Yalla Group Limited

Good morning and good evening, ladies and gentlemen. Thank you for standing by for YALA Group Limited Third Quarter 2022 Earnings Conference Call. 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. I'll turn the call over to your speaker host today, Ms. Carrie Gu, IR Director of the company. Please go ahead, ma'am.

Hello, everyone, and welcome to YALA's third quarter 2022 earnings conference call. We released our earnings earlier today, and the release is now available on our IR website as well as our newsreel 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 annual report filed with the SEC. YALA does not assume any obligation to update any forward-looking statements except as required by law. Please also note that YALA's earnings press release and this conference call include a discussion of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. Yala'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. Jeff Xu, our chief operating officer, who will briefly review our recent business developments. Mrs. Karen Hu, our chief financial officer, will then provide additional details on the company's financial results and discuss our financial outlook. Following management's prepared remarks, we will open up the call to questions. Mr. Saifi Ismayil, the company's president, is unavailable for today's call due to a personal emergency. 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.

Thank you, Kerry, and thank you, everyone, for joining our third quarter 2022 earnings conference call. We are pleased to have delivered another strong quarter with record revenue of 80.1 million USD, exceeding the higher end of our guidance by 6.8%. This also represents a third conductive quarter of record-breaking revenue for the company. and undergoes our unique capabilities in driving business growth at a solid pace while continuing to develop our integrated product ecosystem. Such robust costly results are underpinned by our continuous efforts to refine our operational process, optimize user acquisition, and further drive our product monetization. Together, these actions have effectively improved our user experience, thereby fully boosting YALA's and YALA Leader's user engagement and user's willingness to pay on our platform. Also, our impressive quarterly results are a testament to our core strategy as well as our operational improvements. As we further deepen our expertise and build in our product portfolio in MENA. We are confident in our future growth potential. Now let's take a closer look at our new product updates. Leveraging our extensive industry-leading experience in social and online entertainment in MENA, we established Yala Game to explore the mid-core and hardcore game distribution business as a complement to our casual game portfolio. In this order, Yellow Game has taken a crucial step. We are excited to share with you that after several months of collaboration with the gaming studio we invested in, we have launched the better version of our first hardcore mobile game, Merge Kingdom, in another MENA country. We will soon begin to gather user feedback and actively fine-tune the product through the better stage. paving the way for full-on promotion. We will share more details and metrics with you on our next call. The second hardcore game that we plan to distribute in the region, the RPG game, is on track to be launched by the end of this year. Moreover, Asmina is becoming the next popular emerging market and continues to attract attention from more and more gaming studios. We remain open to discovering good gaming content and potential collaborators with whom we can jointly further explore the middle market. We look forward to sharing more updates with our investors in the near future. We are also very excited to report that we recently launched the Yellow Track version 1.3. which we have already developed into an instant messaging product with a broad area of localized and customized functions. In this quarter, we added more engaging functions into the product. And as we shared previously, we are enhancing Yala Chat by leveraging a unified logging system. Over the past two quarters, we have upgraded our platform and hosted campaigns to encourage users to log into Yala and Yala Ludo using their Yala chat account and to motivate more Yala group users to register for Yala chat account. In addition, this quarter we launched a Yala Ludo mini program within the Yala chat app. Yala Ludo is the number one tabletop game across MENA. Yala Ludo users now have full access to their game assets and get better in the game app when using Yala Ludo Mini program in Yalachat. We believe this is a crucial step to build the product schema here, and at the same time, increase user's thickness to our app. Next, let's take a look at our Waha product, the first ever social metaverse designed for the MENA region. In Q3, we rolled out a number of new functions to enhance WAHA's gamification and entertainment features. First, we continue to launch new social scenes in WAHA, including a difficult scene recorder in which users can dance and play the role of DJ on stage. Second, beyond voice chatting with friends in WAHA's rooms, Users can now also play music and videos, creating a virtual theater space for sharing their favorite entertainment while hanging out with their friends. In addition, to further build out the product's gamification, our team began to roll out mini-games in Wild High Road, encouraging user engagement and boosting user interaction. We will continue to monitor the latest trends and upgrade WAHA accordingly to keep providing our users with fun and cool functions that are tailored to local culture and trends. Before I wrap up, I'd like to share with you that our president, Mr. Saifiz Ma'il, has been named one of the region's 50 most inspiring business leaders of 2022 by the prestigious magazine Arabian Business. which is the Middle East region's top resource for informed news, features, and commentary. Its output includes interviews with some of the world's leading business people and long-form features from around the Middle East. Congratulations, Stacey. In conclusion, I'm happy with our ongoing solid results this quarter. Over the past six years, We have shown our strong focus and commitment to MENA, its people, and its culture. We strive to explore new products to meet MENA users' involving needs and remain dedicated to facilitating digital transformation throughout the region. As a calculator in MENA, we will continue to expand our services and stretch the boundaries of our business while further deepening scenarios of our different products and services to drive brand loyalty among users and improve our platform's brand business. Once again, our vision is to build the most popular destination for online social networking and entertainment activities in MENA, and we remain steadfast in our pursuit of this goal. Now, I will turn this call over to our COO, Mr. Jiaxu, for a closer look at our recent developments.

