Yalla Group Limited
Q2 2021 Earnings Call Transcript

Published: 9 Aug 2021

[Operator:]

Good morning and good evening, ladies and gentlemen. Thank you for standing by for Yalla Group Limited's Second Quarter 2021 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. Kerry Gao, IR Director of the company. Please go ahead, ma'am.

[Kerry Gao:]

Thank you. Hello, everyone, and welcome to Yalla's second quarter 2021 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 US 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 this and other risks and uncertainties is included in our earning release and our registration statements filed with the SEC. Yalla does not assume any obligation to update any forward-looking statements, except as required by law. Please also note that Yalla's earnings press release and this conference call include discussion of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Yalla'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 recent achievements and growth strategies. He'll be followed by Mr. Saifi Ismail, the company's President, who will give a brief review of our recent development. Mrs. Karen Hu, our Chief Financial Officer, will then provide additional details on the company's financial results and discuss financial outlook. Following management's prepared remarks, we will open up 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.

[Tao Yang:]

Thank you Kerry, and thank you everyone for joining our 2021 second quarter earnings conference call. The second quarter was another solid one for Yalla. Yalla Group's total revenue reached US$66.6 million, representing a year-on-year growth of 110.3%. Despite some impacts from the Ramadan holiday falling in the second quarter this year, we effectively grew our user community and advanced our monetization capabilities and the initiatives. In the second quarter of 2021, we also maintained the profitability as demonstrated by our non-GAAP investment margin of 48.2%. With strong execution of our effective marketing campaigns tailored to Midas Group culture, monthly active users for our group increased 17.3 million Q-on-Q to 22.1 million. We have also observed diverse impact from the Ramadan holiday on different types of products. Our social products Yalla’s paying users slightly decreased from 1.2 million to 1.1 million, while card schedule game product, Yalla Ludo saw a 14.6% Q-on-Q increase in paying users to $5.3 million, leading to a group paying user about 29%. Our new products have also been performing impressively. We are very happy to announce that we have officially launched 101 Okey Yalla for Turkish users, which is already receiving positive feedback from the market and has recently reached number one in the ball game category in terms of downloads in Turkey. Additionally, Yalla Baloot, our car game we designed for Saudi users is also in a final stage of the development. We look forward to sharing more updates about this with you next quarter. As for YallaChat, since the launch of this better version in the first quarter, our team has been persistently working to refine and enhance the product based on user feedback. We expect to gradually improve the performance of the product system, and roll out new design features and functions through iterations over the next several months. We are committed to perfecting specific features and customizing our products to cater to local users desires and firmly believe our precise attention to detail will be fruitful. Besides these three new products designed for our main market, as mentioned about Yalla Parchis a South American version of the ludo app, was also officially launched and have already received very good feedback from our users. Leveraging our experience running Yalla Ludo, we facilitated Yalla Parchis development much more effectively and efficiently. We also added the in-game word check function, we have in Yalla Ludo into Yalla Parchis, a feature that is gaining popularity among our South American users and helps to build our community. As a result, user's average daily time spent on Yalla Parchis has already reached 80 minutes, and Parchis also reached number one in the broad game category in terms of download members in eight countries, including Colombia, Venezuela and Ecuador. Another important update, we would like to share with you is that Yalla initiated its internal ESG guidelines this year, and is also working on summarizing core values that we think will play an important role in steering our team's decision-making. Yalla has experienced exponential growth over the last five years. And this period has given us a clear picture of the sort of company Yalla wants to be and a vision for our core values on this journey. As the first UAE-based technology unicorn to be listed in the US, we have always felt a sense of responsibility to contribute to the broader development of the digital economy in MENA, and to build a community with a shared future. Yalla is honored to be participating as a partner in the UAE Government's recently unveiled national program for coders. Our President, Saifi will share more details of this program with you later. As a UAE-based company, Yalla is deeply committed to respecting local users and local culture. At the same time, we also embrace diversity and proactively add global talents to our team. We have hired employees from more than 15 countries around the world. We learn from each other every day, and prioritize fostering efficient, innovative, friendly and inclusive working environment. We believe our strong management capabilities and seamless collaboration of cross borders as well as a deep sense of trust among teams have led to Yalla's robust growth. We are so proud of the fact that over the last five years it locks up with Yalla's development as a company, we have also witnessed more and more young talents become experts, equipped with deep knowledge of the MENA internet industry. We have gradually built a global team, with strong expertise, passion, creativity and diversity and deep trust in our company. In 2020, Yalla Group's employee turnover rate was only 14%, an incredible number in the Internet industry. In conclusion, I would like to reaffirm our mission to build the most popular destination for online social networking and entertainment activities in MENA. As we continue to enrich and enhance the products we offer to better serve local users, we have established and proven our leadership in this field and are confident about the development of the digital economy in this region. Looking ahead, we will continue to closely watch changes in MINA’s local culture and develop Yalla's ecosystem with various products and services tailored to meet local users' needs. Now, I will turn this call over to our President, Mr. Saifi Ismail, for a closer look at our recent development.

