Yalla Group Limited

Good morning and good evening, ladies and gentlemen. Thank you for standing by for YALA Group's limited third quarter 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 is being recorded. Now I will turn the call over to your speaker, host today, Ms. Carrie Gao, IR Director of the company. Please go ahead, ma'am.

Thanks. Hello, everyone, and welcome to Yela's third quarter 2020 earnings conference call. We have released our earnings results earlier today, and it is now available on our IR website as well as on Newswell 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 registration statements filed with the FEC. YALA does not assume any obligation to update any forward-looking statements, expect as required by law. Please also note that YALA's earnings press release and this conference call include discussion of unaudited gap financial information as well as unaudited non-gap financial measures. YALA's press release contains a reconciliation of the unaudited non-gap measures to the unaudited most directly comparable gap measures. Today, you will hear from Mr. Tao Yang, our Chairman and Chief Executive Officer, who will provide an overview of our recent achievements and growth strategies. He will be followed by Mr. Saifi Ismail, the company's president, who will give a brief review on Yala's IPO ceremony in UAE and the support we received from the local government and media. And he will be followed by Mrs. Karen Hu, our chief financial officer, who will provide additional details on the company's financial results and discuss the financial outlook. Following management's prepared remarks, we will open up the call to questions. Our Chief Operating Officer, Mr. Jeff Xu, will join the call for our Q&A session. Just want to kindly remind Yala's 3Q earnings presentation slides are now available on Yala's IR website for investors to download. 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.

Okay. Thank you, Carrie. Good morning and good evening, ladies and gentlemen. Thank you for joining us today. on our third quarter 2020 earnings call. This is our first earnings call as a public company following our IPO in September this year. We appreciate having the opportunity to communicate directly to you all and share our insights on our business operations and financial performance. We are very pleased to announce that in the third quarter of 2020, we delivered robust group performance. further strengthening our position as a pioneering world-centric mobile social networking and entertainment platform in MENA. And our revenue and non-gap net income reached to 33.8 million and 15.5 million USD, increasing 90.4% and 68.3% year-over-year, respectively, driven by the strong growth of Yala and Yala Ludo, and the proliferation of our highly engaged and interactive user community. Strategically and operationally, during the quarter, we continued to emphasize our core competitive strengths. As a first mover in developing a voice-centric mobile social networking and entertainment platform in META, we have achieved a leading position based on our innovative business model, which focuses on user interaction and the social networking theory on our platform and our deep understanding of the local culture. As a pure UGC platform, we encourage users to share and participate actively and bring them a sense of belonging as well as a culture identity, which helps build a healthy and cohesive user communities. Going forward, we will continue to further penetrate into both existing markets and new markets to expand our user base, as well as respond to users' involving demands and add new features to optimize the user experience and enhance their engagement. We differentiate from other online social networking and entertainment platforms with our superior social leaders for users as we provide highly localized and customized product offering. Our platform interaction and communication features are based on different cultural backgrounds of users, which underpins the foundation for social interactions in Nina. In addition, none of our products and services currently have any advertising tied to it in order to ensure the highest quality user experience. The uniqueness of our business model and the premium user experience we offer on our platform has contributed to strong monetization capabilities for us. In the first quarter and the first nine months of 2020, we adjusted. Our adjusted net margin was 45.8% and 47% respectively. Through the sale of virtual items and operating services such as VIP rights or premium memberships on our platform, we will further capitalize on the immense market opportunities in Nina, which stable economic development and well-established mobile internet infrastructure have created a positive environment for the online social networking and entertainment market. Now let's take a closer look at the third quarter performance of our core products, Yala and Yala Ludo. Yala primarily features Yala rules, which can be viewed as the online version of modules or cafes, where people spend their leisure time in casual chat. For Yala, we maintained a sharp focus on building a tight-knit and high-quality user community. In the third quarter, Yala's average MAUs and paying users both more than doubled year-over-year, exceeding 5.5 million and 1 million, respectively. We will continue to enrich Yala with new localized features and new mobile social leisure activities tailored to users' needs in an effort to improve user engagement. And let's turn to our second flagship mobile application, Yela Ludo, for which we have been growing the user base and strengthening our monetization capability significantly. Yela Ludo resembles a family living room where family members and friends play simple board games that are highly popular in Nina, such as Ludo and Domino. While playing games, users can web chat and bond with other players, as well as engage in social networking through chat rooms. We also organize various types of tournaments to enrich users' gaming experience on our platform. Since its introduction in the third quarter of 2018, Yellow Ludo has rapidly gained popularity and has become a significant driver of our user community expansion. And now, also important contributors of our revenue growth. In the third quarter of 2020, the average MAUs of Yela Ludo increased by more than 20 times to 8.8 million. The rapidly growing popularity of Yela Ludo which was recommended by numerous app stores, including Apple Store and Google Store on their home pages. It's a testament to its superior foundation of social features tied to the culture norms of the region, with users able to enjoy real-time voice interaction while playing board games. Looking ahead, we are confident that we are continuing We can continue to capitalize on the significant growth potential in MENA's underserved online social networking and entertainment market. With our continued product innovation and our committed vision to cultivating an online voice-centric social community, we are optimistic we can continue to strengthen and broaden our monetization capabilities. And now I will turn this call over to our president, Mr. Saifi Ismail, to give you a closer look at the jealous appeal ceremony in UAE and the support we received from local governments and media.

