Yalla Group - Q4 2022

Transcript

Operator (participant)

Good morning and good evening, ladies and gentlemen. Thank you for standing by for Yalla Group Limited's fourth quarter and full year 2022 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there'll be a question and answer section. Today's conference call is being recorded. Now I turn the call over to the speaker host today, Miss Carrie Gao, IR Director of the company. Please go ahead.

Kerry Gao (Director of Investor Relations)

Hello, everyone, and welcome to Yalla's fourth quarter and full year 2022 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 earnings release and our annual report filed with the SEC. Yalla does not assume any obligation to update any forward-looking statements except as required by law.

Please also note that Yalla's earnings press release and this conference call include a discussion of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Yalla's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. Today, 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. Saif Ismail, the company's President, who will briefly review our recent business developments. Mrs. Karen Hu, our Chief Financial Officer, then will 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. 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 conference call. 2022 was a challenging year. In light of the macroeconomic headwind, Yalla firmly executed its core strategy while capably adjusting to the market dynamics and made good progress overall. Encouragingly, we delivered year-over-year growth in revenue, underscoring the effectiveness of our quality growth strategy. We also continued to improve efficiency while maintaining the stable development of our two flagship applications, Yalla and Yalla Ludo. We continued to invest in new products to explore untapped opportunities in MENA region's digital market, setting the stage for even better performance in 2023. In Q4, our revenue was $75.1 million, reaching the upper end of the guidance we provided.

Although we did witness a slight downward impact on user activeness, primarily due to the 2022 FIFA World Cup in Qatar, which diverted our users' attention to some degree. The event's influence on our results, which should prove to be a one-time effect, was consistent with our expectations. Nevertheless, the success of the FIFA World Cup in Qatar introduced a modern and open MENA with great energy and strength to a global audience. We are seeing increasing attention and interest in the opportunities related to MENA's digital transformation from enterprises and investors worldwide. Next, I'd like to share some new research from Frost & Sullivan. In their recent research report titled Online Social Networking and Gaming Industry Independent Market Research, Yalla has been recognized as the largest MENA-based online social networking and gaming company in terms of revenue in 2022.

While our social networking products are already well-known throughout the region, we are thrilled to see our games rapidly gaining traction over the past few years. This is yet another testament to our strong brand awareness and reputation, robust technical capabilities, and deep understanding of local culture. We believe that as the number one MENA-based online social networking and gaming company, we are uniquely positioned to capitalize on MENA's strong digitalization chance over the next 5 years, unleashing massive growth potential across Yalla Group's businesses. Now let's take a look at some recent developments of Yalla Game, our subsidiary formed to explore the mid-core and hardcore game business. Leveraging our industry-leading experience in online social networking and gaming in MENA, we recently launched our first internal game studio, making an important step for Yalla Group to begin in-house development of hardcore games.

Going forward. The game development and game distribution business will constitute key strategic pillars for Yalla Game. In addition to collaborating with outstanding content providers on game distribution, in future, it's also possible for us to gradually establish more internal game studios to build up our capabilities in the research and development of mid-core and hardcore games across a broad range of genres. More specifically, we have finished the first round of beta testing on both Merge Kingdom and our RPG game, the first two hardcore games titled we will distribute in MENA. We have been working on product refinement to better address user feedback and improve user experience. We will soon start the second round of testing, and we'll keep you posted on our plans for both games' official launch. Turning now to YallaChat.

We are happy to share with you that we launched the official promotion on YallaChat for the first time in November 2022. In addition to acquiring traffic from general channels, we launched campaigns in our Yalla community to encourage users of our other apps to try out YallaChat. After two months of testing, we are seeing encouraging results, meeting our expectations for YallaChat's first stage of development. Notably, certain localized functions, like the SM feature, gained great traction among users. We believe this first-stage attempt clearly demonstrates the potential of our MENA-based IM product. At the same time, we would like to reiterate that building an IM product is never easy, and we will continue to explore ways to better serve local users' needs in IM product. We believe YallaChat will play an important role in our long-term growth roadmap.

Elevating our value proposition, we will continue to refine the product by catering to MENA users' preferences and conduct further promotional campaigns in an efficient way. In short, the MENA region is developing rapidly. We are pleased to see more and more industry professionals and investors from around the world beginning to show interest in MENA, making an acceleration of the region's development possible. Meanwhile, MENA is also embracing opportunities of collaboration from all the world. As the number-one MENA-based online social networking and gaming company, we are strongly committed to this market and have developed a deep understanding of its unique advantages and user needs. We continue to steadily expand our investments in research and development to explore new products and verticals, while also preparing to seize opportunities arising from the region's digital transformation.

