Q1 2024 Yalla Group Ltd Earnings Call

Participants

Kerry Gao; Investor Relations Director; Yalla Group Ltd

Tao Yang; Chairman of the Board, Chief Executive Officer; Yalla Group Ltd

Saifi Ismail; President, Director; Yalla Group Ltd

Karen Hu; Chief Financial Officer; Yalla Group Ltd

Jianfeng Xu; Chief Operating Officer, Director; Yalla Group Ltd

Xueqing Zhang; Analyst; CICC

Xiaoyue Hu; Analyst; Haitong International Securities Group Limited

Kaifang Jia; Analyst; CITIC Securities Co., Ltd

Lincoln Kong; Analyst; Goldman Sachs (Asia) L.L.C.

Presentation

Operator

Good morning and good evening, ladies and gentlemen. Thank you for standing by for Yalla Group Limited first quarter 2024 earnings conference call. (Operator Instructions) Today's conference call is being recorded. Now I would like to turn the call over to your speaker host today, Ms. Kerry Gao, IR Director of the company. Please go ahead, Mia.

Kerry Gao

So everyone, and welcome to Yalla Group first quarter 2024 earnings conference call. We released our earnings press release earlier today, and the release 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 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 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 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, we'll hear from Mr. Tao Yang, our Chairman and Chief Executive Officer, who will provide an overview of our latest achievements and growth strategies. He will be followed by Mr. 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'd now like to turn the call over to our Chairman and Chief Executive Officer, Mr. Tao Yang. Please go ahead.

Tao Yang

Thank you, everyone, for joining our fourth quarter 2024 earnings conference call, we kicked off 2024 with solid fourth quarter results, even with the impact of Ramadan, which started on March 11 this year. Of the Q1 we have (inaudible) $78.7 million. Including in (inaudible) upper end of our guidance. And once again, demonstrating the remarkable strength of our flagship applications, Yalla, and Yalla Ludo.
Our predicted efforts to deliver quality growth and enhance our operating efficiencies are also yielding positive results. In Q1, our net margin reached 39.5%. Our solid quarterly performance, so created our dedication to refining our operations and our ability to enhance our flagship application communication as well as optimize our user acquisition strategy.
Thanks to these successes, we ultimately deliver a better experience for our users, further boosting Yalla and Yalla Ludo users' willingness to [stay] and pay.
In 2024, we anticipated continued advancement in an acceleration of digital transformation across the MENA region, as the largest MENA-based online social networking and gaming company, Yalla will continue to enrich our services and expand the boundaries of our business, launching business (inaudible) MENA users (inaudible)
Turning to Yalla game development and further strategy, as we continue to explore and interacting games, although clearly exenatide and capabilities have strengthened our determination to expand of a footprint (inaudible) mid-core and hardcore games.
Looking ahead, we will continue to prepare our team and grow our game pipeline. As we mentioned on our last call, mid-core games, which we can leverage our extensive expertise, talented workforce and abundant resources in a heavier gaming sector will be one major focus for the team this year, we look forward to better utilizing our advantages to delivering exceptional gaming experiences to our users.
Then the gaming industry is country booming with one of the world's fastest growth rate. Global top-tier game developers are increasingly recognizing the Middle East and gaming market immense potential and in the region has emerged as a retail growth market for game companies from around the world. As the largest community-based aligns to networking and gaming capital Yalla is actively engaged in discussions.
We are now gaining scale on a global scale, exploring potential collaborations in the region. I want to highlight that Yalla recently joined the UK Interactive Entertainment Association (UKIE) the oldest video game and interactive entertainment trade body in the world where you have attrition and some nuclear CEO and Vice Chairman.
UKIE represents nearly 650 businesses across the UK including major video game platforms, local and international partnerships, independent developers, and a lot of service providers. Our goal is to align ourselves with the game developers worldwide and [put] greater connectivity within industry, we aspire to contribute to the e Middle Eastern gaming community by delivering a wide range of high quality game content to players in the region that is helping the gaming experience and building future gaming options for our uses.
Next, I'd like to elaborate [our AI], which has great significance for our business. We have consistently kept pace with the evolving trend and currently have our dedicated AI team focused on exerting evolution motor, especially tailored to our culture and user habit, well already reaping the rewards of their work, which is helping us enhance the company's management and efficiency in areas such as content recommendation, content, moderation and customer services.
For example, the equity rate of our self-developed image review content is already leading in the region, outperforming a number similar to developed by major service providers. We have also accumulated considerable extra time image motives. AI now plays a crucial role impact such as image recognition and the basic artistic creation, enhancing our team productivity and efficiency.
(inaudible) harnessing the power of AI, we aim to optimize team resources, save time and money, and ultimately improve our overall operational efficiency. Our commitment to leveraging AI also ensured that we can better understand and cater to the news though and with the preferences of our users and provide our users with improved services and that personalized experiences.
Before I conclude a great ESG update Yalla will be public of the 2023 ESG report detailing the company's performance and future goals across five major areas, including responsible governance environment, people and communities. ESG has been a central component of our long-term business vision and core values since day one, and we were pleased to share our ongoing progress in terms of sustainability and social responsibility. We look forward to reaching new heights in (inaudible) and sustainably enriching local digital life.
In summary, we remain confident in the growth opportunities presented by MENA has increasingly pivotal on a global stage standard of agents, rapid digital transformation. And then number one, MENA base online social networking and gaming company, we are dedicated to building relationships locally and globally to broaden our business providing and contribute to the MENA economic (inaudible)
With our strong business fundamentals and outstanding product portfolio, we believe we are well positioned to capitalize on potential growth opportunities.
Now I will turn the call over to our President, Mr. Saifi, it's my view for a closer look at our recent document.