Hello, everyone.

Thanks for joining us today. First of all, I'm pleased to tell you that Yala was recently invited to attend the 6th Future Investment Initiative in Riyadh, titled Investing in Humanity, Enabling a New Global Order. hosted by the Future Investment Initiative Institute. The event brought together the world's foremost CEOs, policymakers, investors, and entrepreneurs to discuss and shape the future of international investment and the global economy. Yala was honored to participate as a featured speaker on the From C to Unicorn, Empowering Youth Entrepreneurship Panel, where we discussed the intersection of innovation, entrepreneurship, youth and talent and shared YALA's story with the local and international investment community. YALA Group is proud to contribute to such events throughout MENA, helping to promote our region's talent, potential, and unique local perspective to a broader audience, demonstrating our commitment to promoting a healthy and well-managed sector environment that facilitates the development of local digital economies. Let's turn to our operations. As well as our product performances this quarter, our team's ongoing efforts to refine our content offerings and user operations further bolsters user engagement, as well as our paying ratios and advanced our monetization capabilities. As a result, we are pleased to report another robust quarter, with Yellow Group's total revenue of $80.1 million beating the higher ends of the company's guidance. In addition, our monthly active users increased 19.1% year-over-year, reaching 30.9 million. Yella Group's paying users also increased to 11.5 million. Now, a closer look at our casual game portfolio. Yella Perchise ranked in the top five in terms of revenue in the board game category in 10 countries, including Colombia, Mexico, Chile, and Spain. During Q3, We host a number of targeted events to encourage user activity on the platform. For example, our Tomato Fight event, which was inspired by the traditional Spanish festival, Nat Matina, attracted participation by more than 60% of our daily active users and improved the diamond consumption on the platform by more than 20%. We will continue to find innovative ways to build the product's user community and strengthen its monetization capabilities. For 101OK Yala, after closely monitoring its operations for several months, we decided to add an expanded Magelist or Chatroom function into the app, as the function has been proven effective in boosting our product monetization capabilities. Beyond that, we also decided to increase our sales marketing spend on this product and to invest more to acquire iOS users. As a result, we have witnessed a decent improvement in both 101OK Yala's number of paying users and paying ratios. where its total revenue improved by more than 100% compared with that of the previous quarter. Although 101OK Yala accounts for only a limited part of the group's revenue, we still see this as an encouraging improvement in products in current stage. For Yala Valute, during the quarter, we continued to upgrade the product and launched several new game modes, fulfilling players' diversities and preferences, as well as increasing apps' gamification. YellowBalloon targets an important market in MENA, and we will continue to tailor the specification of its product design while collecting user feedback. With respect to monetization overall, we continue to explore innovative methods and channels across our portfolio. Let's look at YellowRoodle, one of our flagship products, as an example. YellowRoodle generally demonstrates great monetization potential, thanks to its widespread popularity and sports appeal. This quarter, we boosted its monetization even further via joint marketing efforts with our channel partner for the distribution of gift cards. This partner has launched a successful promotion campaign for Yellow Ludo in MENA, enabling us to reach more potential paying users. As a result, the channel sales of Yellow Ludo gift cards grew by more than 30% compared with the sales before the campaign. Interestingly, the majority of the sales came from first-time purchasers of Yala Ludo gift cards, highlighting certain unproven accounts recharging leads and presenting an opportunity for us to creatively attract new users while improving monetization across our gaming portfolio. We are encouraged by this progress and will further expand our payment methods to continuously improve our users' experience while creating more revenue streams for our company. Before we move on to financials, I'd like to mention that we at Yella Group were extremely honored and privileged to be the co-sponsor of City Talk, a new influencer marketing industry forum, which brought together more than 500 social media influencers from various countries in the Arab world in October in Jordan. While Yella is a user-generated content platform, we have deep relationships in the Arab influencers community, providing a mutually beneficial conduits for sharing ideas, opinions, and experience. These connections empower us to keep up with current trends, identify new opportunities, and remain part of the conversation online. As MENA's largest online social networking and entertainment platform, we are also a valuable partner to influencers in promoting the development of the digital economy, a mission we all share. As we reiterate every quarter, YALA aspers to become the number one online social networking and entertainment platform in the MENA region. We have always been committed to providing the people of MENA with better access to a digital life, and we consistently enrich our product and service offerings and strengthen our partnerships with local channels to foster netizen communities throughout the Arab world. We are well positioned to capitalize on potential growth opportunities in the MENA region and 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.