We will closely monitor market trends and upcoming prospects, and continue to leverage our deep local insights and broaden our business horizons. Once again, our vision is to be the most popular destination for online social networking and entertainment in MENA, and we remain steadfast in our pursuit of this goal. Now, I will turn this call over to our President, Mr. Saifi Ismail, for a closer look at our recent developments.

Saifi Ismail (President and Director)

Hello, everyone. Thanks for joining us today. I would like to start with a closer look at our fourth quarter operations, as well as our product performances. We are pleased to have concluded fiscal year 2022 on a high note, with fourth quarter total revenue of $75.1 million, landing at the high end of the company's guidance. As Tom mentioned, we saw a slight impact on our performance from the FIFA World Cup. We believe this to be a one-time impact, and it was in line with our expectations. Our monthly active users increased 14% year-over-year, reaching 32 million. Yalla Group's paying users also increased to 12.5 million, demonstrating users' increasing willingness to pay on our platform. Our team will continue to refine our user acquisition and operational strategies to further improve operating efficiency.

Next, a brief update on our casual game portfolio, which remains an important component of our overall gaming business. Notably, Yalla Baloot recorded an outstanding performance this quarter. We boosted Baloot's monetization capabilities by rolling out new features, including more premium rides for VIP users and hosting operating events, revealing the game's revenue to $1 million for the fourth quarter. For the rest of our casual game portfolio, including Yalla Baloot and 101 Okey Yalla, we will continue to refine these products and seek creative ways to increase market penetration. Before we move into financials, I would like to mention that we at Yalla Group were extremely honored to win a 2022 Middle East Technology Excellence Award for the second year in a row in the Internet-Media & Entertainment category for Yalla Life, hosted by the Asian Business Review.

These awards honor outstanding companies that have made exceptional contribution in pursuit of technological innovation and revolutionary products and solutions in their respective industries in the Middle East region. We view this prestigious award as further proof of our innovation capabilities and a powerful commendation of the leading online social networking and gaming ecosystem we have created. As a company deeply rooted in MENA, we are proud to contribute to the advancement of the digital world within the region. We are also pleased to announce that Yalla was recently named Best Voice-based Social Network UAE 2022, and Best Entertainment Platform UAE 2022 by International Business Magazine. We are extremely proud to receive these two prestigious awards. These accolades further inspire us to realize our vision of building the most popular destination for online social networking and entertainment activities in MENA.

In conclusion, while 2022 was a year full of challenges, we successfully maintained the stable development of the company while continuing to explore new products and business. As we introduce area, Yalla has been recognized as the largest MENA-based online social networking and gaming company. As always, we remain dedicated to leading the industry in serving MENA users evolving needs in this field. As we witness more and more conversations taking place between global stakeholders and this region every day, we are firmly convinced that the next five years will be crucial in MENA's digital transformation. With our strong business fundamentals and outstanding product portfolio across social networking and gaming, we are well-positioned to capitalize on potential growth opportunities, 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.

Karen Hu (CFO)

Thank you, Saifi. Hello, everyone. Thank you for joining us. We continued to focus on our quality growth strategy in 2022. For the first quarter, our revenues increased solidly by 11.2% year-over-year to $75.1 million amid external challenges. Thanks to our constant efforts to enhance the gamification of our products and user engagements, our MAUs maintained double-digit growth during this quarter. Meanwhile, our paying user ratio further increased to 38.9%, up 8.9 percentage points year-over-year. Each of these metrics highlights the effectiveness of our growth strategy. Also, as we firmly executed our refined operation precise, we achieved healthy profitability with a GAAP net margin of 22.1%.

For full year 2022, we maintained solid growth momentum with revenues up 11.2% to $303.6 million. We were able to maintain our operating efficiency at an outstanding level. Over the past year, the key field in which we increased our investment was R&D. In the effort to build out our product portfolio, we continuously increased our R&D spending, bringing R&D expenses up to 8.1% of total revenues for 2022, compared with 5.2% last year. Sales marketing expenses as percentage of total revenue remained relatively stable at 16.4% throughout the year, while GA percentage of total revenues declined to 12%.

Our GAAP net margin for the year was 26% in 2022, compared with 30.2% last year. Looking ahead, in 2023, we will continue to pursue quality development, improve operational efficiency, and build the Yalla ecosystem through innovation and technology advancement. We believe our deep local insights and solid fundamentals will position us well to navigate the market dynamics and seize future growth opportunities. As always, we are commitment to creating sustainable long-term value for our stakeholders. I would like to walk you through our detailed financials for the fourth quarter of 2022. Our revenues were $75.1 million in the fourth quarter of 2022, an 11.2% increase from $67.6 million in same period last year.

