Yalla kicks of new chapter with new midcore games

The Middle Eastern social media and gaming company plans to launch its first two midcore games this quarter, with another self-developed ‘roguelike game’ to follow

Key Takeaways:

• Yalla revealed it will launch two self-developed midcore games by September, with another self-developed title and a licensed game to follow by year-end
• The social media and casual gaming company’s stock has more than doubled since March, as investors bet the new midcore initiative will jumpstart Yalla’s revenue growth

By Doug Young

After a year or more of rehearsals and fine tuning, it’s finally showtime for Yalla Group Ltd. (YALA.US), one of the leading social media and gaming companies in the fast-growing Middle East and North Africa (MENA) region.

Since its inception nine years ago, Yalla has grown by drawing people in the region to its chatting services and casual games, with more than 42.4 million monthly active users (MAUs) on its platform at the end of June, according to its latest quarterly report released on Tuesday. The company has dabbled in more serious games in the past, testing the waters for a potentially major new revenue source from gamers who aren’t shy about spending big money on their favorite pastime.

Now, the company is taking that experience, combined with its strong roots in the MENA region, including distribution, cultural awareness and local connections, and preparing to put its accumulated know-how to work with the launch of its first two midcore games this quarter, it revealed in the latest report. It also outlined a roadmap for the release of additional titles for serious gamers for the rest of the year, and hinted at the potential for an overhaul of its original Yalla Ludo leisure gaming platform in the years ahead.

All this, as Yalla’s latest results continued many of the company’s recent trends of the last few years, including single-digit revenue growth as its existing businesses mature, and stronger profit growth as it becomes more efficient and controls its costs. The company also began aggressively buying back its shares this year, and looks set to pass its previously stated goal of making $50 million worth of such purchases.

All the buzz has lit a fire under Yalla’s stock, which has more than doubled since March. The shares fell 4% on Tuesday after the latest report’s release, perhaps showing investors are growing impatient to start seeing some results from the upcoming midcore game campaign. Even after the stock run-up, Yalla’s American depositary shares (ADS) still trade at a relatively low price-to-earnings (P/E) ratio of 10, slightly behind the 12 for the similar-sized Pinterest (PINS.US), and well behind the 19 for Chinese game operator NetEase (NTES.US; 9999.HK). That suggests some room for potential upside for Yalla’s stock if initial results from the new games look good.

The two midcore games slated for release this quarter, which the company is simply referring to as “Match-3,” are currently in the “final stages of fine-tuning,” officials said on the company’s earnings call, adding that each title targets “distinct user segments.” The company also revealed it will release a self-developed “roguelike game” in the fourth quarter.

Yalla previously said it is also working with other developers, aiming to leverage its local knowledge and connections to bring their games to the Middle East under licensing agreements. That campaign is also bearing fruit, as the company disclosed its game distribution arm is preparing to distribute a hardcore title from another game developer, though it didn’t give a timeframe.

“We will continue to refine our gaming business strategy and plan to ramp up external partnerships and our game distribution capabilities going forward to more effectively diversify our product portfolios,” Yalla Chairman Yang Tao said on the earnings call.

Ramp-up signs

Signs of the company’s gaming ramp-up were present in several places in Yalla’s latest earnings report. The most apparent of those was a big jump in the company’s product development spending, which rose 28.6% during the quarter as Yalla built up its game development teams.

All eyes will be watching closely now to see what kinds of revenue the new midcore and hardcore games can generate. But in the meantime, revenue from Yalla’s older casual games posted strong growth in the second quarter, rising 17% to $30.7 million – the strongest gains since the fourth quarter of 2023.

The games and chatting services combined gave Yalla total revenue of $84.6 million for the quarter, up 4.1% from the $81.2 million it reported a year earlier. The company forecast revenue of $78 million to $85 million for the third quarter, and we should point out it is quite conservative in its forecasts and often beats those predictions, sometimes by a lot.

While most attention was on the new midcore and hardcore games, Chairman Yang also hinted that change could be coming for the company’s original Yalla Ludo casual game platform. “This second quarter marks the ninth anniversary of Yalla’s launch. For Yalla Ludo, one of our flagship products and MENA’s leading casual game platform, we expect its life cycle to reach 10 to 15 years or even beyond,” he said. Yang added that Yalla is also exploring moves into other online local services, though he declined to be more specific.

Yalla also showcased its local focus and connections by highlighting a co-branded campaign it conducted with the Dubai Department of Economy and Tourism during the quarter, as well as the release of its latest environmental, social and governance (ESG) report.

Apart from its rising game-development budget, the company continued to practice strict financial discipline across most other areas, which helped to boost its net margin to 43.2% for the quarter, up 4.6 percentage points year-on-year. As a result, its net profit grew more quickly than its revenue, rising 16.4% to $36.5 million from $31.4 million a year earlier.

The company also provided an update on its aggressive share buyback program, which has been a likely factor supporting its recent stock gains. It previously said it planned to buy back around $50 million worth of its ADSs in 2025, and disclosed on its earnings call that it already purchased $41 million of that in the first half of the year. Addressing that issue on the call, Yang said the company “expects to reach or potentially exceed our full year goal.”

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