Yalla Group Limited (YALA) Earnings Call Transcript & Summary

Good morning and good evening, ladies and gentlemen. Thank you for standing by for Yalla Group Limited's Fourth Quarter and Full Year 2024 Earnings Conference Call. [Operator Instructions] 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.

Hello, everyone, and welcome to Yalla's Fourth Quarter and Full Year 2024 Earnings Conference. We issued our earnings 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. 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 a 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 Executive Officer, who will provide an overview of our latest achievements and growth strategies. He will be followed by Mr. Saifi Ismail, 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 Executive Officer, Mr. Tao Yang. Please go ahead, sir.

Thank you, Kerry, for joining our fourth quarter and full year 2024 earnings conference call. We concluded 2024 robust fourth quarter results. Our revenue rose to USD 91 million, reaching a new record high for the second consecutive quarter and once again beating the upper end of our guidance. We are bringing our annual revenue to USD 340 million. This exceptional performance is a testament to our deep commitment to enhancing user experiences and boosting user engagement across our ecosystem with content tailored to the local culture. Additionally, we have made significant strides in improving our operational efficiency by enhancing management practices with our service providers, optimizing user acquisition strategies and refining our internal processes, which led to 26% year-over-year increase in operating profitability for full year 2024. This impressive result further demonstrate our ability to drive high-quality growth and fulfill MENA users' evolving online social networking and gaming needs. Looking back at 2024, the thriving digital economy in the MENA region continues to attract attention globally. The increasing number of global leading Internet companies are investing more resources and talent into the MENA market, driving evolving demand trends among local users. This vibrant landscape underscores MENA's potential as one of the fastest-growing mobile Internet markets. On a related note, according to industry research, the digital transformation market in MENA was valued at USD 55 billion in 2024, and it is expected to grow at a compound annual growth rate of 22.5%, reaching USD 418.54 billion by 2034. This dynamic expansion creates tremendous profit and growth opportunities for businesses. Leveraging nearly a decade of experience in MENA region, a well-established product portfolio and flourishing online social and gaming community, Yalla is well positioned for continued market leadership in the MENA region. We remain dedicated to serving local users' evolving needs for social interaction and entertainment. And we will stay closely attuned to local trends as we create and launch new products tailored to MENA users' preference. The MENA region has also experienced significant advancement in artificial intelligence with countries such as Saudi Arabia and the UAE at the forefront of AI infrastructure investments. In the first half of 2024, Abu Dhabi's AI sector grew by 41.3%, bringing the total number of AI companies to 400. During upon Yalla's decade of expertise in MENA's Internet industry and our deep understanding of local culture and user behaviors, we continued to strengthen our capabilities in developing AI algorithm models that are tailored to local culture and user preference. Our dedicated AI team is rapidly integrating AI-driven automation and data analytics into our products and the operations to optimize R&D efficiency and improve the user experience across our product offerings. For example, we have increased the low of our self-developed AI art platform in virtual product design, training it to better align with MENA users' aesthetic preference. This has significantly enhanced design efficiency and accuracy. Additionally, we utilized AI algorithm to comprehensively analyze users' characteristics and they employ personalized recommendations to improve user interaction and reengage dormant users. This enhanced features not only boost user engagement, but also drive profitability. And going forward, we will continue to drive innovation in AI applications to provide local users more efficient and engaging services. At the same time, MENA's gaming industry continues to maintain a strong growth trend as one of the fastest growing regions in terms of global gaming industry revenue. The MENA market shows a high willingness to download and pay for various types of games. As always, we remain committed to enriching our gaming product portfolio with a continuous focus on R&D for Yalla Game. As we've shared previously, Yalla Game product line is vibrant with several self-developed mid-core games in the pipeline. Two of these games have completed development and are in the testing phase. We are also consistently discussing collaboration opportunities with proactively with potential partners from gaming studios around the world. We look forward to seeing these new products to capture their corresponding user base and drive revenue growth in the coming years. 2025 marks the 10th anniversary of Yalla Group. We are excited to see our new products and the diverse efforts we've made recently come to fruition this milestone year. The MENA market is experiencing incredible opportunity for growth with local governments for digital development, laying a solid foundation for future expansion. As MENA's largest online social networking and gaming company, we remain confident in our ability to navigate the ever-evolving digital landscape and deliver value to all of our stakeholders. Now I will turn this call over to our President, Mr. Saifi Ismail, for a closer look at our recent developments.