The increase was primarily driven by the broadening of our user base and enhanced monetization capability. Our average MAUs increased by 14% from 28.1 million in the fourth quarter of 2022 to 32 million in the fourth quarter of 2022. Now let's take a look at our costs and expenses. Our cost of revenues was $27.4 million in the fourth quarter of 2022, a 14.7% increase from $23.9 million in same period last year, primarily due to an increase in technical service fees resulting from the expansion of our product portfolio, as well as an increase in salaries and benefits resulting from the expansion of our operation and maintenance team.

Cost of revenues as a percentage of total revenues increased from 35.4% in the fourth quarter of 2021 to 36.5% in the fourth quarter of 2022. Our selling and marketing expenses were $14.3 million in the fourth quarter of 2022, a 7% increase from $13.3 million in the same period last year, primarily due to higher advertising and marketing promotion expenses led by our continued user acquisition efforts and expanding product portfolio. Selling and marketing expenses as a percentage of total revenues were 19% in the fourth quarter of 2022, decreasing from 19.7% in the same period last year.

Our general and administrative expenses were $13 million in the fourth quarter of 2022, a 60.4% increase from $8.1 million in the same period last year, primarily due to an increase in incentive compensation. GA expenses as a percentage of total revenues increased from 12% in the fourth quarter of 2021 to 17.4% in the fourth quarter of 2022. Our technology and product expenses were $5.4 million in the fourth quarter of 2022, a 37.3% increase from $3.9 million in the same period last year.

Primarily due to an increase in salaries and benefits for our technology and product in development staff, driven by an increase in headcount for our technology and product staff to support for the development of new businesses and the expansion of our new product portfolio. Technology and product development expenses as a % of total revenues increased from 5.8% in the fourth quarter of 2021 to 7.2% in the fourth quarter of 2022. Our operating income was $15 million in the fourth quarter of 2022, compared with $18.3 million in the same period last year. Excluding share-based compensation, non-GAAP operating income in the fourth quarter of 2022 was $20.2 million.

Our income tax expense was $0.42 million in the fourth quarter of 2022, compared with $0.79 million in the same period last year. Moving to the bottom line, our net income was $16.6 million in the fourth quarter of 2022, compared with $19.1 million in the same period last year. Excluding share-based compensation expenses, non-GAAP net income for the fourth quarter of 2022 was $21.7 million. I would like to briefly go through our liquidity and capital resources. As of December 31, 2022, we had cash and cash equivalents of $407.3 million as compared with cash and cash equivalents of $391.2 million as of September 30, 2022.

This improvement demonstrates our ongoing commitment of to refining Yalla Group's operations. On May 21, 2021, we announced the 2021 share repurchase program. As of December 31, 2022, we have repurchased 2,302,141 American depositary shares, representing 2,302,141 Class A ordinary shares from the open market with cash for an aggregate amount of approximately $27 million. The aggregate value of ADS or Class A ordinary shares that may yet be repurchased under the share repurchase program was $123 million as of December 31, 2022. For the interest of time, please refer to our earnings press release for the further details of our 2022 full year financial results.

Moving to our outlook for the first quarter of 2023. Taking the seasonal impact of Ramadan fasting period into consideration, which will take place across MENA between March 22 and April 20 this year, we expect our revenues to be between $68 million and $75 million. The above outlook is based on current market conditions and reflects the company's management's current and preliminary estimates of market and operation conditions and customer demand, which are all subject to change.

This concludes our prepared remarks for today. After which we are ready to take questions.

Operator (participant)

Thank you. We will now begin the question and answer section. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please take up your handset before pressing the keys. To withdraw your question, please press star then 2. Your first question comes from Kaifeng Zhai from CITIC. Please go ahead.

Kaifeng Jiang (Equity Research Analyst)

Hi, management. Thanks for taking my questions. Actually, I have two. The first is that can management show some color about user growth strategy in 2023? That's the first one. My second question is how do management view the impact of AI on our product? Thank you.

Jeff Xu (COO)

Hi, Kaifang. Thank you very much for your question. This is Jeff. I'll be taking your first question. Regarding the user growth strategy for our flagship application, Yalla and Yalla Ludo, we expect to maintain a similar direction as last year's. After seven years of operating our products in the region, we have developed a know-how on the best ways to acquire users and manage our product efficiently. However, we also have new initiatives this year, for example, the mid and hardcore games. For these new products, it really depends on how they develop. We will adjust our sales and marketing strategy according to the market dynamics. It's possible that we will allocate more resources to new product promotion if there are strong growth opportunities. Thank you.

