  yalla group’s net margin improved to 271 in the first quarter as it followed a strategy of maintaining lowdebt and operating profitably   the company launched its first hardcore game the selfdeveloped ‘age of legends’ as its share of revenues from gaming climbs at a time when the global tech sector has rallied after a terrible 2022 the menabased social networking and gaming company yalla group ltd yala is on a bit of cruise control including in terms of its share price as global internet giants like facebook parent meta meta and tencent 0700 hk have pricetoearnings pe ratios in the solid doubledigit range yalla’s ratio of 862 seems quite low for a company that looked like a strong highgrowth bet at the time of its september 2020 ipo its 52week share price increase of 295 lags the sp 500 and its revenue of 735 million in the first quarter ticked up by a modest 16 above the first quarter of 2022 according to its latest quarterly results announced on may 16 yalla’s shares rose about 5 in the two days after the announcement indicating investors were cautiously optimistic about the company’s prospects as it takes steps to breathe new life into its top line revenue chairman and ceo yang tao was looking beyond the near term on the company’s earnings call taking time to invite global internet companies to join it in exploring the digital transformation of the middle east and north africa mena region that is at the heart of the company’s social networking business “by leveraging our deep local knowhow and extensive operating capability we are confident we can capitalize on global investments and achieve mutually beneficial collaborations” he said yang also pledged to continue investing in rd and product development as yalla launched its first proprietary hardcore roleplaying game “age of legends” this month and announced a simulation game “merge kingdom” which would follow soon “age of legends” is a fantasy with roots in arabic culture set against a landscape of oases snowfields and deserts according to yang both games are part of yalla’s recent strategy of moving beyond its older focus on casual games to target more serious players who are willing to spend more money on their passion unlike some of its larger peers which often branch into numerous wideranging new areas to fuel their breakneck growth yalla has kept a steady focus on fundamentals with almost zero debt and cash or cash equivalents of 4356 million up 70 from the end of 2022 it has plenty of cash to meet its commitments president saifi ismail noted that the company has assembled 100 government officials business partners industry experts and media for the official predawn meal of suhoor during the islamic fasting month of ramadan sparking “a fascinating exchange of innovative ideas among our guests” whether its cultural sensitivity or focus on fundamentals will bring outside investors trooping to yalla remains to be seen it is gradually tilting from chatting services to gaming with revenues from chat services down for the quarter to 504 million from 519 million in the same quarter of 2022 revenues from games were still on a growth track climbing to 231 million from 203 million a year earlier with most of its newest products coming up mainly on the gaming side yalla may be gambling that the future is not with facebook or meta whose core services encourage the sharing of photos and experiences rather it may be placing its bets on becoming more like tencent whose gaming accounted for 43 of revenue in 2022 compared to 21 for its social networks business tied largely to its popular wechat and qq services maybe there’s something to be said for cruise control at least for the social networking side of the business in terms of headline numbers yalla’s revenue was nearly flat in the first quarter at 735 million compared to 723 million a year earlier its net income performed a bit better rising to 199 million from 177 million in 2022 as its net margin improved to 271 from 245 a year earlier cfo karen hu attributed the improving profit and net margin to higher efficiency in managing costs as well as decreased sales and marketing expenses and better user monetization despite the company’s slowing revenue growth its paying users jumped by 437 to 135 million in the first quarter from 94 million a year earlier that translates to 41 of its monthly average users now paying for yalla’s services up from 322 a year earlier selling and marketing expenses declined 94 in the latest quarter decreasing as a share of total revenues from 173 to 154 the company’s big increase on tech and product development spending is perhaps its most important story right now as yalla positions gaming as its main new growth driver while its voicedriven chat rooms were a good tech story in 2020 the latest and greatest technologydriven effects are the lifeblood of the 26 billion online gaming industry such functions ultimately show up in the revenue column as users pay for cashgenerating services like inapp purchases and immersion effects that yalla will need to build using licensed or proprietary technology as it tries to develop such bells and whistles yalla’s spending on technology and product development as a percentage of total revenues increased from 83 in the first quarter of 2022 to 101 in its latest quarter over the last two years spending on tech and product development has more than doubled from 33 million in the first quarter of 2021 driven by an increase in the headcount of technology and product development staff to support the development of new businesses and expansion of our product portfolio according to hu the heavier spending on tech and product development would have hit yalla’s profits but the company was able to offset that with an extra lift from higher interest rates that are bad for indebted companies but good for cashrich lowdebt companies like yalla the company’s interest income totaled 31 million in the first quarter compared with just 50000 a year earlier so is yalla moving quickly enough to enter its next phase or simply being prudent in finding its way will its future look more like meta or like tencent time will tell as its latest games gain momentum and try to find an audience one thing we can say for sure is that the company is going through a transition of lower growth compared to its runaway start as a listed company in 2020 as it moves into its next phase