Yalla Group Limited

Good morning and good evening, ladies and gentlemen. Thank you for standing by for YALA Group Limited's fourth quarter and full year 2020 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. 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.

Thank you. Hello, everyone, and welcome to YALA's fourth quarter and four-year 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 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 Security 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 SEC. 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. Mr. Yang will be followed by Mr. Saif Ismail, the company's president, who will give a brief review of our recent development. Finally, Mrs. Karen Hu, our chief financial officer, will provide additional details on the company's financial results and discuss its 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. 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.

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Thank you, Kerry, and thank you everyone for joining our fourth quarter and full year 2020 Earnings Conference Call. 2020 was a milestone year for Yella. We became the first UAE technology unicorn to be listed on the New York Stock Exchange, an accomplishment we are very proud of and a testament to our business model, our fundamentals, and our perseverance. We also saw strong growth momentum across the board as we continued to expand our user community and advance our monetization capabilities. We are pleased to report a very strong fourth quarter where Yala Group's total revenue increased 42.9 Q1 Q2 and reached 48.3 million USD in Q4, exceeding the upper end of the guidance range. We also maintained our net margin at 48.3%. Well, our successful IPO event in Dubai generated far-reaching brand awareness in the Middle East and North Africa region, also known as MENA. Our highly experienced marketing team has been running innovative and resonating campaigns tailored to the local culture. Monthly active users for our group increased 15% during Q and reached 16.4 million. In addition, our ability to monetize our user base also continued to improve as our group's output grew rapidly by 38.5% quarter over quarter and reached 9.2 in Q4. Yala Group's paying users also increased to 5.2 million. Let me provide an example of how we are approaching monetization. A great example is Yala Ludo. It started as a casual game platform and has shown stronger user growth since the beginning of 2020. To boost its monetization capabilities, in July 2020, we introduced chatroom functionality into the platform. in the effort to strengthen the social connections amongst our casual game users. With improved user engagement and further monetization, Yella Ludo accounted for more than half of our group's quarterly revenue in Q4. Going forward, we are focused on three key priority areas in order to expand our business. First, growing our Yella community to cultivating a friendly and engaging environment. Second, providing users with a quality and localized product experience. And third, diversifying our platform's product offerings to create brand extension and deeper loyalty. Mi Necessarity embraces a more balanced lifestyle and having casual chat at a cafe or making phone calls for hours. With France, it's a common way for people to socialize and entertain during daily leisure time. Based on our deep understanding of MENA users' social needs and habits, we designed both of our products to be world-centric, bringing MENA's traditional offline social activity called to an online platform. and enabling Mina users to enjoy their social traditions anywhere and anytime. Expanding our user base is one of our top priorities. With new products lined up for launch this year, we are increasing our marketing efforts and budget in order to pursue new users more heavily while balancing growth and maintaining a healthy community, culture, and atmosphere. Every community has its own characteristics, and Yella is a platform for people to make new friends and have casual chat to enjoy each other's company. Users are having pure and relaxed social experiences on our platform. Since the very beginning, we have been growing Yella's community gradually with care and in a sustainable way without harming the community's culture and intimate feel. Our persistence and patience has paid off. Over the past five years, while the user space continues to grow, we were still able to maintain the healthy community culture. Every day, Yale users spend an average more than four hours on our platform. And in Q4, Yale's daily active rooms reached to more than 500,000. making Yala a unique destination among voice-chatting lovers. Our goal is to continue delivering sturdy and sustainable user growth with active user engagement in our community. The second priority is to continue providing users with quality product experiences. Our deep local insights and obsessive attention to product detail have been in creating a platform that provides customers with a superior and personalized user experience. This has resulted in robust organic growth driven by word of mouth among our users in the MENA region. Aside from our experience management, who have all been working and living on ground throughout MENA for many years, Our product team in Dubai also proactively conducts research and gathers firsthand data about local users, providing significant guidance and feedback for our R&D team as they look to optimize our products. The team's strong capability in product development is making Yella a competitive player in MENA's fast-growing online social networking and entertainment market. We will continue to focus on perfecting the details and developing good products tailored to the local culture, delivering our users a best-in-class product experience. Yella's mission is to build the most popular destination for online social networking and entertainment activities in MENA by continually expanding our brand. And in order to achieve this goal, we have been dedicated to expanding our platform's offerings. Assaifi will share with you momentarily more details about our new products. Looking back over the past year, we successfully launched and returned two highly popular products. Yella and Yella Ludo. Looking ahead, Yella Group will continue to embrace leading-edge technologies, continue to analyze and study the trends of local culture, and continue to roll out new social networking and entertainment products accordingly in order to capture more opportunities in this connected market. In summary, we are tremendously encouraged with our momentum as we enter 2021, this is going to be another important year. Five years ago, we started with a single product, Yella, through which we identified the potential of voice-centric social networking in the MENA region, and since then, dedicated ourselves to building and running a voice-centric social community. We are excited to see more and more people starting to recognize the advantages of voice-centric social networking. And going forward, we will continue to explore and identify opportunities in many areas online, social networking, and entertainment, applying what we have learned into a comprehensive platform with a wide range of product offerings. Now I will turn this call over to our president, Mr. Saif Ismail, to give you a closer look of our recent development.

