Yalla Group Limited

Good morning and good evening, ladies and gentlemen. Thank you for standing by for Yellow Group Limited's first quarter 2023 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, Mr. Logan Yeh, Investor Relations Manager of the company. Please go ahead.

Hello everyone and welcome to YALA's first quarter 2023 earnings conference call. We released our earnings earlier today and the release is now available on our IR website as well as on newswire services. Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor Provision of the U.S. Private 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 this and other risks and uncertainties is included in our earnings release and our annual report field 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 including a discussion of unnoticed gap financial information as well as unnoticed non-gap financial measures. YALA's press release contains a reconciliation of the unnoticed non-gap measures to the unnoticed 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 latest achievements and growth strategy. He will be followed by Mr. Saifi Ismail, the company's president, 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 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 first quarter 2023 Earnings Conference Call. We kicked off 2023 with a solid status of operational and financial results. in the first quarter, even with the impact from Lambda, which started a little earlier than usual this year on March 23rd. Our Q1 revenue still reached 73.5 million USD, falling to the upper end of our guidance, and once again, demonstrating the remarkable strength of our flagship applications, Yala and Yala Luda. Our businesses continue to exhibit formidable stability and vitality thanks to our consistent efforts to build out our community and product portfolio over the past seven years. With our solid fundamentals and robust cash position, Yella is also able to continuously invest in new products and verticals to explore and tap digital opportunities across the MENA region. 2023 has ushered in a fresh economic start among the territories around the globe, with new dynamics and goals influencing investment worldwide. As a raging wave of digitalization, the Middle East is receiving increasing attention from the global technology and investment communities. Meanwhile, countries throughout MENA are also working to showcase the region's vibrant energy and commitment to advancing the new era of development. MENA has long been renowned for its copious nature resources. As a result, traditional industries have long been recognized as the economic backbone of the region. Recently, we have seen a significant shift in this dynamic, as numerous countries across MENA have prioritized digital transformation as one of their most important national development strategies, allocating capital and resources to support digital fields, including gaming and media, among others. As MENA's largest online social networking and gaming company, has been proactively preparing to seize this emerging opportunity. To that end, we have identified two growth engines for Yella Group's development in 2023. First, we will continue to invest in R&D and our self-developed products, building on our well-established user base and product popularity to amplify our value proposition among MENA markets. We will explore collaboration with global internet companies that are interested in Mina's emerging opportunities. By leveraging our deep local know-how and extensive operating capabilities, we are confident we can capitalize on global investment and achieve mutually beneficial collaboration. Now I'd like to share some important updates on Yala Games' recent developments. As we have mentioned previously, we established Yellow Game as a subsidiary to explore the mid-core and high-core games business in Mina. We are thrilled to announce that Yellow Game has officially launched its first high-core mobile game, a massively multiplayer online role-playing game, or MMORPG, entitled Age of Legends. Age of Legends is a self-developed game for which our team built a magical world and virtual characters rooted in Arabic culture and fairytales. Its landscape features oasis, snow fields, deserts, and goldies for users to explore. Leveraging our extensive experience in the middle market, we will also consistently roll out in-game activities tailored to local holidays and other special events. to provide additional localized experiences to our users. We launched Age of Legends at the beginning of May in Turkey with downloads available where Google Play for the first page. The game will also be distributed to additional regions and be made available where the App Store in the near future. We will continue to monitor Age of Legends operating and its financial performance, and we will look forward to sharing more details with you on our next earnings call. Turning to our casual game portfolio, which includes Yella Patches, 101 OK Yella, and Yella Blut, we continue to hone and upgrade our casual game products during the first quarter, rolling out new types of rankings and VIP privileges to improve communication. and provide more meaningful, entertaining experiences. We also continuously create and introduce themed events tailored to MENA's local culture, which improve users' engagement and retention. Thanks to these persistent endeavors, our casual games delivered outstanding performances in Q1. Both purchase and 101 of KELX's quarterly revenue were around $1 million a season. exemplifying our casual game portfolio's monetization capabilities. We will continue to enhance these products and seek creative ways to increase their penetration in different countries across MENA. To sum up, as the MENA region grows rapidly, countries throughout the region are showing their digital ambitions and striving to address opportunities and challenges on their digital transformation journey. As this transformation gathers momentum, we are pleased to see Nina attracting investor interest, not only because of its abundant capital and natural resources, but also due to its unique local market and digital era businesses with great potential. With an increasing inflow of global talent capital, technology, and brilliant ideas into MENA. We anticipate an acceleration of the region's development over the next five years. As a number one MENA-based online social networking and gaming company, we're fully dedicated to this market and present a holistic understanding of its culture, people, and distinct distinctive advantages, which will empower us to seize opportunities arising from the region's digital transformation. We will embrace the channel of development, deepening our investment in research and development to enhance our expertise. in technology and explore new products and workflows while working with partners around the globe to participate in the local digital transformation. Once again, our vision is to build the most popular destination for online social networking and entertainment in China, and we are determined in our pursuit of this goal. Now, I will turn this call over to our president, Mr. Saifi Ismail, for a closer look at our recent developments.

