Good morning, and good evening, ladies and gentlemen. Thank you for standing by for Yalla Group Limited's First Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded. Now I will turn the call over to your speaker host today, Ms. Kerry Gao, IR Director for the company. Please go ahead, ma'am.

Hello, everyone, and welcome to Yalla's First Quarter 2022 Earnings Conference Call. We released our earnings earlier today, and the release is now available on our IR website as well as on newswire services. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our future results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in our earnings release and our registration statements filed with the SEC. Yalla does not assume any obligation to update any forward-looking statements, except as required by law. Please also note that Yalla's earnings press release and this conference call includes a discussion of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Yalla's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. Today, you will hear from Mr. Tao Yang, our Chairman and Chief Executive Officer, who will provide an overview of our recent achievements and growth strategies. He will be followed by Mr. Saifi Ismail, the company's President, who will give a brief review of our recent developments. Mrs. Karen Hu, our Chief Financial Officer, will then provide additional details on the company's financial results and discuss our financial outlook. Following management's prepared remarks, we will open up the call to questions. Our Chief Operating Officer, Mr. Jeff Xu, will join the call for our Q&A session. With that said, I would now like to turn the call over to our Chairman and Chief Executive Officer, Mr. Tao Yang. Please go ahead, sir.

Thank you, Kerry, and thank you, everyone, for joining our first quarter 2022 earnings conference call. We are pleased to have started 2022 on a strong note with our revenue reaching an all-time high of $72.3 million, exceeding the higher end of our guidance. This excellent performance, notwithstanding 2022, is still undoubtedly shaping up to a year full of challenges. Looking at the macro environment variables, such as geopolitical friction among countries as well as pandemic resurgences in various regions are creating fluctuation and ongoing turbulence. Yalla is closely monitoring the macro situation, and we will adjust our company strategy appropriately. For this year, instead of merely pursuing high user base growth, we will increase our focus on improving return on investment with respect to our user base expansion. To that end, we are currently testing and flexibly adjusting our sales and marketing strategy based on our observations of market dynamics. During the first quarter, we were able to deliver solid top-line growth while optimizing the pace of user growth; thus, sales and marketing expenses as a percentage of our total revenues have decreased compared with the previous quarter. We are encouraged by this progress and aim to further improve our sales and marketing efficiency going forward. In 2022, we will continue to expand our services and stretch the boundaries of our business, launching innovative social networking and entertainment products to fulfill MENA users' evolving needs and grow our immersive online ecosystem to deliver more memorable experiences to more users while creating future revenue streams for our company. Now let's take a closer look at our new product update. As the leading player in the online social networking and entertainment industry, Yalla strives to expand its ecosystem and broaden the scope of its product and service offerings to meet MENA…

Hello, everyone. Thanks for joining us today. Let's take a look at our operations as well as our product performances. Operationally, as we move into 2022, our growth momentum carried on as we expanded our user community and further advanced our monetization capability. As Tao mentioned in his remarks, our experienced marketing team has been adjusting our sales and marketing strategy to boost the return efficiency on our user acquisition investments. We are pleased to report a solid quarter with the Yalla Group's total revenue of $72.3 million, beating the higher end of the company's guidance. Our monthly active user increased 55.3% year-over-year, reaching 29.9 million. Yalla Group's paying users also increased to 9.4 million, while the sales and marketing expenses as a percentage of our total revenue decreased from last quarter, leaving us more flexibility and budgetary capacity to promote our new products later this year. We are also happy to share that our casual game portfolio, including Yalla Parchis, 101 Okey Yalla and Yalla Baloot is making good progress. In quarter 1, Yalla Parchis ranked in the top 10 in terms of revenue under the board game category in nine countries. We have rolled out a new game mode and chatting features which further increase user retention and user stickiness on the platform. We also hosted events, including our Independence Day and Yalla Carnaval to celebrate local holidays in various regions and encourage user engagement on the platform, attracting participation by more than 60% of our daily active users. During the first quarter, 101 Okey Yalla, for the first time, was ranked among the top 5 in terms of revenue in Turkey in the board game category on Google Play and was ranked among the top 10 in terms of revenue in Turkey in the board game category…

