Earnings Call: Q2 2021

Aug 10, 2021

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. Carrie Gao, IR Director of the company. Please go ahead, ma'am. Thank you. Hello, everyone, and welcome to Yalla's Q2 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 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 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. Yara'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. Kyle Yang, our Chairman and Chief Executive Officer, who will provide an overview of our recent achievements and growth strategies. He will be followed by Mr. Saipi Ismayu, the Company's President, who will give a brief review of our recent developments. Mrs. Karen Hu, our Chief Financial Officer, will then provide additional details on the company's financial results and discuss financial outlook. Following the 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. Thank you, Carrie. Thank you everyone for joining our 2021 Q2 earnings conference call. The Q2 was another solid one for Yalla. Yalla Group's total revenue reached $66,600,000 representing a year on year growth of 110 0.3%. Despite some impacts from the Ramadan holiday falling in the Q2 this year, we effectively grew our user community and advanced our monetization capabilities and initiatives. In the Q2 of 2021, we also maintained robust profitability as demonstrated by our non GAAP net margin of 48.2 percent. With strong execution of our effective marketing campaigns tailored to MENA's local culture, monthly active users for our group increased 17.3% Q on Q to 22,100,000. We have also observed diverse impacts from the Ramadan Jose on different types of products. Our social product, Yalla's paying users, slightly decreased from 1,200,000 to 1,100,000, while our casual game product, Yalla Ludo, saw a 14.6 Q on Q increase in paying users to 5,300,000, leading to a group paying user of 29%. Our new products have also been performing impressively. We are very happy to announce that we have officially launched 1010 K Yalla for Turkish users, which is already receiving positive feedback from the market and has recently reached number 1 in the ballgame category in terms of downloads in Turkey. Additionally, yellow blue, a card game we designed for Saudi users is also in the final stage of development. We look forward to sharing more updates about this with you next quarter. As for yellow check, Since the launch of this better version in the Q1, our team has been persistently working to refine and enhance the products based on user feedback. We expect to gradually improve the performance of the product system and rollout 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 3 new products designed for our main market mentioned about, the yellow patches, a South American version of the Ludo app was also officially launched and have already received a very good feedback from our users. Leveraging our experience running Yalla Ludo, we facilitated Yalla patches development much more effectively and efficiently. We also added the in game words check function we have in yellow into yellow patches, a feature that is gaining popularity among our South American users and helps to build our community. As a result, users average daily time spent on Yalla touches has already reached 80 minutes. And purchase also reached number 1 in the board game category in terms of downloads numbers in 8 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 5 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 U. S, 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 callers. Our President, Sify, 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 across borders as well as a deep sense of trust among teams have led to Liala's robust growth. We are so proud of the fact that over the last 5 years, it locks up with Liala'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 love 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 trends in MENA'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. Saif Ismail for a closer look at our recent developments. Thanks, Zhao. 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 May, we hosted the Ramadan Kareem event on Yalla to encourage users to visit our platform every day and greet their friends with special gifts designed especially for Ramadan. The event attracted more than 600,000 users. Besides this, we also hosted a series of events online to celebrate Yalla's 5th anniversary in our community. More than $2,000,000 of virtual gifts were sent during these events, demonstrating the impressive engagement level of our participating users. Additionally, as Thao just mentioned, we are very excited about our participation in an important initiative, the National Programme for Coders announced by the UAE Government in July. This program is a testament to the UAE Government's 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 shortlisted as a partner. The program signals to the UAE government's commitment to attracting more talents from all over the world, further improving the local social infrastructure and supporting innovative new ideas as well as academic development over the next 5 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 involvement in the program not only demonstrate the company's commitment to facilitating the development of MENA's local digital economy, but also attest to the fact that Yalla is a reliable and trustworthy local partner. 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 the 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. Thank you, Sassy. 