Hello, everyone, and thanks for joining us today. Let's take a closer look at our quarter one operation, as well as our product performances. We are pleased to deliver solid Q1 results. with our total revenue of 73.5 million US dollars landing in the high end of the company's guidance. As Thao mentioned, Ramadan started earlier than usual this year and partly fell into quarter one. However, its impact is seasonal and limited to our product and was in line with our expectations. Our monthly active users increased by 12.9% year over year, reaching 33 million. Yellow groups paying users also increased to 13.5 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 efficiencies. Before we move on to financial, I would like to mention that Yellow Group was extremely honored to receive the Golden Award of the Most Innovative Social App for our flagship voice-centric group chatting app, Yellow Life, at the prestigious Middle East and North Africa Stevie Awards 2023. The Stevie Awards organization was founded in 2002 and is considered one of the most prestigious global awards in the business world. With a participant base encompassing 70 countries and adjudication team of more than 1,000 executives worldwide, this year's event received more than 800 nominations from organizations across 18 countries in the MENA region. We view this Lusterius Award is yet another testament to our team's dedication to product excellence and their accomplishments throughout the past year, boasting detailed features and localized appeal that deeply resonates with users. Yalla's mobile applications deliver an unparalleled user experience that fosters a loyal sense of belonging, creating a highly devoted and engaged user community. Yellow Group strives to exceed users' expectations with innovative features and services tailored to the MENA region, and this award is a powerful commendation of those efforts. We would like to sincerely thank the CV Awards Organization for this esteemed international award, and we look forward to achieving greater success and cementing our position as the largest online social networking and gaming platform in the MENA region. I would also like to share with you that during the holy month of Ramadan, we hosted a sahur gathering in Dubai, bringing together more than 100 governmental officials, business partners, industry experts, and local media leaders for a festive celebration and discussion of the technology industry's latest strength. The event sparked a fascinating exchange of innovative ideas among our guests, building new relationships across the region and industry. We were privileged to host this distinguished group and have an opportunity to express our sincere gratitude to our partners for their unwavering trust and support. As the largest local online social networking and gaming company in the MENA region, We firmly believe that strong relationships and extensive cooperation among our stakeholders can accelerate our company's development and industry progress, brightening better experience and bringing better experience to users while boosting regional economic development. We will continue to build and maintain our friendships with local communities, business partners, and media. to jointly promote the development of MENA's digital economy while preserving and enjoying our unique local culture traditions. In conclusion, 2023 is poised to be very full of opportunities. The MENA region has been investing heavily in many sectors, including infrastructure, technology, and innovation, which has led to a surge in economic development. The entire region is set to embark on a new era of growth. As the largest MENA-based online social networking and gaming company, Yella will closely monitor trends, maintain open communication with global companies exploring the MENA market, and strive to embrace the changes and opportunities brought about by brokers. With our solid business fundamentals, our deep local know-how, The strong connections we have built over the past seven years and our diversified and evolving product portfolios across social networking and gaming, we are well positioned to capitalize on potential growth opportunities. As always, we remain steadfast in our commitment to serving MENA users' evolving needs in online social networking and gaming. With that, I will now turn the call over to our CFO, Karen. who will discuss our key financial and operational results.