Thanks, Taw. We are proud to be the first UAE-based technology unicorn to go public at the NYC. Our successful September 30th listing on the New York Stock Exchange this year has attracted immense attention from many UAE leaders and royal family members. The Vice President and Prime Minister of the UAE, His Highness Sheikh Mohammed bin Rashid, and the Minister of the Digital Economy congratulated us on our IPO and highlighted Yalla as the first UAE-based technology unicorn to be listed on the New York Stock Exchange in front of the public. We were also honored to have members of the royal family attended our listing ceremony in Dubai. In addition, more than 100 members of the Dubai media reported on our listing, many of whom had stories that lead their front-page headlines, providing further exposure for Yalla. Getting listed in the United States is an important strategic move for Yalla. and we look forward to seeing more local partnership and branding opportunities across the MENA region in the future. Now I will turn this call over to our CFO, Mrs. Karen Hu, for a closer review of our financial performance in the third quarter.

Thank you, Sefi. Hello, everyone. Thank you for joining us. We are very pleased to report our operating and financial performance for the first time as a public company. where our strong monetization capabilities led to healthy top and bottom line performance in the third quarter. Our revenue reached $33.8 million in the third quarter, while our non-GAAP net income was $16.5 million. We were also able to maintain a high non-GAAP net margin of 45.8%. We are confident in our positioning and the ability to capture further significant growth in China's underserved online social networking and entertainment market. Now, I would like to work through our financial details for the third quarter of 2020. Our revenues were $33.8 million in the third quarter of 2020, a 98.4% increase from 17.8 million US dollars in the same period last year. The increase was primarily driven by the widening of both Yara's and YaraLudo's user base and the robust enhancement in YaraLudo's monetization capabilities. Our average MAUs increased by 358.9% from 3.1 million in the third quarter of 2019. to 14.3 million in the third quarter of 2020. Besides, another primary contributor to our solid revenue growth was the significant increase in the number of paying users, which grew from 510,000 in the third quarter of 2019 to 5.1 million in the third quarter of 2020. Our revenues generated from group checking services were $30.3 million in the third quarter of 2020. And our revenues generated from billing services were $3.5 million in the third quarter of 2020. Now, let's look at our costs and expenses. Our cost of revenues were $25.6 million in the third quarter of 2020. compared with 5.4 million U.S. dollars in the same period last year. Excluding share-based compensation expenses, other components of cost of revenues were 11.5 million U.S. dollars for the third quarter of 2020. 112.6% increase from 5.4 million U.S. dollars for the same quarter last year, which was in line with our revenue group and primarily due to the our expanding business scale. Excluding share-based compensation expenses, cost of revenues and percentage of our total revenues increased from 30.6% in the third quarter of 2019 to 34.1% in the same period in 2020, primarily due to an increase in commission rate for third-party payment platforms. Our selling and marketing expenses were $8.5 million in the third quarter of 2020. Compared with $1.7 million in the same period last year, it truly shared these compensating expenses. Other components of selling and marketing expenses were $4 million for the third quarter of 2020, a 131.4% increase from $1.7 million for the same quarter last year. which was primarily due to higher advertising and marketing promotion expenses as a result of our continued user acquisition efforts. Excluding service compensation expenses, selling and marketing expenses as a percentage of our total revenues increased from 9.9% in the third quarter of 2019 to 12% in the same period in 2020. primarily due to higher spending in marketing activities related to Yala Ludo, which experienced substantial growth in the year 2020. Our general and administrative expenses were $28.9 million in the third quarter of 2020, compared with $1 million in the same period last year. East Tunisia's compensation expenses Other components of general and administrative incentives were $1.8 million for the third quarter of 2020, a 78.4% increase from $1 million for the same quarter last year, which was primarily due to, one, an increase in salaries and other benefits for our general and administrative staff, which was in turn driven by an expansion of our general and administrative staff, and two, an increase in professional services fees. If truly share these compensation expenses, general and administrative expenses as a percentage, our total revenues remained at a very stable level of 5.3% in the third quarter of 2020. Our technology and product development expenses were 1.3%. $7 million in the third quarter of 2020, compared with $0.4 million in the same period last year. Excluding share-based compensation expenses, other components of technology and product development expenses were $0.9 million for the third quarter of 2020. a 105.6% increase from $0.4 million for the same quarter last year, which was primarily due to an increase in salaries and benefits for our technology and product development staff. Extruding share-based compensation expenses, technology and product development expenses as a percentage of our total revenues slightly increased from 2.4% in the third quarter of 2019 to 2.6% in the same period of 2020. As such, our operating loss was US$30.9 in the third quarter of 2020, compared with operating income of US$9.1 million in the same period last year. Excluding share based compensation incentives, non-GAAP operating income for the third quarter of 2020 was $15.6 million, a 70% increase from the same quarter last year. Our income tax expenses was $0.11 million in the same quarter of 2020. As a result of foregoing, our net loss was 31 million U.S. dollars in the third quarter of 2020, a 436.9% decrease from 9.2 million U.S. dollars in the same period last year. If Malaysia's compensation expenses non-gap net income for the third quarter of 2020 was 15.5 million U.S. dollars, a 58.3% increase from $9.2 million for the same quarter last year. Next, I would like to briefly look at our cash and cash equivalents. As of September 30, 2020, we had cash and head cash equivalents of $75.7 million as compared to cash and cash equivalents of $58.5 million of June 30, 2020. The fourth quarter of 2020, we expect our revenue to be between $35 million and $36 million. The above outlook is based on current market conditions and reflects the company management's current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change. This concludes our prepared remarks for today. Operators, we are now ready to take questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from Ailee Leung with Hey2 International. Please go ahead.

