110.8% increase from $33.8 million in the same period last year. The increase was primarily driven by the broadening of Yalla Group’s user base and enhancements to Yalla Group’s monetization capabilities. Our average MAUs increased by 81.9% from $14.3 million in the third quarter of 2020 to $25.9 million in the third quarter of this year.

Yalla’s MAUs increased by 72.2% to $9.5 million in the third quarter of 2021 from $5.5 million in the same period of last year; and Yalla Ludo’s MAUs increased by 79% to $15.7 million in the third quarter of 2021 from $8.8 million in the same period of last year. And Yalla Parchis’ MAU also reached $786,000 in the third quarter of 2021.

Now let's look at our costs and expenses. Our cost of revenues was $23.4 million in the third quarter of 2021, compared with $25.6 million in the third quarter of 2020. The decrease was mainly driven by lower share-based compensation expenses of $1.3 million recognized during the third quarter of 2021, a 91% decrease from $14.1 million in the third quarter of 2020, and partially offset by an increase in commission fees for third-party payment platforms resulting from our expanding business scale.

Excluding share-based compensation expenses, cost of revenues as a percentage of our total revenues decreased from 34.1% in the third quarter of 2020 to 31.1% in the same period of 2021 due to continued optimization of our revenue mix which resulted in less increase in commission fees for third-party payment platforms.

Our selling and marketing expenses were $11.0 million in the third quarter of 2021, compared with $8.5 million in the same period last year. The increase was mainly driven by higher advertising and marketing promotion expenses led by our continued user acquisition efforts and expanding product portfolio, and partially offset by decreased share-based compensation expenses of $1.8 million during the third quarter of 2021, compared with $4.5 million in the third quarter of 2020.

Excluding share-based compensation expenses, selling and marketing expenses as a percentage of our total revenues remained relatively stable at 12.9% in the third quarter of 2021. Our general and administrative expenses were $7.3 million in the third quarter of 2021, compared with $28.9 million in the same period last year. The decrease was mainly driven by lower share-based compensation expenses of $4.6 million recognized during the third quarter of 2021, a 82.9% decrease from $27.1 million in the third quarter of 2020, and partially offset by an increase in salaries and other benefits from our general and administrative staff. This in turn was driven by an expansion of our general and administrative staff.

Excluding share-based compensation expenses, general and administrative expenses as a percentage of our total revenues decreased from 5.3% in the third quarter of 2020 to 3.8% in the third quarter of 2021 due to economies of scale. Our technology and product development expenses were $3.9 million in the third quarter of 2021, compared with $1.7 million in the same period last year. The increase was mainly driven by an increase in salaries and benefits for our technology and product development staff, and partially offset by decreased share-based compensation expenses of $0.2 million during the third quarter of 2021, which compared with $0.8 million in the third quarter of 2020.

Excluding share-based compensation expenses, technology and product development expenses as a percentage of total revenues also increased from 2.6% in the third quarter of 2020 to 5.1% in the same period of 2021. As such, our operating income was $25.7 million in the third quarter of 2021, compared with operating loss of $30.9 million in the same period last year. Excluding share-based compensation, non-GAAP operating income in the third quarter of 2021 was $33.6 million, a 116.2% improvement from the same quarter last year.

Our income tax expenses was $0.42 million in the third quarter of 2021, compared with $0.11 million in the third quarter of 2020.

Moving to the bottom line, our net income was $25.3 million in the third quarter of 2021, compared with net loss of $31 million in the same period last year. Excluding share-based compensation expenses, non-GAAP net income for the third quarter of 2021 was $33.2 million, a 114.5% improvement year-over-year.

Next, I would like to briefly go through our liquidity and capital resources. As of September 30, 2021, we had cash and cash equivalents of $326.3 million, as compared to cash and cash equivalents of $292.4 million as of June 30, 2021. This improvement demonstrates our commitment to continuously streamlining and refining Yalla Group’s operations.

On May 21, 2021, we announced the 2021 Share Repurchase Program. As an update, we have repurchased 1,042,985 American depositary shares representing 1,042,985 Class A ordinary shares from the open market with cash for an aggregate amount of approximately $14 million. In the fourth quarter of 2021, we expect our revenues to be between $67 million and $72 million.

The above outlook is based on the 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.