Hello, everyone. Thanks for joining us today. Let's take a closer look at our fourth quarter operations and our products' performance. As of December 31, 2024, our MAU increased by 14.4% year-over-year to 41.4 million. Paying users increased by 3.2% year-over-year to 12.3 million, with ARPU reaching $7.24, an increase of 10.2% year-over-year. During the quarter, we continued to launch innovative features and engaging operational events for our flagship products, strengthening users' engagements and maintaining these products' profitability. For our regional products, we continue to unleash their immense potential with iterations and upgrades. Revenue from 101 Okey Yalla reached a new record high, contributing to our overall growth. We are delighted to see our legacy products exhibits during popularity and generate strong results as we continue to invest in new opportunities to drive future growth. We continue to strengthen Yalla Ludo's momentum with a series of outstanding offline events this year. In December 2024, we held our Yalla Ludo Champion Tournament in Riyadh, in Saudi Arabia, featuring a host of customized experiences inspired by local culture traditions to suit local gamers' tastes. We also provided VR gaming experiences and other immersive activities to strengthen user engagement. With these influential events, we create unique opportunities for talented gamers and game enthusiasts to connect while cementing our bond with users and extending our reach to the broader gaming community. In terms of regional products, we announced in the third quarter of 2024 that 101 Okey Yalla has set a new quarterly revenue record, a milestone. It's swiftly surpassed this quarter. Meanwhile, the product achieved a significant year-over-year increase in monthly average MAU during quarter 4. These remarkable results have inspired us to remain laser focused on crafting high-quality regional products and challenge ourselves to seize every opportunity for success in their respective markets. Our dedication to enhancing MENA's digital lifestyles continue to win social recognition. On the group level, we are proud to announce that Yalla Group was awarded the Powerhouse Partnership Award at the AppGallery Developer Conference 2024 in Abu Dhabi in November 2024. The award was presented by the co-Chairman of the UAE Esports Federation in recognition of Yalla's pivotal contributions to the AppGallery ecosystem, including an array of innovative digital experiences tailored to MENA users' unique needs. Additionally, Yalla Ludo won a GOLD STEVIE Award for innovation in entertainment application at the sixth annual Middle East & North Africa Stevie Awards in 2025. The Stevie awards are widely considered to be the world's premier business awards and are the only business awards to recognize innovation in the workplace in 18 nations in MENA. This marked the third consecutive win for Yalla's industry-leading social apps, underscoring our unwavering commitment to pursuit of innovation, excellence and the ultimate in user experience. In short, as the largest MENA-based online social networking and gaming company, Yalla stands at the forefront of MENA's digital transformation. Looking ahead, we will remain dedicated to boosting the boundaries of innovation, delivering unparalleled experience to meet our users' evolving needs and desires. As MENA's digital economic continues to grow and thrive, we will leverage our core strength and strategic partnership to explore new opportunities and shape the future of social networking and online entertainment. With that, I will now turn the call over to our CFO, Karen, who will discuss our key financial and operational results.