Hi. Can you hear me?

Yes. Yes. Clear.

Hi. Hi. Hi. Thanks for taking my question, Yangzong, Shafi, and Karen. Congratulations on a good set of results since your listing. I have a few questions. The first question is just to do with our outlook. We've got very strong growth in quarter three, and we're also expecting strong growth in quarter four. So my first question is, do we have any revenue targets for 2021 or maybe user targets for 2021? That's my first question. In terms of the second question, I was wondering if management can share any tips details on the time spent for Yala and Yala Ludo during quarter three. And my final question, my third question, is whether we can share any color on maybe new apps or functions or features for 2021 or for the next 12 months. Thank you. That's all my questions.

Thanks, Mr. Liang. The first question is based on the company's current estimates. Our revenue for the year 2021 will exceed 200 million U.S. dollars. And for the next question, I will transfer to both Yang to give you answers.

Yes, for the update on the time span, the average daily time span for Yala was 4.5 hours in Q2, and we have this number We have this number increased in Q3. However, we hope investors understand that Yela's daily average time span is already very high compared with the peer average. And we hope we can be more rational when we look at the growth of this metric. And for Yela Ludo, the average daily time span reached to 105 minutes. and we think there are still ample room to grow. This is an update for the time spent. And for the pipeline of the new app, we have our yellow-blue for the Gulf countries launched recently, and we are still under optimization. And hopefully we will start our campaign from early of next year for Yalapalooza. And we have another casual game for Turkish people. It's called 101OK. It's still under development. I think we will launch it in Apple and Google in December this year. And for the pipeline, after pipeline in next year, we do have our plans, but we prefer not to disclose at this moment. Hope you can understand. Thank you, Billy.

Thank you. Thank you. That was very helpful, and congratulations again. I'll get back into queue.

Thank you very much, Billy. Thank you.

Our next question comes from Alex Poon with Morgan Stanley. Please go ahead.

Hi, management. Congratulations on the very strong results. I have a question on the use of cash. Can you tell us what's your plan for the use of cash, especially the IPO proceeds in the remaining of the year and also next year, the plan of cash? And my second question is regarding If I look at the sequential growth, is there anything to do with the normalization of COVID-19 because there was more severe lockdown during the second quarter period? How does it affect the user engagement in third quarter compared to second quarter? Thank you.

Thanks, A. For the first question, the user perceives. To align with our growth strategy, our key focus is to continue to expand our user base and new product development. As a result, we see ourselves investing more into technology and marketing and then seek for chances on partnerships. We believe that we will spend around 30% to 40% on marketing. and 20 to 30% on IMD, and we are very cautious at spending the remaining 30% on M&A or strategic collaborations or some projects. At the moment, I would think that Organic Group is still a key way for the company to grow, and MENA will continue to be our key focus in terms of regions to capture users. For the COVID-19 pandemic, We both think that COVID-19 has influenced us as a positive effect. But now, the yellow and yellow still keep the pace for the growth always under our control. So we think that in the next quarter, we will still can meet our expectations and we will see. Thank you.

