Yalla Group Limited

Good morning and good evening, ladies and gentlemen. Thank you for standing by for YALA Group Limited second quarter 2024 earnings conference call. At 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. Now, I would like to turn the call over to your speaker host today, Mr. Logan Yee, IR Manager of the company. Please go ahead, sir.

Hello, everyone, and welcome to YALA's second quarter 2024 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 Newswire outlets. 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 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 release and this conference call include a discussion of unaudited gap financial information as well as the unaudited non-gap financial measures. YALA's press release contains a reconciliation of the unaudited non-gap measures to the unaudited most directly comparable gap measures. Today, You will hear from Mr. Tao Yang, our chairman and chief executive officer, who will provide an overview of our latest achievements and growth strategy. 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, We'll then provide additional detail on the company's financial results and discuss our financial outlook. Following management's prepared remarks, we'll open the call to questions. Mr. Jeff Shue, our Chief Operating Officer, will join the Q&A session. With that said, I would now like to turn the call over to our Chairman and Chief Executive Officer, Mr. Tao Yang. Please go ahead, sir.

Thank you, everyone, for joining our second quarter 2024 earnings conference call. We are pleased to report strong second quarter results, even with the impact of lockdown, which lasted from March 11th to April 9th this year. Our second quarter revenues reached 81.2 million USD, beating the upper end of our guidance. This outstanding performance and discuss the remarkable clarity of our flagship applications, Yella and Yella Ludo, as well as our effective strategy for high quality growth. Our operating efficiency improvements are also yielding positive results, elevating our net margin to 38.6% in the second quarter. Throughout the second quarter, we remained dedicated to enhancing our operational procedures, boosting user engagement, optimizing technology utilization to improve efficiency, and refining our user acquisition strategies. This effort has empowered us to build a more engaged community of users who exhibit high willingness to spend on our content and services. Supported by our solid business fundamentals and dedicated team, we remain primed to capture new business opportunities and fulfill media users evolving online social networking needs. The ongoing digital transformation in the Middle East continues to attract attention globally in this year. with international tech companies keen to explore opportunities in the region. 2024 marks Yella's eighth year in the Middle East and the eighth anniversary of our flagship product, Yella. Over those years, Yella has grown from our group's first WhatsApp product into the world's most downloaded WhatsApp app. for 2023 based on Bethead.ai's research with a highly engaged and loyal user community. Keeping our user-first philosophy in mind, we have consistently created memorable experiences and forged deep connections with our users by iterating iterating and upgrading our products to meet their evolving needs. Meanwhile, as an industry pioneer, we have helped propel the evolution and development of internet products and the broader internet sector in the MENA region. We will remain committed to driving the MENA East digital transformation seizing emerging opportunities and growing with our users and the industry as we lead the region's development trends. Turning to Yala Games' development and future strategy, the gaming sector continues to demonstrate immense growth potential that needs leanest, thriving digital transformation. Yala is capturing that potential with consistent investment in Mina's mid-core and hardcore game market, attracting Mina users with a wider range of game options tailored to their unique preferences. This year, we have focused on the exploration and development of mid-core and hardcore games, where we can leverage the extensive expertise, talent, workforce and abundant resources we have accumulated in the casual gaming sector. Our product team are currently developing and refining a strong pipeline of self-developed games set to be back throughout 2025. On the related note, we are proactively exploring AI technology applications to optimize our team's productivity, particularly UI design, which has high requirements for detailed, time-consuming artistic work by harnessing the power of UI. Our UI team has notably enhanced efficiency, leading to substantial improvement in the team's capacity and facilitating faster innovation in product feature and gameplay. We're excited about AI's transformative potential and we'll continue to seek creative applications to craft our business to drive product iteration and operational upgrades. As we mentioned on every call, our vision is for Yela to become the largest online social networking and entertainment company in MENA. This quarter, represented another solid stretch toward our vision. I'm proud of the many efforts we have achieved in this region and its internet industry, creating a better digital life for our loyal users in the Yala community. Our commitment to MENA, its people, and its rich culture is unwavering is borrowing our team's ongoing generation of new ideas and new products to meet maintenance users' evolving needs and facilitate digitalization throughout the region. Now I will turn this call over to our president, Mr. Saifi Ismail, for a closer look at our recent developments.