Thanks, Taw. Hello, everyone. Thanks for joining us today. During our last earnings call, we introduced two new products to our pipeline, Yalla Balut, which is a traditional card game favored by a lot of people in Saudi Arabia, and 101OK, which is also a popular traditional board game in Turkey. The beta versions of both have been made available online, and we will launch these two products officially in quarter two with full-on promotional campaigns. We also have more exciting new products lined up for this year. One important new product that we would love to share with you is YallaChat, an instant message or IM product designed specifically for Arabic users. IM products are closely related to people's daily life, and it serves as an important part of the social infrastructure in modern society. Looking around the world, many countries or regions like United States, China, Japan, Korea, Russia, and Vietnam, to name just a few, have their own IM products that are designed based on local culture and catering to local users' needs. Keeping the Yalla mission in mind, we believe it will be meaningful for Arabic users to have their own IM products, and thus, we aim to launch Yalla Chat this year. The plan is to start it off as a communication platform and continue to add additional functionalities that serve MENA users' particular needs over time. This new product will be an important strategic effort for Yellow Group as it has the potential to significantly expand our scope of business. Leveraging our existing highly active user base, we look forward to cultivating another growth engine for our business. Another product we would love to share here is Yalla Parches. We found this Ludo game is not only popular around the MENA area, but also has a large fan base in South America. And Yalla Parches is a casual game platform we designed for South American Ludo lovers. From a strategic standpoint, we will continue to monitor the South American market closely for future opportunities as we enter that territory with Parches. Let's turn to our two flagship applications, Yalla and Yalla Ludo. To better enrich the content offering on our platform and further promote our platform's awareness among local users, in December 2020, we invited Fadia Tawil, the host of Saudi Arabia's live TV program, The Kingdom, this morning to launch her own chat room on Yalla. Ms. Tawil is well known for her resilient personality and passion for her career She's also a role model who can encourage and inspire young people to live positive and healthy lives both online and offline. During the event on Yalla, hundreds of users grabbed mics to discuss numerous topics, including life attitudes, social skills, and personal development. To name just a few, more than 149,000 users joined Yalla Fadia program during both season one and season two. spending a total of 20 million minutes in the chat room with Fadia on the mic, with 250,000 virtual gifts sent. In Season 2, each episode lasted for 90 minutes, and participants' average daily time spent reached 72 minutes, which demonstrates the impressive engagement level of our users at the event. We also recently launched Yalla Riyada, or Yalla Sports, programs, with one of the most famous sports broadcasters and experts in the region, Mr. Lotfi Az-Zoubi. Mr. Az-Zoubi discussed recent exciting games and sporting events with sport lovers on the Yalla platform. The program provides opportunities for our users from all age groups, specifically youth interested in sports, to discuss their views on football and other sports. More than 147,000 users have joined since Yellow Sports launched this February, with 270,000 virtual gifts sent. Every episode is an hour long, and our users have been spending more than 40 minutes on average every day participating in the program. Yellow Sports drives more sports lovers to the Yellow platform, creating higher engagement by running operation activities that is tailored to hot topics in the region and local users' interest. Looking ahead, we expect to see more operation activities on Yalla platform with popular personalities and subject matter experts as we continue to hone in on local popular culture and social trends in MENA and provide our users with what they love. With that, I will now turn the call over to our CFO, Karen, who will discuss our key financial and operational results.

