Mail.Ru Group Limited Unaudited IFRS Results for H1 2016

18 August 2016. Mail.Ru Group Limited (LSE: MAIL, hereinafter referred as "the Company" or "the Group"), one of the largest Internet companies in the Russian-speaking Internet market, today releases unaudited interim condensed consolidated IFRS financial statements reviewed by an independent auditor and provides the following unaudited segment financial information and key operating highlights for the six months ended 30 June 2016.

H1 2016 Performance Highlights

  • H1 2016 Group aggregate segment revenue grew 11.6% Y-o-Y to RUR 18,834 million. Q2 2016 Group aggregate segment revenue grew 11.9% Y-o-Y
  • H1 2016 Group aggregate segment EBITDA grew 3.2% Y-o-Y to RUR 8,691 million
  • H1 2016 Group aggregate net profit grew 14.0% Y-o-Y to RUR 5,737 million
  • Net cash position as of 30 June 2016 was RUR 7,573 million
  • Mail.Ru Group is the leading online property in Russia with 77.5 million monthly active users (comScore MMX Multi-Platform, Russia, age 6+, June 2016)

Key Recent Developments

Email, Portal and IM

  • myMail and Mail.Ru email apps performance optimization for bad internet connection and older/slower devices
  • ICQ for iOS and Android introduced Stories, a feed of photos and videos taken within the past 24 hours, and a handy photo/video editor
  • ICQ launched end-to-end encryption and data saving mode for voice and video calls in iOS, Android, Window and Mac OS apps

Social Networks

  • VK rollout of smart newsfeed across all devices
  • VK released sticker suggestions and in-message Graffiti painting in mobile and GIF autoplay and new photo-editor with options to place stickers, emojis and text over images and paint with a virtual brush
  • VK launched vk.me, a short URL service for personal and community messages, and callback API, a tool to track followers’ activity in the communities
  • Release of OK Live, a mobile app for live video streaming to OK (on iOS and Android)
  • Release of OK Messages, a fast, free and simple messaging app (on iOS and Android)

Online Games

  • Large Warface update: special operation Anubis, new maps and weapons, new sets of achievements
  • Launch of in-house mobile strategy game Jungle Clash with dynamic real-time PvP battles and MOBA elements
  • Armored Warfare was licensed out for operation in China
  • Acquisition of a license to operate MMORPG Revelation Online in CIS, the EU and North America

Search, E-commerce and Other Services

  • Our mobile location-based marketplace Youla has reached over 2.5mln monthly active users
  • ME partnered with Booking.com allowing users to view hotel details and book rooms and introduced bicycle navigation and OSM map editor ratings
  • Launch of Artisto and Vinci mobile apps that utilize neural networks and artificial intelligence to process short videos and photos respectively in the style of famous artist and artistic patterns
  • Multiple myTarget updates: carousel ads in OK and VK mobile newsfeeds; full screen video ads (reward/non-reward) in mobile ad network; server-to-server API for mobile ad network publishers; affiliate network for CPI-based sales
  • Mail.Ru Group’s Big Data business unit, in cooperation with Equifax Credit Services, launched a credit risk assessment product for the Russian banking system
  • Tarantool, our database management solution, has signed a number of large B2B clients from various industries (VimpelCom, AVITO, QIWI, Badoo)
  • Mail.Ru Group and United Music Agency partner with Universal Music, Sony Music and Warner Music to give access to media content for social networks
  • VK held VK Cup 2016, a contest for young programmers, and VK FEST 2016, a two-day open-air festival in St.Petersburg (with over 70k visitors, 40 bands and 70 speakers/bloggers performing at 15 stages)
  • OK launched a 2-year education program Technopolis in collaboration with Peter the Great St. Petersburg Polytechnic University

Commenting on the results of the Company, Dmitry Grishin, Chairman and CEO (Russia) of Mail.Ru Group, said:

In H1 2016, the Company achieved revenue growth of 11.6% Y-o-Y to RUR 18,834 million with Q2 2016 revenue growth of 11.9% Y-o-Y. H1 EBITDA margins were 46.1% with H1 EBITDA of RUR 8,691 million mostly due to increased marketing spending. As a result of lower interest payments on the loan connected to the acquisition of VK, net profit increased 14.0% to RUR 5,737 million.