Thank you, Saifi. Hello, everyone. Thank you for joining us. We achieved strong top line growth in the first quarter of 2022, recording an increase of 7.1% quarter-on-quarter to achieving $72.3 million. This strong performance once again illustrates our group's ability to deliver growth in rapidly evolving environment. Notably, we also reduced selling and marketing expenses by 5.9% quarter-over-quarter amid macro uncertainty as a result of our ROI-based approach to promotion and advertising. Furthermore, we maintained a healthy non-GAAP net margin of 35.9%, impressive by industry standards, as well as ample cash reserves to sustain the ongoing expansion of our Yalla ecosystem. As we move through 2022, we will focus on growing the group's long-term profitability by further refining our resource allocation to propel product innovation and monetization while boosting sales and marketing efficiency as well as optimizing capital utilization. Now I would like to walk you through our detailed financials for the first quarter of 2022. Our revenues were $72.3 million in the first quarter of 2022, a 6.9% increase from $67.6 million in the same period last year. The increase was primarily driven by the broadening of Yalla Group's user base and enhancements to Yalla Group's monetization capabilities. Our average MAUs increased by 55.3% from 18.8 million in the first quarter of 2021 to 29.2 million in the first quarter of 2022. Now let's look at our costs and expenses. Our cost of revenues was $27.5 million in the first quarter of 2022, a 14.7% increase from $24 million in the same period last year, primarily due to an increase in technical service fees resulting from the expansion of our product portfolio and an increase in salaries and benefits which resulting from the expansion of the operation and maintenance team. Cost of revenues as a percentage of total…

[Operator Instructions] Our first question comes from Man Kun with CICC. Please go ahead.

This is Man Kun from CICC. I'll be asking questions on behalf of Xueqing. First, I'd like to congratulate the company for a very impressive set of first quarter results. We have two questions today. First, I'd like to ask about YallaChat. We're curious about what the company think is the significance of the app to the company's product metrics? For example, does the company expected to connect the company's various products and even drive traffic among them? Our second question would be on Yalla, Yalla Ludo. Given that they're the more mature product that the company has, we'd like to know what's the company's current strategy for their user operation going forward. Thank you.

Good morning. Thank you very much for your question. And I'll be answering your questions. The first one about the YallaChat plays a distinct role in our ecosystem. As we mentioned earlier in our prepared remarks, starting this quarter, we will gradually build a unified login system with YallaChat and we have already started marketing this upgrade with Yalla. We think this is a crucial step in building the Yalla ecosystem among our diverse user communities to better introduce various products to all of them. We hope this will help boost synergies between different products in our Yalla ecosystem and further improve our brand user stickiness. And for the second question about the strategy for Yalla and Yalla Ludo. Actually, we are committed to serving the MENA market. Our vision is to become the largest online social networking and entertainment platform in MENA. And for the past 5 years, we have strived to improve and gather experiences in our product design and operations. This is also for why in our corporate culture, user first and multicultural understanding are the two top priorities to remind our team to stick with our value and strategy and be dedicated to achieving our goal. In our community, users enjoy a healthy, relaxing social entertainment experience with mutual respect. This unique experience is how we differentiate our products from others. It is also why we achieved such rapid development over the past years.

Our next question comes from Shiqi Ge with CICC. Please go ahead.

Thanks management for taking my question. And congrats on another strong quarter. I have two questions. The first is, given that the group is growing and that the management has mentioned that YallaChat will soon allow the users to log into any Yalla product with their YallaChat ID, will each product be operated separately and have separate ROI? And are you prioritizing any products over others? And my second question is about the margin. I see the gross margin in 1Q 2020 [ph] has declined by several percentage points, does the company have a steady margin guidance for the long run?