Thank you, Sophie. Hello, everyone. Thank you for joining us. Our leadership position as a voice-centric social networking and entertainment platform in MENA is clearly being demonstrated by our robust top line and bottom line growth that continued in this quarter. Our first quarter revenues grew 150.9% year-over-year to 48.3% US dollars, while our non-GAAP net income reached 23.3 million US dollars with growth of 181.6%. Our non-GAAP net margin remained elevated at 48.3%, reflecting our unique business strategy, marketing positioning, and strong operating efficiency. With 2021 well underway, we are very confident we can deliver another year of strong growth and profitability as we continue to execute on our strategic roadmap. Now I would like to walk through our financial details for the fourth quarter of 2020. Our revenues were 48.3 million US dollars in the fourth quarter of 2020. a 150.9% increase from $19.3 million in the same period last year. The increase was primarily driven by the widening of both Yala and Yalaludo's user base and the robust enhancement in chatting services monetization capability. Our average MAUs increased by 295.4% from 4.2 million in the fourth quarter of 2019 to 16.4 million in the fourth quarter of 2020. YALAS MAU increased by 94.8% to 6.4 million in the fourth quarter of 2020 from 3.3 million in the same period of last year. and Yellow Ludo's MAU increased by 1057.5% to 10 million in the first quarter of 2020, from 0.9 million in the same period of last year. In addition, another primary contributor to our solid revenue growth was the significant increase in the number of paying users, which grew from 0.7 million in the fourth quarter of 2019 to 5.2 million in the fourth quarter of 2020. Now let's look at our costs and expenses. Our cost of revenues was 18.4 million US dollars in the fourth quarter of 2020. Excluding share-based compensation expenses, cost of revenues for the fourth quarter of 2020 were 16.2 million US dollars a 177.8% increase from $5.8 million for the same quarter last year. The increase was in line with our revenue growth and primarily due to our expanding business scale, excluding share-based compensation expenses, cost of revenues, as a percentage of our total revenues increased from 30.3% in the first quarter of 2019 to 33.6% in the same period in 2020, primarily due to, number one reason, an increase in salaries and the benefits for our staff related to the operations, which was in turn driven by an expansion of our staff related to the operations due to the increasing user base of our projects. And number two, an increase In commission fee for the third-party payment platforms, our selling and marketing expenses were $7.6 million in the fourth quarter of 2020. Excluding share-based compensation expenses, selling and marketing expenses for the fourth quarter of 2020 were $4.4 million, a 43.9% increase from $3.1 million for the same quarter last year. The increase was primarily due to higher advertising and marketing promotional expenses as a result of our continued user acquisition efforts. Excluding share-based compensation expenses, selling and marketing expenses as a percentage, our total revenues decreased from 16% in the fourth quarter of 2019 to 9.2% in the same period in 2020. primarily due to organic user acquisition through word-of-mouth reference and economies of scale. Our general and administrative expenses were $11.3 million in the fourth quarter of 2020. Excluding share-based compensation expenses, general and administrative expenses for the fourth quarter of 2020 were $2.6 million. a 66.6% increase from $1.6 million for the same quarter last year. The increase was primarily due to 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, excluding share-based compensation expenses, general and administrative expenses as percentage of our total revenues, decreased to 5.4% in the fourth quarter of 2020 from 8.1% in the fourth quarter of 2019 due to economies of scale. Our technology and the product development expenses were 1.6 million US dollars in the fourth quarter of 2020. Excluding share-based compensation expenses, technology and the product development expenses for the fourth quarter of 2020 were 1.4 million. a 223% increase from 0.4 million for the same quarter last year. The increase was primarily due to an increase in salaries and benefits for our technology and product development staff, which was in turn driven by an expansion of our technology and product development investment in new products and services. As a result of these reasons, excluding share-based compensation expenses, technology and product development expenses also increased as a percentage of our total revenue from 2.3% in the first quarter of 2019 to 2.9% in the same period in 2020. As such, our operating income was $9.3 million, U.S. dollars in the fourth quarter of 2020, compared with operating income of 8.3 million U.S. dollars in the same period last year. Excluding share-based compensation, non-GAAP operating income for the fourth quarter of 2020 was 23.7 million U.S. dollars, a 183.4% increase from the same quarter last year. Our income tax expenses was $331.4 trillion in the fourth quarter of 2020. As a result of the foregoing, our net income was $9 million in the fourth quarter of 2020, compared with $8.3 million in the same period last year. Excluding share-based compensation expenses, Non-GAAP net income for the first quarter of 2020 was $23.3 million, a 181.6% increase from $8.3 million for the same quarter last year. Next, I would like to briefly look at our liquidity and capital resources. As of December 31, 2020, we had cash and cash equivalents of $236.9 million as compared to the cash and cash equivalents of $75.7 million as of September 30, 2020. For our 2020 four-year financial results, please refer to our earnings press release for further details. For the first quarter of 2021, we expect our revenues to be between $60 million and $63 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. This concludes our prepared remarks for today. Operator, 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 one on your telephone keypad. If you are 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 two. For the benefit of all participants on today's call, If you wish to ask your question to management in Arabic or Chinese, please immediately repeat your question in English. At this time, we will pause momentarily to assemble our roster. The first question comes from Feiya Hao of Haitong International. Please go ahead.

