Yalla Takes Its Gaming Act On The Road As Search Continues For New Growth Engines

Key Takeaways:

• Yalla has been building its reputation as a Middle Eastern gaming powerhouse through a recent series of high-profile events
• The company is trying to prepare the ground for its next growth phase as it looks to enter mid- and hardcore games through self-development and partnerships

By Doug Young

First it got its act together by building one of the Middle East’s top social media and gaming platforms. Now, Yalla Group Ltd. YALA is taking that act on the road, moving beyond the smartphones, tablets and PCs where most people use its products to host a growing number of major gaming events in its home market.

The end game is to build up a fan base for the company’s planned move into mid- and hardcore games, which it hopes will be its next major growth engine as its original social media and casual gaming platforms start to mature.

The maturing nature of those businesses was apparent in the company’s latest quarterly results, which included some of its relatively slower revenue growth since its inception. That’s pressuring Yalla into finding its next big growth spot, as it lays the groundwork to quickly ramp up any promising new initiatives in its mid- and hardcore gaming business that is still a work in progress.

At the same time, the company’s strong focus on cost controls and efficient operations have kept its margins relatively high and profits growing, meaning it won’t feel any financial pressures anytime soon. Instead, the biggest pressures it may feel will come from investors hoping to see a return to the kind of high double- and even triple-digit growth the company reported in headier times after its U.S. listing in 2020.

“This year, we have focused on the acceleration and investment of midcore and hardcore games, where we can leverage the extensive expertise, talented workforce and abundant resources we have accumulated in the casual gaming sector,” Yalla CEO Yang Tao said on the company’s earnings call this week. “Our product teams are currently developing and refining a strong pipeline of self-developed games set to debut throughout 2025.”

COO Xu Jianfeng revealed the company has three self-developed midcore games in its pipeline, with plans to start testing by the end of this year. “Meanwhile, we are also proactively discussing collaborations with potential partners in the game industry,” he said, without giving any names.

Yalla has been trying to persuade investors for quite a while about its potential to become a major player in the fast-growing market for serious gamers in the Middle East and North Africa (MENA), drawing on the company’s eight years of history operating from its base in Dubai. Its past efforts included two self-developed midcore and hardcore games that it tested last year.

But none of those brought the blockbuster results it was seeking, leading the company to shift gears and also search for more seasoned game operators to leverage its strong Middle Eastern base. As part of that search, it joined the UK Interactive Entertainment Association earlier this year, calling it one of the world’s oldest and most influential video game and interactive entertainment trade bodies with nearly 650 members.

Gaming Events

While it looks for the right mid- to hardcore games to entice its big base of 39 million monthly active users (MAUs), Yalla has been staging a growing number of real-world events for gamers since the end of last year.

“We are leveraging offline events to strengthen our product and brand awareness, including our Ludo Champion Offline Tournament series,” said Yalla President Saifi Ismail on the earnings call. “The two tournaments we have held thus far, in Riyadh and Baghdad, were smash hits attracting over 150,000 registered players and garnering overwhelmingly positive feedback from participants.”

COO Xu added that the tournaments have received “very good feedback” from both Yalla’s partners and local users, and that Yalla is planning two more tournaments in the region in the second half of the year to continue building its momentum.

The company will need that momentum to jumpstart revenue growth to find new growth engines. It reported its revenue grew 2.5% to $81.2 million in the second quarter from $79.2 million a year earlier, continuing a recent trend of single-digit growth.

Within the bigger revenue figure, Yalla reported the contribution from its chat services was roughly flat year-on-year at $54.9 million, accounting for nearly two-third of its total. The remainder comes from its faster-growing game division, whose revenue rose 9% to $26.2 million. Yalla also reported its average revenue per paying user for the quarter rose 14% to $6.60 from $5.80 a year earlier, indicating users’ growing willingness to pay on the platform.

Despite its single-digit revenue growth, Yalla was able to post stronger profit gains thanks to its ongoing focus on controlling costs and operating more efficiently. Its quarterly costs and expenses actually fell 6.8% during the quarter, while its selling and marketing expenses dropped by 31.4%. Additional savings from smaller declines in its R&D and general and administrative spending helped Yalla to boost its operating income by 23.8% to $29.6 million, as its net margin improved to 38.6% from 35.7% a year earlier.

On the bottom line, Yalla reported its net income rose 10.9% to $31.4 million from $28.3 million a year earlier.

We’ve previously compared Yalla to a well-oiled car just waiting for the right racetrack to strut its stuff. That status is reflected in the company’s valuations, which look relatively strong in some ways but weak in others. Its price-to-sales (P/S) ratio looks relatively strong at 2.1, ahead of the 1.57 for social app Kuaishou (1024.HK) and 1.14 for Weibo WB, often called the Twitter of China. But it looks more lackluster on a price-to-earnings (P/E) basis, with a ratio of 5.4 that trails the 16 for Kuaishou and 6.7 for Weibo.

At the end of the day, Yalla seems to be a company with strong potential due to its deep roots and relatively long history in the dynamic Middle Eastern social media and gaming market. Now it just needs to find the right fuel, be it from popular new midcore games or social media apps, to shift its engine back into high gear.

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