Yalla Group Limited

Ladies and gentlemen, thank you for standing by for YALA Group Limited's fourth quarter and full year 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, Ms. Carrie Gow, IR Manager of the company. Please go ahead, ma'am.

Hello everyone and welcome to YALA's fourth quarter and full year 2023 earnings conference call. We released our earnings press release earlier today and the release is now available on our IR website as well as on NewsBio 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 the YALA's earnings press release and this conference call include a discussion of unaudited gap 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. Saifi Ismayil, 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. Mr. Jeff Xu, our chief operating officer, will join the QA section. With that said, I'd now like to turn the call over to our chairman and chief executive officer, Mr. Tao Yang. Please go ahead, sir.

Thank you. Thank you everyone for joining our fourth quarter and full year 2023 Earnings Conference Call. 2023 was a year filled with changes and opportunities. As a global enterprise, Yella faced a complex and dynamic international environment with many moving parts. Nevertheless, we forged ahead with our core business strategies and capped the year with robust results. I will begin with a brief overview of our pivotal achievements. and financial performance in 2023. We continued to grow our two flagship applications, Yela and Yela Ludo. We also deepened our engagement in the nickel and hardcore game business, building relationships with global players who are drawn to the surge of development in the MENA region. Meanwhile, we continued to improve our operating efficiency by optimizing cost and expenses through more rigorous vendor selection and management, user acquisition strategy requirements, and greater talent utilization. We sustained our robot's financial momentum as a result of this effort, ending the year with strong growth across our revenues from gaming services as well as net income. Our fourth quarter revenue were $80.9 million exceeding the upper end of our guidance, where our revenues from gaming services in the fourth quarter reached 28.5 million USD, representing year-over-year growth of 35.2%. Before year 2023, our revenues were 318.9 million USD, while our net income reached 113.1 million USD. representing a significant year-over-year growth of 43%. Our strong financial performance reflects the excellent execution of our effective quality growth strategy. Supported by our solid business fundamentals and healthy cash position, we will continue to expand our services and stretch the boundaries of our business, launching innovative social networking and entertainment products to fulfill MENA users' evolving needs online. I'm also proud to share that, thanks to our robust and consistent financial performance, Yala Group was recognized by Fortune magazine as one of the 2023 top 500 Arab companies, according to the Fortune 500 Arabian list. The Fortune 500 is a distinguished list, showcasing the 500 largest companies in the Pacific region based on revenues. This year marked the inception of the Fortune 500 Arabia. Highlighting companies in the MENA region, we'd like to extend our heartfelt gratitude to Fortune 500 Arabia for recognizing JALA Group's contributions and achievements with inclusion in this esteemed list. Next, let's turn to Yellow Games development and future strategy. Yellow Games made several crucial moves this year, including the launch of our first two hardcore games. In the process of developing and operating these games, we gained vast experiences across key aspects of MENA gaming market, including product selection, product design, and user acquisition, among others. Our comprehensive understanding of this market has proven invaluable as we continue to organize and train our professional team for this specific region. In turn, our growing expertise and capabilities strengthen our determination to expand our footprint in the midpoint hardcore game business in MENA. Moving forward, We will continue investing in mythical and hardcore games and enriching our game path. Mythical games will be a particular focus as we believe they will optimally leverage our enormous pool of experience, talent, and resources related to casual games in the region. Additionally, we are actively communicating with global top-tier gaming cities to explore potential joint monetization opportunities in the region. We will keep you posted on our progress. Notably, we also plan to enhance our social networking products this year. Iteration, including innovative new functions and a host of creative design upgrades will allow us to explore monetization while better serving media users' diverse and evolving needs. We captured and capitalized the area for growing opportunities in 2023 as MENA's role on the global stage and its digital transformation grow and evolve. We are pleased to see more and more visionary industry professionals and investors from around the world allocating more resources to MENA and participating in its searching development preparing programs across the region. As the number one media-based online social networking and gaming company, we are deeply committed to this market and thoroughly understand its unique advantages and specific user needs. We will continue to leverage our profound local insights to broaden our business horizons. as we build the most popular destination for online social networking and entertainment in MENA. Now I will turn this call over to our president, Mr. Saifi Ismail, for a closer look at our recent developments.