We continue to be pleased with the growth in advertising revenues which in H1 2016 grew 28.6% Y-o-Y to RUR 8,098 million. We saw a continuation of the trends of Q1 2016 with continued strong demand, and revenue growth, especially on mobile and generally in native ads.

As we have previously commented the growing mobile audience and inventory as well as implementation of ad technologies are driving the shift of advertising budgets into mobile in which we are able to have good market share.

While the comparables clearly become tougher for advertising revenues in H2 2016 the favorable structural trends are expected to continue and we continue to see a number of opportunities. With the addition of new ad formats particularly on our social networks we expect more big brands to continue relocating their ad budgets from other media into digital. As such, for FY 2016 we continue to expect to see good growth in advertising revenues.

VK engagement and audience continued to see good growth. In H1 we launched the new smart (algorithmic) newsfeed which has been well received by users and led to a significant increase in views and engagement. 4 out of 5 users who tried the new smart newsfeed keep using it demonstrating positive user feedback and the adoption rate is already about 60% of the total audience. VK desktop redesign, which is now available to all users, has also been well received. We continue to focus on native, and especially mobile advertising, and expect the ad load and pricing to continue to increase from the current levels which are still comparatively low. In H1 2016 VK’s total revenues grew 41.0% to RUR 3,810 million. We continue to see significant further opportunities for VK with both an expanding user base and an increasing number of features.

In H1 2016 our MMO games revenue grew 9.1% Y-o-Y to RUR 4,507 million. Warface remains our largest revenue generating game and had a well-received update in May. Armored Warfare and Skyforge are now among our highest revenue generating games and in Q2 Armored Warfare was licensed out for operation in China. Armored Warfare now has 6.6m registered users. However user retention, especially on the international side has been lower than expected. Additionally the continued FX and macro pressures continue to squeeze the Russian consumer and that has started to impact our games revenues. This is expected to continue in H2. The pipeline is full and most notably we have the launch of Revelation in Q4 2016 in Russia and Q1 2017 internationally. Additionally we continue to develop further titles, and releases on different platforms, based around our key franchises. However we expect that the consumer spending will remain under pressure in H2 and hence this will affect games revenue growth.

In IVAS, we continue to focus on fine tuning the IVAS mechanics especially on mobile, and hence increasing paying user penetration. However we have not yet achieved suitable mobile monetisation. This, combined with the effect of the macro and FX headwinds on the consumer continues to weigh on IVAS revenues. As a result in H1 IVAS revenues declined 4.0%. We do not anticipate any significant change in the IVAS revenues in H2.

Our mobile location-based marketplace Youla has reached over 2.5mln monthly active users. We will continue its expansion in H2 with the addition of new features.

At the end of July we launched two new mobile-only products: Vinci and Artisto. Vinci uses neural networks and artificial intelligence to transform photos into paintings in the style of famous artists or any other artistic pattern. Artisto is the world’s first app that utilizes similar technology, but for processing short videos. We will monitor the progress of these standalone apps and continue to develop internally the underlying technologies that might also be utilized by various communication products of the Company.

The strong cash generating capacity of our business remains unchanged. As we previously commented at the end of Q1 2016 we moved into a net cash position of RUR 573 million. Since then we have received the second tranche of the payment connected to the sale of HeadHunter and fully repaid the balance of the Gazprombank loan. Q2 cash conversion was as expected. As a result net cash at the end of H1 was RUR 7,573 million.

H1 2016 EBITDA margins were 46.1%. As stated these were adversely affected by marketing costs being weighted to H1. In H2 we do not anticipate a repeat of this factor.

Overall H1 has seen a solid performance. We are encouraged by the growth in advertising and believe we are well positioned to benefit from the ongoing structural trends in that area. А number of the new projects are also showing very significant promise. However, as commented, the ongoing squeeze on the Russian consumer is expected to continue to affect our IVAS and games revenues in H2. Notwithstanding this, and based on current visibility and current market conditions, we retain our FY 2016 ex HeadHunter like-for-like revenue guidance of 8-14% but without an improvement in consumer spending we expect to be in the lower half of this range. As a function of timing of product releases we also expect that H2 will be Q4 weighted. While H1 margins were affected by H1 weighting on marketing we continue to maintain effective cost management and despite the slightly lower revenue growth assumptions we anticipate full year EBITDA margins at between 47-48%.