Thank you very much.

Thank you very much.

Thank you, Alex.

Our next question comes from Bo Pei with Oppenheimer. Please go ahead.

Hi. Good morning, management. Thanks for taking my questions. And congrats on the solid results and the recent IPO. So I have two questions, if I may. So the first is about our two products were very successful in MENA. So I was just wondering what are the most of our products in MENA? Is that user scale or is that something else? And then the second question is, you talk about a little bit the new product launch plan. And then I'm just wondering the resonals and the strategies behind this product launch. How do we decide what kind of products to develop? How do we determine the market opportunities and, you know, land related to that? So thank you very much. Thank you very much.

Thank you, thank you, Mr. Pam. I'll answer the two questions. And for the first question, first of all, we have already built a highly interactive and engaged user community, and our unique business model differs from the traditional live broadcast, whose interaction is mostly one way. There is no fault in any of our channels, and all content are user-generated. This allows all users in Yala and Yala Ludo to participate actively, further stimulates their creativity and strengthens our user loyalty to our platform. Besides, we have a very strong local team. The management has a deep understanding to the MENA market. MENA is a market with high barriers. Without local know-how, it's very difficult to succeed here. A team with years of experience in living in this area and expertise in the TMP industry is also very important. I think that's the most for our products in MENA. And for the second question, just now I already replied to Mr. Alex about our product pipeline, which is yellow, blue, and 101OK for Turkish people. And we are not restricted to these two. We have other plans, but we prefer not to disclose it at this moment. But I can tell you how we decide what kind of product we plan to develop, what's the decision chain in our company. We have a very strong local team. and the management has deep understanding to the middle market, as mentioned just now. We will make our decision based on the management's local know-how, combined with insights we gain from user surveys we conducted. We have already over 15 million MAUs in both Yala and Yelaludo. So we have our user surveys. they like, what they'd like to have in the future, we know that. At this stage, we already identified popular social networking and entertainment activities offline and replicated them online to fulfill the local people's real daily needs that has existed for a long time. Thank you, Ms. Pam. That is our answer.

Thank you. That's very helpful.

Thank you.

As a reminder, if you have a question, please press star then 1 to be joined into the queue. Our next question comes from Ali Leong with Hey2 International. Please go ahead.

Hi, management. It's Billy from HiCom again. Just wanted to follow up with one question, and it's to do with competition. Can management maybe share their view or maybe the outlook of what they see of what you see in terms of voice, social networking, or maybe just in terms of social networking competition in MENA region, just to share with us in terms of the competitive environment. Thank you. Thank you.

I would like to answer this question. So they are well-established online social network and entertainment company that are trying to get into MENA. like YY, who have developed apps like Bego, Hugo, or HelloYou. If you look at the MOU numbers of Bego or Hago, they have around 10 to 12 million monthly active users in MENA in the quarter two of 2020 at most. They have been in the market since 2018, and they are still just of the same or if not smaller than our companies. Therefore, we would like to emphasize that it's not that we have never faced any competition. The competition do exist in MENA, and we are able to compete effectively due to a couple of reasons. Number one is our ability of understanding what the MENA user really needs, as Mr. Yang explained before. Second is the design of our product according versus just replicating a product from the west or east to MENA. We have very effective marketing and user acquisition strategy, which is reflected in our PAT and sales and marketing expenses. The third reason, most importantly, the community we have established is the strong barrier to entry. Users are very sticky to our platform. More than five hours they spend on the daily average. So in that case, I think MENA is a very highly underdeserved market. Even if there are more apps coming into the market, why can't we coexist just like China and the U.S.? We serve the different needs of online users and the other competitors like Vigo, live streaming. As we do voice chat and casual games, TikTok does also share short videos. We will all have our own position in MENA.

Thank you, Sarthi. That was very, very helpful. And just to follow up on that, is it possible to share maybe some engagement data for quarter three against quarter two? Are we seeing better engagement in the last quarter? Thank you.

In terms of engagement, it's the same user's behavior. We have seen the user engaging on our Yellow Light platforms. They are socializing, talking, singing, running music, sharing moments, upload photos, texting each other. And the gift in nature is still strong as we go on. And Yalla Ludo experienced also the same behavior after we integrated the online majlis. Plus, the users are still enjoying and entertaining. playing the games of Ludo and Domino's. So the users are still having the same level of engagement, if not more. And this is proven by the incremental of the time spent on our platform.

Thank you. That was helpful. I'll get back to you.

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

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 Yellow's Investor Relations through the contact information provided on our website or the PS&A Group Investor Relations.

Okay, thank you. Thank you all, gentlemen, ladies and gentlemen.

This concludes the conference call. You may now disconnect your lines.