Yalla Group - Q2 2024

Transcript

Operator (participant)

Good morning, and good evening, ladies and gentlemen. Thank you for standing by for Yalla Group Limited Second Quarter 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 is being recorded. Now, I would like to turn the call over to your speaker host today, Mr. Logan Ye, IR Manager of the company. Please go ahead, sir.

Logan Ye (IR Manager)

Hello, everyone, and welcome to Yalla Second 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 this 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 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 strategy. 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 detail 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 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 (Chairman and CEO)

Thank you, everyone, for joining our second quarter 2024 earnings conference call. We are pleased to report strong second quarter results, even with the impact of lockdown, which lasted from March eleventh through April ninth this year. Our second quarter revenues reached $81.2 million, beating the upper end of our guidance. This outstanding performance underscores the remarkable popularity of our flagship applications, Yalla and Yalla Ludo, as well as our effective strategy for high-quality growth. Our operating efficiency improvements are also yielding positive results, elevating our net margin to 38.6% in the second quarter. Throughout the second quarter, we remained dedicated to enhancing our operational procedures, boosting user engagement, optimizing technology utilization to improve efficiency, and refining our user acquisition strategies.

These efforts have empowered us to build a more engaged community of users who exhibit high willingness to spend on our content and services. Supported by our solid business fundamentals and dedicated team, we remain primed to capture new business opportunities and fulfill MENA users' evolving online social networking needs. The ongoing digital transformation in the Middle East continues to attract attention globally this year, with international tech companies keen to explore opportunities in the region. 2024 marks Yalla's eighth year in the Middle East and the eighth anniversary of our flagship product, Yalla. Over those years, Yalla has grown from our group's first WhatsApp product into the world's most downloaded WhatsApp app for 2023, based on data.ai's research, with a highly engaged and loyal user community.

Keeping our user-first philosophy in mind, we have consistently created memorable experiences and forged deep connections with our users by iterating, iterating, and upgrading our products to meet their evolving needs. Meanwhile, as an industry pioneer, we have helped propel the evolution and development of internet products and the broader internet sector in the MENA region. We will remain committed to driving the Middle East's digital transformation, seizing emerging opportunities, and growing with our users and the industry as we lead the region's development chance. Turning to Yalla Games development and future strategy. The gaming sector continues to demonstrate immense growth potential within MENA's thriving digital transformation. Yalla is capturing that potential with consistent investment in MENA's mid-core and hardcore game market, attracting MENA users with a wider range of game options tailored to their unique preferences.

This year, we have focused on the exploration and development of mid-core and hardcore games, where we can leverage the extensive experience, talented workforce, and abundant resources we have accumulated in the casual gaming sector. Our product teams are currently developing and refining a strong pipeline of self-developed games set to be built throughout 2025. On a related note, we are proactively exploring AI technology applications to optimize our team's productivity, particularly in UI design, which has high requirements for detailed, time-consuming artistic work. By harnessing the power of AI, our UI team has notably enhanced efficiency, leading to substantial improvement in the team's capacity and facilitating faster innovation in product features and gameplay. We're excited about AI's transformative potential, and we'll continue to seek creative applications across our business to drive product iteration and operational upgrades.

As we mentioned on every call, our vision is for Yalla to beócome the largest online social networking and entertainment company in MENA. This quarter represented another solid step toward our vision. I'm proud of the many firsts we have achieved in this region and its internet industry, creating a better digital life for our loyal users in the Yalla community. Our commitment to MENA, its people, and its rich culture is unwavering, empowering our teams on growing generation of new ideas and new products to meet MENA's users' evolving needs and facilitate digitalization throughout the region. Now, I will turn this call over to our president, Mr. Saifi Ismail, for a closer look at our recent developments.

Saifi Ismail (President)

... closer look at the second quarter operations and our product performance. We redoubled our efforts to engage the Yalla community. Our average monthly active users increased by 14.1% year-over-year to 39 million. At our eighth anniversary, we engaged new users and loyal fans alike with our Explore the World of Yalla event. This iconic online festival was featured on the App Store and Google Play, boosting average daily consumption of gold coin games currency to a record high for our anniversary event. We are also leveraging offline events to strengthen our product and brand awareness, including our Global Champion offline tournament series. The two tournaments we have done thus far in Riyadh-

Operator (participant)

Pardon me, Saifi, this is the operator.