[Saifi Ismail:]

Thanks, Tao. Hello everyone. Thanks for joining us today. First of all, I would like to highlight our efforts in product operating. To better encourage user engagement on our platform, we continue to roll out localized operating events that are tailored to the MENA culture. For example, during Ramadan in April and May, we hosted the Ramadan Kareem event on Yalla to encourage users to visit our platform every day and greed their friends with special gift, designed specially for Ramadan. The event attracted more than 600,000 users. Besides that, we also hosted a series of events online to celebrate Yalla's fifth anniversary in our community, more than 2 million of virtual gifts were sent during this event, demonstrating the impressive engagement level of our participating users. Additionally, as Tao just mentioned, we are very excited about our participation in an important initiative. The National Program for Coders, announced by the UAE government in July. This program is a testament to the UAE government dedication to developing talent, expertise and innovation in the digital economy and we are thrilled that Yalla is the only local internet company among universities and other global technology giants to be short-listed as a partner. The program signals to the UAE government's commitment to attracting more talent from all over the world, further improving the local social infrastructure and supporting innovative and new ideas, as well as academic development over the next five years. Yalla is honored to be part of this great program and is dedicated to contributing to the development of UAE's digital economy and delivering online, social and entertainment products tailored to the MENA culture. We will share more details with our shareholders, once the government makes a more detailed announcement regarding the collaboration. Yalla's close in the program, not only to demonstrate the company's commitment to facilitating the development of MENA's local digital economy but also attest to the fact that is Yalla reliable and trustworthy local partners. This serves to elevate the Yalla brand, as we open our doors to more talents to provide best-in-class products and services tailored to a MENA’s users' needs and preferences and continue to enhance our influence in the local community. Our mission is to become the number one online social networking and entertainment platform in the MENA region and we are well on our way to achieving this. With that, I will now turn the call over to our CFO, Karen, who will discuss our key financial and operational results.

[Karen Hu:]