Conference Call

The Mail.Ru Group management team will host an analyst and investor conference call at 9.00 UK time (11.00 Moscow time), on Thursday 18th August 2016, to discuss details of the Company’s performance and certain forward-looking information. The conference call will include a Question and Answer session.

To participate in this conference call, please use the following access details:

Confirmation Code: 51569227

Participant Toll Free Telephone Numbers:
From Russia 81080024342044
From the UK 08000731340
From the US 18664341089 

For Further Information Please Contact:

Investors
Matthew Hammond
E-mail: hammond@corp.mail.ru 

Press
Madina Tayupova
E-mail: m.tayupova@corp.mail.ru

Cautionary Statement regarding Forward Looking Statements

This press release contains statements of expectation and other forward-looking statements regarding future events or the future financial performance of the Company. You can identify forward looking statements by terms such as "expect", "believe", "anticipate", "estimate", "forecast", "intend", "will", "could", "may" or "might", the negative of such terms or other similar expressions including "outlook" or "guidance". The forward-looking statements in this release are based upon various assumptions that are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and may be beyond the Company's control. Actual results could differ materially from those discussed in the forward looking statements herein. Many factors could cause actual results to differ materially from those discussed in the forward looking statements included herein, including competition in the marketplace, changes in consumer preferences, the degree of Internet penetration and online advertising in Russia, concerns about data security, claims of intellectual property infringement, adverse media speculation, changes in political, social, legal or economic conditions in Russia, exchange rate fluctuations, and the Company's success in identifying and responding to these and other risks involved in its business, including those referenced under "Risk Factors" in the Company's public filings. The forward-looking statements contained herein speak only as of the date they were made, and the Company does not intend to amend or update these statements except to the extent required by law to reflect events and circumstances occurring after the date hereof. 

About Mail.Ru Group

Mail.Ru Group (LSE:MAIL, listed since November 5, 2010) is a leading company in the Russian-speaking Internet markets (Russia is Europe's largest Internet market measured by the number of users, comScore). Mail.Ru Group's sites reach approximately 93% of Russian Internet users on a monthly basis (comScore, June 2016).

In line with the ‘communitainment’ (communication plus entertainment) strategy, the Company is building an integrated communications and entertainment platform. The Company owns Russia’s leading email service and one of Russia’s largest internet portal, Mail.Ru (TNS, all Russia, age 12-64, June 2016). The Company operates the three largest Russian language social networks, Vkontakte (VK), Odnoklassniki (OK) and Moi Mir (My World), and Russia’s largest online games business (including such gaming titles as Warface, Armored Warfare, Skyforge and Perfect World). The Company also includes a leading OpenStreetMap-based offline mobile maps and navigation service MAPS.ME, two instant messaging (IM) services, Mail.Ru Agent and ICQ, which are popular in Russia and Commonwealth of Independent States (CIS), and other products.

The Company holds minority equity stakes in Qiwi (1.31%) and a number of small venture capital investments in various Internet companies in Russia, Ukraine and Israel.

Group Aggregate Segment Financial Information*

 

RUR millions

 

H1 2015

H1 2016

YoY, %

Group aggregate segment revenue (1)

     

Online advertising

6,297

8,098

28.6%

MMO games

4,131

4,507

9.1%

Community IVAS

6,366

6,110

-4.0%

Other revenue**

88

119

35.2%

Total Group aggregate segment revenue

16,882

18,834

11.6%

Group aggregate operating expenses

     

Personnel expenses

3,290

3,998

21.5%

Office rent and maintenance

902

987

9.4%

Agent/partner fees

2,362

2,709

14.7%

Marketing expenses

284

868

205.6%

Server hosting expenses

1,051

984

-6.4%

Professional services

165

215

30.3%

Other operating (income)/expenses, excl. D&A

407

382

-6.1%

Total Group aggregate operating expenses

8,461

10,143

19.9%

Group aggregate segment EBITDA (2)