Saifi Ismail (President)

Yes, please.

Operator (participant)

Pardon me, we are having difficulties with the speaker line. Please stand by for just a moment while we reconnect Saifi's line. Okay, one moment. Thank you. Ladies and gentlemen, thank you for standing by. Thank you for your patience. At this time, I will ask the President, Mr. Saifi Ismail, to continue. Just one moment. Please proceed, Saifi.

Saifi Ismail (President)

Thank you. Hi, everyone. Our product's performance. We increased our efforts to enhance user experience and engagement this quarter, and we are pleased to see these efforts paying off across our vibrant Yalla community. Our average daily active users increased by 2.1% year-over-year to 31 million, reflecting our products' enduring appeal. For example, our eighth anniversary... Award of Yalla event... App Store and Google Play, who... To a record high... Our product and brand appeal, including our online tournament series. The tournaments we held this fall in Riyadh and Dubai were huge hits, attracting over 150,000 registered players and garnering overwhelming positive feedback from participants. In June, we celebrated the success with a magnificent light show on Burj Khalifa in Dubai, the world's tallest structure, and for Yalla, a symbol of MENA's endless possibilities.

Offline events like these deepen gamers' engagement with our product and enhance our brand influence locally. Further, unlocking the MENA region's potential. We are also thrilled to announce that Yalla partnered with the Dubai Department of Economy and Tourism, DEDT, for the first Dubai Esports and Games Festival, DEF, in April. As part of the collaboration, Yalla Ludo hosted an online tournament, Game Battle, with DEF, attracting over 4 million participants. We incorporated iconic Dubai landmarks and symbols into Ludo's interface, including teams, sports teams, and the Burj Khalifa, providing players an immersive gaming experience, celebrating Dubai's vibrant culture. This collaboration underscores our commitment to innovation and promoting user experience. Finally, we are extremely honored to receive the prestigious Dubai Games Award at the MENA's Industry Awards 2024, held at the world-renowned Dubai Expo Summit.

These awards celebrate the region's top talent in the game development, publishing, and support services. Yalla Group was selected by a panel of 80 industry experts for the top spot in the Dubai Games Star category, a testament to our remarkable success, influence, and innovation in gaming, as well as our commitment to fostering growth across MENA's gaming industry. I'm grateful to the MENA Games Industry Awards organization for their recognition and look forward to further shaping the industry's future as the largest online social networking and gaming platform in the MENA region. In conclusion, throughout the past 8 years, we have established a strong presence in MENA. By creating innovative products that align with local user habits and preferences. We have also consistently fostered extensive collaboration with local communities, promoting the growth of the digital economy and the internet industry.

As regional leaders in online social networking and games, we are proud to play a key role in the MENA digital transformation. As always, our vision is to become the number one online social networking and entertainment platform in the MENA region. With that, I will now turn the call over to Cindy Apalati, who will discuss our key financial and operational results.

Karen Hu (CFO)

Thank you, Saifi. Hello, everyone. Thank you for joining us today. Our financial performance remained robust through the second quarter of 2024. Our top line again exceeded our expectations and sustained our year-over-year revenue growth momentum as we strove for high quality development and user growth. Our consistent operating efficiency enhancements also continued to yield positive results. Our net income, our net margin grew by 2.9 percentage points year-over-year to 38.6%, while net income increased by 10.9% to $31.4 million. By leveraging our solid business fundamentals, we will remain primed to capture new business opportunities and deliver sustainable value to our all stakeholders in the long run. Let's move on to our detailed financials for the second quarter of 2024.

Our revenues were $81.2 million in the second quarter of 2024, a 2.5% increase from $79.2 million in the second 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 was also partially attributable to the significant increase in ARPU, which grew from $5.8 in the second quarter of 2023 to $6.6 in the second quarter of 2024. Now, let's take a look at our costs and expenses. Our total costs and expenses were $51.6 million in the second quarter of 2024, a 6.8% decrease from $55.3 million in the same period of last year.