Another look at our second quarter operations and our project performance. We redoubled our average monthly active users increased by 14.1% year over year to 39 million. our eighth anniversary to our new users and local fans. Alive with our Explore the World of Yalla event, this iconic online festival was featured on the Apple Store and Google Store, boosting average daily consumption of gold coin games currency to a record high for our anniversary event. We are also leveraging offline events to strengthen our product and brand awareness, including our global champion offline tournament series. The two tournaments we have thus far in Riyadh Pardon me, Safi.

This is the operator. We are having difficulties with the speaker line. Please stand by for just a moment while we reconnect Safi's line. Okay. One moment. Thank you. Thank you. Thank you. Thank you. Ladies and gentlemen, thank you for standing by. Thank you for your patience at this time. I will ask the President, Mr. Asafi, Ismael, to continue. Just one moment. Please proceed, Safi.

Thank you. Hi, everyone. ...and our product's performance. We look at our efforts to enhance user experience and engagement this quarter, and we are pleased to see these efforts being offered across our Biden-Tiala community. Our average sales increases by 3.1% year-over-year to $30 million, reflecting our projects' enduring appeal. For example, at this anniversary, we won the World of Yalla event, Apple Store, and Google Store. We have run to a record high. We have a level of success with our products and brands. We have won many tournaments. The tournaments we have held thus far in Riyadh and Baghdad were smash hits, attracting over 150,000 registered players and garnering overwhelming positive feedback from participants. In June, we celebrated our success with a magnificent lunch show in Burj Khalifa in Dubai, a portable structure, and together assembled a team of men and women in the facilities. Offline events like these bring members' engagement with our products and enhance our brand influence locally. Further, we are looking at the region's potential. We also announced that Yalla partnered with the Dubai Department of Economy and Tourism, DAP, that sends Dubai sports and games to the DEF in Hebron. As part of the collaboration, Yalla hosted an online tournament, Game Battle, with DEF, attracting over 4 million participants. We incorporated Dubai landmarks and symbols onto Ludo's interface, including team fights, board games, and other frames. providing players an immersive gaming experience, celebrating Dubai's vibrant culture. This collaboration underscores our commitment to innovation and promoting user experience. Finally, we were extremely honored to receive the prestigious Dubai Games First Award at the MENA's Big Industry Awards 2024, held at the world-renowned Dubai Expo Summit. This award celebrates the region's top talent in the game development, publishing, and support services. Yellow Group was selected by a panel of 80 industry experts for the top spot in the Dubai Games Star category. A testament to our remarkable success, influence, and innovation in gaming, as well as our commitment to fostering growth across China's gaming industry. are grateful to the MENA Games Industry Awards organization for their recognition and look forward to shaping the industry's future as the largest online social networking and gaming platform in the MENA region. In conclusion, throughout the past eight years, we have established a strong presence in MENA by creating innovative projects that align local users' habits and preferences. We have also consistently with local and with communities, the growth, the digital economy, and the internet industry. As business leaders in online social networking and games, we proud to play a key role in the digital transformation. Always our vision to become number one online social networking and entertainment platform in Amina. I will now turn the call over to Sophie Apparatus, who will give us a few financial and professional results.