Tao Yang (Chairman and CEO)

Hi. Morning, Kaifeng, this is Yang. I will take the second question. The AI for sure is an important field we have continued to research over the past years. We have established our own AI team to focus on the development of AI technology for Arab users. As you may already know, different languages, cultures, or user habits can strongly impact the algorithm. So far, the representation of Arabic in AI-related databases is not as extensive as that of English. There is a lot we can do and a lot we need to do as a leading tech company in this region. It's also an important topic for the MENA region's digital transformation.

We have already applied AI to our platform, for example, in the areas of chat room recommendation and content evaluation, which can improve our operating team's efficiency in preventing inappropriate content from being posted in our chat rooms. In the future, we are also looking into a virtual assistant who can greatly increase the efficiency of our customer service teams, or facilitate translation that will allow users to speak different languages to better communicate with others and make friends. For mid-core and hardcore games, AI technology can also be applied to create personalized game levels which can better fit each gamer's preferences and needs. There are many more opportunities we are looking into, and we will keep you posted on the updates. Thank you, Kaifang.

Kaifeng Jiang (Equity Research Analyst)

Okay, that's very helpful. Thank you so much.

Tao Yang (Chairman and CEO)

Thank you.

Operator (participant)

Thank you. The next question comes from Xueqing Zhang from CICC. Please go ahead.

Xueqing Zhang (Equity Research Analyst)

Hi. Good morning. Thanks for taking my question, and I have two. The first one is regard to YallaChat. As I mentioned in the prepared remarks, you conducted a series of promotion activities for it. Could management share more operating data after the promotion, and color on YallaChat's product strategy and outlook for 2023? My second question regard to R&D expense outlook. Notice the company expanded content sharing and virtual building in the external happenings in 2022. Do you expect to keep a similar scale in 2023, and will that reflect on the cost and R&D expense? Thank you.

Tao Yang (Chairman and CEO)

Thank you very much, Xu Qing, and good morning. I'll take the first one, and I think our CFO, Carolyn, will take the second. As mentioned earlier, for the Yalla Chat, as mentioned earlier, after the first round of testing, we are seeing encouraging results. The MAUs of Yalla Chat during the promotion were around 1 million, meeting our expectations for Yalla Chat's first stage of development. We are saying first stage because, as we keep saying, building an IM product is never easy, and it's going to be a long-term project. Based on our experience in this market, we will continue to upgrade the product and explore ways to better serve local users' needs in this Yalla Chat product.

At the same time, as digital transformation becomes a key channel and strategy across the MENA region, we will continue to monitor the market and look for opportunities to transition YallaChat to the second stage. We will keep you posted on the updates. I think the second question will be taken by Karen.

Karen Hu (CFO)

Thank you. Thank you very much, Tao. Thank you, Xueqing, for your close attention to our company's development. Yes, we continued to expanding our team during 2022, and the majority of our new hires are R&D professionals. There are 2 key reasons. Firstly, our company has developed rapidly over the past few years, and our teams has often been working at full capacity. We have to keep hiring, especially when we plan to launch new products. Additionally, as the company continues to grow, we also need to build independent teams instead of shared headcounts to standardize the management of different projects, which will allow us to manage different projects more efficiently in the future. For the year of 2023, we will plan to maintain our current size.

For now, we don't have any plans to make layoffs, nor do we have plans to increase our headcounts aggressively either. However, for example, if we see excellent performance in some of our new initiatives, such as heavy games, it's possible that we will allocate more resources to grow our R&D team again and accelerate the initiatives development. Hope I answered your question. Thank you.

Xueqing Zhang (Equity Research Analyst)

Thank you. Very helpful.

Operator (participant)

Thank you. Your next question comes from ng Yulin Zhong from Haito. Please go ahead.

Yulin Zhong (VP of Equity Research)

Hello. Thanks, management, for taking my questions. Actually, I got two questions. Number 1, could you please provide the outlook on your legacy products into 2023, such as Yalla and Yalla Chat, the two core legacy products? Number 2 is regarding the margin trend. Could you share with us some color on your margin trend going into 2023, especially given that you just mentioned that the company is going to allocate more resources into the new initiatives. How should we look at your margin trends in this year? Thank you.

