Yalla Profit Zooms On Gaming Jump, Enhanced Efficiency

Key Takeaways:

• Yalla’s revenue rose 6.4% in the third quarter, fueled by a 31% jump in revenue from its gaming operation
• The company’s paying users posted a rare decline in the quarter as Yalla shifted its focus to higher-spending users

By Doug Young

The game is on for Yalla Group Ltd. YALA, a leading social media company focused on the Middle East, as well as developing markets in Turkey and Latin America.

Yalla started out as a social media company, briefly grabbing global headlines for its voice-based functions shortly after its 2020 IPO. But more recently the company has pivoted to games, which were the star of its latest quarterly earnings report released on Monday last week. The company’s gaming business charged ahead with more than 30% revenue growth for the period, as Yalla diversifies into more hardcore games from its older focus on casual gamers.

At the same time, its focus on those more serious gamers helped to drive a 7% jump in average spending per user. Still, the company was relatively muted with new updates for its first two hardcore games, “Merge Kingdoms,” a simulation game launched in the second quarter; and “Age of Legends,” which it launched in Turkey in May and began rolling out in the Middle East in August.

“Merge Kingdoms” was among the top 10 strategic games in Gulf countries, including Saudi Arabia and Qatar, in the third quarter in terms of revenues on iOS, Yalla Chairman Yang Tao said on the company’s earnings call. Meanwhile, “Age of Legends” also took the top spot on Google Play’s role-playing games category in terms of revenues in Saudi Arabia, the UAE and Oman, he added.

“Although compared with our flagship applications midcore and hardcore games are still not yet making a substantial contribution to our group’s revenue, we see immense room for growth in this sector,” Yang said.

Yalla’s shares fell nearly 10% after the earnings came out, though they regained some of that the next day. It is worth noting that the stock trades near a two-year high as expectation builds for the new hardcore gaming drive. The stock price is up about 70% so far this year as investors return to the company for its strong position in the Middle Eastern social media market.

The broader rally for its shares has given Yalla a price-to-earnings (P/E) ratio of about 12, which is below the 30 for global titan Meta META, operator of Facebook, but not far behind the 15 for leading Chinese game operator Tencent (0700.HK). Yalla’s figure is also ahead of the 7 for WeiboWB, often called the “Twitter of China,” reflecting the current broad range of valuations for social media and gaming companies.

While the newer hardcore games are still building their audience, Yalla’s overall gaming business was still the clear star of its latest quarterly report. Revenue from that business rose 31% year-on-year during the quarter to $31.2 million, sharply accelerating from just 2.8% growth in the previous quarter. At that level, gaming now accounts for 37% of Yalla’s total revenue, up from 30% in the previous quarter. The rest of the company’s revenue comes from its older chat services.

Quality Gamers

Yalla explained that it’s shifting its focus away from simply chasing paid users to trying to improve the quality of those users, in other words, prioritizing people who are willing to spend more money when they go online.

That shift shows up in the latest data for its paying monthly active users (MAUs), which experienced a rare decline with a 2.6% year-on-year drop during the quarter to 11.2 million. But while the number of paying users dropped, the company’s average revenue per paying user (ARPPU) actually rose about 7% year-on-year to $7.35. Those two numbers combined imply that the decline in paid users was largely the result of lower-spending people departing.

While Yalla’s gaming operations did well, its chat service looked weaker with a 4% year-on-year decline to $53.9 million in revenue. The big gains in gaming and decline in chat services combined to give Yalla a record $85.2 million in revenue for the quarter, up 6.4% from a year earlier, and well ahead of the company’s previous guidance for $73 million to $80 million.

Yalla is a relatively conservative company with little debt and large cash reserves that totaled $545 million at the end of September. Its big cash pile worked to its advantage in the current high interest rate environment, yielding $5.6 million in interest income in the latest quarter versus only $778,000 a year earlier. As a result of that windfall, plus the company’s ongoing strict cost controls, Yalla’s net profit jumped by a healthy 44% year-on-year to $35.2 million for the quarter.

The company’s net margin also leaped to 41.4% in the quarter from 30.5% a year earlier, and CFO Karen Hu said the company expects the figure to stay around 35% or higher for all 2024.

Yalla has shown it isn’t shy about trying new things and already hinted in August about an upcoming initiative aimed at animation lovers. Yang hinted at yet another new initiative on the company’s latest earnings call.

“In addition to midcore and hardcore games, we are exploring new products and businesses that could bring traditionally offline services online for (Middle Eastern) users as a complement to Yalla’s portfolio,” he said, adding the company will provide more details “when there is meaningful progress.”

Last but not least, Yalla disclosed that its main market in the Middle East is undergoing a quiet shakeup, and also receiving new validation, with the arrival of global sensation TikTok and its popular short video service. Yalla officials didn’t seem too concerned about TikTok just yet, but noted that not everyone in the market feels the same.

“TikTok (has) moved fast and is performing very well in the market so far,” said Yalla President Saifi Ismail on the earnings call. “In terms of competition, TikTok has a greater impact on livestreaming or short video products. If you look at third-party data, some of them are losing their market share because of TikTok.”