Hello, everyone. Thanks for joining us today. Let's take a closer look at our fourth quarter operations and our product performance. We delivered another solid quarter with average monthly active user rising by 13.3% year over year to 36.2 million. Our average revenue per paying user also increased to 6.5 US dollars in the fourth quarter from 6.01 US dollar in the same period of last year. Additionally, our ongoing adjustments to our game mechanism aimed at boosting overall user engagement and delivering better user experiences, have proven effective, paying users increased by 6.2% quarter over quarter, demonstrating users' growing willingness to pay on our platform. For our flagship application, Yalla!, we continued to improve gaming features in the fourth quarter. We also rolled out a series of operational activities including the football carnival event, which was recommended by the App Store. With respect to Yalla Ludo, I am pleased to announce the resounding success of our Yalla Ludo champion tournament. More than 150,000 players registered to participate in an intense series of over 1.8 million preliminary matches online, an overwhelming response that ultimately produced 32 exceptional finalists. These skilled players engaged in a highly competitive offline final at Saudi Arabia's Riyadh VOV Gaming Center on December 1st, 2023, where three top winners emerged amid enthusiastic live audience participation. The Yellow Ludo champion tournament was more than just a competition. It was a celebration of the Yalla Ludo community. Events like these not only enhance our brand impact, but also underscore our commitment to creating memorable, engaging experience and fostering a sense of camaraderie and connection. Next, two additional highlights. First, we launched the Yalla Festival event on the App Store across 13 countries in the MENA region this February. a milestone achievement in our development that further strengthen our brand awareness. This collaborative effort with the App Store, featuring five of our flagship products, not only underscores Apple's recognition of yellow product popularity in the region, but also validates our efforts to meet MENA user growing entertainment demand. Moving forward, we will remain dedicated to developing more social networking and gaming applications tailored specifically for MENA users. Moreover, we will keep nurturing strong relationships with global channels to ensure that we continue to reach users effectively and provide them with the best possible experience. Last but not least, we are honored to announce that Yalla Group has been invited for an interview with Dubai's Department of Economy and Tourism . With the ultimate vision of making Dubai the world's leading destination for commerce, investment and tourism, DET supports the government in positioning the Emirate as a major hub for global economic activity and tourism, as well as in boosting the city's economic and tourism competitiveness indicators, notably DET is committed to transforming Dubai into an original gaming hub, as evidenced by the 2022 launch of the Dubai Esports and Game Festival. As the first Dubai-based technology unicorn listed on the NYSE, Yalla Group serves as a key contributor to Dubai's dynamic landscape and is poised to propel the government's vision for the area. We are dedicated to leveraging Dubai's strategic location as a business hub and its exceptional infrastructure to further develop our Yalla gaming products, facilitating the gaming sector's development while driving the city's growth. We are profoundly grateful for DET's invitation to this interview and for recognizing Yalla Group's leading role in the social networking and gaming industry in the MENA region. As we reiterate every quarter, Yalla aspires to become the number one online social networking and entertainment platform in the MENA region. We continue to build relationships locally and globally to broaden our business horizons and embrace the opportunities brought by MENA's digital transformation, with the entire region set to impart on a new era of growth, we are more committed than ever to providing the people of MENA with better access to a digital life. We believe we are well positioned to capture the potential growth opportunities in the MENA region, 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, Saifi. Hello, everyone. Thank you for joining us today. We delivered a robust financial performance in 2023 with four-year revenues rising to US$318.9 million, another testament to our ability to drive growth in a rapidly evolving environment. In the past year, we continue to actively optimize costs and expenses and improve our overall efficiency. As a result, we greatly enhanced our profitability, recording significant growth for both the fourth quarter and the full year. Specifically, fourth quarter net income increased by 79% year-over-year to $29.7 million, while full-year net income increased by 43% year-over-year. to $113.1 million with a net margin of 35.5% compared with 26% last year. As we head into 2024, we will continue to pursue quality growth, improve operational efficiency, and invest in our Yala ecosystem. We believe our solid business fundamentals and healthy cash position will empower us to capitalize on future opportunities, driving sustainable and long-term growth. Let's move on to our detailed financials for the fourth quarter of 2023. Our revenues were $80.9 million in the fourth quarter of 2023, a 7.7% increase from $75.1 million in the fourth quarter of last year. The increase was primarily driven by the broadening of our user base and our enhanced monetization capability. Our solid revenue growth has also partially attributable to the significant increase in ARPPU, which grew from $6.01 US dollars in the fourth quarter of 2022 to $6.58 in the fourth quarter of 2023. Now let's take a look at our costs and expenses. Our total costs and expenses were $57.6 million in the first quarter of 2023, a 4.1% decrease from $60.1 million in the same period of last year. Our cost of revenues increased by 11.4% to $30.6 million in the first quarter of 2023, from 27.4 million US dollars in the same period of last year, primarily due to an increase in incentive compensation and a one-time game cost related to UI design fees. Cost of revenues as percentage of total revenues increased to 37.8% in the fourth quarter of 2023, compared with 36.5% in the same period of last year. Our selling and marketing expenses were $10.4 million in the fourth quarter of 2023, a 27.3% decrease from $14.3 million in the same period of last year, primarily driven by our more disciplined advertising and promotion approach and lower share-based compensation expenses recognized in the fourth quarter of 2023. Selling and marketing expenses as percentage of total revenues decreased from 19% in the fourth quarter of 2022 to 12.8% in the fourth quarter of 2023. Our general and administrative expenses were $11.3 million in the fourth quarter of 2023, a 13.3% decrease from $13 million in the same period of last year. primarily driven by lower share-based compensation expenses recognized in the fourth quarter of 2023. General and administrative expenses as a percentage of total revenues decreased from 17.4% in the fourth quarter of 2022 to 14% in the fourth quarter of 2023. Our technology and the product development expenses remained stable at 5.4 million US dollars in the fourth quarter of 2023 and in the same period of last year. Technology and product development expenses as percentage of our total revenues decreased from 7.2% in the fourth quarter of 2022 to 6.7% in the fourth quarter of 2023. As such, our operating income was 23.3 million US dollars in the fourth quarter of 2023. a 55.2% increase from $15 million in the same period of last year. Excluding share-based compensation expenses, our non-GAAP operating income in the fourth quarter of 2023 was $27.1 million, up 34.1% year-over-year. Our interest income was $6.5 million in the fourth quarter of 2023, compared with $2.3 million in the same period of 2022, primarily due to an increase in interest rates applicable to companies' bank deposits and the continued increase in the company's cash position. Our income tax expense was $539,000 in the fourth quarter of 2023. compared with 416,000 US dollars in the same period of last year. Moving to our bottom line, our net income increased by 79% to 29.7 million US dollars in the fourth quarter of 2023, compared with 16.6 million US dollars in the same period of last year. Next, I would like to briefly review our liquidity and capital resources. Our cash position remains solid. As of December 31, 2023, we had cash and cash equivalents, restricted cash, term deposits, and short-term investments of $535.7 million, compared with $453 million as of December 31, 2022. Under our $150 million share repurchase program that began on May 21, 2021 and has since been extended by our board through May 21, 2024. We have accumulatively repurchased 3,972,876 ADS or Class A ordinary shares in open market cash repurchases. totaling approximately 35.5 million US dollars as December 31, 2023. Moving to our outlook for the first quarter of 2024, we expect our revenues to be between 72 million US dollars and 79 million US dollars. The above outlook is based on current market conditions and reflects the company's management, current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change. In the interest of time, please refer to our earnings price release for future details on our first quarter and full year 2023 financial results. This concludes our prepared remarks for today. Operator, we are ready to take questions.