Thank you, Jeff. Hello, everyone. Thank you for joining us. We delivered another outstanding set of financial results in the third quarter of 2022. with group revenues reaching a record $80.1 million, up 12.3% year-over-year. Thanks to our enhanced gamification and entertainment features, we also saw robust growth in paying users, driving our group's paying ratio to 37.4%. Furthermore, we maintained healthy profitability with a gap net margin of 30.5%. and excluding share-based compensation, a non-GAAP net margin of 36.7%, all the while investing in innovation across our portfolio and strategically boosting our marketing spend. Going forward, we will continue to expand and integrate our Yala ecosystem, optimizing operational efficiency, and explore new monetization avenues to propel our long-term growth and support sustainable returns to shareholders. Now I would like to walk you through our detailed financials for the third quarter of 2022. Our revenues were $80.1 million in the third quarter of 2022, a 12.3% increase from $71.3 million in the same period last year. The increase was primarily driven by the broadening of Yala Group's user base and the enhancement to Yala Group's monetization capabilities. Our average MAUs increased by 19.1%, from 25.9 million in the third quarter of 2021 to 30.9 million in the third quarter of 2022. Now, let's look at our costs and expenses. Our cost of revenues was $29.6 million in the third quarter of 2022, a 26.3% increase from $23.4 million in the same period last year, primarily due to an increase in technical service fees resulting from the expansion of our product portfolio and the increase in salaries and benefits resulting from the expansion of our operations and maintenance team. Cost of revenues as percentage of our total revenues increased from 32.8% in the third quarter of 2021 to 36.9% in the third quarter of 2022. Our selling and marketing expenses were 12 million US dollars in the third quarter of 2022, a 9% increase from 11 million US dollars 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 percentage of our total revenues were 14.9% in the third quarter of 2022, decreasing from 15.4% in the same period last year. Our general and administrative expenses were $8.6 million in the third quarter of 2022, a 16.9% increase from $7.3 million in the same period last year, primarily due to an increase in performance-based incentive compensation and an increase in professional service fees. General and administrative expenses as percentage of total revenues increased from 10.3% in the third quarter of 2021 to 10.7% in the third quarter of 2022. Our technology and product development expenses were 5.5 million US dollars in the third quarter of 2022, a 42.2% increase from 3.9 million US dollars in the same period last year. This was primarily due to an increase in salaries and benefits for our technology and product development staff, driven by an increase in the headcount of our technology and product development staff to support all the development of new businesses and expansion of our product portfolio. Technology and product development expenses as a percentage of total revenues increased from 5.4% in third quarter of 2021 to 6.9% in the third quarter of 2022. As such, our operating income was 24.5 million U.S. dollars in third quarter of 2022, compared with 25.7 million U.S. dollars in same period last year. Excluding share-based compensation, Non-GAAP operating income in third quarter of 2022 was 29.5 million US dollars. Our operating tax expense was 0.79 million US dollars in third quarter of 2022, compared with 0.42 million US dollars in the same period last year. Moving to the bottom line, our net income was 24.4 million US dollars in third quarter of 2022, compared with 25.3 million US dollars in the same period last year. Excluding share-based compensation expenses, non-GAAP net income for the third quarter of 2022 was 29.4 million US dollars, Next, I would like to briefly go through our liquidity and capital resources. As of September 30, 2022, we had cash and cash equivalents of 391.2 million US dollars as compared with cash and cash equivalents of 384.9 million US dollars as of June 30, 2022. This improvement demonstrates our ongoing commitment to streamlining and refining Yala Group's operations. On May 21, 2021, we announced the 2021 share repurchase program. As of September 30, 2022, we have repurchased 2,302,141 American depository shares, representing 2,302,141 Class A ordinary shares from the open market with cash for an aggregate amount of approximately 27 million U.S. dollars. In the fourth quarter of 2022, we expect our revenues to be between 70 million U.S. dollars and 76 million U.S. dollars 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.

Thank you. We'll now begin the question and answer session. Ask a question, you may press star then one on your touch-tone phone. Using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. This time we'll pause momentarily to assemble the roster. First question will be from Chai of Creek. Please go ahead.

