IR blog: Gaming in focus

This is the inaugural IR blog publication by Mail.Ru Group. With these releases we will aim to keep you informed of all the latest developments around our verticals, as well as our domestic Internet market as a whole. We hope you will find these blogs useful and welcome feedback on how we can further improve our disclosure.

Our first blog post is focused on gaming, following the recent issuance of App Annie’s annual report on mobile trends, where it also provided its 2019 forecasts. Below are a few highlights specifically around gaming:

  • Games continued to rank as the top category in revenue and downloads in both iOS and Google play stores.
  • Globally, on a category level, games accounted for 74% of consumer spend in 2018 and are expected to account for 75% in 2019.
  • The top 5 parent companies for global consumer spend in 2018 were Tencent, NetEase, Activision Blizzard, BANDAI NAMCO and Netmarble, respectively - all gaming companies.
  • Mobile games were the fastest growing sector of the overall gaming market, beating consoles, PC/Mac, and handheld gaming and are expected to reach 60% market share of consumer spend in 2019, surpassing growth of other gaming segments by >10x since 2013. Mobile games are expected to continue to be the fastest growing form of gaming in 2019.
  • China, US and Japan accounted for 75% of mobile gaming revenues in 2018. Importantly, between 2016 and 2018, data shows that user spending has been growing remarkably fast in both mature and emerging markets.
  • In 2018, mobile gaming experience became more mature, with a demonstration that mobile devices are powerful enough to be able to see launches of games previously suitable for console or PC only as demonstrated by popularity of PUBG Mobile, Fortnite, Rules of Survival and Free Fire. This can explain the growing trend where mobile games are becoming more attractive to even the hardcore players.
  • Pokemon GO has popularized AR-games and remains among most popular games globally, due in part to feature innovations like social gaming, peer-vs-peer trainer battling and events.
  • There is a lot of focus globally this year on the expected launch of Harry Potter: Wizards Unite from Niantic and whether it can repeat the success of Pokemon GO, which reached $100mn in revenues just 2 weeks post launch and has been the fastest game in history to reach $1bn in revenues.

Vladimir Nikolsky, Chief Operating Officer of Mail.Ru Group:

"There are more than 2.3bn gamers globally - with $135bn spent on games in 2018 - meaning that every third person on the planet is a gamer. As this market has been growing at ~14% CAGR in 2015-18E, and with major global Internet companies now willing to invest in gaming, we remain very excited about the prospects of our gaming business, and the industry as a whole. Over the last 2 years, Mail.Ru Group's gaming division has more than doubled in revenues, with FY 2018 revenue growth of 34% Y-o-Y to RUR 23,290mn. Growth of 2018, was driven by a broad base with ongoing success in both established and recently released titles.

Mobile was a $63.2bn market in 2018 (47% of industry revenues), growing at 14% vs 11% growth for the industry, with ~50% of Mail.Ru Group’s gaming revenues coming from mobile.

We continue to invest in our gaming portfolio, which is more diverse than it has ever  been, with  over 50  titles currently in the pipeline, being developed internally or licensed from 3rd parties.

We are very pleased with our titles like Hustle Castle, which has >30mn downloads, only a year since its launch, and is now our most successful in-house developed gaming project. On Google Play, the game has around 950,000 reviews, with an average score of 4.7/5, whilst in the AppStore it has a rating of 4.6/5. There are further updates to the game expected in 2019 and hope that  Hustle  Castle  will  be  a  larger revenue generator through its lifespan, than War Robots.

War Robots has 120mn downloads after being released 5 years ago. It had another successful period in 2018, where it continues to see solid growth and remains our second largest game. In 2019, there will be a series of further updates including new robots, modules and an updated monetization system to be released in summer 2019.

The Warface franchise continues to perform well and remains our number three revenue generating  game.    In late Q3, the franchise was expanded to consoles, with versions launched on both PS4 and Xbox  One.  Since this expansion, Warface accrued over 6.5mn registrations, with 95% of  these  registrations  coming from international players. In January 2019, Warface became #3 free-to-play game on PS4 in the United States, in terms of downloads. We expect to see further growth of the Warface game franchise through the release of the Warface mobile game in 2019, as well as effective continued support  for the  console versions of the game. As such, we continue to see Warface as a key ongoing franchise.

We have a full and exciting pipeline of releases for 2019. We have already launched Space Justice, a mobile game based on the proved Hawk game mechanic and the monetization model from ITT Studio, and are releasing, among others, two licensed MMORPG titles; the Conqueror’s Blade and the Lost Ark. We believe that our games portfolio, both existing and new releases, are well positioned.

