U.S. markets closed

Edited Transcript of MAIL.L earnings conference call or presentation 26-Feb-20 6:00pm GMT

Full Year 2019 Mail.ru Group Ltd Earnings Call

LIMASSOL Mar 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Mail.Ru Group Ltd earnings conference call or presentation Wednesday, February 26, 2020 at 6:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Andrey Rogozov

VKontakte Ltd - Executive Director

* Boris Dobrodeev

Mail.ru Group Limited - CEO

* Elina Isagulova

Mail.ru Group Limited - VP & Commercial Director

* Fedor Rubtsov

Mail.ru Group Limited - CFO of Russia

* Matthew Charles Perrins Hammond

Mail.ru Group Limited - MD & CFO

* Tatiana Volochkovich

Mail.ru Group Limited - Director of IR

================================================================================

Conference Call Participants

================================================================================

* Anna Kurbatova

Joint Stock Company Alfa-Bank, Research Division - Senior Analyst

* Cesar Adrian Tiron

BofA Merrill Lynch, Research Division - Research Analyst

* Igor Goncharov

Gazprombank (Joint Stock Company), Research Division - Senior Analyst

* Kirill Panarin

Renaissance Capital, Research Division - Equity Analyst

* Maria Sukhanova

BCS Financial Group, Research Division - Research Analyst

* Miriam Anuoluwapo Adisa

Morgan Stanley, Research Division - Equity Analyst

* Svetlana Sukhanova

Sberbank CIB Investment Research - Senior Analyst

* Vladimir Bespalov

VTB Capital, Research Division - Analyst of Industrials, Transportation, Infrastructure, Chemicals & Equities and Internet Analyst

* Vyacheslav Degtyarev

Goldman Sachs Group Inc., Research Division - Equity Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, and welcome to the Mail.ru Group's Fourth Quarter and Full Year Results Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the call over to Tatiana Volochkovich, Director of Investor Relations at Mail.ru Group. Miss Volochkovich, please, you may begin.

--------------------------------------------------------------------------------

Tatiana Volochkovich, Mail.ru Group Limited - Director of IR [2]

--------------------------------------------------------------------------------

Thank you all, and welcome to Mail.ru Group Fourth Quarter and Full Year 2019 Audited Financial Results Conference Call. I'm joined by Boris Dobrodeev, Matthew Hammond, Fedor Rubtsov, along with Andrey Rogozov, CEO of VK; Elina Isagulova, Vice President and Commercial Director of the Group; and Elena Grigoryan, Head of Games Marketing.

Before I pass the call to Matthew, who will comment on our results, I will read the safe harbor statement. Please note that this press release contains statements of expectations and other forward-looking statements regarding future events or future financial performance of the group. 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 Group's control. Many factors could cause actual results to differ materially from those discussed in the forward-looking statements included herein, including those referenced on the risk factors in the Group's public filings. We would like to direct you to read the forward-looking disclaimer at the back of our release, particularly with respect to the possible differences between management and IFRS account.

--------------------------------------------------------------------------------

Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [3]

--------------------------------------------------------------------------------

Thank you. It's Matthew Hammond. Good evening, and good morning, and thank you all for joining us. I'm going to make a number of comments, and then I'm going to hand over to some of my colleagues from the operating side, and we're going to run you through a number of parts of the business. This is going to be a slightly longer than usual statement. We are going to be giving a lot of data with this statement. I would also encourage you to -- you'll see most of that data replicated in the slide decks, which you'll find on the website.

So when I'm commenting on the year, I would say that we're very pleased with 2019. It's been another very strong year for us. While the skilled revenues and especially profitability of our business of the last quarter of the year can make forecasting visibility more challenging, we continue to deliver on both our targets and our guidance. Even though the macro backdrop was somewhat more challenging and the core advertising in games businesses were facing high base effects throughout the year, on a pro forma basis Q4 revenues grew 18.6% to RUB 25.6 billion, with full year revenue growth of 22.4% to RUB 87 billion, which is in the middle of our guidance range of RUB 86 million to RUB 88 billion.

Despite the fact that only 2 of the 5 budgeted gaming launches occurred in H2, and despite the fact that we continue to put significant resources behind Youla, content and MRG tech lab and the rollout of our international gaming platform and the completion of our key partnership transactions, we delivered on our full year EBITDA with RUB 29.8 billion, which was in line with our guidance.