Tao Yang (Chairman and CEO)

Good morning, Yulin. I'll take the first one, and I think our CFO will take the second one with the margin trend. For our legacy products, regarding our Yalla and Yalla Ludo, we believe our strategies for growing these 2 apps have been proven successful over the past 7 years. Our deep local know-how and understanding of the MENA users' habits and preferences are key factors. We also continue to update our apps to provide outstanding experiences for our users. Considering 2023, we will continue to work on upgrading our apps and providing best-in-class services to our users. We expect our flagship applications to keep their current steady pace of growth. Karen will take the second one.

Karen Hu (CFO)

Thank you. Hi, Yulin. I'll take this question. I think the margin for 2023 will be similar to 2022 if there are no large scale investments in new initiatives. For this year, we will take more measures and be more dedicated to cost control. In that case, we think that we still be able to keep the margin above 30% for the full year. Of course, each quarter's performance may vary depending on how and when we invest in different products. I do think that 30% non-GAAP net margin for the whole year is fair. Thank you, Yulin.

Yulin Zhong (VP of Equity Research)

Thank you. That's very helpful.

Operator (participant)

Thank you. Your next question comes from Thomas Chong from Nomura. Please go ahead.

Thomas Chong (Equity Research)

Hi. Good morning. Thank you, management, for taking my question. I have one question. Could management provide an update on our top line growth target for the year of 2023? Thank you.

Karen Hu (CFO)

Hi, Thomas. I'll take this question. Thank you very much for your attention. entering 2023, we have seen the macro situation improve, especially since the MENA market has gained a lot of interest around the world. In face of challenges and opportunities, we are confident that for 2023, revenue will maintain the same revenue level as 2022 based on our current market condition, while we will continue to explore new growth opportunities and grow our business. On the one hand, this year we will continue to upgrade our flagship products while continuing to expand our product portfolio to better grow our revenues. On the other hand, as we mentioned, there are many opportunities related to MENA's digital transformation. We will keep monitoring the trend and see if there are good opportunities for acquisitions.

This will also a very important strategy for our Group. With buy and build strategy, we expect to deliver a better performance in this year. Thank you.

Thomas Chong (Equity Research)

Thank you.

Operator (participant)

Thank you. Your next question comes from Edward Wang from Credit Suisse. Please go ahead.

Edward Wang (Equity Research Analyst)

Hi, management. Thanks for the presentation. I have two questions about the outlook this year. What is the guidance for the paying user number and ARPU in 2023? What are the main strategies for the firm to achieve these targets? Can you share with us about the company Opex guidance this year, and in which areas does the firm want to invest more? Thank you.

Jeff Xu (COO)

Hi, Edward, this is Jeff. I'll be taking your first question. Regarding the number of paying users and ARPUs, these two factors relate to each other. Actually, in practice, the number of paying users can be largely affected by the format of the operating events. It's hard to give specific guidance on at the beginning of the year. For example, if I were asked the same question this year last, this time this last year, it would be very difficult to predict that our paying users would have increased by more than 45% during the year. We don't have specific guidance for our paying users, but all of our operating events aim to improve user engagement on our platform and grow revenue. Revenue is the ultimate KPI that we care about the most, and in order to achieve that, there is much we can do.

For example, we could continue to upgrade the product, add new game modes, launch more fun operating events, and conduct rounds of user surveys to better know our users. There is a lot we can do to improve our operational refinements.

Karen Hu (CFO)

Hi, Edward. Thank you for your second question about the Opex guidance. Regarding our plans for expense and investments for the year. Firstly, as we mentioned earlier, our operating efficiency will be maintained at a similar level as last year. The key areas of the company we'll spend on will remain our user acquisition and our R&D. At the same time, if we identify promising opportunities to pursue, whether internal or external, we can invest or spend more to seize these opportunities. I believe this will benefit the companies in the long run, and we will keep you posted if this occurs. Thank you.

Edward Wang (Equity Research Analyst)

Thank you. That's very helpful.

Operator (participant)

Thank you. Your next question comes from Zemin Chen from Huafu Securities. Please go ahead.

Zemin Chen (Research Analyst)

Management, thank you for taking my question. I have a one question. Iran and Saudi Arabia resumed peace in talks brokered by China. Will this impact or promote Yalla's business? Thank you.

Jeff Xu (COO)

Hi, Zhi Ming. Thanks for your question. Basically, this is a macro-level topic, and we observe positive voices in the market and regard this progress as actively promoting peace in the region. In the short term, we will still develop our business based on our current business framework, and we expect no direct promotion or hindrance from this event. Thank you.

Zemin Chen (Research Analyst)

Thank you.

Operator (participant)

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

Karen Hu (CFO)

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

Operator (participant)

That does conclude our conference for today. Thank you for participating. You may now disconnect. Thank you.