Earnings Call: Q1 2021

May 11, 2021

Good morning and good evening, ladies and gentlemen. Thank you for attending standing by for Yalla Group Limited's Q1 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 would like to turn the call over to your speaker host today, Ms. Carrie Gao, IR Director of the company. Please go ahead, ma'am. Hello, everyone, and welcome to Yalla's Q1 2021 earnings conference call. We released our earnings earlier today, and the release is now available on our IR website as well as on new file 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. 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 strategy. He will be followed by Mr. Syed Itmayeo, 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 management's prepared remarks, we will open up the call to questions. Our Chief Operating Officer, Mr. Jeff Xu, will join the call for our QA 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, Gary, and thank you, everyone, for joining our 2021 Q1 earnings conference call. 2021 is off to a remarkable start. Yalla Group's total revenue increased almost by 40% Q on Q and reached rps67.6 million, exceeding the upper end of our guidance range by 7.4%. This better performance was driven by our continued efforts to grow our user community. The effective conversion of active users into paying users and the further advancement of our monetization capabilities and initiatives. In the Q1 of 2021, we also maintained robust profitability as demonstrated by our non GAAP net margin of 49.7%. With the strong execution of our efforts to raise brand awareness across the Middle East and North Africa region and our respective marketing campaigns tailored to the local culture. Monthly active users for our group increased by 14.6% Q on Q and reached 18,800,000. In addition, increasing user engagement on our platform drove Yalla Group's paying users up by 11.5% quarter over quarter to 5,800,000, leading to outstanding paying ratio of 31 percent. Our ability to monetize also continued to improve as our group's revenue our group's ARPU grew rapidly by 25.5 percent quarter over quarter, reaching $11.6 in Q1. During previous earnings calls, we announced 4 new products in our pipeline. 3 of them are casual game platforms, including Volut for users in Gulf countries, 1010 ks for Turkish users and Yellow Touch for South American users. The better version of all the 3 casual game products have been made available online, and we have also made great progress in refining the technological and user interface details of this new product over the past quarter. Our President, Sethi, will share more details with you in his part later. Our 4th new product is Yellow Chat, an instant message for I'm product designed specifically for air users. We are pleased to share that we launched the better version of Yala Chat in March with this strategically significant product. Yalla Group aims to build and strengthen connections among our individual apps and create an integrated and synergistic ecosystem. To this end, we have adopted measures to attract the right talent to join our R and D and product team. This better version supports basic instant messaging functions such as messaging, voice chatting and video chatting. Since its launch, our development team has continued to refine and enhance the product based on user feedback and we will gradually roll out new design features and functions on the platform based on the local users feedback and desires. The improvement and the iteration of I'm product is always ongoing process. And the initial better stage can take more than several months. We are dedicated to perfecting the details of the product before the team decides to officially launch the product and start full promotion. As we mentioned in our last earnings call, Yalla's top priority this year is to expand our user base with new products lined up for official launch. We plan to increase our sales and marketing activities to build out our initial user base for this product. For our existing 2 products, Yala and Yala Ludo, we will maintain our strategy for steady user growth and don't expect to see much change in exciting phase related to these 2 apps. Furthermore, as we continuously enrich our portfolio, we aim to amplify synergies among our various products and gradually build and develop a comprehensive Yara ecosystem. Our President, I think, will elaborate more on his ideas called this idea in a few minutes. We had an outstanding Q1 marked by strong growth across our primary operational and financial metrics. In just a few days, Yalla is going to have its fixed address rate. 5 years ago, we identified the WhatsApp to be uniquely suitable for online social networking and entertainment in MENA and pioneered the development of Yalla as the 1st voice centric mobile social networking and entertainment platform in the region. Over the past 5 years, our leadership in this field was from strength to strength and we gradually enrich and enhance the product we offer to better serve local users, we're affirming our mission to build the most popular destination for online social networking and entertainment activities in MENA. Looking ahead, we continue to closely watch trends in MENA's local culture, expand our friendly community and build Yala's ecosystem with various products and services tailored to local users' needs. Now I will turn the call over to our President, Mr. Saifie Ismael, for a closer look at our recent developments. Thanks, Thao. Hello, everyone. Thanks for joining us today. As we continue