Our cost and revenues increased by 2.5% to $29 million in the second quarter of 2024, from $28.3 million in the same period of last year, primarily due to higher commission fees paid to the party payment platforms as a result of increasing revenue generated. Cost of revenues as a percentage of total revenues remained relatively stable at 35.7% in the second quarter of 2024. Our selling and marketing expenses were $8.5 million in the second quarter of 2024, a 31.4% decrease from $12.4 million in the same period of last year, primarily driven by our more disciplined advertising and promotion approach.

Selling and marketing expenses as a percentage of total revenues decreased from 15.6% in the second quarter of 2023 to 10.5% in the second quarter of 2024. Our general and administrative expenses was $7.6 million in the second quarter of 2024, a 5.5% decrease from $8 million in the same period of last year, primarily driven by lower share-based compensation expenses recognized in the second quarter of 2024. General and administrative expenses as a percentage of total revenues decreased from 10.1% in the second quarter of 2023 to 9.3% in the second quarter of 2024.

Our technology and product development expenses were $6.5 million in the second quarter of 2024, a 1.6% decrease from $6.6 million in the same period of last year, primarily driven by lower share-based compensation expenses recognized in the second quarter of this year. Technology and product development expenses as a percentage of total revenues decreased from 8.3% in the second quarter of 2023 to 8% in the second quarter of 2024. As such, our operating income was $29.6 million in the second quarter of 2024, a 23.8% increase from $23.9 million in the same period of last year.

Excluding share-based compensation expenses, our non-GAAP operating income in the second quarter of 2024 was $33.5 million, up 13.9% year-over-year. Our interest income was $7.1 million in the second quarter of 2024, compared with $4.6 million 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 expenses was $5.8 million in the second quarter of 2024, compared with $821,000 in the same period of last year. The increase was primarily due to the introduction and implementation of UAE corporate tax law, which is effective for the financial years starting on or after June 1, 2023.

Moving to our bottom line, our net income increased by 10.9% to $31.4 million in the second quarter of 2024, compared with $28.3 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 June 30, 2024, we had cash and cash equivalents, restricted cash, term deposits, and short-term investments of $528.7 million, compared with $535.7 million as of December 31, 2023.

Under our $150 million share repurchase program that began on May 21, 2021, and has since been extended by our board through May 21, 2025, we have accumulatively repurchased 3,972,876 ADS, or Class A ordinary shares, in open market cash repurchases, totaling approximately $35.5 million as of June 30, 2024. Moving to our outlook. For the third quarter of 2024, we expect our revenues to be between $75 million and $82 million. The above outlook is based on the current market conditions and reflects the company's management's current and preliminary estimates of the markets 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 (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star and then two. At this time, we will take the first question from the line of Sarah Hu from Haitong International. Please go ahead.

Sarah Hu (Analyst)

Thank you, management, for taking my questions, and congratulations on a solid quarter. Could management elaborate more on the sales and marketing strategy and trends in 2024? Thank you.

Tao Yang (Chairman and CEO)

Hi, Sarah. Thank you for your question. We have insisted on quality growth strategy in 2024, which requires consistently optimizing our sales and marketing strategy and efficiency. This includes more detailed budget management, a focus on ROI, and diversifying user acquisition channels online and offline, among other things. As you can see from the financial report, our efforts have resulted in a solid improvement in our sales and marketing efficiency over the past 2 quarters. We think our sales and marketing expenses will remain at a similar level for the second half of 2024, though we may launch new products for testing in Q4. If feedback indicates we need to increase our sales and marketing budget to promote these products, we will adjust our guidance accordingly. Thank you.

Sarah Hu (Analyst)

Thank you.

Operator (participant)

Our next question today will come from Xueqing Zhang of CICC. Please go ahead with your question.

Xueqing Zhang (Analyst)

Thanks, management, for taking my question. Congratulations on the solid quarter, you did well in the first half of this year. So how are the company's key products performing in third quarter, and what's the management's outlook for the full year in 2024? Thank you.