Thank you for taking my question and congrats on a solid quarter. I have one question for you. What is the MAU outlook for Yala and Yala Ludo in 2021 and what are your key strategies to reach your MAU target? Thank you.

We expect both Yala's and Yala Ludo's MAUs to grow by 10% to 15% quarter over quarter this year. and that's around 50% to 70% growth annually. But please note, this number is only for Yala and Yala Ludo. We haven't included potential contributions from our new products in this outlook. In terms of growth of the new products, we will need to get more feedback from the market to get a better sense of it. We will keep monitoring the performance of our new products after we officially launch them, and we will keep you posted of our progress. Thank you.

Thanks.

The next question comes from Kaifeng from CITC. Please go ahead.

Yes, thanks for taking my question and congratulations for strong quarter. So I have a question about the competition. So we see some Chinese game companies have entered the middle market. So how do management see the competition and what are our strategies for this? Thank you.

Hi, Kaifeng. This is Taoyang. I would like to take this question. Actually, we were not the first company that launched mobile games in the middle market. There were more than 100 Ludo games apps in the middle market. MENA market before we introduced the Yala Ludo. In addition, Yala Ludo is also competing with other board games. So it has been facing competition since day one. Again, since the competition, Yala Ludo is the number one board game in the MENA region in terms of revenue generated. And the most important difference between Yala Ludo and the other Ludo platforms is that we have built very strong social features into it. and we run Yellow Ludo as not only a game platform, but also a social community. At this point, we haven't seen strong competitors in this vertical, but we will be alert to dynamic competitive landscape.

Okay, a follow-up question about the So we have several games and social networking apps. So can you give us more details about your plan about the platform and the YALA charge?