to enrich our product portfolio, including Yalla, Yalla Ludo and the 4 new products in the pipeline, we are looking to boost synergies among individual apps to develop a more integrated ecosystem, which will help us improve efficiency in acquiring new users going forward. With this move, we expect to see an increase in the flow of users from application to application, especially between the chat rooms available on each of our products. We also anticipate seeing an increase in users' awareness of the multiple products and services provided by the Yalla Group, which will, as a whole, lead to a larger user base, longer time spent in Yalla's ecosystem and deeper brand loyalty in the long run. We recently tested the effectiveness of advertising Yalla on Yalla Ludo in a few regions, and the resulting traffic gain for Yalla was solid. While we have observed good potential for cross selling on Yalla Ludo before we decide to launch this project officially, we plan to run more trials. Essentially, we will test the concept in a few countries. 1st, progressively apply it to all other countries that we operate in and potentially replicate the same process to help promote our upcoming new products or even collaborate with other apps in the future. Another exciting update we would love to share with you and our investors here is about our new product, Yalla Purchase. As UAE's 1st technology unicorn listed on the NYSE, besides focusing on serving our MENA's users' needs in the Internet era, Yalla is also exploring overseas opportunities in the South American market. Our first product customized for South America purchase has received very good user feedback in its beta trial, and we are very encouraged by its user metrics that we are constantly evaluating. We will keep monitoring the trend, and we will share more updates for Patch's development with you next time. Yalla will continue to leverage the team's deep local insights to provide MENA local users with various products tailored to their needs and preferences as it remains dedicated to building and developing the Yalla ecosystem. Our mission is to become the number one provider for online social networking and entertainment in the MENA region, and we are well on our way to achieve it. With that, I will now turn the call over to our CFO, Karan, will discuss our key financial and operational results. Thank you, Stephanie. Hello, everyone. Thank you for joining us. Our strong performance sustained into the Q1 as we successfully executed our group strategy that prioritized user experience and the community development. Our 1st quarter revenues grew by 2 21% year over year to US57.6 million dollars while our non GAAP net income reached $33,600,000 with a good reach of 263.7 percent year over year. Our non GAAP net margin remained elaborated at 49.7%, reflecting our unique monetization strategy, marketing positioning and the strong operating efficiency. Now I would like to walk through our financial details for the Q1 of 2021. Our revenues were USD 57.6 1,000,000 in the Q1 of 2021, a $2.21 increase from US21.1 million dollars in the same period last year. The increase was primarily driven by the widening of both Yalla and Yalla Ludo user base and the enhancement in Yalla Group monetization capability. Our average MAUs increased by 206.9% from $6,100,000 in the Q4 of 2020 to $18,800,000 in the Q4 of 2021. Yalla's MAUs increased by $0.81.6 to $7,300,000 in the Q4 of 2021 from $4,000,000 in the same period of last year. And the yellow Ludo's MAU increased by 445.4 percent to $11,500,000 in the Q4 of 2021 from $2,100,000 in the same period of last year. In addition, another primary contributor to our solid revenue growth was a significant increase in the number of paying users, which grew from $1,600,000 in the Q4 of 2020 to $5,800,000 in the Q4 of 2021. Now let's look at our costs and expenses. Our cost of revenues was US24 $1,000,000 in the Q1 of 2021. Excluding share based compensation expenses, cost of revenues in the Q4 of 2021 were US22.3 million dollars a $227.2 percent increase from US6.8 million dollars for the same quarter last year. The increase was primarily due to an increase in commission fees for third party payment platforms resulting from our expanding business scale. If truly share based compensation expenses, other components of cost of revenues as a percentage of our total revenues remained relatively stable at 33% in the Q4 of 2021 compared with 32.3% in the same period in 2020. Our selling and marketing expenses were US8.4 million dollars in the Q4 of 2021. Excluding share based compensation expenses, other components of selling and marketing expenses for the Q4 of 2021 were $5,100,000 an 81.7% increase from US2.8 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 use acquisition efforts. Excluding share based compensation expenses, other components of selling and marketing expenses as a percentage of our total revenues decreased from 13.4 percent in the Q1 of 2020 to 7.6 dollars in the same period in 2021, primarily due to strong growth in organic user acquisition through Watch of More Referral as well as Brand Impact and enhanced marketing efficiency. Our general and administrative expenses were USD 11,700,000 in the Q4 of 2021. Excluding share based compensation expenses, other components of general and administrative expenses for the Q4 of 2021 were US3 $1,000,000 a 124.4 percent increase from US1 $300,000 for the same quarter last year, which was primarily due to an increase in salaries and other benefits for our general and