Tao Yang (Chairman and CEO)

Hi, Xueqing. Good morning. This is Yang. Thank you for your question. So for Q3 2024, according to what we have observed over the past month and a half, Yalla and Yalla Ludo, our flagship applications, are performing well and stably as we continue to roll out new features and operating events. And you can also see the trend from the guidance we provided earlier. We think Q3 is likely to outperform Q2 at this point. On the margin side, the Yalla Ludo team is organizing a series of offline tournaments across different cities in EMEA to increase our brand's local impact, efficiently penetrate the market, and reach more users through offline channels with higher ROI. So you can see that our operating efficiency is consistently improving. For the rest of 2024, I think we will maintain this solid and stable trend with improved efficiency.

Hope this answers your question. Thank you.

Operator (participant)

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

Chenghao Li (Analyst)

... Hi, management. Thanks for taking my questions, and congratulations on a solid quarter. My question is about our game business. How should we view Yalla Game strategy? And could management share more color on new games test feedback and the launch timeline? Thank you.

Tao Yang (Chairman and CEO)

Hi, Chenghao. Thank you for your question. For Yalla Games, this year, we are allocating more resources to our in-house team to self-develop products, mainly focusing on mid-core games. We are accumulating valuable experience and broadening our team's expertise through this process, which will empower us to move forward with confidence in the future. We currently have three self-development core games in our pipeline and plan to start testing by the end of this year. Then we need some time to work on iterations based on the feedback we receive from the users before we start on-scale promotions. Meanwhile, we are also proactively discussing collaborations with potential partners in the game industry. We'll let you know once there's anything we can share publicly. Thank you.

Operator (participant)

Our next question today will come from Kaifang Jia of CITIC. Please go ahead.

Kaifang Jia (Analyst)

Hi, management. Thanks for taking my question. I have a question about your overseas markets. So would the company consider broadening your company scope outside of the Middle East? Thank you.

Tao Yang (Chairman and CEO)

Hi, good morning, Kaifang. Thank you for the question. As always, we will remain dedicated to the Middle East market, while also keeping an eye on opportunities in other markets. For instance, we currently have Parchis, which focuses on the South American market, which is one of our attempts to explore the overseas market. Going forward, if we see that new products have popularization potential, not only in MENA, but also in other markets, we may consider conducting global promotions. However, our main focus is undoubtedly on the Middle East market, where we have unique advantages and can continue to leverage our core capabilities to unlock our growth potential. Thank you very much.

Operator (participant)

Our next question today will come from Lincoln Kong of Goldman Sachs. Please go ahead.

Lincoln Kong (Analyst)

Thank you, management, for taking my question. My question is about capital allocation. How does the company view in terms of increasing the shareholder return versus continuing investing into any new initiatives or on the practice? Thank you.

Karen Hu (CFO)

Hi, Lincoln, this is Karen. Thank you for your question. Yalla is dedicated to return value to shareholders through our share repurchase program. As of June 30, 2024, we have deployed a total of $35.5 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 anything new to report. In terms of new initiatives, our strategy team is proactively looking into opportunities that may have synergies with our current businesses and fit with MENA culture and local users' needs, and we remain open to these possibilities. In short, we believe strongly in Yalla's long-term potential and dedicated to generating value for all parties involved. I hope that this answers your question. Thanks.

Operator (participant)

The next question will come from Rachel Guo of Nomura. Please go ahead. Rachel, your line is open.

Rachel Guo (Analyst)

Hello. Good morning. Thanks, management, for taking my question. My question is that the Yalla Ludo has already hosted several online and offline tournaments across MENA. Can management please share with us any further plans in the future about this? Thank you.

Tao Yang (Chairman and CEO)

Hi, Rachel. Thank you very much for your question. Since the end of last year, our team has been hosting a series of online and offline Ludo tournaments with our local and global partners across several cities in MENA. We believe this move enhances our brand's local impact, helps penetrate the local market, and further expands our user base. We have received very good feedback on the tournament series so far from both local users and our partners, and we are receiving more invitations from potential partners conducting similar tournaments in different cities and different countries across MENA. So far, we have two more tournaments scheduled for the second half of the year to engage more users in different countries, and we plan to keep building on this momentum. Thank you.

Operator (participant)

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

Tao Yang (Chairman and CEO)

Thank you once again for joining us today. We look forward to speak 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's website.

Operator (participant)

The conference is now concluded. We thank you for attending the presentation, and you may now disconnect your line.