Yalla Eyes A Bigger Slice Of Middle Eastern Gaming Market

The Middle Eastern social media company reported its strongest revenue growth in two years as it prepares to launch two new self-developed games later this year

Key Takeaways:

• Yalla's revenue grew 12.2% in the fourth quarter, while its profit rose nearly 10% on cost controls and better monetization of its users
• The Middle Eastern social media company is currently testing two self-developed mid-core games, which could start contributing revenue in the second half of this year

Social media and gaming company Yalla Group Ltd. (YALA.US) on Monday reported its fastest revenue growth in more than two years, as it continued to better monetize its large user base in the Middle East and North Africa (MENA). It also held out the possibility that the growth could accelerate in the second half of this year with its rollout of two new self-developed games.

Yalla's latest quarterly report also detailed steps it is taking to incorporate AI into both its operations and apps, in a bid to keep improving its efficiency and user experience. Its careful spending has already given the company enviably high net margins that typically hover around 40%, though the figure dropped in the latest quarter as it ramped up its R&D spending on the two new mid-core games that could provide some new lift to its revenue.

The company has been actively exploring opportunities in the mid- and hardcore gaming spaces over the last two years, seeking to diversify beyond its traditional focus on casual gamers by targeting people who are willing to spend more heavily on the hobby.

As part of its bid to position itself as a major player in the regional gaming space, Yalla is also staging offline gaming events and tournaments throughout the region. It held six such events last year in cities including Abu Dhabi, Baghdad and Cairo, and ended with a December event in Riyadh, its second in the Saudi capital during the year.

While the company gave details on those events and its latest financial performance, the focus among investors during its latest earnings call was on the potential for additional revenue from the new mid-core games, one or both of which are likely to launch this year. Both games are currently in the testing phase.

Yalla hopes to take a bigger slice of a Middle Eastern gaming market that it said is one of the world's fastest-growing and will be worth $6.5 billion in 2026, as countries like Saudi Arabia spend heavily to promote the industry in efforts to diversify their local economies.

"We have a number of new products in our pipeline that have the potential to contribute to the company's revenue growth in the second half of this year," said Yalla Chairman and founder Yang Tao on the company's earnings call, in a reference to the new gaming initiative.

COO Jeff Xu provided more details, saying Yalla has completed its 1.0 versions of two mid-core games and is now "in the process of fine-tuning them."

"Meanwhile, we have been proactively pursuing external collaborations that complement our business. Leveraging Yalla's extensive experience in the Middle East, we are working with more potential partners to unlock the local market's opportunities and establish a deeper foothold in the Middle East," he said.

Xu did not elaborate on what potential partners Yalla was talking to. But the company has previously said it is open to using its experience as a leading Middle Eastern game operator to work with other experienced developers to bring their popular games to the region. That would complement its other strategy of self-developing its own games.

Return to double-digit growth

We'll have to wait for more details on the two new games, since Yalla has been stingy on details even as it regularly updates development progress in its quarterly earnings reports. Meanwhile, the company's growth accelerated in the final quarter of last year, rising by double-digits for the first time in more than two years, hinting at a return to the kinds of rapid gains that excited investors so much in Yalla's early days.

The company reported fourth-quarter revenue of $90.8 million, up 12.2% year-on-year and well ahead of its earlier guidance, and also marking a second consecutive record high. The growth rate was the company's best since the third quarter of 2022 and marked a return to double-digit growth after seven quarters of single-digit gains.

Fourth-quarter revenue from the company's chat services rose 14.6% year-on-year to $59.8 million, accounting for about two-thirds of the total. The remaining $30.8 million came from gaming services, up 8.1%. The company attributed the strong revenue gains partly to better monetization of its user base, as its number of paying users rose 3.2% year-on-year to 12.3 million during the latest quarter.

While its cost of revenue and most of its expenses contracted or grew at slower rates than its revenue during the quarter, one notable exception was R&D, whose costs jumped 70% year-on-year to $9.2 million as the company built up its gaming development capabilities. That was a factor behind its net margin drop to 35.8% for the quarter.

On its bottom line, Yalla reported its net income rose 9.7% in the fourth quarter to $32.5 million from $29.7 million a year earlier, helping it to record an 18.7% annual profit increase to $134.2 million.

The company also described steps it is taking to take advantage of AI that is currently revolutionizing many industries, from manufacturing to Yalla's own focus on social media.

"Drawing upon Yalla's decade of expertise in MENA's internet industry and our deep understanding of local culture and user behaviors, we continued to strengthen our capabilities in developing AI algorithm models that are tailored to local culture and user preferences," Yang said. "Our dedicated AI team is rapidly integrating AI-driven automation and data analytics into our products and operations to optimize R&D efficiency and improve the user experience across our product offerings."

Yalla's American depositary shares (ADS) rose 4.48% on Tuesday after the release of its latest report. The stock currently trades at a relatively muted price-to-earnings (P/E) ratio of 5.4, similar to the 7.3 for Chinese social media app Weibo (WB.US; 9898.HK) but well behind the 25 for Facebook parent Meta (FB.US), implying potential for some upside if the upcoming new games perform well.

To support its stock Yalla also disclosed it plans to accelerate its share buybacks under a $150 million program first unveiled in 2021. The company bought back $14 million worth of its ADSs last year, and Yang revealed it has set a target of "at least doubling" its buyback activity this year to $28 million or more.