Yalla In Cruise Mode As It Looks For New Racetrack To Test Its Tires

Key Takeaways:

• Yalla’s revenue continues to grow, as it consolidates its place as a leading Middle Eastern social media and gaming company
• The company announced its entry to a major British gaming association, as it looks to bring established hardcore games to the Middle East to jumpstart its growth

By Doug Young

What do you do when you have a well-oiled high-performance car, but have no place to drive it immediately beyond your own backyard?

That’s the question facing Yalla Group Ltd. (NYSE:YALA), which has consistently boasted very strong profit growth as it hones its core apps that have made it one of the Middle East and North Africa’s (MENA) top social media and gaming operators. At the same time, the company’s revenue hasn’t been going anywhere fast lately, posting single-digit gains, as it looks for new racetracks to showcase its highly streamlined body.

That summarizes the leading trends on the dashboard in Yalla’s latest quarterly results announced on Monday last week, which showed its profit zoomed ahead by 56% during the three-month period on turbocharged margins. But its revenue grew by a slower 7.1%, though that may have been at least partly due to a quirk of timing related to an earlier start to the holy month of Ramadan this year compared with 2023.

Yalla has solidified its place as a major player in the MENA market for its core social media and gaming services centered on its flagship Yalla and Yalla Ludo apps. Its focus to date has been mostly on casual games that are now its biggest growth driver. But it sees big potential in midcore and hardcore games favored by more serious players who are often willing to pay big money to engage in their favorite pastime.

It initially experimented with its own self-developed games, rolling out two last year for its core Middle Eastern audience that numbered 37.8 million monthly active users (MAUs) in the first quarter, up 14.6% year-on-year. But after lukewarm results, it shifted its strategy to looking for more established game publishers and operators to help it enter the midcore and hardcore spaces, seeking partnerships that can allow it to leverage its Middle Eastern expertise.

“As MENA’s digital transformation continues to advance rapidly, we are being approached by many companies from Europe, in the States and China, to discuss potential opportunities in the region, mostly in the gaming and social networking sector,” said Yalla Chairman and CEO Yang Tao on the company’s earnings call. “We are open to this discussion, and our strategic team is consistently exploring these opportunities.”

Yang revealed that Yalla recently took a significant step in its search for suitable partners with its entry to the UK Interactive Entertainment Association. It described the organization as “the oldest video game and interactive entertainment trade body in the world,” noting its members included nearly 650 businesses across a spectrum that includes video game platforms, local and international publishers and independent developers.

Yalla’s shares fell 4% the day after the results announcement, though they regained most of that the next day, perhaps reflecting shareholder impatience with the speed of the drive into midcore and hardcore games. The stock is still up 11% over the last 52 weeks. But it was up as much as 50% during a rally last year when excitement was running higher as the company tested out the two new, self-developed hardcore games, “Merge Kingdoms” and “Age of Legends.”

Well-Oiled Machine

Next, we’ll dive into the company’s latest financials that show how it really is a very well-oiled machine that’s driving in a lower gear as it searches for a new racetrack. The company’s revenue rose 7.1% for the quarter to $78.7 million from $73.5 million a year earlier, similar to its growth rate in the previous quarter but well off the double and even triple-digit growth it posted in its early days when it was establishing itself as a major regional player.

Executives explained that revenue may have been partly affected by the timing of Ramadan, which began on March 11 this year, affecting the quarter’s last three weeks. By comparison, Ramadan began later on March 23 in 2023, meaning it only would have dampened demand for the final week of the quarter in the year-ago period.

Revenue for Yalla’s older chat services rose 3.6% year-on-year during the quarter to $52.2 million, returning to growth after contracting in the previous quarter. Revenue from its smaller but faster-growing game division rose 15% to $26.5 million. The company forecast it would post $72 million to $79 million in revenue for the current quarter through June. That would be roughly flat compared with the $79.2 million from a year ago if the company follows its recent trend of reporting revenue that often comes in at the top end of or even beats its previously announced forecasts.

While those top line growth figures weren’t particularly fast, the rest of the company’s financials show how it has gradually boosted its efficiency to become a highly profitable – and cash rich – machine. The company’s average revenue per paying user rose 12% year-on-year to $6.03 for the quarter, as it better monetized its paying users by focusing on the heaviest spenders. It also kept growth for its cost of revenue to just 2.6%, well below its actual revenue growth, with the result that its cost of revenue as a percentage of its total revenue shrank to 36.3% from 37.9% a year earlier.

Last but not least, the company also kept down its sales and marketing expenses, which were down 28.7% year-on-year, as well as its general and administrative spending, which fell by an even larger 34.6%. It also got a boost from a rise in its interest income, thanks to globally high interest rates and its large store of cash and short-term investments that totaled $483 million at the end of March.

That all added up to a sharp rise in the company’s net margin to 39.5% from 27.1% a year earlier, as CFO Karen Hu noted the figure should stay around 40% for the rest of the year. The bottom line was that Yalla’s net income grew 56% to $31.1 million.

The analyst community is still relatively upbeat on the company, with analysts from four relatively big banks attending the company’s earnings call. But investors are more cautious, giving the company a relatively low price-to-earnings (P/E) ratio of 6.6. That’s actually slightly above the 6.3 for Weibo(NASDAQ:WB), often called the Twitter of China, though it trails the 11 for NetDragon (0777.HK), a mid-sized game operator with a similar size to Yalla.

At the end of the day, there does seem to be some upside potential for Yalla if it can put its solid foundation to use in new product areas like hardcore gaming. Now, it just needs to find the right partners to help it realize that potential.

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