One more update before I hand the call over to the operator. Starting in the fourth quarter of 2021, as we continue to expand our product portfolio, we will report our MAUs and paying users at the company level instead of by product, to better reflect our increasingly integrated product ecosystem.

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

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] For the benefit of all participants on today's call if you wish to ask your question to the management in Chinese, please immediately repeat your question in English. At this time, we will pause momentarily to assemble our roster.

The first question comes from Shiqi Ge with CICC. Please go ahead.

Shiqi Ge

Thanks management for taking my question, and congrats on your strong quarter. So I have two questions. The first question is about YallaChat. So how will you differentiate YallaChat from other IM products? And how were you initiate the product with the users?

And my second question is about your margin. So how should we look at the long term margin for your current business? Because the products must face growth pressure in the long run. Maybe could you share what the lowest margin might be that the company feels comfortable about? Thank you.

Tao Yang

Hi, good morning, Shiqi. Thank you for that question. I'll take the first question. Our YallaChat version 0.2 can fulfill users' most basic need for IM product. As mentioned earlier, this new version will enhance app foundation and improved the product systems. This helps provide users with richer user experience and allows the app to support a larger user base. With future iterations as we continue to upgrade, we plan to add more innovative entertaining and localized function.

Regarding how to initiate the YallaChat with seed users later, we have a significant advantage here that we can leverage the Yalla community over the past five years. We have built our own community with over 20 million loyal users. This is an ideal environment from which to introduce YallaChat. So when we think YallaChat is ready, we will further polish and fine tune the product within our existing community of users. Hope this answers your question.

The second question I'll hand over to our CFO, Karen.

Karen Hu

Thanks, Tao. Thanks, Shiqi. Thank you for your question. About the margins. I think that every company needs to consider and prioritize different operation metrics at different stages in its growth. For Yalla Group, we continually strive to optimize our monetization model. It's in our DNA. But that doesn't mean that margin will always be the only metric we care about. In the future it's possible that there will be other metrics that we will place higher importance on depending on the needs of company at that time.

We are a young internet company with a lot of potential. There are a lot of things we need and want to do in the MENA region. Some of these include further building our brand, strengthening our marketing efforts, investing R&D capabilities, continuing to expand our product portfolio, and growing our headcounts with right talent. So as we execute initiatives, our margin may fluctuate. We trust that investors understand that all of these investments target the goal of creating a more developed, robust ecosystem and a more vibrant, engaged community, which will in turn drive the long term growth.

Currently, our net margin is about 45%. So we estimate that with just a 10% point fluctuation we will be able to support the operating needs I just mentioned. Naturally, we do not want to rule out the possibility of bigger moves if business needs arise. But with that said, I believe, compared with our peers, we will be able to maintain our margins at a very competitive level. Hope this answer your questions. Thank you.

Shiqi Ge

Sure, thanks management.

Operator

The next question comes from Kaifang Jia with CITIC. Please go ahead.

Kaifang Jia

Hi, management. Thanks for taking my question. I have two questions. The first is about as the new product. So can management just share some updates about YallaChat and any color about the monetization of the new products? The second is that for the first quarter and 2022, we will be more positive on user growth, and just wondering the strategic difference between South America and MENA. Thank you.

Karen Hu

Thank you, Kaifang. Thanks for your question. I will take the first question, and then our CEO Jeff will answer about the user group.

Just as I answer Shiqi for the last question, the monetization will depends on different product types. For social and casual game products, I think that the first priority after launch will be the building and expanding the user base followed by production iterations. Immediately monetization may be not the primary consideration at this stage for these products. But for the mid to heavy game products, monetization may come faster. I hope this answer your question.

Tao Yang

Hi, Kaifang. So I will be answering your second question regarding the user growth and strategy. Our expectation for MAU growth for fourth quarter is still 10% to 15% quarter-over-quarter. And for next year, since the user base will be larger, we expect each quarter our MAU to grow by around 10%, quarter-over-quarter.

Regarding the user acquisition strategy for South American market yet is different from the MENA market for sure. We need to consider many region-specific characteristics, including local cultures, consumption patterns and levels, social traditions and the competitive landscape, among other things. So we have different strategies and adjust them quarterly based on the dynamics of the marketplace, paying a watchful eye to such factors as our user acquisition pace, our monthly budget and the actions of competitors, just to name a few.

In summary, our acquisition strategy needs to be always evolving, otherwise, we will see a decrease in efficiency. Hope that answers your question, Kaifang.