Thank you, Sophie. Hello, everyone. Thank you for joining us today. Our financial performance remained robust through the second quarter of 2024. Our top line again exceeded our expectations and assisted our year-over-year revenue growth momentum as we strove for high-quality development and user growth. Our consistent operating efficiency enhancements also continue to yield positive results. Our net income, our net margin rose by 2.9 percentage points year over year to 38.6%, while net income increased by 10.9% to 31.4 million US dollars. By leveraging our solid business fundamentals, we will remain primed to capture new business opportunities, and deliver sustainable value to all our stakeholders in the long run. Let's move on to our detailed financials for the second quarter of 2024. Our revenues were $81.2 million in the second quarter of 2024, a 2.5% increase from $79.2 million in the second 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 was also partially attributable to the significant increase in our pool, which grew from $5.8 in the second quarter of 2023 to $6.6 in the second quarter of 2024. Now let's take a look at our costs and expenses. Our total costs and expenses were $51.6 million in the second quarter of 2024, a 6.8% decrease from $55.3 million in the same period of last year. Our cost and revenues increased by 2.5% to $29 million in the second quarter of 2024, from $28.3 million in the same period of last year, primarily due to higher commission fees paid to third-party payment platforms as a result of increasing revenue generated. Cost of revenues as percentage of total revenues remained relatively stable at 35.7% in the second quarter of 2024. Our selling and marketing expenses $8.5 million in the second quarter of 2024, a 31.4% decrease from $12.4 million in the same period of last year, primarily driven by our more disciplined advertising and promotion approach. Selling and marketing expenses as percentage of total revenues decreased from 15.6% in the second quarter of 2023 to 10.5% in the second quarter of 2024. Our general and administrative expenses was $7.6 million in the second quarter of 2024, a 5.5% decrease from $8 million in the same period of last year, primarily driven by lower share-based compensation expenses recognized in the second quarter of 2024. General and administrative expenses as percentage of total revenues decreased from 10.1% in the second quarter of 2023 to 9.3% in the second quarter of 2024. Our technology and product development expenses were $6.5 million in the second quarter of 2024. a 1.6% decrease from $6.6 million in the same period of last year, primarily driven by lower share-based compensation expenses recognized in the second quarter of this year. Technology and product development expenses as percentage of total revenue decreased from 8.3% in the second quarter of 2023 to 8% in the second quarter of 2024. As such, our operating income was $29.6 million in the second quarter of 2024, a 23.8% increase from $23.9 million in the same period of last year. Excluding share-based compensation expenses, our non-GAAP operating income in the second quarter of 2024 was $33.5 million U.S. dollars, up 13.9% year-over-year. Our interest income was 7.1 million U.S. dollars in the second quarter of 2024, compared with 4.6 million U.S. dollars in the same period of 2023, primarily due to an increase in the interest rates applicable to the company's bank deposits. Our income tax expenses was 5.8 million US dollars in the second quarter of 2024, compared with 821,000 US dollars in the same period of last year. The increase was primarily due to the introduction and implementation of UAE corporate tax law, which is effective for the financial years starting on or after June 1, 2023. Moving to our bottom line, our net income increased by 10.9% to $31.4 million in the second quarter of 2024, compared with $28.3 million 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 June 30, 2024, We had cash and cash equivalents, restrict cash, term deposits, and short-term investments of 528.7 million US dollars, compared with 535.7 million US dollars as of December 31, 2023. Under our 150 million US share repurchase program that began on May 21, 2021, and has since been extended by our board through May 21, 2025. We have accumulatively repurchased 3,907,876 ADS or Class A ordinary shares in open market cash repurchases, totaling approximately 35.5 million US dollars as of June 30, 2024. Moving to our outlook for the third quarter of 2024, we expect our revenues to be between $75 million and $82 million. The above outlook is based on the current market conditions and reflects company's management current and preliminary estimates of the markets and operating conditions and customer demands, which are all subject to change. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. And to withdraw your question, please press star, and then two. At this time, we will take the first question from the line of Sarah Hughes. from Haitong International. Please go ahead.

Thank you, management, for taking my questions. And congratulations on a solid quarter. So could management elaborate more on the sales and marketing strategy and trends in 2024? Thank you.

Hi, Sarah. Thank you for your question. We have insisted on quality growth strategy in 2024, which requires consistent optimizing of sales and marketing strategy and efficiency. This includes more detailed budget management, a focus on ROI, and diversifying user acquisition channels online and offline, among other things. As you can see from the financial report, our efforts have resulted in a solid improvement in our sales and marketing efficiency over the past two quarters. We think our sales and marketing expenses will remain at a similar level for the second half of 2024, though we may launch new products for testing Q4. The feedback indicates we need to increase our sales and marketing budget to promote these products. We will adjust our guidance accordingly. Thank you.

Thank you. Our next question today will come from Xu Qingzong of CICC. Please go ahead with your question.

Thank you for taking my question. Congratulations on the solid quarter. You did well in the first half of this year. So how are the company's key products performing in third quarter and what's the management outlook for the fourth year in 2024? Thank you.