Hi, management. Can you hear me? Yes. Thanks for taking my question, and I have two. The first is, can management provide some details about new business like gaming and chatting, and will you have a monetization plan in the next year? And my second question is, how does management see the margin and OPEX moving over the next several quarters?

Hi, good morning. Thank you very much, Kevon. Good morning. I will take the first question, and I think the second question will be taken by our sample. Our new instant message product, YellowChat, reflects our observations respecting local MENA users' social habits and preferences. And we have continued to roll out various localized and entertaining features to fulfill users' diverse needs with the L&M products. We launched a marketing campaign for Yellowchat in November, and some of you may have already seen Yellowchat ranked among the top three on the App Store, downloading the download ranking in certain regions. We are excited about this strong performance, but it's still in a very early stage, and we will need more time to test the market. We strongly believe that a dedicated IAM product with features customized for Mina users is the next thing that we will strive to achieve this goal. In the short run, or at least in 2023, we don't expect to start monetization on Yellowchat. The focus for the product in this stage will still be expanding the user community over for our gaming distribution business are different. Gaming does account for part of our revenue expectations for next year, but since we just recently launched the SRG game, it will take some time to collect user feedback and give an estimate on the scale of its revenue. We will share more details with you next quarter. I think Karen will take the second question.

Thank you, Ms. Liang. Thank you very much, Kaifeng. This is Karen. About the margin and the OPEX moving, I think that with the current pace of our development, the non-GAAP net margin can be maintained around 35% this year. However, since we just launched the marketing campaign for Yalachet in November, and we may need to invest more in sales marketing during Q4. We will continue to adjust our campaign strategy for Yellowchat according to the market feedback. Therefore, the budget for these campaigns is not a fixed number. It is subject to change. In past years, we focused on the development of our two successful flagship applications, And the year of 2022 is a year for our adjustment as we aim to add more applications to our product portfolio. We have invested more to successfully complete this portfolio expansion with the goal of diversifying our future revenue streams and building Yala into a larger internet platform. During this process, some of our new products like YalaChat, and game distribution business are not contributing to our current revenue because we still need to invest in their R&D and sales marketing. Given all that, as we mentioned last quarter, I would say that it's fair to expect our non-GAAP net margin to remain around 30% in the last few quarters. The target remains unchanged, and we think this will significantly benefit the company's long-term goals. Thank you, Kaifeng. Hope I can answer your question.

Thank you. That's very helpful.

So operator, we're ready for the next question.

Thomas Shen, please go ahead with your question, please.

Hi, good morning, management. Thank you for taking my question. I have two questions. The first one is, could management elaborate more on the company's marketing strategies going forward? I also have another question on games. Could management share more details on the game pipeline for next year? Thank you.

Thank you very much, Thomas. Shane, for your question. This is Jeff. You asked a very good question.

So for the first question, the marketing strategy is an issue that our team thinks about and discuss constantly. First, I want to highlight again that the dynamic market environment is an important factor, and we may adjust our marketing strategy accordingly anytime. For now, if you ask my view on next year's use acquisition plan, I would say the pace will be pretty similar to this year's. We will maintain our disciplined, sales and marketing strategy, and focus on the ROI of our spending. For the second question regarding the game pipeline, beyond the SLG game and the RPG game that we are working on, we have also started to explore mid-core games. We may look for some good studios to collaborate with, or we may also invest in some, as we did previously with our hardcore games. We are still in an early stage. So I will share with you more details in the future. Thank you for your question again.

Thank you.

Thank you. The next question will be from Edward Wong of Credit Suisse. Please go ahead.

Hi, management. Appreciate it for the presentations, and congratulations on the robust quarterly results. So I would like to follow up on questions about YalaChat. Yalachet has launched several mini-program functions in the past two or two quarters. What will be the positioning of mini-programs in the future? Thank you.

Hi, Edward. Good morning, and thank you very much for your question. Yes, we continue to roll out mini-programs to provide diverse functions to fulfill our users' various needs. We see significant potential in mini-programs. It is a flexible and efficient way to expand the services that we can provide with our YALA chat. Our team will have mini social games like WhoCat, and then the Attend feature, and now the YALA Ludo mini program. It's still in the early stage, but I think there is a lot more we can do with mini programs. We will keep you posted on the progress. Thank you. Thanks. That helps a lot. Thank you.

Thank you. The next question will be from of CICC. Please go ahead.

