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 2022 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 section. Today's conference call is being recorded. Now I'll turn the call over to the speaker host today, Ms. Kerry Gao, IR Director of the company. Please go ahead.

Hello, everyone, and welcome to YALA's fourth quarter and four-year 2022 earnings conference call. We released our earnings earlier today, and the release is now available on our IR website, as well as our news 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. 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 information 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. 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.

Thank you, everyone, for joining our conference call. 2022 was a challenging year. In light of the microeconomic headwind, IEALA 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, Yala and Yala Ludo. At the same time, we continued to invest in new products to explore and tap opportunities in MENA region's digital market, setting the stage for even better performance in 2023. In Q4, our revenue was 75.1 million USD. reaching the upper end of the guidance we provided. Although we did witness a slight downward impact on user activity, 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. I'd like to share some new research from Frost and Sullivan. In their recent research report, titled Online Social Networking and the Gaming Industry Independent Market Research, Yela has been recognized as the largest media-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 game actually 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 five years, unleashing massive growth potential across the other groups' businesses. Now let's take a look at some recent development of Yala Games, our subsidiary formed to explore the mid-core and high-core 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 Yala Group to begin in-house development of high-core games. Going forward, The game development and game distribution business will constitute key strategic pillars for Yellow 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 medical and hardcore games across a broad range of genres. More specifically, we have finished the first round of beta testing on both March Kingdom and our RPG game. The first two hardcore games titled we will distribute in media. And we have been working on product requirements 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 Yellowchat, we're happy to share with you that we launched the official promotion on Yellowchat for the first time in November 2022. In addition to acquiring traffic from general channels, we launched campaigns in our Yellow community to encourage users of our other apps to try out Yellowchat. After two months of testing, we are seeing encouraging results, meeting our expectations for Yellowchat's first stage of development. Notably, the certain localized functions like the SN feature gained great traction among users. We believe this first stage attempt clearly demonstrates the potential of our Mina-based IAM product. At the same time, we would like to reiterate that building IAM product is never easy and we will continue to explore ways to better serve local users' needs in IAM product. we believe Yellowchat 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 Mina, making an acceleration of the region's development possible. Meanwhile, Mina is also embracing opportunities of collaboration from all over the world. As the number one Mina-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 , 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 development.

Hello, everyone. Thanks for joining us today. I would like to start with a closer look at our fourth quarter operation, 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 US dollars 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, but 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. Yellow groups 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, Yellow Parchees recorded an outstanding performance this quarter. We boosted purchase monetization capabilities by rolling out a new feature including more premium rides for VIP users and hosting operating events, revealing the game's revenue to 1 million US dollars for the fourth quarter. For the rest of our casual game portfolio, including Yalla Balut and 101 OK Yalla, we will continue to refine these products and see creative ways to increase market penetration. Before we move on to 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 and entertainment category for Yalla Life. hosted by the AGM Business Review. These awards honor outstanding companies that have made exceptional contributions in pursuit of technological innovation and revolutionary products and solutions in their respective industries in the Middle East region. We view this A serious 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 areas Yalla has been recognized as the largest MENA-based online social networking and gaming company. And 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.

Thank you, Sophie. Hello, everyone. Thank you for joining us. We continue 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 pay-in-use 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 gap net margin of 22.1%. For four year 2022, we maintain solid growth momentum with revenues of 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. Since marketing expenses as percentage of total revenue remained relatively stable at 16.4% throughout the year, well, GA's percentage of total revenues declined to 12%. As a result, our gap 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 Yala 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 save future growth opportunities. As always, we are committed to treating sustainable long-term value for our stakeholders. Now 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 the same period last year. The increase was primarily driven by the broadening of our user base and the 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 US dollars in the fourth quarter of 2022. a 14.7% increase from $23.9 million in September 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 operations and maintenance team. Cost of revenues as 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 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 first 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 first quarter of 2021 17.4% in the first quarter of 2022. Our technology and product expenses were 5.4 million US dollars in the first quarter of 2022. A 13.7% increase from 3.9 million US dollars in the same period last year. This primarily due to an increase in salaries and benefits for our technology and product development staff, driven by an increase in headcount for our technology and product staff to support for the development of new businesses and expansion of our new product portfolio. Technology and product development expenses as a percentage of total revenues increased from 5.8% in the fourth quarter of 2021 to 7.2% in the fourth quarter of 2022. As such, 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. Extreme share-based compensation expenses, non-GAAP net income for the fourth quarter of 2022 was $21.7 million. Next, 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 to refining Yala 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 Depositive Shares, representing 302,141 Class A ordinary shares from the open market with cash for an aggregate amount of approximately 27 million U.S. dollars. The aggregate value of ADS or Class A ordinary shares that may yet be repurchased under the share repurchase program was 123 million U.S. dollars as of December 31, 2022. For the interest of time, please refer to our earnings press release for the further details of our 2022 four-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 U.S. dollars. 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, of which we are ready to take questions.