Thank you, Saifi, and hello, everyone. Thank you for joining us today. We delivered robust 2024 results, reflecting our unwavering commitment to driving high-quality growth in dynamic and rapidly evolving market. For full year 2024, our revenues reached USD 339.7 million. In the fourth quarter alone, our revenues increased by 12.2% year-over-year to USD 90.8 million, exceeding the up end of our guidance and underscoring the ongoing success of our user acquisition and monetization strategies. Moreover, we remained focused on enhancing our operational efficiency and optimizing costs which has significantly contributed to our operating profitability. Our operating income increased by 29.4% year-over-year to USD 30.1 million in the fourth quarter and by 26% year-over-year to USD 121.4 for the full year. This meaningfully boosted our overall profitability with net income increasing by 18.7% to USD 134.2 million for the full year 2024. As we move into 2025, we will continue to prioritize quality development, focusing on both product innovation and the refined operational processes. We will also deepen our commitment to enriching the user experience and expanding our services to cater to the region's involving needs. With our deep local insights and strong financial fundamentals, we are well positioned to navigate the market dynamics and seize future growth opportunities. Let's move on to our detailed financials for the fourth quarter of 2024. Our revenues were USD 90.8 million in the fourth quarter of 2024, a 12.2% increase from USD 80.9 million in the same period last year. The increase was primarily driven by our broadening user base and enhanced monetization capability. Our solid revenue growth was also partially attributable to the substantial increase in the number of paying users, which grew to 12.3 million in the fourth quarter of 2024 from 11.9 million in the same period last year. Turning to our costs and expenses. Our total costs and expenses were USD 6.7 million in the fourth quarter of 2024, a 5.3% increase from USD 57.6 million in the same period last year. Cost of revenues was USD 31 million in the fourth quarter of 2024, a 1.5% increase from USD 30.6 million in the same period last year, primarily due to higher commission fees paid to third-party payment platforms as a result of increasing revenues generated. Cost of revenues as a percentage of total revenues decreased from 34.2% in the fourth quarter of 2024 from 37.8% in the same period last year. Our selling and marketing expenses were USD 7.4 million in the fourth quarter of 2024, a 28.5% decrease from USD 10.4 million in the same period last year, primarily driven by our more disciplined advertising and promotion approach. Selling and marketing expenses as a percentage of total revenues decreased to 8.2% in the fourth quarter of 2024 from 12.8% in the same period last year. Our general and administrative expenses were USD 13.1 million in the fourth quarter of 2024, a 15.6% increase from USD 11.3 million in the same period last year, primarily due to an increase in incentive compensation. General and administrative expenses as a percentage of total revenues increased to 14.4% in the fourth quarter of 2024 from 14% in the same period last year. Our technology and product development expenses were USD 9.2 million in the fourth quarter of 2024, a 69.6% increase from USD 5.4 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 headcount of these staff to support the development of new businesses and expansion of our product portfolio. Technology and product development expenses as a percentage of total revenues increased to 10.1% in the fourth quarter of 2024 from 6.7% in the same period last year. As such, our operating income was USD 30.1 million in the fourth quarter of 2024, a 29.4% increase from USD 23.3 million in the same period last year. Interest income was USD 7.1 million in the fourth quarter of 2024 compared with USD 6.5 million in the fourth quarter of 2023. Income tax expense was USD 3.35 million in the fourth quarter of 2024 compared with USD 0.54 million in the fourth quarter of 2023. The increase was primarily due to an increase in income tax expenses recognized for recognition of deferred tax liabilities for the undistributed retained earnings on consolidated subsidiaries. As a result of foregoing, our net income was USD 32.5 million in the fourth quarter of 2024, a 9.7% increase from USD 29.7 million in the fourth quarter of 2023. And our non-GAAP net income in the fourth quarter of 2024 was USD 35.7 million, a 6.8% increase from USD 33.4 million in the same period last year. Moving on to our liquidity and capital resources. Our cash position remains solid and healthy. As of December 31, 2024, we had cash and cash equivalents, restricted cash, term deposits and short-term investments of USD 656.3 million compared with USD 535.7 million as of December 31, 2023. We continued to return value through our share repurchase program. Our Board of Directors has approved an extension of the expiration date of the share repurchase program to May 21, 2026, for the company's share repurchase program beginning on May 21, 2021. During the fourth quarter, we repurchased 1,595,879 ADS or Class A ordinary shares from the open market, totaling approximately USD 6.9 million. Cumulatively, as of December 31, 2024, we had completed cash repurchases in the open market of 7,305,138 ADS of Class A ordinary shares, totaling approximately USD 49.4 million. Moving to our outlook. For the first quarter of 2025, we expect our revenues to be between USD 75 million and USD 82 million. The above outlook is based on the current market conditions and reflects the company's management'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 and full year 2024 financial results. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

[Operator Instructions] Our first question today comes from Xueqing Zhang with CICC.

My question about your game business. Could management share the latest progress of new game products and what's your insights into commercialization expectations?

Thanks, Xueqing, for the question. This is Jeff. I'll take your question. Throughout 2024, we focus on advancing the research and development of our new gaming products, consistently exploring new avenues to expand our product portfolio. We have completed the version 1.0 development of 2 mid-core games and are now in the process of fine-tuning them. Meanwhile, we have been proactively pursuing external collaborations that complement our business, leveraging Yalla's extensive experience in the Middle East. We are working with more potential partners to unlock the local market opportunities and establish a deeper foothold in the Middle East. As the largest MENA-based online social networking and entertainment platform, we aim to curate top-tier games and offer game players a richer entertainment experience. We hope Yalla Game's recent achievement will contribute new revenue streams to the group this year. The specific financial guidance will be disclosed in due course. Thank you very much about your question.