Thank you. To ask a question, please press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Today's first question comes from Cheng Hao Li with CICC. Please go ahead.

Hi, management. Thanks for taking my question, and congratulations on a solid quarter. I have two questions. First, what have we learned from the operation of the two mid to hardcore games? and how should we consider strategy of the game business in this year? And secondly, how should we see the development trend of the two flagship titles, Yala and Yala Ludo, in this year, and are there any changes in the competitive landscape in the MENA region? Thank you.

Hi, Cheng Hao. Thanks for your question. I will take your first question and leave the second one to Saifi. The two mid- to hardcore games, as our initial offerings, have shouldered significant responsibilities. They've allowed us to gain valuable insights into local user preferences and successfully recruit and train a local operations team, paving the way for our further development in this field. At this stage, we believe they have completed their main goals and we realize that these two products are projected to fall short of the company's revenue expectations despite several rounds of optimization. So after careful evaluation going forward, we will shift more of our focus to new products in our development pipeline. Regarding our game strategy, firstly, we are looking to collaborate with more mature gaming studios or those with successful game publishing. We will carefully select game content that is more suitable for the MENA market, leveraging our localized expertise. Secondly, we plan to look for opportunities to collaborate with global players who are interested in the MENA market to capitalize on our monetization strategies and our expertise in community engagement. Lastly, we are committed to our in-house development team's continuous enhancement and professional growth. We expect to introduce a series of new self-developed mid-core games this year. I will keep you updated if we have any further progress. Thank you.

Ai-Shing Ho, I will take your second question. The performances of Yalla and Yalla Ludo currently remain very stable. We have cultivated a vibrant, highly engaged community with a loyal user base, and both products are exhibiting long life cycles. We are confident that both products will continue to develop well and maintain their momentum. We are also actively working on improvements as well as making some bold experiments, hopeful of even better performances from these two products. In terms of competition, every quarter we address questions about the competition, reflecting the fact that competition in the MENA region is always present and constantly evolving. During the past quarter, no significant new competitors have entered the market, Of course, we are aware of an increasing number of companies exploring overseas expansion, with the Middle East emerging as a popular destination. This trend may introduce multiple new variables. However, as presents, we see that the competitive landscape seems stable, even with big names like TikTok, which have been in the Middle East market for a while. Nevertheless, our team have been monitoring the trend closely for emerging opportunities, and we will share with new observations, if any. Thank you.