Thank you, Saifi. Hello, everyone. Thank you for joining us. Our robust year-on-year growth indicates our sustained strong performance, despite the Ramadan holiday falling during this quarter. This is a testament to the steadfast execution of our growth strategy that reality is user experience and community development. Our second quarter revenues grew by 110.3% year-over-year to US$66.6 million, while our non-GAAP net income reached US$32.1 million, with a gross rate of 101.4% year-over-year. Our non-GAAP net margin remained elevated at 48.2%, reflecting our unique monetization strategy, marketing positioning and strong operating efficiency. Now I would like to walk you through our financial details for the second quarter of 2021. Our revenues were US$66.6 million in the second quarter of 2021, a 110.3% increase from US$31.7 million in the same period last year. The increase was primarily driven by the widening of both Yalla and Yalla Ludo's user base and the enhancement of Yalla Group's monetization capabilities. Our average MAU increased by 77% from 12.5 million in the second quarter of 2020 to 22.1 million in the second quarter of 2021. Yalla's MAUs increased by 73.2% to 8.4 million in the second quarter of 2021 from 4.8 million in the same period of last year. And Yalla Ludo's MAU increased by 79.5% to 13.7 million in the second quarter of 2021 from 7.6 million in the same period last year. Now let's look at our costs and expenses. Our cost of revenues was US$23.8 million in the second quarter of 2021. Excluding share-based compensation expenses, cost of revenues in the second quarter of 2021 was US$22.1 million, a 112.1% increase from US$2.4 million for the same quarter last year. The increase was primarily due to higher commission fees for the third-party payment platforms, resulting from our expanding business scale. Excluding share-based compensation expenses, other components of cost of revenues as a percentage of total revenues remained relatively stable at 33.2% in the second quarter of 2021 compared with 32.9% in the same period in 2020. Our selling and marketing expenses were $9.8 million in the second quarter of 2021. Excluding share-based compensation expenses, other components of selling and marketing expenses for the second quarter of 2021 was $6.6 million. 139.8% increase from $2.7 million for the same quarter last year. The increase was primarily due to higher advertising and marketing promotional expenses as a result of our continued use acquisition efforts. As a result of these reasons, other components of selling and marketing as a percentage of our total revenues increased from 8.6% in the second quarter of 2020 to 9.8% in the same period in 2021. Our general and administrative expenses were $11.1 million in the second quarter of 2021. Excluding share-based compensation expenses, other components of general and administrative expenses for the second quarter of 2021 were $2.4 million, a 72% increase from $1.4 million for the same quarter last year, which was primarily due to an increase in salaries and other benefits for our general and administrative staff, which was in turn driven by an expansion of our general and administrative staff. Excluding share-based compensation expenses, other components of general and administrative expenses as a percentage of our total revenue dropped from 4.4% in the second quarter of 2020 to $0.036 in the second quarter of 2021 due to economies of scale. Our technologies and product development expenses were $3.2 million in the second quarter of 2021. Excluding share-based compensation expenses other components of technology and product development expenses for the second quarter was 2021 was $3.1 million, a 192.7% increase from $1 million for the same quarter last year. The increase was primarily due to an enhancement in salaries and benefit base for our technology and product development staff which was in turn driven by an expansion of our technology and product development staff arising from higher investments in new products and services. As a result of these reasons, other components of technology and product development expenses, our percentage of our total revenues goes from 3.3% to 4.6% year-over-year. As such our operating income was 19.8 -- $18.8 million in the second quarter of 2021 compared with operating income of $16.1 million in the same period last year. Excluding share-based compensation, non-GAAP operating income for the second quarter of 2021 was $32.5 million, a 112.1% improvement from the same quarter last year. Our income tax expenses was $0.38 million in the second quarter of 2021 in comparison to $0.23 million in the second quarter of 2020. Moving to the bottom line. Our net income was $18.4 million in second quarter of 2021, a 15.2% increase from $16 million in the same period last year. Excluding share-based compensation expenses, non-GAAP net income for the second quarter of 2021 was $32.1 million of 101.4% improvement year-over-year. Next, I would like to briefly go through our liquidity and capital resources. As of June 30, 2021 we had cash and cash equivalents of $292.4 million as compared to cash and cash equivalents of $261.7 million as of March 31, 2021. This improvement demonstrates our result and capability to ameliorate Yalla Group's operations as a consistent basis. On May 21, 2021 we announced the 2021 share repurchase program. And as an update we have repurchased 441,931 ADS representing 441,931 Class A ordinary shares from the open market with cash for an aggregate amount of approximately $8.29 million as of June 30, 2021. For the third quarter of 2021, we expect our revenues to be between $67 million to $72 million. The above outlook is based on the current market conditions and reflects the company's management current and preliminary estimates of market and operating conditions and the customer demand which are all subject to change. This concludes our prepared remarks for today. Operator we are now ready to take questions.

[Operator:]

Our first question will come from Shi Gee with CITC. Please go ahead.

[Unidentified Analyst:]

Hi management, thanks for taking my question and congrats on your strong quarter. So I have two questions and I'll ask them one by one. My first question is regarding the regulatory risks, since you have an R&D team in China, do you see any potential influence on your business from recent tighter regulation to Internet companies in China?