Saifi Ismail

Hello, everyone, thanks for joining us today. I would like to start with a closer look at our operations and our products performances for quarter one. our average monthly active users increased by 14.6% year over year to $37.8 million. Our average revenue per paying user also increased to USD6.03 in the first quarter from USD5.39 in the same period last year.
Furthermore, our ongoing adjustments to our game mechanism aimed at improving user engagement and experience have proven effective paying users increased by 7.3% quarter-over-quarter, demonstrating users' growing willingness to pay on our platform. Following our successful offline Yalla Ludo tournament in Riyadh in Q4 last year, we hosted a second offline tournament in Baghdad in quarter one.
Over 10,000 players registered an impressive response 128 outstanding finalist competed in the life final round. The success and popularity of these events reflects Yalla Ludo, growing influence and appeal in the mobile gaming world, conducting offline tournaments and other regional events also strengthen our partnerships with local channels, deepen our product penetration among local gaming communities and enhances our brand awareness.
We are excited to bring more thrilling experiences to our users, continually pushing the boundaries of mobile gaming and ensuring that Yalla Ludo remains an industry leader.
Now for a few highlights from our investing activities this quarter. We are very proud to announce that for the fourth consecutive year, Yalla Group was recognized by data that AI annual top publisher awards as one of the top 50 publishers headquarters in the Europe, the Middle East and Africa region.
This added AI is the premier global platform offering unified data analytics for the mobile app market. Since 2012, the top publisher awards have acknowledged outstanding mobile publishers worldwide. We extend our [heart fall] gratitude to data it is AI for this distinguished award and remain committed to delivering high-quality, tailored digital products that cater to the evolving needs of MENA users in the online social networking and gaming sector.
Next, Yalla hosted as a whole gathering in Dubai during the holiday months of Ramadan, bringing together more than 100 governmental officials, business partners, industry experts and local media leaders to discuss the latest technology industry trends. (inaudible) also allows us to thank and celebrate our partners who have always trusted and supported the Yalla Group.
As the largest local online social networking and gaming company in the MENA region, we strongly believe that good friendship, friendship, and extensive cooperation amongst our stakeholders can accelerate our company and the industry's development, bring better experiences to users, and Invigorate regional economic development. We will maintain our strong relationships with local governments, business partners and media to jointly promote the development of the digital economy in the MENA region and promote and preserve our unique local culture tradition.
Finally, Yalla was invited to share our success story at the WN Conference 2024 in Abu Dhabi, a hallmark of the global gaming industry since 2012, the WN conference spans nearly 10 cities worldwide. This year's event in Abu Dhabi grew over 800 attendees, primarily from the GCC video game market and featured leading international players.
It was a phenomenal platform for discovering new partners and exploring diverse topics within the gaming sphere. From game analytics to AI integration as pioneering a local Internet company EMEA events like this provide us with vast opportunities to contribute to the region's digital transformation goals. We remain committed to enhancing our social economic value by improving digital access and advancing the digital lifestyle throughout MENA.
In conclusion, we are post drive progress in MENA digital transformation as the regional leader in online social networking and gaming, we will continue to deepen our partnership locally and globally to broaden our business horizons and embrace the opportunities brought by the transformation. As always, our vision is to become number one, online social networking, and entertainment platform in the MENA region.
And 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 today. Our financial performance remained robust throughout the first quarter of 2024, our ongoing efforts to deliver high quality growth and enhance our operating efficiency resulted in meaningful profitability improvements with net income increasing 56.2% year over year to USD31.1 million and net margin expanding from 27.1% to 39.5%.