Kaifang Jia

Thank you. That's all.

Operator

The next question comes from Yulin Zhong with Haitong International. Please go ahead.

Yulin Zhong

Hello, management. Thanks for taking my question. I was wondering have you had any new monetization initiatives, such as do you have any plan on adding live streaming hard-core games? And if you have any, could you elaborate a little bit about your new monetization plan? And when should we expect this new initiatives to contribute to revenue? Thank you.

Tao Yang

Okay. Hi, Yulin, this is Yang. This is a topic we have been active discussing internally with our team. We have looked into and examined possibilities in advertising ecommerce, and others. And among all of these options, we believe at this stage gaming is the next area to develop as a monetization channel. Thank you.

Yulin Zhong

Thanks.

Operator

The next question comes from Thomas Shen with Nomura. Please go ahead.

Thomas Shen

Hi, good morning, management. This is Thomas Shen from Nomura. I have a question on our user acquisition costs as we have seen some peers adjusting their overseas marketing strategy. Could the management share more color on the trend of our user acquisition cost? Thank you.

Jeff Xu

Hi, Thomas. I'll be answering this question. So for the user acquisition cost, we believe that you will gradually trend upwards. That's for sure. And that's true not just for Yalla Group, but for all internet product companies around the world. All companies are competing for users, and we're one of them. However, compared with our peers, we have shown very strong ability in managing our user acquisition cost. And we will continue to do so.

We're confident that we will be able to keep our user acquisition costs at a competitive level among all the peers. Thank you.

Thomas Shen

Thank you.

Operator

The next question comes from Yuchen Yang with TF Securities. Please go ahead.

Yuchen Yang

Hi, management. Thanks for taking my question. And congratulations on the strong results for the quarter. So could you please just share your plan in developing heavy game in house? And are we going to see increasing R&D expense related to game this year or next year? And the second is there are many more and more voice centric social networking and entertainment companies joining this market? Could you please introduce Yalla's advantage and how to maintain your leading position in the MENA market? Thank you.

Tao Yang

Thank you, Yuchen, and good morning. To answer your questions, as the first one about the game, our previous experience are more related to casual game. So we'll be cautious as we move into the realm of heavy game. At this stage, we plan to collaborate with external studios that have high quality content assets instead of developing heavy games in-house. Through this collaboration, we will gradually grow our experience base and build our team.

It's going to be a process. So we don't expect to see immediate jump in our R&D expenses related to heavy games. And about the second question, the competition, yes, there are increasing number of voice-centric social apps available in the market now. But what we want to emphasize is that Yalla, was the first voice-centric social networking, entertainment application in the MENA market. And for the past five years, we have always been the largest in the region. And we're always growing and innovating.

Two years ago, we launched Yalla Ludo in the market. And at that time, we were the first company to combine casual game and chatting together. And now, Yalla Ludo has become the number one board game in MENA, and leads the trend in the market. Yet, more and more companies are trying to replicate the success of Yalla and Yalla Ludo. But so far, we haven't seen any that can even come close to challenging our position in the market.

Yalla Group has always been the trend leader in this market. Looking into the future, as a leading internet company in MENA, we understand the importance of innovation, and are continuously uncovering new opportunities. As we just mentioned, we are going to launch the first metaverse social app designed for users. We believe the metaverse concept opens the door to new and exciting potential for chatting to Yalla.

We will continue to invest in our R&D, encourage innovation among our team. We would have our team with U.S. patent and better prepare ourselves for future opportunities. Another thing I would love to mention, if we look at Yalla Group's current ecosystem, we now have a more diversified product portfolio, extending beyond voice-centric social or entertainment app. On our pipeline, we have casual games, a heavy game, distribution, business, and messenger products product and metaverse social app, and we may also look into other verticals with good potential.

What I'm trying to say is that Yalla Group is not going to only focus on the voice related business. Our vision is larger than that. We intend to build the largest online social networking and entertainment platform in MENA. Thank you very much.

Operator

As there are no further questions, I would like to turn the conference back over to Ms. Kerry Gao for any closing remarks.

Kerry Gao

Thank you once again for joining us today. We look forward to speaking with you in the last quarter. If you have any further questions, please feel free to contact Yalla's investor relations through the contact information provided on our website, or The Piacente Group Investor Relations. Thanks.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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