Thank you, Saifi. Hello, everyone. Thank you for joining us. We were pleased to sustain our year-over-year revenue growth momentum in the first quarter as we continue to strive for the high-quality development and user growth. During the quarter, we also actively refined our cost management operations and the processes to improve overall efficiency. Our ROI-based marketing strategies may remain effective, evidenced by decreased sales and marketing expenses and solid growth in both MAUs and paying users for the first quarter. As a result, we maintained healthy levels of profitability during this quarter, recording a net margin of 27.1% and excluding share-based compensations. a non-GAAP net margin of 34.7%. Looking ahead, we see our emperor cash position and proven execution capabilities empowering us to capitalize on future opportunities, drive sustainable growth, and create value for all our shareholders. Now I would like to walk you through our detailed financials for the first quarter of 2023. Our revenue was $73.5 million in the first quarter of 2023, a 1.6% increase from $72.3 million in the same period last year. The increase was primarily driven by our broadening of our user base and our enhanced monetization capabilities. Our average MAUs increased by 12.9% from $29.2 million in the first quarter of 2022 to $33 million in the first quarter of 2023. Now let's take a look at our costs and expenses. Our cost of revenues was $27.9 million in the first quarter of 2023, a 1.2% increase from $27.5 million in the same period last year. primarily due to an increase in salaries and benefits resulting from the expansion of our operation and maintenance team, as well as an increase in technical service fees resulting from the expansion of our product portfolio. Cost of revenues as percentage of total revenues remained relatively stable at 37.9% in the first quarter of 2023, compared with 38.1% in the same period last year. Our selling and marketing expenses were $11.4 million in the first quarter of 2023, a 9.4% decrease from $12.5 million in the same period last year, primarily due to our more disciplined advertising and promotion approach. Selling and marketing expenses as percentage of total revenues were 15.4% in the first quarter of 2023, decreasing from 17.3% in the same period last year. Our general and administrative expenses were $10.2 million in the first quarter of 2023, a 26.6% increase from $6 million in the same period last year, primarily due to an increase in incentive compensation and an increase in professional service fees. G&A expenses as percentage of total revenues increased from 11.1% in the first quarter of 2022 to 13.8% in the first quarter of 2023. Our technology and the product development expenses were 7.4 million US dollars in the first quarter of 2023, a 23.8% increase from six million in the same period last year. primarily due to an increase in salaries and benefits for our technology and product development staff, driven by an increase in the headcount to support the development of new businesses and expansion of our product portfolio. Technology and product development expenses as percentage of total revenues increased from 8.3% in the first quarter of 2022 to 10.1% in the first quarter of 2023. As such, our operating income was $16.7 million in the first quarter of 2023, compared with $18.3 million in the same period last year. Excluding share-based compensation, non-GAAP operating income in the first quarter of 2023 was $22.3 million. We strategically leveraged a high interest rate with a strong cash position, resulting in a substantial increase in interest income of 3.1 million US dollars during this quarter. Our income tax expense was 0.62 million in the first quarter of 2023, compared with 0.61 million US dollars in the same period last year. Moving to the bottom line, our net income was 19.9 million US dollars U.S. dollars in the first quarter of 2023, compared with 17.7 million in the same period last year. Extrusion-based compensation expenses non-GAAP net income for the first quarter of 2023 was 25.5 million U.S. dollars. Next, I would like to briefly go through our liquidity and capital resources. As of March 31, 2023, we had cash and cash equivalents of 435.6 million US dollars as compared with cash and cash equivalents of 407.3 million US dollars as of December 31, 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 March 31, 2023, we have repurchased 2,302,141 ADS, or Class A ordinary shares, from the open market with cash, totally approximately 27 million U.S. dollars. The total value of ADS or Class A ordinary shares that may yet be purchased under the share repurchase program was 123 million US dollars as of March 31, 2023. Our board of directors has approved an extension of the expiration date of the share repurchase program to May 21, 2024. Moving to our outlook for the second quarter of 2023, we expect our revenues to be between 68 million U.S. dollars and 75 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 the market and operation 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. If you'd like to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you'd like to cancel your request, please press star 2. If you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Thomas Shen from Nomura. Please go ahead. Hi.