[Tao Yang:]

Hi Shi Gee. Thank you for this question. First of all, we highly value the importance of complying with the local policy and law, no matter which countries we operate our business in. In China, there are a lot of experienced talent in the Internet and technology industry. Our R&D team in China has played an important role in Yalla substantial growth over the past five years. We really appreciate the support from the local government, the open business environment and our team's expertise. And that's also the key reason why we decided to have our R&D center in China. In addition, I would like to emphasize that Yalla doesn't have a VIE structure. Yalla's headquarters in Dubai and we don't have revenue from China since our products are not available in China's app stores. As such there is no impact on our business from China's recent tighter regulation on Internet companies. Our main market is MENA and our products are designed based on MENA's culture and MENA users' preferences. We highly appreciate MENA users trust and UAE government support along our development. Thank you.

[Unidentified Analyst:]

Thank you. That's very helpful. And my second question is about the short selling report that came out a few months ago, although neither of them was written by big influential institutions. Could you please provide more details on their questions about your MAU and the business model, maybe help clarify whether there are robots in your chat room and whether you hire KOLs to run the chat rooms? And also why does the company has a bank account in Singapore?

[Tao Yang:]

First of all, I would like to reiterate that those two short reports are of poor quality and contained numerous errors. They weren't even able to provide any solid evidence to prove many of their claims. Here I would like to provide some additional details to our investors. Firstly, regarding our MAU. Yalla clearly stated in the press release that it has never placed a robot in any of its chat-offs. Yalla is a world centric social platform, on which users need to talk and interact with each other to make sense. People who understand this business can easily tell, robots won't even work on our platform. It is true that in some rooms there are accounts with similar names, users create this alternative accounts to collect extra virtual coins or gift from the platform. Similar cases exist on many other online platforms and Yalla has taken many measures to restrict such user behavior. For example, we set various rules to examine and block accounts with suspicious user behavior. However, the replicated accounts are like a game of hide and seek. It's very difficult to radically remove them at once. But what we can confirm is that alternative accounts are only a minority on Yalla as evidenced by the strong growth in our revenues every quarter. If the majority of users were only alternative accounts, which have limited spending power, we won't have been able to deliver such strong revenue growth. Secondly, regarding our business model, we can resolutely after that we have never paid money or shared revenue with any KOLs or any professional content creators on Yalla or Yalla Ludo. These two products are both designed to be pure UGC platforms. This is our strategy for those two products and we may remain unchanged in the foreseeable future. Accompanying our pure UGC platform is no cash-out feature, which is an important reason why Yalla is able to achieve high net margin every quarter. Thirdly, in contrary to the claims of those short sellers who try to mislead their audience, we didn't have any unprofessional audit partner. Instead Yalla's auditor is KPMG, one of the before. And we have been working with KPMG since 2018 long before Yalla went public integrating is one of our top priority. We have very high standards in our financial reporting and we highly value the importance of compiling with SEC's requirements on the closure. And lastly regarding cash, Yalla's cash balance has always been consistent with our reported revenues and cash is always the most difficult to rely about in any business. We disclosed in our 20-F that we have bank accounts in three countries including Dubai of UAE, Singapore and Hong Kong, China. Dubai is well our headquarters facing and both Singapore and Hong Kong are global financial centers. A company need to consider a lot of factors when allocate its cash. For example where whether it's convenient for our daily operations and whether we have access to it. It's nature. Yalla has a solid business in the MENA region. We are very confident in our business model and our business and potential to grow is also solid. Hope this answers your questions. Thank you.

[Unidentified Analyst:]

Thank you very clear. Thank you.

[Operator:]

Our next question will come from Bo Pei with Oppenheimer. Please go ahead.

[Bo Pei:]

Hi, management. Thanks for taking my questions. So I have three if I may. The first one is about the repurchase plan. So I think during May 21 and the end of last quarter, we bought back around US$3.7 million shares. So is this the sort of pace we should be expecting for the future quarters? Do we consider increase that buyback amount, given our cash balance has been growing pretty nicely? And then my second question is about the progress of new apps. We talked about some user metrics, time spent, engagement. But can you talk about when should we expect to see some meaningful monetization from these new apps? Should it be later this year or maybe next year? And then the last question is about the margin. So we have been achieving very healthy margins since the IPO. So can you talk about with these new apps and potentially some advertising activities, should we still expect this kind of healthy margin going forward? Thank you.