Hi, good morning. Shiqi. I'll be answering the first question. We have our efficient internal management system. Each one of our product has operated separately with independent accounting. They also have different KPIs, depending on their development stage, and ROI is just one KPI. So for example, our current task for certain products is to expand the user base and increase user stickiness. Once the product reaches a certain stage, monetization subsequently becomes our target. Yalla has always done a good job in the monetization stage if we look at the company's past performances, which shows Yalla's monetization capability is impressive by industry standards. As product characteristic is different in each phase, we will adjust our priorities accordingly. These priorities are fluid rather than static. So we can't say that a given product is not important, only which product is more important in the current stage and can contribute more to our ultimate goal. YallaChat is unlike other products and follows a different logic, which also means we have different expectations for it. We are not looking to monetize YallaChat in the medium to long term but want to utilize it to connect all of our products. It is also an IM product that meets the unique cultural needs of Arab users. YallaChat plays an important role in our long-term plan. And it is a very challenging project. We adjust the strategy based on the product's performance and the changing situation. And I think the second question will be answered by Karen.

Thank you, Yang. Thank you, Shiqi. Allow me to answer this question. Our cost structure is quite stable. For the past eight quarters, we have maintained our gross margin level above 65%. So the majority of our costs coming from the commission for third-party payment platforms, which were stable in Q1. The change in our costs during Q1 was mainly due to the increase in technical service fees, which attributed to the expansion of our new products and increase in salaries driven by the expansion of our operations and maintenance team. So with our new product expansion, we are looking for a new balance. And we think that any fluctuations between 3 to 5% are expected. So given our current cost structure, we think that our cost and gross margin will remain relatively stable this year, which above -- which at about 60%. I hope we can answer this question.

Yes, very clear. Thank you.

Our next question comes from Kai Feng with CITIC. Please go ahead.

Management, thanks for taking my question. And congratulations for strong quarter. I have two questions. The first is about your investment direction. So under the current complex market environment, what are your main investment directions? And what are the most -- what are the key products will you invest? And my second question about unit growth. So in terms of unit growth, how the management build the natural decline of the growth rate? And will you adjust your future growth strategy in the next several quarters?

Thank you, Kaifang, for the questions. I'll be answering the first one. The macro environment is becoming volatile due to geopolitical friction and the pandemic resurgences. And if we look at the capital markets, there are also pressures with stock valuations changing drastically. Hence, we will be more prudent in making investment decisions during this uncertain time. If we look at the projects that we have invested so far, all of them generate synergies with our existing products and services. There are two reasons for this. First, we have more experience with this type of business. And second, this complementary process may be able to support Yalla in maintaining its leading position in the MENA market by leveraging its localization advantages. In 2022, we will continue to look at new opportunities and verticals. The MENA market is unique with its own regulations as well as its own local economic development needs. We will continue to look for opportunities related to our business and share our progress with our investors when we have any meaningful updates. And for the next question about user growth, I think our COO, Mr. Jeff, will be answering it.

Thank you, Kaifang, for your questions. So I'll be taking the second question. As Mr. Yang mentioned in the remarks section, we have adjusted our user acquisition strategy. As a result, we saw in Q1 that we were able to reduce our sales and marketing expenses Q-on-Q. We are still delivering robust growth in our top line, which reached an all-time high. This demonstrates the improvement in our sales and marketing strategy and is consistent with our goal of delivering quality growth amid the challenging macro environment. Pace of user growth is well under control. This year, we are focused on delivering quality growth and increase our focus on improving the ROI of our user base expansion. As we mentioned last quarter, we will continue to expand our marketing investment in Gulf countries to better penetrate users here and, at the same time, seize potential opportunities to efficiently gain users in the Pan-Arab region, too. We expect in 2022 that the group will deliver single-digit growth Q-on-Q in terms of user base growth. Thank you.

Thank you. That’s very helpful.

Our next question comes from Zhong Yulin with Haitong International. Please go ahead.

Thanks. Hello management and thanks for taking my question. Actually, I have two questions. Number one is regarding your new products. You just mentioned some kind about the YallaChat. In addition to YallaChat, could you just give us or update on the progress and achievements of your new initiatives? And as the company now is adopting the quality growth strategy, then how should we expect the financial contributions from those new initiatives this year? That's the first two questions. Number one, question on a high level. You mentioned several times about the macro impact. And could you elaborate a little bit on this front and how the geopolitical context as the inflation impact your business specifically? Thank you.