Good morning, management. Thank you for taking my question. I have one question. Could you share more color on YALA's monetization strategies going forward? Thank you.

Hi, Thomas. Good morning. This is Tao Yao. And I will take this question. Regarding monetization strategies, For the flagship application, Yala and Yala Ludo, we don't expect big changes. We will continue to work on the product iterations and roll out new events, game models, etc. But the key monetization model will not be changed. For our new casual games, such as Patches and 101OK, Its monetization capability continues to improve over the past two quarters as we continue testing the best way to monetize it, and we will continue to roll out new functions and features. For micro and hardcore games, I'd say in-app purchases will still be the major way to monetize. At the same time, our strategic department is also actively looking for external opportunities for investments and collaboration. And if there is more concrete plans, will they keep you updated on the potential monetization of the new businesses? Thank you, Thomas.

Thank you.

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

Good morning, management, and thank you for taking my questions. I have two. The first one is related to the costs and OPEX. According to the guidance in the prepared remarks, we will absorb dollar value of these costs, and the IMD GLA expenses remain relatively stable. And the second one is that we will promote self-developed games within its own products, such as Yala and Ludo, Does this mean that the company adopts advertising as the commercial approach? How should the company balance commercialization and the user experience? Thank you.

Thank you, Xueqin. Glad to see you here. This is Karen. I will take your first question and leave the second strategic one to Mr. Tao Yang. Looking ahead to the rest of 2023, if there is no large-scale investments in new initiatives, I believe our R&D and GA expenses will be maintained at a relatively stable level. As we mentioned last quarter, I think for 2023, taking the potential system marketing expenses on our mid-core to high-core game into consideration, we can maintain our non-GAAP net margin above 30% for the full year. Each quarter's performance may vary depending on how and when we invest in different products. Hope I answered your question. Thank you.

Hi, Shuqing. For the second question, let's say last year we started to drive traffic from Yala and Yala Ludo to our new products, for example, Yala Chat, and some of our casual game products also. So we are well prepared to promote our possible games within our communities where users are highly engaged, and many of them are also game lovers. We did see outstanding conversion rates from our positive clearances, and that's one of the important advantages we have, and one that supported us to start our game distribution business in MENA. However, it doesn't necessarily mean that we will adopt advertising as a commercial approach immediately. So far, we haven't collaborated with any external platforms yet. We only share traffic with our own products within the Yala ecosystem. At the same time, we are also trying our best to seek the right balance to protect our users' experience. Every time when we decide to promote a new product in our community, we will test first to evaluate its impact. And regarding our hardcore game marketing strategy, besides leveraging our own user community, we will also purchase traffic from external channels, which will help us to evaluate the efficiency or value of our Yala community from a commercial perspective. Thank you, Chi-Ching.

Thank you, Karen. Thank you, Paul. Thank you.

Thank you. Your next question comes from Shen Gao Li from CICC. Please go ahead.

Hey, good morning, management. Thanks for taking my question. I have a follow-up question about the progress of the company's two hardcore games. Could the management share about how is the testing going for the two new games, and are there any comparable products in the Middle East market that can help us understand their potential? And besides, could the management share about the company's expectations for these two new games? Thanks.