Thank you. And our next question today comes from Shuqing Zong with CICC. Please go ahead.

Hi, Benjamin. Thanks for taking my question, and congratulations on the story quarter. My first question is about financial outlook. How should we think about revenue growth and margin chain this year? And my third question is about shareholder return. Can management share some details on the share buyback and the dividend plan in the future? Thank you.

Hi, Xueqing. Glad to have you here. Thanks for your questions. For 2024, Regarding our current product portfolio, we are so confident that we can at least maintain our top line at current stable level. At the same time, we're looking forward to revenue contributors from new products and business collaborations in the coming year. We expect our margin to be around 40% for the year, excluding potential investments in new products. If factoring in new products, our margin may fluctuate around 35%. For your second question about the share repurchase and dividend, YALA is dedicated to return value to shareholders through our share repurchase program. As of December 31, 2023, we have repurchased a total of $35.5 million. Given our solid fundamentals, we will continue to conduct our share repurchase program while considering cash dividend payments in dual case. We will keep you posted if there are any updates. In short, we are confident in Yala's long-term prospects and committed to creating value for all stakeholders. I hope that answers your question. Thanks again.

Thank you. And our next question comes from Kaifeng Jiang with CIPIC. Please go ahead.

Hi, management. Thanks for taking my question, and I have a question about your strategy in 2024. Can management share what is the company's key focus in 2024? Hi, Kaifeng.

This is Xiao. Thanks for the question. As a first mover in this market, we focus our attention on the stability and growth of our flagship applications. To maintain our leading position in the market, We will enhance the two products and drive through and drive growth in this year by adopting a more innovative approach and undertaking further experimentation. We do not doubt Yala and Yala Ludo's competitiveness and the long-tail growth momentum in the Middle East market. Meanwhile, we also assume more responsibility for new product development. and we will allocate our important resources to the planning and the implementation of our revenue growth product. Thank you.

Thank you. And our next question today comes from Xiaoyu Hu with Hightang International. Please go ahead.

Hello, Benjamin. Thank you for taking my question. So my question is that since the Middle East has become a go-to market for a lot of investors in the past year, so what... Good morning, Sarah.

Thank you for the question. As MENA's role on the global stage has grown, we have seen growing opportunities with increasing attention and resources from around the world participating in its surging development. As a company rooted in MENA, we believe its vibrant market will drive our further development. The MENA market has its own characteristics, which can be very different from other markets. We are continuously navigating the market dynamics while actively exploring opportunities and potential collaboration. We will keep you posted on the progress. Thank you. Thank you.

And our next question today comes from Lincoln Cohn with Goldman Sachs. Please go ahead.

Thank you, management, for taking my question. My first question is about the gaming business. So can management give us some updates in terms of the game publishing strategy and also the game pipeline in the next few years? And the second question is in terms of what are the growth fiber for 2024 when we think about the overall business growth. Thank you.

Thanks, Lincoln. Thanks for your question. I'll take your first one. We are actually proactively speaking with global top-tier gaming studios to explore potential cooperation. We now have a clearer roadmap and some potential options. In the process of exploring the sector, we are gaining experience, which empowers us to better move forward and achieve positive outcomes. We also have some new self-developed mid-core games in our pipeline. We will share more details when we have made further meaningful progress. Thank you.

Good morning, Lincoln. I will take the second question. For the year 2024, we will still be dedicated to enhancing and developing our flagship products. We are proud of Yala and Yala Ludo's service science and good performance. And we do expect the two products to unlock more growth potential this year. We see the potential to further penetrate the market. Also, as we earlier introduced, we anticipate the launch of new mid-core and high-core games as an important potential growth driver. Thank you, Lincoln.

Thank you. And our next question comes from Rachel Guo with Nomura. Please go ahead.

Hi, management. Thanks for taking my question. My question is about your business expansion. Would your company consider expanding your business to more regions globally besides the Middle East? Thanks.

Hi, Richard. Thank you for the question. First of all, we will remain dedicated to the Middle East market while also keeping an eye on opportunities in other markets. especially for some of our new products in our portfolio. If we see their potential to be distributed, not only in the middle market, but also in other markets, we may consider conducting global promotions. Our main focus is undoubtedly on the Middle East market, where we have unique advantages, and we will continue to leverage our core capabilities to unlock our growth potential. Thank you, Victor.

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 next quarter. If you have further questions, please feel free to contact Yala's Investor Relations or Piacente Financial Communications. Both parties' contact information is available in today's press release as well as on our company website. Thank you.

Thank you. This concludes the conference call. You may now disconnect your line, and thank you.