I'm now going to hand over to our colleagues starting with Andrey from VK.

--------------------------------------------------------------------------------

Andrey Rogozov, VKontakte Ltd - Executive Director [4]

--------------------------------------------------------------------------------

Thank you, Matthew. I'm Andrey from VK and so -- and I want to start with giving you some details about our engagements about our high -- some product highlights. So VK remains a strong leader among communication platforms in Russia with RUB 71.6 million MAU, up by 2.2% year-on-year, including 3% growth on mobile. So engagement continued to rise throughout 2019.

And let me give you -- to give you more sense about that, let me give you several examples. So right, we rose by above 45% in public monthly stories. Also, we see 47% rise in daily live streams. A 34% rise in daily media uploads and 15% in daily rise -- in daily messages delivered and a 27% rise in the monthly number of audio and video calls. Rising engagement stimulates time spent, which was up 12.5% in December to 36 minutes per day, including 16% growth in mobile. VK's the most active user category -- remains the -- from 12 to 24 years old, who spends on average 68 minutes a day on the network in December.

So when it comes to slide, VK product highlights. I want to highlight a few of them, which are, I think, the most important. So VK Mini Apps platform continues to expand with more than 13,000 in access apps. The platform has seen 14x growth in MAU year-on-year to about 23 million in December and through the scale beyond VK in 2020. QR code usage continues to rise with more than 10.1 million QR codes scanned in fourth quarter versus 160,000 in Q1.

VK has also been rolling out multiple conveniency tools for interacting with audience, which led us to 26% increase in the number of access communities, the premium in December. Also, we launched a new version of VK mobile app in -- for -- to -- for all our users in the first quarter this year. Also grew existing subscriber base, including throughout VK has now surpassed 3.1 million. Also, I want to mention that VK has been rolling out a number of major updates of the storage platform, which is now the most engaging and fast-growing content format. This led us to 40% in daily storage used year-on-year.

And let me -- this is -- that's all for VK, and let me pass on to Elina.

--------------------------------------------------------------------------------

Elina Isagulova, Mail.ru Group Limited - VP & Commercial Director [5]

--------------------------------------------------------------------------------

Thank you. VK ad effectiveness continues to increase in 2019, with CTR growing 35% for CPC ads. VK added new statistics, improved optimization algorithms, introduced ad auction prediction, launched retargeting using QR codes and also updated the ad format.

Advertisers' average ticket grew by 12% and the number of advertisers by 17%. VK launched further automation of ad pricing, with advertisers now able to simply set a daily ad budget agreement with the system determining the rate that will allow the ads to achieve maximum reach. As a result, the average CPC decreased by 60%. The launch of the new HTML5-based interactive ad formats and the development of VK Mini Apps and QR codes have provided opportunities for an even deeper connection between off-line and online, increasing the sales of special projects for brands by 40%. All these efforts resulted in VK delivering 27.6% revenue growth year-on-year in Q4 with acceleration from 25% in Q3.

Having nearly doubled revenue during the previous 3 years, including the 7-year growth in Q4 2018, MMO games revenue continued to expand, rising by 9.5% for the quarter. And [UGC], which is the main currency for the division in the current stage grows to at 40. As much as we grew for this year, our gaming business continues to outperform global games markets.

The games segment margin was 17.1% in 2019, versus 12.1% in 2018, in line with our commentary at the beginning of this year that 2019 will be a heavy investment year for gaming. This is an improved with function of product shape. As of such, we expect to be half 2 weighted in terms of 2020 growth. In the meantime, we continue our mobile-focused international expansion. Share of mobile revenues stood at 61 in Q4 with 68 international rate of share in the whole year.

We continue to mitigate the [still] driven nature of our gaming business to portfolio diversification in terms of genres and types, while aiming to maximize return on investment by making major titles for multi platforms and with continuous focus on development in our own IP. We have prudent approach to our margin with the most active market in [1] and reduced efforts during the peak Q4 season, which is beatable in our monthly execution as well as the stability trend into year-end.

On new initiatives. We see multiple areas of excitement and opportunity here, including Youla, B2B, online education, Marusia, Pulse, Combo and many others, on Youla more specifically. Youla delivered RUB 708 million in revenue in the fourth quarter, up 1.7x year-on-year and exceeded its RUB 2 billion revenue target for 2019, finishing at RUB 2.1 billion, while meeting its RUB 2 billion target growth. Youla's strategic goal is to remain a mobile-focused technological leader among domestic classifieds with deep attention to user security and differentiation through extensive social and e-commerce functionality accessible through the group.