Good morning, gentlemen. Thanks for taking my question. I have two questions. The first one is that the company's revenue in the third quarter of this company's guidance and the market expectation So just wondering what the driver is driving by Yala or Ludo, and is it donated by PIN user or by APU? And my second question is related to Yala patches. Jeff just mentioned in the prepared remarks a number of patches even to have built a patches user community. Can management share with us the current user level and how we improve its monetization capabilities? Thank you.

Good morning, Xueqing. Thank you for your two questions. Our products have been making good progress over the past quarter, as you can see. In Q3, the growth was mainly driven by the increasing paying usage. but it's hard to determine whether paying users or our pool will determine the growth in the future. We dynamically adjust our operational strategy and sales and marketing strategy according to the market situation and the user's feedback. So it varies every quarter. And for the purchase, we constantly only disclose and use at the group level, but in general, Our user acquisition strategy focused more on the ROI of our investment in sales and marketing. Our group MAU growth rate remains at around 3% quarter over quarter. And in terms of monetization, purchase performance is encouraging. The product is now generating not only revenue but also gross profits. That's an excellent sign, and we are doing more work on boosting the monetization of this product. We look forward to sharing more details with you in next quarter. Thank you. Thank you, Shixin. Thank you.

Thank you.

Thank you. Our next question will be from Chengai Li of CICC. Please go ahead.

Hi, Matt and Mary. Thanks for taking my question and congratulations on another solid quarter. I have two questions. Could management please share some color or change on the competitive landscape in the MENA region? And secondly, we can see the pay ratio continues to improve in recent quarters. So how should we expect YALA's pay ratio and ARC Pro to change in the future? Thank you.

Thank you. Thank you, Chen Hao, and good morning. As we mentioned last quarter, MENA is an emerging market with great potential. We started our business here six years ago, and as a leading company in the region, we have achieved certain milestones that have been also recognized by the industry. In recent years, many strong internet peers have entered the market, such as BatDance and Wego. and some mobile gaming apps. It's exciting, and it's also a testament to the region's market potential. Except for all those growing businesses in MENA, more and more investors are now studying this market, which is very important for the industry's prosperity. And I want to reiterate that competition is never bad. It inspires us to refine our product design, learn from our users, studying new technologies and industry trends, and to drive innovation. As a leading player in this region, we will take proactive steps to establish our position and remain confident in our capabilities after all these years. Thank you, Chen Hao.

Thank you. That's .

Thank you. Thank you. The next question, we're from of Haitong International. Please go ahead.

Thank you. Thanks, Matt, for taking my question. I have two questions. Number one, could you share more kind of on the macro impacts in MENA area, and how could that impact your fundamentals going forward? And then number two, as we saw some very encouraging results in your design operation strategy. So could you elaborate more about your user matrix training and operating strategy in the legacy core products, such as YALA and Yalachat? Thank you.

Good morning. Good morning, Yuli. And I will take this to a question. Last quarter, we mentioned that NINA's micro Environment is improving compared to the previous two years. COVID is easing and oil prices are also rising. After another quarter, we are still not seeing big changes. I think consumers in Mina remain confident. If we look at our product performance, we delivered another quarter of record high revenue. Our momentum is strong so far. Also, we are seeing government paying more attention to facilitating the development of the digital economy. Factors such as gaming, e-sports, Web3 are hot topics and are getting more attention and resources than before. I believe these are good signs. And about our user metrics and operation strategy in our product, Yala and Yala Ludo are our flagship applications. They are our group's main revenue contributors, and their operation and development are of significant importance to the company's performance every quarter from Q4 and next year. We will continue with our operation refinement strategy. In terms of our user acquisition strategy, We just mentioned the pace will be similar to that of this year. YALA and YALA Ludo will still play crucial roles in YALA Group's development next year. Thank you, Aileen.

Thank you.

Thank you. The next question will be from Zemin Chen of Hayafu Securities. Please go ahead.

Good morning, management. Thank you for our good performance. I have a question about the traffic in our ecosystem. Can management share how traffic is connected and converged across the different apps? Thank you.

Hi, thank you for your question. Actually, the conversion effectiveness between our apps is very encouraging. we're seeing promising feedback and data.

Also, we think that the conversion will positively impact our users' long-term LTV. We have built a product ecosystem that provides diverse services to fulfill Mina users' virus online social networking and entertainment needs. When we decide to convert users from one app to another, usually these two products represent different sectors and provide distinct services. largely facilitating the improvement of users' total LTV on the YALA whole platform. Thank you. Hope I answered your question well. Thank you.

Thank you. Thank you.

That concludes our prepared remarks. Our question and answer session is now over. There are no further questions. I'd now like to turn the call back over to management for their closing statements.

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

The conference is now concluded. You may now disconnect. Thank you.