8,421

8,691

3.2%

margin, %

49.9%

46.1%

 

Depreciation, amortisation and impairment (3)

1,155

1,336

15.7%

Other non-operating income (expense), net***

-906

-145

-84.0%

Profit before tax (4)

6,360

7,210

13.4%

Income tax expense (5)

1,326

1,473

11.1%

Group aggregate net profit (6)

5,034

5,737

14.0%

margin, %

29.8%

30.5%

 

Note: Group aggregate segment financial information for the six months ended June 30, 2015 and 2016 was retrospectively adjusted to account for pro-forma deconsolidation of HeadHunter from January 1, 2015

(*) The numbers in this table and further in the document may not exactly foot or cross-foot due to rounding
(**) Including Other IVAS revenues
(***) Including interest expenses of RUR 1,243 and 718 million in H1 2015 and H1 2016 respectively

  • Group aggregate segment revenue is calculated by aggregating the segment revenue of the Company's operating segments and eliminating intra-segment and inter-segment revenues. This measure differs in significant respects from IFRS consolidated net revenue. See "Presentation of Aggregate Segment Financial Information" below.
  • Group aggregate segment EBITDA is calculated by subtracting Group aggregate segment operating expenses from Group aggregate segment revenue. Group aggregate segment operating expenses are calculated by aggregating the segment operating expenses (excluding the depreciation and amortisation) of the Company's operating segments including allocated Company’s corporate expenses, and eliminating intra-segment and inter-segment expenses. See "Presentation of Aggregate Segment Financial Information".
  • Group aggregate depreciation, amortisation and impairment expense is calculated by aggregating the depreciation and amortisation expense of the subsidiaries consolidated as of the date hereof, excluding amortisation and impairment of fair value adjustments to intangible assets acquired in business combinations.
  • Profit before tax is calculated by deducting from Group aggregate segment EBITDA Group aggregate depreciation, amortisation and impairment expense and adding/deducting Group aggregate other non-operating incomes/expenses primarily consisting of interest income on cash deposits, interest expenses, dividends from financial and available-for-sale investments and other non-operating items.
  • Group aggregate income tax expense is calculated by aggregating the income tax expense of the subsidiaries consolidated as of the date hereof. Group aggregate income tax expense is different from income tax as would be recorded under IFRS, as (i) it excludes deferred tax on unremitted earnings of the Company's subsidiaries and (ii) it is adjusted for the tax effect of differences in profit before tax between Group aggregate segment financial information and IFRS.
  • Group aggregate net profit is the (i) Group aggregate segment EBITDA; less (ii) Group aggregate depreciation, amortisation and impairment expense; less (iii) Group aggregate other non-operating expense; plus (iv) Group aggregate other non-operating income; less (v) Group aggregate income tax expense. Group aggregate net profit differs in significant respects from IFRS consolidated net profit. See "Presentation of Aggregate Segment Financial Information".

Operating Segments

We identify our operating segments based on the types of products and services we offer. We have identified the following reportable segments on this basis:

  • Email, Portal and IM;
  • Social Networks (excluding VK);
  • Online Games;
  • VK;
  • Search, E-commerce and Other Services

The Email, Portal and IM segment includes email, instant messaging and portal (main page and media projects). It earns almost all revenues from display and context advertising.

The Social Networks (excluding VK) segment includes our two social networks (OK.RU and My World) and earns revenues from (i) user payments for virtual gifts, (ii) revenue sharing with application developers, and (iii) online advertising, including display and context advertising.

The Online Games segment includes online gaming services, including MMO, social and mobile games. It earns almost all revenues from (i) sale of virtual in-game items to users and (ii) royalties for games licensed to third-party online game operators.

The VK segment includes the Company’s social network Vkontakte (VK.com) and earns revenues from (i) commission from application developers based on the respective applications’ revenue, (ii) user payments for virtual gifts and stickers, and (iii) online advertising, including display and context advertising.

The Search, E-commerce and Other Services segment primarily consists of search engine services earning almost all revenues from context advertising, e-commerce and related display advertising. This segment also includes a variety of other services, which management considers insignificant for the purposes of performance review and resource allocation.

