Company’s latest results show a strong rebound as it moves ahead on a wide range of initiatives aimed at recapturing its former days of explosive growth

Key Takeaways:

  • Yalla generated record revenue in the second quarter despite a month-long Ramadan holiday, thanks to better user monetization and cost controls
  • Company bolstered its position in its home market with the naming of a former UAE telecoms chief as a new independent director

By Doug Young

After starting as a voice-focused social networking service, Yalla Group Ltd. (YALA.US) is trying to take itself to the next level by adding more diversified offerings like text, graphics, gaming and even a bit of the metaverse to its platform. The overhaul comes as the company seeks to reignite the explosive growth that briefly made it an investor darling, but has faded somewhat lately.

That’s the big picture coming through in the company’s latest earnings report, which is filled with updates on the many initiatives Yalla is taking in its bid to become an equivalent of Facebook (FB.US) for developing markets. The signs look good in general, though turning ideas into profits will be the real test of whether Yalla can truly become a significant global player.

At the same time, the company, which is based in the Middle East, is building up the network it needs to thrive in its home market in the Middle East and North Africa region (MENA) with a major new appointment that we’ll look at shortly. And it’s slowly expanding beyond those borders by ramping up business in the Spanish-speaking world and in Turkey.

With so many moving parts, we’ll start with the big picture from Yalla’s latest financial report that showed the company’s revenue growth began to accelerate in the three months through June after reaching a low-point in the previous quarter. It made that shift partly by better monetizing its growing user base and also controlling costs, with the result that its profit returned to a growth track after a rare decline in the previous quarter.

So now some specifics.

The company’s revenue grew 14.2% in the second quarter to $76.1 million, reaching a second consecutive record high despite including the Ramadan period that traditionally sees traffic drop at the start of the monthlong holiday. That rate marked a doubling of the 6.9% growth from the previous quarter, though both figures were still well below the high double-digit and even triple-digit growth the company reported in the first few quarters after its October 2020 IPO.

Significantly, the company’s revenues from its chatting services, which account for about 70% of its total, returned to growth during the quarter after a first-ever decline in the first three months of the year. Yalla also managed to better monetize its customer base, with 35% of its 29.9 million users paying for service in the second quarter, up from 29% who were paying a year earlier.

“Such a robust quarterly result is a testament to our operational success in refining our processes … and optimizing user acquisition,” Chairman Yang Tao said in a statement. “Together, these actions have holistically elevated our user experience further boosting Yalla’s … user engagement and users’ willingness to pay on our platforms.”

The company also kept its spending under control, with costs and expenses up by a modest 15%. As a result, Yalla’s profit rose 11% to $20.4 million for the quarter, reversing a decline in the previous period.

Despite signs that the company may be rebounding from a first-quarter bottom, Yalla’s revenue guidance signaled the bounce-back is far from certain. The company forecast third-quarter revenue of $70 million to $75 million, which most likely would represent growth from the year-ago $71.3 million figure, but also leaves the potential for a contraction.

Gaming growth

With all those big-picture numbers as background, we’ll spend the second half of this space looking at the latest updates on some of the many initiatives Yalla is taking to broaden its base and appeal, both in terms of products and also geographically.

The company began as a Middle Eastern voice-based social networking services provider, with an R&D center in the Chinese coastal city of Hangzhou. It briefly shot to global attention in early 2021 when it drew comparisons to U.S. sensation Clubhouse. Since then it has been adding other formats, including a new texting service called YallaChat launched earlier this year that provides a single unified login system for its various products.

The company is also moving aggressively into games, its other major revenue source that is growing much faster than its chatting revenue. To that end, Yalla previously announced plans to move beyond its traditional casual games and target hard-core gamers who are often more willing to pay to play. In its latest report officials indicated the company will launch its first hard-core title by year-end, and is also now exploring some mid-core games.

Geographically, Yalla has been branching into the Spanish-speaking world, and noted that its Yalla Parchis product ranked in the top three, in terms of revenue in the board game category, in six countries during the quarter, including Colombia, the Dominican Republic and Spain.

Last but certainly not least, the company announced the appointment of a new big-gun as an independent board member in Mohamed Al Ghanim, founder and ex-director general of the UAE Telecommunications and Digital Government Regulatory Authority. How many companies can say they have a country’s former telecoms regulator on their board? Not many, and such a connection will almost certainly help Yalla steer clear of regulatory issues in its home base.

At the end of the day, investors weren’t exactly doing cartwheels over Yalla’s latest report, with the company’s stock roughly unchanged the day after the results were announced. Reinforcing the lack of excitement, the company’s latest price-to-earnings (P/E) ratio of 10 is below the ratios of 15 for both Facebook and Weibo (WB.US), the latter often called the Twitter of China.

That would seem to indicate investors are taking a wait-and-see attitude towards all of Yalla’s new initiatives. At the end of the day, it’s nice to try new things. But it’s even nicer when those new things turn into new money spinners.

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