And our next question comes from Xiaoyue Hu with Haitong International.

So can management elaborate on the company's strategic priorities and the key initiatives for 2025?

Thank you, Xiaoyue. This is Yang. I will answer your question. I think 2025 marks the 10th anniversary for our company's founding. Our 2 flagship products continue to thrive. And we are immensely grateful for our MENA-based users' unwavering support and enthusiasm over the years. We will continue to iterate this flagship app by enhancing gamification and rolling out innovative new content while leveraging advanced technology to offer diverse and engaging experience for our users. Additionally, as we mentioned earlier, we have a number of new apps in our pipeline that have potential to contribute to the company's revenue growth in the second half of this year. Going forward, we plan to further expand our local team in the Middle East to enhance our local presence and align with the region's sweeping digital transformation trend. We will keep a sharp eye on MENA's evolving user needs and stay open to the new market opportunities while consistently delighting local users with products that appeal to their culture values and taste. Thank you, Xiaoyue.

And our next question comes from Kaifang Jia with CITIC.

I have a question about how should we think about the revenue and margin trends in 2025?

Hello, Kaifang. Glad to see you here. This is Karen. For 2025, even without factoring in potential revenue from new products, we anticipate at least maintaining our current revenue size. We also think that maintaining a net profit margin of around 40% is reasonable. Of course, our upcoming products are likely to generate new revenue streams this year, but we will until -- we will wait until these products are launched to provide revenue guidance. Given the necessary sales and marketing investments for these new products, we expect a margin of around 35%, but we will adjust our investment budget depending on the specifics of these new product launches. Thank you.

And our next question comes from Rachel Guo with Nomura.

My question is about the shareholder returns. Can management provide an update on your share repurchase plan, please?

Thank you, Rachel. This is Yang. I think we are committed to delivering value to our shareholders through our share repurchase program. In 2024, we repurchased around 3 million ADS amounting to approximately USD 14 million. Moving into this year, we will accelerate shareholders' returns through our share repurchase program. We are fully committed to achieving our target of at least doubling our buyback activity to USD 28 million this year. We may escalate this amount later this year, and we will provide quarterly updates on the plan's progress. We host strong confidence in Yalla's long-term potential and are dedicated to generating sustainable long-term value for all stakeholders. I hope that helps. Thank you.

And our next question comes from Lincoln Kong at Goldman Sachs.

So can management elaborate our strategic vision for leveraging AI to drive growth and innovation here?

This is Yang. Thank you for raising this. As we noted earlier, we have a dedicated algorithm team and proprietary AI task platform, and we are already capitalizing on AI to empower our products, boosting efficiency and elevating user experience. Meanwhile, we see tremendous upside potential in further integrating AI into our ecosystem. We are actively evaluating various user cases across our products, exploring how to synergize our internal teams with external AI resources to deepen user engagement and expand our market reach. We aim to harness AI not only as a tool for enhancing efficiency, but also catalyst for innovation, ensuring that our products remain at the forefront of MENA's digital entertainment market. I hope this offers a clear picture. Thank you, Lincoln.

And our next question comes from Jenny Yuan with UBS.

My question is regarding our regional strategy. So could you please provide any update on whether our company's future development will still be MENA-focused or if we have any plans to expand operations to other regions?

Thanks, Jenny. This is Saifi, and I'll take this question. We have always viewed MENA as our core market and strategic home base, making it the solid foundation supporting our business growth. At the same time, as our product portfolio expands, we may reach users elsewhere, diversifying our user base. Some of our new products may also have the potential for distribution in other regions. We will also carefully evaluate such situations based on the market data and market prudent decisions that maximize our potential and enhance our ROI. However, wherever else we may go, the MENA region will always remain at the heart of our business, and we will continue to deepen our presence in this region to strengthen our market leadership. Thank you.

Thank you. And this concludes our question-and-answer session. I'd like to turn the conference back over to the company for closing remarks.

Thank you all 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 or Piacente Financial Communications. Both parties' contact information is available in today's press release as well as on our company website. Thank you.

Thank you. This concludes today's conference call. You may now disconnect your lines and have a wonderful day.