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 steady fast execution of our growth strategy that we already use experience and community development. Our 2nd quarter revenues grew by 110.3% year over year to US66 $600,000 while our non GAAP net income reached US32.1 million dollars with a gross reach of 101.4 percent 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 Q2 of 2021. Our revenues were US66.6 million dollars in the Q2 of 2021, a 110.3% increase from US31.7 million dollars in the same period last year. The increase was primarily driven by the widening of both Yalla and Yalla Loodles use base and the enhancement of Yalla Group's monetization capabilities. Our average MAU increased by 77% from CNY12.5 million in the Q2 of 2020 to CNY22.1 million in the Q2 of 2021. Yalla's MAUs increased by 73.2 percent to $8,400,000 in the Q2 of 2021 from $4,800,000 in the same period of last year. And the yellow Ludo's MAU increased by 79.5 percent to RMB13.7 million in the Q2 of 2021 from RMB7.6 million in the same period last year. Now let's look at our costs and expenses. Our cost of revenues was US23.8 million dollars in the Q2 of 2021. Excluding share based compensation expenses, cost of revenues in the Q2 of 2021 was US22.1 million dollars a 112.1 percent increase from US2.4 million dollars for the same quarter last year. The increase was primarily due to higher commission fees for the 3rd 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 Q2 of 2021 compared with 32.9 percent in same period in 2020. Our selling and selling and marketing expenses were US9.8 million dollars in the Q2 of 2021. Excluding share based compensation expenses, other components of selling and marketing expenses for the Q2 of 2021 was US6.6 million dollars a 139.8 percent increase from US2.7 million dollars for the same quarter last year. The increase was primarily due to higher advertising and marketing promotional expenses as a result of our continued news acquisition efforts. As a result of these reasons, other components of selling and marketing as percentage of our total revenues increased from 8.6% in the Q2 of 2020 to 9.8% in the same period in 2021. Our general and administrative expenses were US11.1 million dollars in the Q2 of 2021. Excluding share based compensation expenses, other components of general and administrative expenses for the Q2 of 2021 were US2.4 million dollars a 72% increase from US1.4 million dollars 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 revenues dropped from 4.4% in the Q2 of 2020 to 3.6% in the Q2 of 2021 due to economies of scale. Our technology and the product development expenses were US3.2 million dollars in the Q2 of 2021. Excluding share based compensation expenses, other components of technology and product development expenses for the Q2 was 2021 or US3.1 million dollars a 192.7 percent increase from US1 $1,000,000 for the same quarter last year. The increase was primarily due to an enhancement in salaries and the balance base for our technology and the product development staff, which was in turn driven by an expansion of our technology and product development staff arising from higher investment in new products and services. As a result of these reasons, other components of technology and the product development expenses as percentage of our total revenues rose from 3.3% to 4.6% year over year. As such, our operating income was US19.8 million dollars in the Q2 of 2021, compared with operating income of US16.1 million dollars in the same period last year. Excluding share based compensation, non GAAP operating income for the Q2 of 2021 was US32 point $5,000,000 a 102.1 percent improvement from the same quarter last year. Our income tax expenses was US0.38 million dollars in the Q2 of 2021 in comparison to US0.23 million dollars in the Q2 of 2020. Moving to the bottom line, our net income was US18.4 million dollars in the Q2 of 2021, a 15.2% increase from US16 $1,000,000 in the same period last year. Excluding share based compensation expenses, non GAAP net income for the Q2 of 2021 was US32.1 million dollars a 101.4 percent 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 US292.4 million dollars as compared to cash and cash equivalents of US261.7 US261.7 million dollars as of March 31, 2021. This improvement demonstrates our resolve and capability to ameliorate Yalla Group's operations as consistent basis. On May 21, 2021, we announced the 2021 share repurchase program. And as an update, we have repurchased 441,931 ADS, representing 441,930 1 Class A ordinary shares from the open market with cash for an aggregate amount of approximately US8.29 million dollars as of June 30, 2021. For the Q3 of 2021, we expect our revenues to be between $67,000,000 to $72,000,000 The above outlook is based on the current market conditions and reflects company's management's 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. We will now begin the question and answer session. Our first question will come from Shikki G with CICC. Please go ahead. Hi, management. Thanks for taking my question and congrats on your strong quarter. So I have two questions and I will ask them 1 by 1. My first question is regarding the regulatory risks. Since you have an R and D team in China, do you see any potential influence on your business from recent tighter regulation to Internet companies in China? Hi, C. J. Thank you for your first 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 talents in the Internet and the technology industry. Our R and D team in China has played an important role in Yalla's substantial growth over the past 5 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 and 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 in MENA and our product 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. Thank you. That's very helpful. And my second question is about the short selling reports 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? 