Yalla Group Limited

Good morning and good evening, ladies and gentlemen. Thank you for standing by for YALA Group Limited's first quarter 2026 earnings conference call. At this time, all participants are in listen-only mode. After the management's repair 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 first speaker host today, Ms. Carrie Gao, IR Director of the company. Please go ahead, ma'am.

Hello everyone and welcome to YALA's first quarter 2026 earnings conference call. We issued our earnings press release earlier today and it 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 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. Saifiz Mayu, 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 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 first quarter 2026 earnings conference call. We delivered resilient first quarter results with revenues of 79 million USD in line with our expectations giving the shifting geopolitical environment and the impact of Ramadan. We find operations and focused market strategies drove a 7.7% increase in average MAUs, a notable uptick reflecting continued strong user reach and engagement, underscoring the essential role our platforms play in the daily lives of mini users. Our core product ecosystem performed steadily, and our gaming business reinforced its position as a company's key growth engine. We continue to monitor the impact of regional situation on our business with our March survey indicating a moderate effect on user sentiment. Supported by years of accumulated user loyalty and deep community connections, as well as consistent upgrades, we are confident that our Lexi product will continue to serve as resilient foundation and pinning the company's overall stability. What's more, we expect our mid-core and high-core games to contribute to revenues in the second half of this year and beyond, boosting our games segment performance and elevating the group's overall revenue scale. Let's take a closer look at our medical and hardcore games business. First, for our SLG gaming initiatives. We are pleased to announce our partnership with Blaze Area Interactive Entertainment, the international division of our top SLG game studio, whose gross billing in the SLG category has ranked among the top five globally over the past five years. This partnership harnesses our complementary respective strengths. The Blaze area team leads R&D, leveraging its proven game development expertise to craft a game rooted in Mina's heritage and visual taste, while Yala Group leads distribution, using its deep local know-how and accumulated gamer community to deliver the title across Mina. Our SLG title was officially launched on Android in April and has already shown stable performance and solid early user feedback. It also debuted on iOS in early May. According to Sentinel data, it ranked as highest number one on iOS in five GCC countries in terms of downloads under the strategy game category. We are closely monitoring data and managing marketing strategies accordingly, and we will keep you posted on the game's progress and key milestones. Our self-developed Match 3 title, Turbo Match, has also performed well in its early stage, following our recent ramp-up of user acquisition campaigns. It ranked in the top 10 downloads under the puzzle games category across diverse minimarkets, including UAE and Saudi Arabia, according to sensitive data. Our recent co-promotion with Yela Ludo resulted in improved user engagement and retention metrics. We will gradually increase our budget for user acquisition from external channels to steadily reach more users from additional overseas market in the upcoming months. We continue to see significant growth potential for SLG and Match 3 games, and we'll continue to invest in these two games. Both new titles' early performance has been encouraging, laying the groundwork for future growth. We continued to expand our games team over the past year and have been exploring additional gaming verticals, including the casual and hyper casual sectors across more overseas markets, we will share a more detailed overview of this new initiatives in due course additionally. we keep leveraging AI technologies to enhance our product capabilities and overall operational efficiency. We are exploring in-product AI applications to further improve user engagement and drive interaction, including experimenting with new forms of social and interactive experiences. Internally, we are encouraging employees to actively adopt AI tools in their daily work while providing the necessary resources and support. We are also building a dedicated management platform to better monitor and optimize token usage, thereby improving productivity and efficiency. These initiatives, together with our Themis model, not only help, safeguard community safety, but also leverage technology and local insights to continuously drive operational leverage and innovation. We continued to deliver on our shareholder return commitments. As of March 31st, 2026, the company had repurchased $1,460,900 989 ADS or Class A ordinary shares for an aggregate amount of 9.7 million USD in this year, bringing the total number of shares repurchased under the 2021 share repurchase program to 17,143,162 with an aggregate amount of 115.7 million USD. We will continue to execute the 2021 program through May 21st, 2026, and subsequently implement our newly authorized 2026 share repurchase program of up to 150 million USD over the 24 months starting from March the 9th. Once again, I would like to emphasize that we consistently place shareholder interest at the core of our capital allocation decisions, maximizing shareholder value through a continuously optimized return framework. 2026 will be a pivotal year for Yala's evolution as a leader in Lina's digital transformation. We will continue to strengthen our products and maximize synergies between our social and gaming ecosystem, boosting cross-product engagement and user lifetime value. By leveraging our strong in-house R&D, years of accumulated local resources and expertise, and expanding collaboration with leading global partners, we will continue unlocking the MENA market's immense growth potential. supported by a strong balance sheet, solid profitability, and healthy cash flow. We are confident in our resilience and our ability to capture growth opportunities, consistently creating long-term value for global investors. Now, I will turn this call over to our president, Safi Ismail. Safi, please go on.