Recent launches of stories, video and online call marks further step from Youla towards social commerce, which we aim to continue. Youla is also one of the good examples of active cross-selling within the group with video calls launched within OK technology and integration of jobs vertical into VK among most recent example.

On B2B technology business, our B2B technology business have surpassed RUB 1 billion in revenues in 2019, showing 140% year-on-year growth, and we expect close to doubling in 2020. Online education. In December, we exercised an option to gain control in Skillbox, educational platform. We are very enthusiastic about this segment prospects. Marusia powered smart speaker launched presales. Marusia now has more than 60 skills and will be more deeply integrated with the group services throughout 2020. Pulse personalized content recommendation platform launched last January, reached 45 million MAU and 3.5 million DAU in the fourth quarter, with an average time spent of 10 minutes per day, an encouraging early monetization result. In 2020, we will focus on further diversification of quantum offering of Pulse in order to further boost engagement and monetization.

Combo loyalty program is set to become the enabler of our ecosystem. Combo users demonstrate increased usage and penetration into [MIG] services as visible among our early adopters.

They also provide a boost to G&D and frequency of integrated services. Our loyalty program will be further enhanced in 2020.

--------------------------------------------------------------------------------

Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [6]

--------------------------------------------------------------------------------

Thank you very much. I'm going to make a few comments about our JVs because I know there's a lot of interest in the operating statistics of those. Obviously, none of the JVs are included in our management accounts but we do want to give as much visibility as we can because we know there's real interest. First of all, AliExpress Russia.

AER remains the leader in terms of downloads and MAU, with the new recent peak of 25 million. Logistics continued to improve with a 3x increase in pick-up locations to over 13,000 today and the target is to reduce average delivery time to 10 days. AER is not just a cross-border platform today either as 15% of GMV now comes from local sellers, a number of which increased very significantly to above 10,000 in the past year. The financial year for AER ends in April. So we're not in a position to discuss its financials at this stage, but we'll give further updates in the future.

Secondly, Delivery Club. The revenue was up 128% year-over-year to RUB 1.47 billion in Q4, with RUB 4.46 billion in revenues in full year 2019, up 131% and ahead of the target of doubling revenues for the full year. A new record of 3.5 million in restaurant orders from its now 13,700 restaurants was reached in January.

Q1 is thus far shaping up better than Q4, with our ambition to reach around 4 million orders this spring, and this is excluding e-grocery orders, where initial results are also very encouraging. Delivery Club is targeting to double its revenues in 2020. Citymobil. Citymobil exceeded its GMV target of RUB 3 billion, finishing December at RUB 3.6 billion. With more than 13 million in monthly rides, up 3.5x year-over-year, it is now present in 17 cities, with 3 new launches so far this year. Citymobil is seeing around 540,000 in daily rides in recent weeks and is aiming to grow rides by at least 3.5x in 2020. It is a top 3 player across all cities of presence already and aims to gain further share in 2020.

Modern Pick. We use our right to reverse the eSports partnership transaction around ESforce due to noncompletion of the key asset consolidation condition by the majority shareholder. ESforce remains an asset held for sale in our accounts, and we continue to look for alternative options.

With that, I'm going to pass on to Boris who's going to comment on strategy.

--------------------------------------------------------------------------------

Boris Dobrodeev, Mail.ru Group Limited - CEO [7]

--------------------------------------------------------------------------------

Thank you, Matthew, and good evening, everyone. 2019 has been a pivotal year for us in our strategic goal of transitioning into an ecosystem. We have now formed a well-diversified product portfolio, the keywords strong and complementary JVs. Our new partners include Alibaba and Sberbank, both of which are also now our shareholders along with Naspers and Tencent.

Our next development phase is focused on formation of our ecosystem by cross-selling and deeper integration of group's assets, which we have already started to do through the launch of Combo loyalty program and unified group ID. We are transforming VK more and more into the heart of our ecosystem. The VK account will be the foundation of our group ID. VK Pay is being scaled across the group. VK Mini Apps will turn into the unified group platform for developers and VK Super app developer kit will be the technology uniting all these initiatives alongside with Combo loyalty offer and the Marusia voice technology.