Looking ahead, we are confident that our strong cash position and excellent execution will empower us to capitalize on future opportunities, driving sustainable growth and creating value for all our stakeholders.
Let's move on to our detailed financials for the first quarter of 2024, our revenues were USD78.7 million in this first quarter of 2024, a 7.1% increase from USD73.5 million in the first quarter of 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 significant increase in ARPPU, which grew from USD5.39 in the first quarter of 2023 to USD6.03 in the first quarter of 2024.
Now let's take a look at our costs and expenses. Our total costs and expenses were USD49.6 million in the first quarter of 2024, a 12.7% decrease from USD56.8 million in the same period of last year. Our cost of revenues increased by 2.6% to USD28.6 million in the first quarter of 2024 from USD27.9 million in the same period of last year.
Primarily due to higher commission fees paid to third-party payment platforms as a result of increasing revenue generated. Cost of revenues as a percentage of total revenues decreased to 36.3% in the first quarter of 2024 compared with 37.9% in the same period of last year.
Our selling and marketing expenses were USD8.1 million in the first quarter of 2024, a 28.7% decrease from USD11.4 million in the same period of last year, primarily driven by our more disciplined advertising and promotion approach and the lower share-based compensation expenses recognized in the first quarter of 2024.
Selling and marketing expenses as a percentage of total revenues decreased from 15.4% in the first quarter of 2023 to 10.3% in the first quarter of 2024. Our general administrative expenses were USD6.6 million in the first quarter of 2024. 34.6% decrease from USD10.2 million in the same period of last year, primarily driven by lower share-based compensation expenses recognized in the first quarter of 2024 and a decrease in professional service fees.
General and administrative expenses as percentage of total revenues decreased from 13.8% in the first quarter of 2023 to 8.4% in the fourth quarter of 2024. Our technology and product development expenses was USD6.3 million in the first quarter of 2024. a 15.5% decrease from USD7.4 million in the same period of last year, primarily due to a lower amount in performance-based bonuses recognized during this quarter.
Technology and product development expenses as a percentage of total revenue decreased from 10.1% in the fourth quarter to 2023, to 8% in the first quarter of 2024. As such, our operating income was USD29.1 million in the first quarter of 2024, a 74.2% increase from USD16.7 million in the same period of last year.
Excluding share-based compensation expenses, our non-GAAP operating income in the first quarter of 2024 was USD33.3 million, up 49.3% year over year. Our interest income was USD6.6 million in the first quarter of 2024 compared with USD3.1 million in the same period of 2023, primarily due to an increase in the interest rate applicable to the company's bank deposits.
Our income tax expense was USD3.5 million in the first quarter of 2024, compared with USD0.6 million in the same period of last year. The increase was primarily due to the introduction and the implementation of UAE corporated tax law, which is effective for the financial years starting on or after June 1, 2023.
Moving to our bottom line, our net income increased by 56.2% to USD31.1 million in the first quarter of 2024 compared with USD19.9 million in the same period of last year.
Next, I would like to briefly review our liquidity and capital resources. Our cash position remains solid. As of March 31, 2024, we had cash and cash equivalents, restricted cash term deposits and short-term investments of USD482.7 million compared with USD535.7 million as of December 31, 2023. The decrease was primarily due to the reallocation of some of the company's cash reserves to long-term investments in the first quarter of 2024
Under our USD150 million share repurchase program that began on May 21, 2021 and has since be extended by our Board through May 21, 2024, we have accumulatively repurchased 3,972,876, ADs or Class A ordinary shares, in open market cash repurchases. Totaling approximately USD35.5 million as of March 31, 2024. On May 16, 2024, our Board of Directors approved an extension of the expiration date of the share repurchase program to May 21, 2025.
Moving to our outlook for the second quarter of 2024, we expect our revenues to be between USD72 million and USD79 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, this concludes our prepared remarks for today. Operator, we are now ready to take questions.