administrative costs, which was in turn driven by an expansion of our general and administrative staff. Excluding share based compensation expenses, other components of G and L and administrative expenses as a percentage of our total revenues dropped from 6.4% in the Q1 of 2020 to 4.4% in the Q4 of 2021 due to economies of sales. Our technology and product development expenses were US3.3 million dollars in the Q4 of 2021. Excluding share based compensation expenses, other components of technology and product development expenses for the Q4 of 2021 were US3.2 million dollars a 2 77% increase from US0.9 million dollars for the same quarter last year. The increase was primarily due to an enhancement in salaries and benefits for our technology and product development staff, which was in turn driven by an expansion of our technology and product development, arriving from higher investment in new products and services. As a result of these reasons, other components of technology and the product development expenses as a percentage of our total revenues rose from 4% to 4.7% year over year. As such, our operating income was $20,200,000 in the Q1 of 2021. Compared with operating income was of $9,200,000 in the same period last year. Excluding share based compensation, non GAAP operating income for the Q1 of 2021 was US34 million dollars a 257.8 percent improvement from the same quarter last year. Our income tax expense was USD 0.43 million in the same quarter in the Q1 of 2020 in comparison to US0.19 million dollars in the Q1 of 2021. Moving to the bottom line. Our net income was US19.8 million dollars in the Q1 of 2021, a 114.6% increase from US9.2 million dollars in the same period last year. Excluding share based compensation expenses, non GAAP net income for the Q4 of 2021 was USD 33,600,000 a USD 263.7 percent improvement year over year. Next, I would like to briefly go through our liquidity and the capital results. As of March 31, 2021, we had cash and cash equivalents of USD 261,700,000 as compared to cash and cash equivalents of $236,900,000 as of December 31, 2020. This improvement demonstrates our results and capabilities to improve Yara Group's operations on a consistent basis. As we enter the 2nd quarter, with the Ramadan fasting period taking place, of course, Nina between 13th April through 12th May in 2021, we expect to have a relatively moderate revenue growth due to potentially reduced social and entertainment activities, which is an annual seasonal impact. We expect our revenues to be between USD 65,000,000 and USD 71,000,000 in the Q2 of 2021, taking the seasonality into consideration. Looking ahead, we will leverage our team's deep local insights, continue to develop the Yalla ecosystem and enhance our brand building to further pave the runway for long term growth. As we are committed to delivering a superb experience to our users and meaningful returns for shareholders. The above outlook is based on the current market conditions and reflects the company management's current and the preliminary estimates of marketing and operation conditions and customer demand, 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. The first question today comes from Faiya Pao with Haitong International. Please go ahead. So my question is mainly related to the yellow patches. Could you please provide some color to the current stage of yellow patches such as MAU revenue, user profile, time spent and user paying behavior? And what is the most active country for Yala Patches now? And when are you going to officially launch the product? Thanks. Hi, Faye. I want to answer this question. Based on the feedback we received, which clearly showed love for Zelle patches from users in South American market, we believe patches has the potential to become a popular product in this region. We have already started the promotion of the other patches in Q1. And according to the app and its data, it is already among the top 5 in 6 countries under the all game category in Android. And we will continue to monitor the engagement trend and look forward to sharing more feedback and data with you next quarter. I think we are starting to strengthen our campaigns in Q2, the numbers like the MAUs, the other operation that we will provide, we prefer to provide you later next earnings call. The next question comes from Bo Pei with Oppenheimer. Please go ahead. So I do have 2 quick questions here. So first is, I guess, our non GAAP margin actually improved sequentially in 1Q. I guess that's because we haven't started spending on sales and marketing yet. So my question is, when do we tend to spend more on sales and marketing for especially for our new products, right? And then if we when we do that, what's going to be the impact on our net income margin? Then the second question is about our MAU growth outlook. So last time we talked about 10% to 15% sequential growth for each quarter of this year. So can management comment on that? Any update on that? And then how should we think about the MAU outlook for the new products? For example, by the end of this year, like, what's going to be the use size for the new products? Thank you. Thank you, Bo. Thank you for your question. So for Q1, Yalla achieved very good net margin again. And for Q2, since we have going through full promotions of our new products, we will see some increase from that to our margin. In terms of how much we are going to spend in sales and marketing, it really depends on user feedback and marketing dynamics. We will adjust our promotion strategy accordingly