Thank you. We will now begin the question and answer section. To ask a question, you may press star then one on your touch screen, sorry. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Your first question comes from Kai Fang Zhai from CDIC. Please go ahead.

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

Hi, Kaifeng. Thank you very much for the question. This is Jeff. I'll be taking your first question. Regarding the user growth strategy for our flagship application, Yala and Yala Ludo, we expect to maintain a similar direction as last year's. After seven years of operating our product in the region, we have developed 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.

Hi, morning. Hi, founder. This is Yang. I will take the second question. The AI for sure is an important field. We have continued to research over the possible, 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. And so far, the representation of Arabic in AI-related databases is not as extensive as that of English. So 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 recommendation and content evaluation, which can improve our operating team's efficiency in preventing in appropriate content from being posted in our chat rooms. In the future, we're also looking to 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 hard-core 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, Kaifeng.

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

Thank you. Your next question comes from Su Cheng Zeng from CICC. Please go ahead.

Hi, good morning. Thanks for taking my question. And I have two. The first one is about the YALA chat. As I mentioned in the prepared remarks, you conducted a series of promotion activities for it. And can management share more operating data after the promotion? And kind of on your product strategy and outlook for 2023. And my second question regards to IMD experience outlook. Notice the company expanded its con-hiring and project building in the external highways in 2022. So do expect to keep a similar scale in 2023, and will that reflect on the cost and R&D expense? Thank you.

Thank you very much, Jieqing, and good morning. I'll take the first one, and I think our staff will carry on. We'll take the second. As mentioned earlier, after the first round of testing, we are seeing encouraging results. The MAUs of Yellowchat during the promotion were around 1 million, meeting our expectations for Yellowchat's first stage of development. We are seeing in first stage because As we keep saying, building an AM 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 Yellowchat product. At the same time, as digital transformation becomes a key trend and strategy across the MENA region, we will continue to monitor the market and look for opportunities to transition yellow chat to the second stage. We will keep you posted on the updates. And I think the second question will be taken by Karen.

Thank you. Thank you very much, Tao. Thank you, Xueqin, for your close attention to our company's development. Yes, we continued to expand our team during 2022, and the majority of our new hires are R&D professionals. There are two key reasons. Firstly, our company has developed rapidly over the past few years, and our team has often been working at full capacity. So 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 headquarters to standardize the management of different projects, which will allow us to manage different projects more efficiently in the future. So 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 initiative's development. Hope I answered your question. Thank you.

Thank you. Very helpful. Thank you. Your next question comes from Yulin Zong from Haitong. Please go ahead.

Hello. Thanks, management, for taking my questions. Actually, I got two questions. Number one, could you please provide the the outlook on your legacy products into 2023, such as YALA and the YALA chat, the two core legacy products. And the number two is regarding the margin trend. And could you share with us some kind of your margin trend going into the 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 trend in this year? Thank you.

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

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. Hence, in that case, we think that we will 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. But I do think that 30% non-GAF net margin for the whole year is fair. Thank you, Yulin.

Thank you. That's very helpful.

Thank you. Your next question comes from Thomas Zhang from Nomuras. Please go ahead.

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.

Thank you very much for your attention. Entering 2023, we have seen the macro situation improve, especially since the middle market has gained a lot of interest from around the world. In the 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. So 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 Mina's digital transformation. We will keep monitoring the trend and see if there are good opportunities for acquisitions. This will also be a very important strategy for our group. So with buy and build strategy, we expect to deliver a better performance in this year. Thank you.

Thank you.

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

Hi, management. Thanks for the presentation. And I have two questions about the outlook this year. So what is the guidance for the paying user number and our pool in 2023? And what are the main strategies for the firm to achieve these targets? Also, 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.

Hi, Edward. This is Jeff. I'll be taking your first question. Regarding the number of paying users and APUS, 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 event. It's hard to give specific guidance at the beginning of the year. For example, if I were asked the same question this time 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. 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.

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 will spend on will remain our user acquisition and our R&D. And 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. So I believe this will benefit the companies in the long run, and we will keep you posted if this occurs. Thank you.

Thank you. That's very helpful.

Thank you. Your next question comes from Ziming Chen from Heartful Securities. Please go ahead.

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

Hi, Takun. 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.

Thank you.

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.

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.

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