Question and Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions)
Xueqing Zhang, CICC.

Xueqing Zhang

Thanks, management for taking my question and congratulations on the strong. I have two questions. The first one is about flagship products, a can management share some color on the recent progress of the two flagship products, Yalla and Yalla Ludo and the main strategy for this year? And the second one is about financial outlook, commencements acted on the revenue growth and the net profit margin achieved this year? Thank you.

Saifi Ismail

Hi, Xu Zhang, this is Saifi, and I will answer your first question. Yalla and Yalla Ludo performances are currently remaining stable. Over the years, we have gradually cultivated a loyal user community that loves the manage risk culture and is highly vibrant and engaged on the platform. Of course, this year, we will continue working on upgrades and rollout more fresh features and functions for our users to enjoy.
Additionally, as I just mentioned, for Yalla Ludo The team is actively organizing more offline tournaments, to strengthening our brand local impact and to better penetrate the market through offline channels. We will also continue to look for growth opportunities or was legacy products.

Karen Hu

Hi, Xueqing, this is Karen, and I will take you the second question. For 2024, we are very confident of maintaining our current stable top line performance for our existing product portfolio. Our new products may also contribute to revenue growth later this year. We will update the market on our progress when we have a clear picture up to our product launches.
Regarding the net margin, we think is fair to expect around 40%. It's excluding any potential investments in new products. However, if we take into account of the new products, the potential impact our margin may end up in the 35% range.
Thank you. Thank you for your questions.

Operator

(inaudible) CICC.

Hi, management. Thanks for taking my question and congratulations on solid quarter. My question is related to our external cooperation. Can we expect more external cooperation to settle this year and could management share more color about strategy of future cooperation direction? Thank you.

Tao Yang

Hi, (inaudible) this is Tao Yang. Thank you very much for your question. (inaudible) transformation continues to evolve rapidly, we are being approached by many companies from the [Europe] in the state and China to discuss potential opportunities in the region, mostly in the gaming and social networking sector.
We are open to the discussion and our strategic team is consistently exploring that opportunity. In terms of strategy for consider the synergies with our current businesses, the teams kind of or the fundamental quality of the assets and lastly of Nike [OI] of course. In terms of the timeline, we will keep you updated once there is anything we can share with the public. Thank you, (inaudible)

Operator

[Xiaoyue Hu], [Haitong].