Thank you. Hello, everyone. Thanks for joining us today. Let's take a closer look at our first quarter operations and product performance. Our operations continued to progress smoothly in the first quarter of 2026. Our team members in the areas impacted by the conflict are safe and have shifted to a flexible work from home arrangement with remote working support and dedicated living allowances provided by Yalla. As the region celebrated Ramadan in the first quarter, we conducted a wide-reaching marketing campaign to better reach local users and support them in observing their traditions, driving a strong increase in average MAUs up to 7.7% year-over-year to 48 million during the quarter. This accelerated growth underscored our community's strong cohesion and highlighted Yalla's growing role as a hub of the regional digital culture social interaction, and emotional connection. On the product side, Ramadan was a key focus this quarter. Through a wide array of culturally-resonant online celebrations, we transcended physical boundaries, enabling users to rediscover the holiday's traditional warmth in the digital world. Notably, 101 Okay Yalla's Ramadan campaign not only achieved record high participation, but also new historical high in paying users across both the gaming and chat room segments, driving all-time highs in 101 OK Yellow's products, MAU, and quarterly revenue. Beyond our product platform, we continue to deepen our regional presence through strategic partnerships and high-level industry engagement. This year, we began a building a partnership with the Saudi Esports Federation to drive growth across the regional esports ecosystem. We served as an official event partner for the SEF Saudi E-League 2026, the nation's premier esports competition. Specifically, we are also pleased to announce that Yalla serves as the presenting partner of the Yalla Saudi E-League Women 2026. This event is designed to highlight and elevate female players in the professional environment across four major game titles. The Saudi E-League is currently underway and attracting attention across the region, demonstrating the development potential of e-sport and particularly women's e-sport in Saudi Arabia and throughout MENA. a segment we view as one of the most significant growth opportunities in competitive gaming today. Looking ahead, we will continue to refine operations and user experience while deepening content localization and leveraging AI tech to enhance user engagement. Supported by deep insight into Middle Eastern culture and consistently strong execution, we are confident that Yalla is well-positioned to strengthen its leadership of MENA's digital entertainment market.