Thank you, Yulin. Thanks for the question. For the first question quickly progress of newly-launched products. We are making good progress actually on our new product. We are working on localization and we will introduce the beta version of our first hard-core mobile game. As for our social metaverse product, WAHA. We recently launched a new iteration with a new 3D social scene with more interactive features. And you can find some of the screenshots in our earnings activity. We also launched a new iteration of YallaChat. And as I mentioned earlier, its united login system will be an important development to fulfill MENA users' needs regarding our IM products, we will continue to work on adding more localization and user-friendly features to YallaChat. Regarding our casual game apps, they're all focusing on building their user base as well as online communities as they are in that current phase. Our team continues to receive user feedback and work on iterations to refine this product. We will let you know any update next quarter. And for the second question about the macro economy with the situation, the geopolitical situation, as the player in the global economy, the Middle East is also impacted by the global macro-economic environment. However, so far, we haven't seen any significant negative effect. At least in MENA, we -- there have been no major geopolitical conflicts in recent times. COVID-19's impact are beginning to fade, and rising oil prices are not bad news for us. So on the whole, the macro environment is positive for the MENA region. But if we look at the rest of the world, there is a tension. And as we mentioned earlier, stock valuations are also changing drastically. And capital raising may not be as easy as it were in the past 2, 3 years. So for many companies, that may be a problem. Cash becomes more and more important. For Yalla, we have a better position as our cash flow is strong and healthy, but still, we need to be more cautious amid the challenging environment when making decisions regarding our spending and investment. We will keep everyone informed if there are any new development. And as for the competition, no doubt, it is intensifying across the world. Many companies need to go beyond their borders and explore overseas markets, so they’ve come to the Middle East. This trend is not new. It has existed for many years. And it is also exactly why we are expanding our product metrics and promoting localization. At the moment, we don't see anything that may impact us in this regard. We will leverage our localization capabilities and our experience in the Middle East to make full use of our advantages.

Our next question comes from Thomas Shen with Nomura. Please go ahead.

Hi, thanks management for taking my question. I have two questions. The first one is could management share the revenue growth outlook for the company's games business in the second quarter and the second half of this year? And also, what is the company's marketing and promotional strategy going forward?

Thank you, Thomas. I'll take this -- the first question. So as you said about our revenues coming from the game business, our revenue generated from the game services are contributed by the different products. In the third quarter of 2020, when we reported our revenue, which generated from the game services for the first time, our revenues were $3.5 million. And after two years, our revenues generated from the game services increased more than 5 times to $20 million in Q1 this year. So all of our gaming revenues were generated by casual games, and we think that we will continue to grow steadily in the near future. Moreover, we will soon have revenue from our hardcore game distribution business, too. Different gaming products have different phases of development. So if you are referring to the revenue outlook for our hardcore game distribution business, it's probably a little too early to talk about the monetization for Q2. This is our first time exploring the hardcore game distribution business. Also, the pandemic resurgence in China will bring some changes to our timeline as it affects our R&D team. So, to be honest, there are uncertainties, but we may see some revenue in Q4. Thank you. And the next question will be answered by Jeff.

Yes. Thank you, Karen. And Thomas, this is Jeff. I will take the second question. Our sales and marketing strategy is really very dynamic. It depends on the type of product and the phase of that product development. For flagship applications, we continue to adjust our strategy based on our experience over the past five years to improve user acquisition efficiency. For some of our new products, we may try some new approaches. It really depends on the characteristics of different products and their user bases. Thank you, Thomas. Hope we answered your question.

Thank you.

As there are no further questions, now I'd like to turn the call back over to management for closing remarks.

Thank you once again for joining us today. We look forward to speaking with you in the next quarter. If you have further questions, please feel free to contact Yalla's Investor Relations through the contact information provided on our website or The Piacente Group Investor Relations.

This concludes the conference call. You may now disconnect your lines. Thank you.