Yalla Seeks Major Game Publishers For 'Act Two' Of Its Hardcore Gaming Foray

Key Takeaways:

• Yalla’s revenue could return to double-digit growth in the first quarter, as it improves its user monetization and rolls out new functions for its core social media services
• The company said its first two hardcore games were valuable test cases and is shifting its focus to working with more established game publishers

By Doug Young

Leading Middle Eastern social media company Yalla Group Ltd. YALA is getting ready for “Act Two” of its move into mid- and hardcore games, after drawing the curtain on a first act that brought it valuable experience, if not huge new revenues.

The company detailed its experience with its foray into serious gaming last year in its latest quarterly results released last Monday, as it aims to copy its success in more casual gaming in the more lucrative mid- and hardcore spaces. The company also detailed other initiatives in the year ahead, including a plan to enhance its core social networking apps based on voice and text chatting.

Yalla is hoping not only to introduce its own new products into its core base in the Middle East and North Africa (MENA), but also position itself as a partner for other global companies looking to enter the market. Such companies could include content providers for its flagship Yalla and Yalla Ludo social media apps that are two of the region’s most popular.

Reflecting its position in the region, the company also pointed out it was included in the inaugural Fortune 500 Arabia, a regional version of the U.S. magazine’s famous global list of the world’s biggest companies. Rankings aside, the company is now trying to show it has the foundation to build an operation that can profit from the MENA region’s rapid rise.

“We are pleased to see more and more visionary industry professionals and investors from around the world allocating more resources to MENA and participating in its surging development, propelling progress across the region,” said Yalla Chairman and CEO Yang Tao.

Yalla rose to prominence in the region on its original voice-based app, which posted strong double- and even triple-digit revenue growth in its earlier days. However, the company’s newer gaming business has taken over since then as its biggest growth engine.

On the top line, that combination of voice services and games boosted Yalla’s revenue 7.7% year-over-year in the fourth quarter to $80.9 million, slightly faster than the 6.4% growth the previous quarter. The company forecast it would report revenue of $72 million to $79 million in this year’s first quarter, which would translate to 2.7% growth at the midpoint. But given its recent trend of easily beating its own forecasts, Yalla’s revenue growth could potentially accelerate to 8% or higher, and perhaps even return to its double-digit gains of earlier times.

The company’s gaming division powered the latest gains, growing 35% year-over-year to $28.5 million, accounting for more than a third of the total. That was more than enough to offset the slight revenue decline from its chatting services business, which fell 3.3% to $52.2 million.

High-Quality Users

Yalla has been focused on getting more money from its users, rather than simply chasing more users who don’t necessarily pay or pay very little. That was reflected in its average revenue per paying user (ARPPU), which jumped 10% year-on-year to $6.58 in the fourth quarter, helping to boost the company’s overall revenues, even as its paying user base actually declined slightly year-over-year.

That focus on higher quality users, combined with strict cost controls, has helped the company maintain relatively high net margins that are expected to be around 40% this year, excluding potential investments in new products, said CFO Karen Hu on the company’s call. It also helps that Yalla is sitting on a large – and growing – pile of cash and short-term investments, which rose to $535.7 million at the end of last year from $453 million a year earlier.

All of those factors helped Yalla to report a 79% jump in its fourth-quarter net income, which rose to $29.7 million from $16.6 million a year earlier.

Yalla’s stock closed down 2.8% the day after the results release. But the shares are up 42% over the last 52 weeks on broader bullishness about its prospects and strong cash position. Even after the gains, the shares now trade at a relatively modest price-to-earnings (P/E) ratio of 9.3, far behind the P/E of 34 for global giant Meta META, operator of Facebook.

While Yalla has a ways to go to reach Facebook’s size, it’s making efforts to boost its geographical footprint and also the breadth of its core social media and gaming products. It has made moves into Turkey and Latin America, and this year plans to enhance its social networking products with “innovative new functions and a host of creative design upgrades” that could generate more revenue, Yang said on the earnings call.

He also provided an update on Yalla’s first two hardcore games, “Merge Kingdoms” and “Age of Legends,” which it self-developed and launched last year in a bid to turbocharge its gaming revenue by attracting more serious players who aren’t afraid to spend heavily on their hobby.

“The two mid- to hardcore games as our initial offerings have shouldered significant responsibilities,” Yang said. “They’ve allowed us to gain valuable insight into local user preferences, and successfully recruit and train a local operations team, paving the way for our further development in this field.”

But he added the pair of games have “completed their main goals” by now, noting that they are expected to “fall short of the company’s revenue expectations despite several rounds of optimization.”

The lesson learned is that it’s good to find an experienced partner when entering this kind of new area that differs quite a lot from Yalla’s strength in casual games. To that end, Yang said, Yalla has shifted its hardcore game strategy to focus on collaborating with more mature gaming studios with a record of publishing popular games. Meantime, it will use its own expertise and position to select and operate titles that are most suitable for the MENA market. He added that Yalla will also continue to self-develop its own midcore games.

“We are actively communicating with global top-tier gaming studios to explore potential joint monetization opportunities in the region,” he said.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.