and in time to maximize the efficiency of the spending. For the Yala and the LUL's MAUs outlook, as we mentioned last quarter, we think that both products MAU grew by to 15% quarter over quarter in 2021. And for the new product MAUs outlook, we think it will depend on the user feedback and for the case the marketing progress. Thank you for your question. Got it. Thank you. The next question comes from Kai Zhang with Citi. Please go ahead. Hi, management. Thanks for taking my question and congratulations for a strong quarter. So my question about the YaraChats. So in terms of the instant message product, how to see the competition from other products like Wacai? And what is your user growth strategy and timeline for Yara Catch? Thank you. Hi, good morning, Kai Pao. I would like to answer his question. As a company with local teams based in UAE, we are dedicated to offering AIAN products that's tailored to Arabic users' nationality using habits and preferences, which is the main difference between Yellowjack and WhatsApp. We will build many localized features features for this product and continue to refine it based on local user feedback. And in terms of user growth strategy, when we think the product is ready, we will introduce Yellowjack to users in our Yellow community from Yellow and Yellow Loop and other products and encourage them to give it a try. In this way, we will be able to leverage the community we have built and the social connections we have bolstered over the past years. Thank you, Okay. Thank you. Very clear to you. The next question comes from Chikki Jie with CICC. Please go ahead. Thanks management for taking my question. First, I would like to congratulate for the another strong quarter. I have a question regarding your product pipelines. Currently, both of Yalla's products are video centric since are voice centric, since video entertainment applications have gained a lot of attention these days. Do you have any plans to launch video centric products in the future? Can you please share more color about that? Thank you. Thank you, Shishi. At this point, we don't have video centric products in our pipeline. But it doesn't mean that we will only focus on voice centric products. We will keep monitoring the user's needs and trends in social networking and entertainment, and we will continue to adjust our strategy accordingly. Thank you. Thank you. The next question comes from Fiona Fan with Jefferies. Please go ahead. Hi, management. Thanks for taking my question. And congratulations on the great results. So I have two questions. So the first question is about the strategies of user acquisitions. So I would like to ask, are there any differences of user acquisition strategies for different products and in different regions? So like for example, we launched a new product in South America. So what will be the marketing strategies there? And my second question is about mid to long term outlook. So could management share some colors about outlooks for 2 to 3 years from now, like geographic expansion and business line expansion product offerings? Thanks. Thanks, Fiona, for the question. This is Jeff. I'll be answering the question. Through running marketing campaigns on Yalla and Yalla Rudolf over the past 5 years, our team has gained valuable experiences and gradually built strong capabilities in marketing. Our high user acquisition efficiency can be demonstrated by our excellent excellence control in sales and marketing and the consistent increase in our MAUs. Besides the traditional user acquisition through advertising on media, both of Ooyala and Yalaloo has also shown strong organic growth. And at the same time, because of the high quality of the product and decocalization, our products have also been recommended for free by top tech platforms like Apple and Google. These all contributed to our successful user acquisition. For every new product, we will design marketing plans based on our understanding of the product special characteristics, and we will always follow our own pace in execution and adjust our strategy according to the feedback, the metrics that we keep monitoring. It's always a very dynamic process. We also have different plans tailored for different dredges to maximize the efficiency of Spain. So for the upcoming promotion of our new product, we're very confident in our team's capabilities to achieve strong results. Thank you for the question again. And I'll be answering the second question. Since for the next 2 3 years, MENA will certainly be our main focus. And with REGALA patches launch, we will keep an eye on the Southern American market and see if there are any other potential opportunities. In addition to Yala, Yala Ludo and 4 new products we introduced earlier, we will continue to monitor local users' needs and preferences and identify further opportunities to serve MENA users. At the same time, as we introduced earlier, we will gradually start to drive traffic from one product to another with the dedication to build and develop our Yalla ecosystem, which will as a whole lead to a more integrated user community, longer time spent in Yalla's ecosystem and deeper brand loyalty in the long run. Thank you, Fiona. Thanks. As there are no further questions now, I'd like to turn the call back over to management for any 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 Yalla's Investor Relations through the contact information provided on our website or the PSN A Group Investor Relations. This concludes the conference call. You may now disconnect your lines.