Thank you, Sefi. And hello, everyone. Thank you for joining us today. In the first quarter, we continue to focus on efficiency enhancement and pursue high-quality development. Our revenues were $79 million, with revenues from game services grew to $30.3 million. accounting for 38.3% of total revenues. We continue to enhance our overall efficiency and maintain healthy margins. Our non-GAAP net income was 33.3 million US dollars with a net margin of 42.1%. Our strong balance sheet and healthy cash flow continue to support our investments in business development as well as consistent shareholder returns. We will continue to invest in long-term growth opportunities to drive high-quality growth and maximize value for all stakeholders. Let's move on to our detailed financials for the first quarter of 2026. Our revenues were $79 million in the first quarter of 2026, compared with $83.9 million in the same period last year. primarily due to a decrease in paying uses attributable to the impact of the recent geopolitical events in the broader region. Turning to costs and expenses, total costs and expenses were $55.5 million in the first quarter of 2026, compared with $52.7 million in the same period last year. Our cost of revenues was $26.5 million in the first quarter of 2026, a 9.3% decrease from $29.2 million in the same period last year, primarily due to lower commission fees paid to third-party payment platforms. Cost of revenues as a percentage of total revenues decreased to 33.5% in the first quarter of 2026, from 34.8% in the same period last year. Our selling and marketing expenses were $9.7 million in the first quarter of 2026, a 40% increase from $6.9 million in the same period last year, primarily due to higher advertising and marketing promotion expenses attributable to the company's continued user acquisition efforts. and expanding product portfolio. Selling and marketing expenses as a percentage of total revenues increased to 12.3% in the first quarter of 2026 from 8.3% in the same period last year. Our GA expenses were 10.3 million US dollars in the first quarter of 2026, a 11.9% increase from 8.3% in the same period last year, primarily due to an increase in share-based compensation and the foreign exchange loss, partially offset by a decrease in incentive compensation. GA expenses as a percentage of total revenues increased to 30% in the first quarter of 2026, from 10.4% in the same period last year. Our technology and product development expense was $9.1 million in the first quarter of 2026, a 16.2% increase from $7.8 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 headcounts to support the development of new businesses and our product portfolio expansion. Technology and product development expenses as a percentage of total revenues increased to 11.5% in the first quarter of 2026, from 9.3% in the same period last year. As such, Our operating income was $23.5 million in the first quarter of 2026, compared with $31.2 million in the same period last year. Interest income was $5.9 million in the first quarter of 2026, compared with $6.6 million in the same period last year. Investment loss was $0.4 million in the first quarter of 2026, compared with $11,700 in the same period last year, primarily due to fluctuations in the fair value of wealth management products. Income tax expense was $0.6 million in the first quarter of 2026, compared with $1.4 million in the same period last year, As a result of outgoing, our net income was $28.4 million in the first quarter of 2026, compared with $36.4 million in the same period last year. Our non-GAAP net income in the first quarter of 2026 was $33.3 million, compared with $39.1 million in the same period last year. Moving to our liquidity and capital resources, our cash position remains solid and healthy. As of March 31, 2026, the company had cash and cash equivalents, restricted cash, term deposits, and short-term investments of $806.7 million, compared with $754.6 million as of December 31, 2025. Moving to our outlook, for the second quarter of 2026, we expect our revenues to be between $75 million and $82 million. The above outlook is based on our current market conditions and reflects the company's current and preliminary estimates of the market and operating conditions and customer demand, which are all subject to change. In the interest of time, please refer to our earnings press release for further details on our first quarter 2024 financial results. 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. If you order to ask questions, please press star 11 on your telephone and wait for a name to be announced. If you would like to cancel your request, please press star 11 again. One moment for the first question. The first question comes from the line of Xueqing Zhang from CICC. Please go ahead.

Good morning. Thank you for taking my question. And my question is about your core business. Given the complex job situation in the Middle East, How does management assess the future stability of your company? Thank you.

Good morning, Shijie. Thank you for your question. As noted in our prepared remarks, our remarks today shows the original situation has impacted user sentiment to some extent. While we have no direct business presence in RUN, Our users in the broader region have not been immune to the uncertainty, and we have seen a slight moderation in their willingness to pay. First quarter revenues declined modestly year-over-year, and seeing the current conditions, we expect full year revenue from our Lexi business to be down by a low to mid-single-digit percentage year-over-year. Overall, the impact on our business is manageable. Thanks to our resilient business model and solid fundamentals, this is not the only challenging event we have endured over the past decades of operating in the Middle East. For more than 10 years, we have built strong brand loyalty and trust among local users, which has translated into clear business resilience during periods like this one. A complex medical backdrop places a preeminent on local operating experience and capability, and ultimately tests a company's ability to sustain a long-term presence in any given region. By that measure, Yara's operational resilience and stability in the Middle East have been well demonstrated. thoroughly validated and this continues to be a market where our competitive strengths are clear. We still believe strongly in the MENA region's long-term economic growth and digital transformation prospects. With that said, As our gaming business develops, we are also actively exploring overseas markets, including the US and Europe, as part of our broader diversification strategy. Overall, we see our legacy business remaining relatively stable and resilient, while our gaming business continues to create new energy. We are excited about the potential growth opportunities that our new game pipeline could bring in this second half of this year. I hope this answered your question, Xuqing. Thank you.