Hi, Xiaoqing. Good morning. This is Yao. Thank you for your question. For three key 2024, according to what we have observed over the past month and a half, Yella and Yella Ludo, our flagship applications, are performing well and stably as we continue to roll out new features and operating events. And you can also see the trend from the guidance we provided earlier. We think Q3 is likely to outperform Q2 at this point. On the margin side, the Yellow Ludo team is organizing a series of offline tournaments across different cities in MENA to increase our brand's local impact, efficiently penetrate the market, and reach more users through offline channels with higher ROI. So you can see that our operating efficiency is consistently improving. For the rest of 2024, I think we will maintain this solid and stable chain with improved efficiency. Hope this answers your question. Thank you.

Our next question will come from Shenghao Li of CICC. Please go ahead.

Hi, Amanda. Thanks for taking my question and congratulations on our solid culture. My question is about our game business. How should we view Yellow Game's strategy and could management share more color on your game's task feedback and launch timeline? Thank you.

Hi, Cheng Hao. Thank you for your question. For Yellow Game, this year we are allocating more resources to our in-house team's self-developed products, mainly focusing on mid-core games. We are accumulating valuable experience and broadening our team's expertise through this process. which will empower us to move forward with confidence in the future. We currently have three self-development core games in our pipeline and plan to start testing by the end of this year. Then we need some time to work on iterations based on the feedback we receive from the users before we start on-scale promotions. Meanwhile, we are also proactively discussing collaborations with potential partners in the game industry. We'd like to know once there's anything we can share publicly. Thank you.

Our next question today will come from Kaifeng Jia of CITIC. Please go ahead.

Hi, management. Thanks for taking my question. I have a question about your overseas market. So would the company consider furthering your company scope outside of the Middle East? Thank you.

Hi, good morning, Kaifeng. Thank you for the question. As always, we will remain dedicated to the Middle East market while also keeping an eye on opportunities in other markets. For instance, we currently have patches, which focuses on the South American market, which is one of our tasks to explore the overseas markets. Going forward, if we see that new products have popularization potential, not only in MENA, but also in other markets, we may consider conducting global promotions. However, our main focus is undoubtedly on the Middle East market, where we have unique advantages and can continue to leverage our core capabilities to allow our growth potential. Thank you very much.

Our next question today will come from Lincoln Kong. of Goldman Sachs. Please go ahead.

Thank you, management, for taking my question. So my question is about capital allocation. So how does the company view in terms of increasing the shareholder return versus continuing investing into any new initiatives or in the RRI process? Thank you.

Hi, Lincoln. This is Karen. Thank you for your question. Yala is dedicated to return value to shareholders through our share repurchase program. As of June 30, 2024, we have deployed a total of 35.5 million U.S. dollars for share repurchases. Given our solid fundamentals, we will continue to conduct our share repurchase program while considering cash dividend payments in due course. We will keep you posted if we have anything new to report. In terms of new initiatives, our strategy team is proactively looking into opportunities that may have synergies with our current businesses and fit with MENA culture and local users' needs. And we remain open to these possibilities. In short, we believe strongly in YALA's long-term potential and dedicated to generating value for all parties involved. I hope that this answers your question. Thanks.

The next question will come from Rachel Gao of Numura. Please go ahead. And Rachel, your line is open.

Hi Rachel, thank you very much for your question.

Since the end of last year, our team has been hosting a series of online and offline Ludo tournaments with our local and global partners across several cities in MENA. We believe this move enhances our brand's local impact, helps penetrate the local market, and further expands our user base. We have received very good feedback on the tournament series so far from both local users and our partners, and we are receiving more invitations from potential partners conducting similar tournaments in different cities and different countries across MENA. So far, we have two more tournaments scheduled for the second half of the year to engage more users in different countries, and we plan to keep building on this momentum. Thank you.

As there are no further questions now, I'd like to turn the conference 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 Yaris Investor Relations or PR Center Financial Communications. Both parties' contact information is available in today's press release as well as on our company's website.

The conference is now concluded. We thank you for attending the presentation, and you may now disconnect your lines.