Hi, Cheng Hao. Thank you very much for your question. This is Jeff, and I will take this question. We actually have received positive feedback from users for both new games during the testing, and we also continue to work on optimizing the design of the games based on user feedback. If you check the ranking on App Store or Google Play, you will find a number of popular SLG games. It's one of the most popular genres of games in Mina. For our SLG game, Merge Kingdoms, we hope to deliver more localized gaming experiences to Mina users. And for the RPG game, currently there's no iconic product in the region yet. But we think it's a genre that is worth pursuing, especially for Turkey, where RPG game has a larger share of the market. Since we just launched our RPG game AOL, it will take some time to get a more concrete evaluation on the game's performance. So we'll keep monitoring and hope we can have an update to share with you very soon. Thank you.

Thank you. Your next question comes from Xiaoye Hu from Haitong. Please go ahead.

Hello, management. Thank you for taking my question. So my question is about the company's Cairo products. Could management help provide a growth outlook for the Cairo games portfolio, especially Yala Parkis and 101 Okiyala? Thanks.

Hi, morning, Xiaoye. Thank you very much for your question. For the casual game, YALA patches and 101OK YALA have delivered good performances over the past few quarters. For patches, we do expect a relatively big upgrade to the app during the second half of this year. Now, it is still in its early stage, and we will keep our investors posted once there is more concrete information. For 101OK YALA, we mentioned that its quarterly revenues was around 1 million feet, and we think there is still ample room to grow. We are confident in the growth of monetization capabilities. Thank you very much. Thank you.

Thank you. The next question comes from Kaifeng Jia from CITIC. Please go ahead.

Hi, management. Thanks for taking my question. And I have two. The first is about the users. So can management give some color about the user growth strategy for different apps, and especially the gaming? And my second question is about the OPEX. So how does management view the trend for sales experience in the next several quarters?

Thank you, Kaifeng, for your question. So regarding the user growth strategy for our flagship application, I would say we maintain a similar pace as the past several quarters, as we don't expect any big changes. Regarding the hardcore game strategy, there are two key parts that we care the most about. Firstly, when we promote a new game, thinking about how to build a community with good dynamics is very significant. And in order to achieve that, we need to be very accurate on the pace of marketing. Secondly, as ROI is a key matrix when promoting games, We're monitoring our ROI on a daily basis to drive the best results we can deliver. For the second question, the promotion of mid-core and high-core games has its own pace or pattern. At the launch of the game, usually there's an investment period. The company will need to invest in promoting the game first, but revenue may not come immediately. The investment period may last for three months to several months, according to our industry experience. And of course, it also depends on the different type of games. Thus, this may drive us our sales and marketing expenses for the short run. But as Karen just mentioned, we have already included the potential impact in our current financial model. Regarding the trend or level of sales and marketing expenses, it may take a longer time for us to get a more concrete evaluation. The trend for mid- and hardcore games is different from that of casual games. We need to monitor the feedback and optimize the amount to invest during this cycle, and we can keep you updated. Thank you.

Thank you. That's very helpful.

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

Hi, management. Thanks for the presentations and congratulations on the robust results. So I have a follow-up question about the games. What is the company's expectation towards the new game pipeline in terms of launch time and potential revenue contribution? Thanks.

Hi, Edward. Thank you for your question. In terms of the revenue, since we just launched AOL, it's still hard to give an accurate guidance at this point. It may at least take a couple more weeks, and hopefully we can share more insights with you on our next earnings call. Regarding the launch time, we launched the RPG game AOL at the beginning of May, and for the SLG game, we plan to officially launch it before the end of May. So it's going to be very soon. Thank you.

Thanks.

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

Thank you once again for joining us today. We look forward to speak with you in the next quarter. If you have further questions, please feel free to contact Yala Investor Relations through the contact information provided on our website or the Piacente Group Investor Relations.

This concludes our conference call for today. You may now disconnect your line. Thank you.