One moment for the next question.

Our next questions come from the line of Chloe Wei from CICC. Please go ahead.

Thanks, management, for taking my question. First, congratulations on your solid results. And my question is about the management, maybe share some colors on the outlook for the full year 2026. And also, how do you think about the revenue trend heading to 2027? Thank you.

Thank you, Chloe. This is Yang. And I will answer this question. As Mr. Yang just mentioned, factoring in the recent regional developments, we currently expect our legacy business revenue to decline by a low to middle single-digit percentage year-over-year in 2026. However, both of our new game titles, Turbo Match, and our new themed SLG title have not officially launched and are in active promotion. We expect the new games to start contributing the total revenues gradually. in the second half of the year, supporting group-level revenue. As a result, for 2026, we expect our total revenues to be broadly flat compared with 2025. Looking into 2027, as the two new titles mature in terms of scale and the revenue generation, this is a potential, if everything progresses well, for us to move towards double-digit year-over-year growth. We will closely observe the monetization performance and the user traction of both schemes before providing more specific guidance. Thank you.

Thank you.

Questions? One moment for the next question. Our next question comes from the line of Tianhao Liu of CTIC. Please go ahead.

Hi, good morning, management. Thanks for taking my question. I think the market is highly focused on the performance of Yala's mid and hardcore games. So could management elaborate on the current rollout and the marketing cadence for the new games? Thanks.

Thank you for your question, Tianhao. Entering the second quarter, we advanced an internal cross-promotion initiative between TurboMatch and Yala Ludo. driving increased TurboMatch downloads and stronger user retention. More recently, we have started to step up external user acquisition efforts for TurboMatch and will gradually roll out focused marketing campaigns across multiple markets. Given that TurboMatch is designed For global users, we plan to promote it across various international markets, including the US and Europe. This means its market penetration timeline will be relatively longer, which also implies a larger potential user base and a longer product lifecycle. For the SLG title, the go-to-market pace will be faster. Following its recent official launch on both Android and iOS, we have already begun scaling paid user acquisition across the Middle East. If everything progresses as planned, we expect marketing spending to ramp up significantly over the next six months, driving a steeper revenue contribution curve.

Thank you. Thank you for the questions. Our next question comes from the line of Jenny Yuen of UBS. Please go ahead.

Thank you. Thank you, management, for taking my question. My question is regarding our capital allocation plans. So we see the company's cash balance continues to increase. Could management please share its capital allocation priorities? Would you consider M&A or other investment opportunities going forward? Thank you.

Thank you, Jenny. Our capital allocation strategy has always been centered on maximizing long-term shareholder value. Current market conditions present an attractive opportunity to return capital to shareholders, which is why we just launched a new two-year $150 million USD share repurchase program. We will maintain a strong cash position to support our business development, particularly our gaming marketing and R&D requirements. As for M&A, we remain pretty open, but also highly disciplined. Any potential target must be a strong strategic fit for Yella in terms of business synergies. For now, share repurchases remain one of our key tools to return value to our long-term shareholders. Thank you, Jenny.

Thank you for the question. Our next question comes from the line of Rachel Wang of Haitong International. Please go ahead.

Shai, thanks, management, for taking my question. And my question is that as the official partner of the Saudi Esports League 2026, what tangible impact will this have on Yalex business development in Saudi Arabia? Thank you.