Xiaoyue Hu

Hello (technical difficulty) thanks for taking my question. can I please ask what management think about the TikTok banned in the US, what would be the impact on us? Thank you.

Saifi Ismail

Hi thank you for your question. TikTok entered the media market around 2021 and 2022. It's a very strong player, that had a big impact on the live streaming landscape in MENA upon entry now that the stock has been in the Middle East market for a while, we believe the competitive landscape has restabilized, I would like also to remind you that we don't compete with TikTok directly.
Since we are not a live streaming platform, we need a different set of needs for our users and (inaudible) TikTok global strategy. Yalla is rooted deeply in the MENA tradition and says a group of loyal MENA users who love the nationalist culture, love voice chatting and love the pure and equal social networking atmosphere, our platform offers our team has been monitoring the situation closely, but nothing significant has happened recently. So we will share new observations, if any, on future calls.
Thank you.

Operator

Kaifang Jia, CITIC.

Kaifang Jia

Hi management, thanks for taking my question. And I have a question about your original strategy. So does the company have any plan to expand into other regions offset MENA? Thank you.

Tao Yang

Hi Kaifang. Good morning, this is Tao Yang and I will answer this question, and as we always emphasize, our primary focus will continue to be the Middle East, of course, at the same time, we will remain alert and open to opportunities in overseas markets. With our current products, we have already gained access to certain user groups from overseas markets, including South America and Southeast Asia. For certain new products in our pipeline, we may come back global promotional activity to realize greater potential, and we have (inaudible) the identified solid opportunities for distribution (inaudible) in the MENA market.
However, the primary emphasis and principally lies in MENA where we possess distinct advantages and again, that utilize our core capabilities to drive growth.
Thank you, Kaifang.

Operator

Lincoln Kong, Goldman Sachs.

Lincoln Kong

Thank you, management, for taking my questions. My question is one is can you just share some color on Yalla games outlook and publishing strategy and what about the strategy to expand in those gaming business? And my follow-up is on either any updates in terms of shareholder return. I can imagine, sir. Thank you.

Jianfeng Xu

Hi Lincoin, thank you for your question this is Jeff. I will take your first two questions and the last one to Karen. So we are working on a better version of one of our new products and optimizing its design before the official launch, for the other new products in our pipeline, we will keep you posted on their progress.
Regarding our game strategy, first, going forward we will look to collaborate with more mature gaming studios for those with successful track records in gaming publishing. We will also carefully select game content that is suitable for MENA markets, leveraging our localized expertise.
Second, we plan to explore collaborations with global players who are interested in the MENA market, utilizing our expertise in community engagement and our deep local know how to drive win-win outcomes.
Finally, we are committed to growing our in-house development team and expect to introduce a series of new self-developed mid-core games this year. Thank you.

Karen Hu

Hi Lincoin, glad to hear here. Yalla (inaudible) is to return value to shareholders through our share repurchase program. As of March 31, 2024, we have deployed a total of USD35.5 million for share repurchases. Also, as we mentioned in our prepared remarks, we have extended our share repurchase program for another year, to ensure that the company can repurchase shares from market at any time during the next 12 years a month.
Giving our solid fundamentals, we will continue to conduct our share repurchase program while considering cash dividend payments in due course. We will keep you posted if we have any more updates. In short, we believe strongly in Yalla's long-term potential and are dedicated to generating value for all parties involved. I Hope this answer will make you feel satisfied. Thank you.

Lincoln Kong

Thank you.

Operator

As there are no further questions now. I'd like to turn the call back over to management for closing remarks.

Karen Hu

Thank you once again for joining us today. We look forward to speaking with you in the next quarter. If you have any further questions, please feel free to contact Yalla Investor Relations or Piacente Financial Communications. Both parties contact information is available in today's press release as well as all our company website. Thank you.

Operator

This concludes the conference call. You may now disconnect your lines. Thank you.