Thank you. Yeah, that is a very interesting question. Yes, building YALA as a platform is an important strategic move for us. We aim to build and strengthen the connections among our individual apps and create new synergistic ecosystem. We can drive traffic from one of our apps to another through ads or operating activities. At this stage, we think Yala Chat can be a good starting point to facilitate our implementation of this strategy. As Shafi mentioned earlier, our plan is to start Yala Chat off as an as a communication platform and continue to add additional functionalities, connecting all of our apps and services into one large platform. Thank you, platform, for your question. Yeah, very clearly. Thank you.

Thank you.

Thank you very much.

Again, if you would like to ask a question, please press star, then 1. on a touch tone phone. The next question comes from Bo Pai of Oppenheimer. Please go ahead.

Hi, management. Thanks for taking my question. Congrats on the strong results. So I have two questions, if you don't mind. So first, can you talk about what percentage of Ludo users use the chat feature in 4Q? And then I noticed you've entered the South American market. Can you briefly discuss the geographic expansion opportunity, for example, the total draftable market in South America, and also in terms of competition? How does that compare with the MENA market? And then is there any other market, for example, Southeast Asia or any other regions you plan to enter as well? Thank you.

Thank you, Mr. Bo. Good morning. Currently, over 20% of the users from Yela Ludo are using our magic function. I think, Mina, and for the second question, I think, Mina, for sure, it is our most important market and main focus for YALA. One of the most important advantages we have is our team's deep understanding into the Arabic culture and our strong localization capabilities. When we consider expanding into other regions, we usually begin with countries having similar cultural backgrounds. For example, our first flagship app, Yella, only supported Arabic in the beginning. And we gradually added Turkish, Hindi, Urdu, and Indonesian, et cetera. And our app is also available for download in more than 100 countries around the world. In addition, we also offer Spanish and Portuguese on Yella. The culture of people who speak Spanish and Portuguese It's very different from the cultures of other countries and regions in which Yala usually operates. But through operating products in Spanish-speaking countries and serving local users there, our team has gained valuable consumer insights and experiences about this market over the past three years. South America is a good example. We found that Pachichi is a very popular traditional board game in the South American market. And it's similar to Ludo. And with Yala Patricia's launch this year, we expect to grow our presence in this market. We will continue to monitor the South American market closely for future opportunities. Thank you. Ms. Bull?

Thank you.

The next question comes from Iris Geh of CICC. Please go ahead.

Hi, Benjamin. Thanks for taking my question and congrats on your strong financial performance. My question is regarding your expense plan and the margins because historically the non-GAAP net margins have been very high, almost 50%. I'm wondering can you please share more color on your investment and expense plans on like sales and marketing, R&D, and others, and how do you expect them to impact your margin level? Thank you.

Thank you, Shiqi. That's a really interesting question. Our net margin has been at a very good level of around 45% in the past several quarters, but this year we don't think maintaining our margin is our top priority. With a new product line up for launch, we expect to increase our efforts to pursue new users, hence our budget in marketing. This is important for the company from a growth perspective, and will benefit the company in the mid to long run. Thank you. Thank you, Shijie.

Thank you. That's very helpful.

Thank you.

The next question comes from Vincent Yu of Needham and Company. Please go ahead.

Thank you, management, for taking my question. My question is about monetization, a very general question. So for our existing products and our products in the beta testing version, any other, any new monetization opportunity that the company is most excited about in the next few years? Thank you.

Thank you, Vincent. Yeah, the current monetization capability is already very healthy and strong, I think. In the foreseeable future, social networking and entertainment will still be our main focus. And for us, if we decide to give it a try, we will do it gradually and cautiously. For the other businesses, like e-commerce, it's not in our plan at this point. We will share with our investors if we have any updates on our company's strategy or pipeline. Thank you, Vincent.

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

This concludes this conference call. You may now disconnect your line. Thank you.