Thanks, Rachel, for the question. Our partnership with EF embeds Yalla deeply into Saudi Arabia's national esports ecosystem. It also reflects and further enhances Yalla's brand recognition in one of our strategically important markets. This year, we also served as the presenting partner of Saudi E-League Women, enabling us to precisely reach female players. a high-potential segment that represents an increasingly important part of the gaming community. In addition, we co-promoted our new games title with SEF during these national competitions, reaching more local gaming users and further increasing our product visibility and user awareness. Beyond the immediate brand impact, the SEF partnership helps us deepen our understanding of the strategic development direction and resources of the local esports and gaming ecosystem, while also enabling us to actively participate in and shape its long-term growth. We believe this partnership carries meaningful strategic importance for Riella's sustainable development in this core market. Thank you.

The question. Our next question comes from the line of Lincoln Kong from Goldman Sachs. Please go ahead.

Thanks, management, for taking questions. So could management share more color on the company's internal AI adoption and on related strategic plan going forward? Thank you.

Thank you, Lincoln. I'll take the discussion. Like many leading internet companies, we are embracing this technological wave and have already deeply integrated AI into our operations and the daily workflows. Our AI model, Siemens, has significantly improved Arabic content moderation efficiency while lower costs. And we have recently begun accelerating the incubation of new AI-driven social networking products to enrich our future product pipeline with the goal of delivering a more vibrant and engaging user experience. We will deploy such investments prudently, consistent with our longstanding practice. Additionally, for our Lexi products, we have been exploring AI-powered interactive in-app features designed to diversify social gameplay and strengthen user retention. We are also actively encouraging employees to leverage AI tools to improve R&D efficiency while providing AI resources. We are building internal management system to better monitor token usage, manage resource allocation, and improve overall ROI. The AI wave is irreversible. We remain committed to exploring AI applications tailored to Arabic language and local culture context, and have established dedicated teams to closely track AI developments and identify areas where we can meaningfully participate. Thank you, Lincoln.

Thank you for the question. One moment for the next question. Our next question comes from the line of Rachel Guo of Nomura. Please go ahead.

Hi, thank you for taking my question. My question is about the profit margin. I noticed that the profit margin has declined this quarter. Could management elaborate on the key reasons behind the compression? And what's your outlook for margin trend going forward? Thank you.

Thank you for your question, Rachel. The margin fluctuations in Q1 were driven by a combination of factors. First, our legacy business revenue came under some pressure due to geopolitical events and adjustments during the Ramadan. At the same time, we increased the marketing spending for one of our social products to better engage local users for Ramadan in Q1. So in addition, we kicked off several new products at the group level late last year. So we expanded our R&D team. These incremental investments in Q1 were mainly directed towards products that have not yet started to generate revenue, leading to some margin compression. Looking ahead, given that neither marketing nor ND expenses are expected to decline materially in the near term, we believe a margin level of around 35% is a reasonable expectation for our existing legacy business this year. On top of that, if the new gaming projects progress as planned, we may further increase marketing spend in the second half of the year. As we have previously guided, we intend to allocate around 5% of group revenue as promotion budget for the new games. That side, market spend and revenue will skim together, and it is too early to pinpoint precisely where margins will settle, given this dynamic relationship. We will provide more specific guidance once the monetization models of the games become clearer. Gaming businesses typically go through an upfront investment phase during which margins come under some pressure. Once our investment phase is completed, we expect marketing expenses to normalize and profitability to be achieved. We hope this helps clarify the margin dynamics going forward. Thank you.

Thank you for the questions. As there are no further questions now, I would 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 the next quarter. If you have further questions, please feel free to contact Yala's Investor Relations or PS&T Financial Communications. Both parties' contact information is available in today's press release as well as on our company website. Thank you.

This concludes this conference call. You may now disconnect your line. Thank you.