[Karen Hu:]

Thanks, Bo. This is Karen. I will take the number one and the number three questions. By means of our rehab on May 21, 2021, we announced a share buyback program authorized for our Board Directors, whereby we repurchased up to US$150 million of our ADS from time to time over the following 12 months. And by the end of Q2, we have already repurchased 441,931 ADS from the open market with cash for an average amount of around US$ 8 million. For the remainder of our authorized period, we will continue to repurchase shares in this program, depending on market conditions and always with the commitment to work for the best long-term interest of our shareholders. And for the margin question, I think, that we were able to maintain our net margin at a relatively stable level over the past several quarters at around 45%. Although, we have been launching some new products in the second quarter, but we think that we will still able to maintain our net margin at this level. And at this point, we don't expect to see significant changes to the net margin in the third quarter. Thank you.

[Tao Yang:]

And for the progress on the new apps and the monetization, I will answer you. As we just discussed during our prepared remarks, we have officially launched two new products and are receiving good feedback from the market. At the current stage, I think, we will still focus more on expanding our initial user base and developing our community. Yearly monetization will come after that. And the part that Yalla Ludo went through can be a good reference. We hope next quarter we will have a good operating numbers of our new apps to share with you and our investors. Thank you, Bo.

[Bo Pei:]

Okay. Thank you. That’s helpful.

[Tao Yang:]

Thank you.

[Operator:]

Our next question will come from . Please, go ahead.

[Unidentified Analyst:]

Hi, management. Thanks for taking my questions. And you mentioned that you released your new apps. So could you please provide more details on your strategy in building Yalla ecosystem?

[Tao Yang:]

Okay. I will answer this question. We have built two flagship applications, Yalla and Yalla Ludo, through years of development we’re gradually building our Yalla community. Going forward, when our next generations of social products are ready, we plan to drive traffic from Yalla to these new social apps. We will also leverage Ludo's user base to promote our new casual game product, as well as upcoming mid to heavy games. As most of Ludo users are game lovers, the trial we conducted earlier have shown very good conversion rate from Ludo. In this way, we expect to introduce more of our products and services to our users, continue improve our efficiency in user acquisition and further develop the Yalla ecosystem. Thank you.

[Unidentified Analyst:]

Okay. Thank you. Very clear.

[Tao Yang:]

Thank you.

[Operator:]

Our next question will come from Natalie Wu with Haitong International. Please go ahead.

[Unidentified Analyst:]

Hello thanks. This is Rene on behalf of Natalie Wu, Haitong International. Thanks management for taking my question and a congratulations on the very strong quarter. My question is regarding your user metrics. Could the management share with us more counters on the trend of your latest user matrix for Yalla and Yalla Ludo such as user demographics, retention rates, and acquisition costs? Thank you.

[Tao Yang:]

Thanks Rene. This is Jeff and I will -- with respect to user profile, Yalla's users are year between 18 to 35 and the male-to-female ratio is about 7

[Unidentified Analyst:]

Thanks. That's very clear. I have follow-up questions regarding your outlook. I was wondering if you could share with us your expectations on your MAU growth going into the third quarter and the fourth quarter. And a last one here, I just want to confirm if the third quarter revenue guidance has included the revenue contribution from the new ITT Knox? Thanks.

[Jeff Xu:]

Our guidance of Q3 didn't include the US.

[Unidentified Analyst:]

Okay. Thank you. And could you share with us your expectation for the user growth going into the third quarter and the fourth quarter? Thank you.

[Tao Yang:]

For the users growth, as we told the investors always, we can be the Q-on-Q around 13% to 15% for the user groups both Yalla and Yalla Ludo. And for the new product user growth, we don't conclude it in the expectation.

[Unidentified Analyst:]

Okay. Thank you. That’s very helpful.

[Operator:]

There are no further questions. Now, I'd like to turn the call back over to management for closing remarks.

[Tao Yang:]

Thank you once again for joining us today. We look forward to speaking with you next quarter. Thank you.

[Operator:]

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