We fully recognize that players are becoming more demanding in terms of quality, with even casual games becoming more “deep”. Furthermore, consumers seek smooth cross-device servicing,  which  we  also  account for in our strategic planning. We also see trends like subscriptions, as well as a rising appetite for social components through clans  or  neighborhoods,  leagues  within  games,  personal  rankings,  concerts and other events. We also believe that mixed genres will become a rising trend  too. Currently,  Mail.Ru Group is primarily focused on shooter and RPG genres but we are of course always focused on broadening  our user offering.

Also, recent developments like the planned near-term ‘Stadia’, a streaming platform launched by Google, could be transformational for the market if it is able to take away gaming budget from consoles. According    to NewZoo, Console games accounted for 28% of gaming spend in 2018. Launches like Stadia could make high-quality games affordable to a much broader audience,  which in turn  could further unlock  the potential of the Russian gaming market, among others. We see plenty of opportunities domestically, with Russia presently accounting for ~$1.7bn gaming turnover (<1.5% of global turnover). With ~65mn players, NewZoo ranks the Russian market at #11 in the world, which suggests that there is vast potential for growth.

At the same time, we continue to see gaming as a global opportunity, with the share of our international gaming revenues rising to 63% as of Q4 2018 versus 50% in 2017. USA, Germany and Japan continue to be our largest non-Russian markets. We recognize that there are specifics around local mentality, with gaming tastes varying by region and therefore, we always seek to localize our games. Chinese players have recently been introduced to Western titles, which could present a major opportunity for us, as the Asian lifetime of games tends to be longer, across genres.

Overall, ensuring that gaming experiences are as diverse and engaging as ever is imperative. As we  mentioned during the last set of results, the focus for 2019 for us, as it was in 2018, will be on the continued expansion of our international user base and continuing to build a sustainable gaming business model.  As ever, the margin of our gaming business is a mix between different platforms and timing of marketing spend for new titles. FY 2018 games margins were 17%. The focus for 2019, as it was in 2018, will be on continued expansion of our international user  base, allowing the  building  of a  sustainable  model with a target of low to mid 20’s sustainable EBITDA margin through the cycle and EBITDA doubling over the next 4 years, with more than twice as many users.

Whilst E-sports is still a very new  segment, it already had 454mn viewers in the last  year alone. According  to    NewZoo, Russia was    3rd  largest    global e-sports audience    in    2018,     with     22.3mn     viewers  and Russian language was the 2nd most popular on Twitch (~15% of all streams  were  in Russian versus 63.3% in English). Among the latest exciting examples, FIFA showed in its 2015-18 report, 114% revenue growth from e-sports, up to $600mn, with 206% growth in 2018 alone to $185mn. We can benefit from such trends through our ESForce business, which offers access to e-sports teams (Virtus Pro), tournaments, broadcasting, analytics (through Ruhub), video production, and e-sports tournament venue (Yota) where tournaments are hosted through our Epicenter business. Having closed the transaction to buy 100% of ESforce in late March 2018, we have seen the business make considerable progress. In Q4 2018, we hosted a number of successful tournaments including the Dota 2 Winter Clash in December. EPICENTER XL held by ESforce was the sixth most viewed esports tournament and the second most viewed Dota 2 tournament worldwide in 2018.

Our main asset is our people and the technology-driven culture which they create, with future success of Mail.Ru Group dependent on our ability to attract, retain and motivate the best talent. Currently, our gaming division consists of 9 own gaming studios and is run from 5 regional offices, with over 1,500 members of staff. In order to educate the market about the gaming industry and seek cooperation with potential new engineers and gaming studios, we and our partners organize major events like the recent, The Big Deal Conference , which marked the biggest ever gaming forum hosted in Russia with Epic Games, Blizzard, Tencent, Ubisoft, Riot Games, Google, iDearmSky, App Annie etc among presenters and more than 900 gaming industry professionals among attendees. Our idea is to make such events into  a  leading  local  platform for an exchange of views on best practices in gaming development and publishing, with access to real-life case studies on product development, design,  optimization, analytics,  and investment, discussion  and debate around gaming market trends and outlook, as well as on the  specifics  of  various  gaming  markets, with an ultimate goal of broader market understanding and cooperation.

In 2017, we have also established the MRGV gaming investment fund with up to $100mn  budgetary allocation for targeted acquisitions and other investments in the development of our games vertical in the coming years.

Given that Russia produces the most engineering talent globally, we continue to see many exciting opportunities and talent to support our gaming business across all its verticals and as such approach the gaming segment future with a high degree of optimism and confidence."

For further information please contact:

Investors:

Tatiana Volochkovich
Phone: +7 495 725 6357 extension: 3434
Mobile: +7 905 594 6604
E-mail: t.volochkovich@corp.mail.ru

Press:

Olga Zyryaeva
Phone: +7 909 974 5996
E-mail: o.zyryaeva@corp.mail.ru