Each segment's EBITDA is calculated as the respective segment's revenue less operating expenses (excluding depreciation and amortisation and impairment of intangible assets), including our corporate expenses allocated to the respective segment.

Operating Segments Performance H1 2016

 

Email, Portal and IM

Social Networks
(ex VK)

Online Games

VK

Search,
E-commerce and other

Eliminations

Group

RUR millions

 

 

 

 

 

 

 

Revenue

             

External revenue

 2,136

 7,149

 4,599

 3,797

   1,153

 -

 18,834

Intersegment revenue

 2

 7

 -

 13

   193

 (215)

 -

Total revenue

 2,138

 7,156

 4,599

 3,810

   1,346

 (215)

 18,834

Total operating expenses

 1,542

 2,229

 3,755

 1,697

   1,135

 (215)

 10,143

EBITDA

 596

 4,927

 844

 2,113

   211

 -

 8,691

EBITDA margin, %

27.9%

68.9%

18.4%

55.5%

  15.7%

 

46.1%

Net profit

           

 5,737

Net profit margin, %

           

30.5%

Note: Group aggregate segment financial information for the six months ended June 30, 2016 was retrospectively adjusted to account for pro-forma deconsolidation of HeadHunter from January 1, 2016 

Operating Segments Performance H1 2015

 

Email, Portal and IM

Social Networks
(ex VK)

Online Games

VK

Search,
E-commerce and other

Eliminations

 Group

RUR millions

 

 

 

 

 

 

 

Revenue

             

External revenue

 1,973

 6,904

 4,189

 2,703

   1,113

 -

 16,882

Intersegment revenue

 1

 3

 -

 -

   165

 (169)

 -

Total revenue

 1,974

 6,907

 4,189

 2,703

   1,278

 (169)

 16,882

Total operating expenses

 1,270

 1,885

 2,839

 1,424

   1,212

 (169)

 8,461

EBITDA

 704

 5,022

 1,350

 1,279

   66

 -

 8,421

EBITDA margin, %

35.7%

72.7%

32.2%

47.3%

  5.2%

 

49.9%

Net profit

           

 5,034

Net profit margin, %

           

29.8%

Note: Group aggregate segment financial information for the six months ended June 30, 2015 was retrospectively adjusted to account for pro-forma deconsolidation of HeadHunter from January 1, 2015

Liquidity

As of 30 June 2016, the Company’s net cash balance (including term deposits) was RUR 7,573 million and the Company had no debt outstanding.

Filing of the Report

The Company's interim condensed consolidated financial statements for the six months ended 30 June 2016 prepared in accordance with IFRS and accompanied by an independent auditor's review report have been filed on the National Storage Mechanism appointed by the Financial Services Authority and can be accessed at http://corp.mail.ru/media/files/mail.rugroupifrsh12016.pdf

Presentation of Aggregate Segment Financial Information

The Group aggregate segment financial information is derived from the financial information used by management to manage the Company's business by aggregating the segment financial data of the Company's operating segments and eliminating intra-segment and inter-segment revenues and expenses. Group aggregate segment financial information differs significantly from the financial information presented on the face of the Company's consolidated financial statements in accordance with IFRS. In particular:

  • The Company's segment financial information excludes certain IFRS adjustments which are not analysed by management in assessing the core operating performance of the business. Such adjustments affect such major areas as revenue recognition, deferred tax on unremitted earnings of subsidiaries, share-based payment transactions, disposal of and impairment of investments, business combinations, fair value adjustments, amortisation and impairment thereof, net foreign exchange gains and losses, share in financial results of associates, as well as irregular non-recurring items that occur from time to time and are evaluated for adjustment as and when they occur. The tax effect of these adjustments is also excluded from segment reporting.
  • The segment financial information is presented for each period on the basis of an ownership interest as of the date hereof and consolidation of each of the Company's subsidiaries, including for periods prior to the acquisition of control of the entities in question, so long as the Company held at least one share of such entities during such periods. The financial information of subsidiaries disposed of prior to the date hereof is excluded from the segment presentation starting from the beginning of the earliest period presented.
  • Segment revenues do not reflect certain other adjustments required when presenting consolidated revenues under IFRS. For example, segment revenue excludes barter revenues and adjustments to defer online gaming and social network revenues under IFRS.

