Emerging markets-focused social media company details several new initiatives in its latest quarterly report as it diversifies beyond its core voice-based services
- Yalla said its first-quarter revenue rose 6.9% to a record $72.3 million, as strong gains for its game services offset a first-time decline for its core voice business
- Company is launching a wide array of new initiatives, including an instant messaging app and its first-ever hardcore game, in a bid to become more diversified
By Doug Young
It burst onto investor radar screens with comparisons to the Clubhouse chatting app that briefly captured the world’s attention early last year. But highlights from its latest earnings report show that Yalla Group Ltd. (YALA.US) is turning its focus to other areas these days as it tries to build out an integrated social networking platform modeled after much bigger names like Facebook and Tencent.
That’s the main message coming from a company that is trying to make a name for itself as a social media heavyweight in emerging markets, starting with its base in the Middle East and more recent moves into Turkey and Latin America. In addition to its stronghold in the Middle East, the company also has a major R&D center in China separate from its headquarters in Dubai.
At the same time, Yalla’s other big story is its slowing growth in this year’s first quarter as it faced headwinds created by geopolitical tensions and pandemic-related disruptions. Rising costs and continued investments in R&D also weighed on its results.
We’ll start our latest look at this company with some of the progress Yalla is making into areas outside its core voice-related services that briefly made it an investor superstar last year on the Clubhouse comparisons. That shot of publicity lit a fire under the company’s stock that saw it rise to more than $40 in February last year from an IPO price of just $7.50 five months earlier, as people scrambled in search of Clubhouse concept stocks.
Since then, the world has moved on, and so has Yalla. These days, it seems the company may be more interested in comparisons to a more well-rounded social media player like Facebook, which changed its name last year to Meta Platforms (FB.US), in a nod to the big potential it sees in a future metaverse where users can interact between many kinds of apps and platforms in the cyber realm.
Yalla first teased investors late last year when it said it was working on a “cutting-edge social app, which will feature the first-ever social metaverse.” It went on to launch the Waha app in this year’s first quarter. Company officials gave a brief update on that initiative in the latest report, saying they gathered feedback after the initial launch and have already launched a new iteration of the app.
Then there’s YallaChat, an instant messaging (IM) app that is tailored for Middle Eastern users that looks similar to the WhatsApp and WeChat apps that are extremely popular in the west and China. The company has experimented with various pre-1.0 versions of the more text- and photo-based product over the last year. It turned up its game with the recent launch of YallaChat 1.0, which, among other things, also provides a unified way for users to log into the company’s various other products.
The company also implied that some M&A could be on the way as it works to further diversify both its product offerings and geographic reach. “We are also actively looking for diverse investment opportunities to continue to flexibly and efficiently broaden Yalla’s ecosystem,” Chairman Yang Tao said on the company’s earnings call. Such a move could draw on the company’s big war chest of $367.5 million in its coffers at the end of March.
Going hardcore with games
The other expanding piece of Yalla is games, which saw strong growth in the latest quarter – a sharp contrast to the company’s larger voice-based services whose revenue actually declined during the period.
Its game-based revenue rose 59% for the quarter year-on-year to $20.3 million, even as revenue from chatting services fell 5.3% to $51.9 million. Those two main revenue sources combined to give Yalla first-quarter revenue of a record $72.3 million, representing a modest 6.9% year-on-year gain that contrasted with the high double- and even triple-digit growth the company posted in 2021.
Yalla didn’t give too much color regarding its revenue growth though Yang said that 2022 was shaping up as a “year full of challenges.” On the investor call after the results came out, Yang pointed out that the company’s Middle East base “hasn’t seen any significant effect” from geopolitical tensions so far, and even added that “rising oil prices are not bad news for us.”
Up until now, Yalla has focused exclusively on casual gamers who might shell out a dollar here and a few cents there to play games like tic-tac-toe and chess during their idle time. But in a major shift, the company is preparing to launch its first title for more hardcore gamers who are often willing to spend much more time and money on their favorite pastime.
Yang said the company will soon introduce a beta version for the game, calling it a “milestone” for Yalla.
With its core chat-services slowing and many of the new initiatives just starting to gain traction, it should come as no surprise that Yalla’s net income fell 11% during the quarter to $17.7 million from $19.8 million a year earlier. The company said it expects the slower revenue growth to continue into the second quarter, forecasting revenue of $66 million to $70 million for the period, versus $66.6 million a year earlier.
Following their meteoric rise shortly after the IPO, Yalla’s shares have been more earthbound since the start of this year, perhaps at least partly being punished for the company’s China connection. The shares actually rose 7.5% after the results were announced on May 16. But at their latest close of $3.46, they now trade at just under half of their IPO price. The company announced a $150 million share buyback last May to support the stock, and said in its latest results that it has extended the program for another year.
In valuation terms, Yalla is priced quite cheaply compared to peers with a trailing price-to-earnings (P/E) ratio of just 8. By comparison, Meta is twice that level with a P/E of 16, while China’s Twitter-like Weibo (WB.US; 9898.HK) also trades at a higher P/E of 11. At the end of the day this looks like a company with many irons in the fire that could ultimately come together to create a sort of Facebook for developing markets. But that day is still at least a year or two away, and investors will be watching closely to see how well all the new initiatives perform.
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