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 states in the press release that it has never placed a robot in any of its chatrooms. Yalla is a voice 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 these alternative accounts to collect actual virtual coins or gifts 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 learning 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. What we can confirm is that alternative accounts are only a minority on Yala, 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 affirm that we have never paid money or shared revenue with any KOL 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 2 products and we may remain unchanged in the foreseeable future. Accompanying our pure UGC platform is a 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 tried to mislead their audience. We didn't have any unprofessional audience partner. Instead, Yalla's auditor is KPMG, one of the big four. And we have been working with KPMG since 2018, long before Yalla went public. Integrity is one of our top priority. We have very high standards in our financial reporting, and we highly value the importance of complying with SEC's requirements on disclosure. And lastly, regarding cash, Yalla's cash balance has always been consistent with our reported revenues and cash is always the most difficult to lie about in any business. We disclosed in our 20 F that we have bank accounts in 3 countries, including Dubai, UAE, Singapore and Hong Kong, China. Dubai is where our headquarters is based in 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, whether it's convenient for our daily operation and whether we have instant access to its stature. 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. Thank you. Very clear. Thank you. Our next question will come from Bo Pei with Oppenheimer. Please go ahead. Hi management. Thanks for taking my questions. So I have 3, 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 US8.7 million dollars shares. So is this the sort 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 the 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. Thanks, Paul. This is Karen. I will take the number 1 and number 3 questions. By means of our rehab on May 21, 2021, we announced a share buyback program authorized for our Board of Directors whereby we may repurchase up to US150 $1,000,000 of our ADS from time to time over the following 12 months. And by the end of Q2, we have already repurchased 441,000 931 ADS from the open market with cash for an aggregate amount of around US8 $1,000,000 For the remainder of our authorized period, we will continue to repurchase shares under 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 Q2, but we think that we were 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 Q3. Thank you. 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 2 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. Usually, monetization will come after that. And the path that Yellow 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. Okay. Thank you. That's helpful. Thank you. Our next question will come from Kaifeng Jia with Citix. Please go ahead. Hi, management. Thanks for taking my questions. And you mentioned that you released the new apps. So could you please provide more details on your strategy in building Yala ecosystem? Okay. I will answer your question. We have built 2 flagship applications, Yalla and Yalla Ludo. Through years of development, we are gradually building our Yalla community. Going forward, when our next generations of social products are ready, we plan to drive traffic from Yalla to this new social app. 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 these 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. Okay. Thank you. Very clear. Thank Our next question will come from Natalie Wu with Haitong International. Please go ahead. Hello, thanks. This is on behalf of International. Thanks management for taking my question and 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 metrics for Yalla and Yalaludu such as user demographics, retention rates and acquisition costs? Thank you. Thanks, Yulin. This is Jeff and I will answer. With respect to user profile, Yalla's users are usually between 18 to 35 and male to male female ratio is about 7:3. For Yalla Ludo, since it's a popular traditional casual game, age range of users is between 12 to 40 and the male to female ratio is around 6 to 4. But since we highly value our users' privacy, we don't require users to verify their IDs to join Yala And we don't have LBS either. So the demographic data is just for your reference. In terms of user acquisition cost, since our business covers the whole MENA region, costs can vary a lot among different countries. For example, the cost in GCC countries is usually higher than that of the other countries. Yala's products are designed for Arabic users as well as users from some other countries with similar culture backgrounds. As you can see, we have a large market and our current user base only accounts for a small portion of the total population in the region. So we still see a lot of untapped potential in this market. Because of Yalla and Yalla Ludo's unique business model, their development doesn't require massive spending in sales and marketing, which has been demonstrated by our stable sales and marketing expenses over the past years. As such, we think the user acquisition cost will be relatively stable for at least in the near term, and we believe we still have ample room to grow in this region. Thanks. That's very clear. I have a follow-up question regarding your outlook. Was wondering if you could share with us your expectations on your MAU growth going into the Q3 and the Q4. And lastly, I just want to confirm if the Q3 revenue guidance has included the revenue contribution from the new APT or not? Thanks. Our guidance of Q3 didn't include in the new app. Okay. Thank you. And could you share with us your expectation for the user growth going into the Q3 and the Q4? Thank you. For the users growth, as we told the investors always, we can beat the Q on Q around 13% to 15% for the users growth, both Yalla's and Yalla Ludo's. And for the new products user growth, we don't conclude it in the expectation. Okay. Thank you. That's very helpful. 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 next quarter. Thank you.