A reconciliation of Group aggregate segment revenue to IFRS consolidated revenue of the Company for the six months ended 30 June 2015 and 2016 is presented below:

RUR millions 

H1 2015

H1 2016

Group aggregate segment revenue, as presented to the CODM

16,882

18,834

Adjustments to reconcile revenue as presented to the CODM to consolidated revenue under IFRS:

   

Effect of difference in dates of acquisition and loss of control in subsidiaries

1,419

 530

Differences in timing of revenue recognition

(135)

 (491)

Barter revenue

38

  28

Dividend revenue from venture capital investments

51

  13

Consolidated revenue under IFRS

18,255

 18,914

A reconciliation of Group aggregate segment EBITDA to IFRS consolidated profit before income tax expense of the Company for the six months ended 30 June 2015 and 2016 is presented below:

RUR millions 

H1 2015

H1 2016

Group aggregate segment EBITDA, as presented to the CODM

8,421

8,691

Adjustments to reconcile EBITDA as presented to the CODM to consolidated profit before income tax expenses under IFRS:

   

Effect of difference in dates of acquisition and loss of control in subsidiaries

655

  250

Differences in timing of revenue recognition

(135)

 (491)

Net loss on venture capital investments

8

 (216)

Share-based payment transactions

(796)

 (1,015)

Dividend revenue from venture capital investments

51

   13

Non-recurring VAT charge

(250)

    -

Other

(170)

  (46)

EBITDA

7,784

 7,186

Depreciation and amortisation

(3,557)

 (3,768)

Impairment of intangible assets

(59)

    -

Share of profit of equity accounted associates

20

   42

Finance income

300

  563

Finance expenses

(1,243)

 (718)

Other non-operating income

34

   38

Net gain on financial assets and liabilities at fair value through profit or loss over the equity of subsidiaries and other agreements

111

  179

Net gain on disposal of shares in subsidiaries

 -

 8,712

Net foreign exchange losses

(411)

  (617)

Consolidated profit before income tax expense under IFRS

2,979

 11,617

A reconciliation of Group aggregate net profit to IFRS consolidated net profit of the Company for the six months ended 30 June 2015 and 2016 is presented below:

RUR millions

H1 2015

H1 2016

Group aggregate net profit, as presented to the CODM

5,034

5,737

Adjustments to reconcile net profit as presented to the CODM to consolidated net profit under IFRS:

   

Share-based payment transactions

(796)

 (1,015)

Differences in timing of revenue recognition

(135)

 (491)

Effect of difference in dates of acquisition and loss of control in subsidiaries

542

  219

Amortisation of fair value adjustments to intangible assets and impairment thereof

(2,447)

 (2,424)

Net gain/(loss) on financial instruments at fair value through profit or loss

119

   (37)

Net gain on disposal of shares in subsidiaries

 -

  8,712

Net foreign exchange losses

(411)

  (617)

Share of profit of equity accounted associates

20

   42

Non-recurring VAT charge

(250)

    -

Other

(172)

  (44)

Tax effect of the adjustments and tax on unremitted earnings

527

 1,299

Consolidated net profit under IFRS

2,031

 11,381

Selected Operating Statistics

  • Mail.Ru Group is the leading online property in Russia with 77.5 million monthly active users (comScore MMX Multi-Platform, Russia, age 6+, June 2016)
  • Mail.Ru Group is holding the lead in Russian mobile internet (TNS, Russia, cities 700k+, age 12-64, daily active users, June 2016)
  • MMO average monthly payers amounted to 570 thousand users in H1 2016 (the numbers combine paying users of individual MMO games and may include overlap)
  • Community IVAS average monthly payers amounted to 8,350 thousand users in H1 2016 (the numbers combine paying users of VK, OK.RU, My World, love.mail.ru and our own social games on third-party networks and may include overlap) 

Changes to non-executive Director

Following the resignation of Vasily Brovko, Ivan Tavrin has been re-appointed to the Board as a non-executive director, he previously served on the Board between April 2011 and June 2013.