As a group, we aim to continue to look for ways to create value and grow our market share. Our current 3-year vision plan show potential for doubling the sales of our business, but in order to make it materialize, we will be putting resources into technologies and product lines, which will help us drive engagement, time spent and enhance our ecosystem.

Despite the market expectation of a deceleration in digital advertising growth, we have a strong ambition to deliver above-market results and continue to gain market share. This will be done through broader presence across performance advertising, growth of our exposure to SMEs broadening of our offer in areas like video as well as omni-channel initiatives.

Overall, our improving AdTech and growing ROIs for our clients should allow us to continue to benefit from ongoing shift of budgets online and to social within digital. Games will continue to increase their global reach and mobile focus. We will maintain our extreme dedication to reduction of the hit-driven nature of the games business through a long-term planning and management of games pipeline, studios, talent, analytics and marketing budgets in a way that quarterly volatility, which is typical for this business will not prevent us from reaching our longer-term KPIs set back in 2018.

Among new initiatives, so we want to continue to invest in Youla as we believe in its major potential in both audience and monetization with significant competitive advantages coming, not just from the quality of its team and tech stack but also synergies with the group. They allow for social and other integrations, which we'll increasingly explore. We will also invest into other new initiatives, including Marusia, which is embedded into our Capsule smart speaker, where pre-sales have started.

Products like Pulse are a reflection of our strategy to make our services more personalized in order to better satisfy users' hunger for information and entertainment. Unified video platform for the whole group will be launched later this year, and we will be much more active in development of our video product while also creating more video entry points. We believe in the future of online education, and hence, our recent consolidation of Skillbox. We also have an ambition to be not just the B2C, but a B2B company with ongoing related investments within new initiatives as well.

Overall, we want to continue to enhance our AdTech and offer more use cases, be active among AI, Big Data and various types of content while connecting to our users through multiple devices, loyalty and through unified ID. There is a large number of synergies within the group, which we will actively exploit. The goal of -- the goal is for our services to be personalized with smooth and easy movement for the user between them, which should result in rising paying user share and ARPU.

We believe that such a strategic approach will significantly enhance our market position and allow us to exceed current market expectations for 2022 in both revenues and EBITDA. We remain committed to public markets during this new development phase. The Board of Directors is actively considering a secondary listing in the Moscow Stock Exchange with the final announcement to come in due course.

Now we will turn it back to Matthew to comment more specifically on our guidance.

--------------------------------------------------------------------------------

Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [8]

--------------------------------------------------------------------------------

Thank you, Boris. Our strategy clearly frames our guidance and we look into 2020 with confidence. However, in order to be as transparent as possible, let me give you some detail on guidance and the shape of the year. I'm going to make a series of points here. You'll be able to check these points with us afterwards. But let me be as transparent as we can.

First of all, we forecast full year 2020 revenue growth of 18% to 20%, which is a RUB 103 billion to RUB 105 billion. Growth will be H2-weighted with 1Q being the low point in ad growth for the year, given the significant increase in conversions achieved through recent ad tech improvements, which leads to a technical temporary decline in CPM and a slowdown in inventory utilization given higher efficiency.

We expect significant sequential acceleration in ad growth in Q2. More specifically, on VK, stories, video, music, communities, messaging and social commerce will be amongst our focused growth areas. We continue to promote UGC and PGC through VK Talent platform. We aim to further boost VK Mini Apps penetration and expand the platform throughout group products. We aim to further enhance VK's messaging service, which will be used to increase engagement of our 30-plus year old audience, boost SME rollout of social commerce development. Our goal is to grow the VK audience in Russia and CIS to over 100 million within the next 2 to 3 years while further boosting time spent and meeting of target of doubling VK revenues versus the 2018 level.

In terms of margins, we expect a slight decline in 2020 EBITDA margin for the S&C segment due to music investments. Ex music, margin in S&C would be broadly flat. For games, we are confident in our 2020 pipeline as well as continued performance of existing titles, including the core War Robots, Warface, Hustle Castle games. We expect 2020 games revenue growth similar to 2019. This is taking into account the planned temporary growth slowdown in Q1 as we prepare for more launches. In addition to the recent launch of the first mobile version of Warface as well as its expansion onto the Nintendo Switch platform.

Games margin will be broadly in line with 2019 as ever subject to the traction of the planned launches. We continue to expect games EBITDA to double versus 2018 level in 2022, with low to mid-teens margin through the cycle. Near-term focus in Youla, the largest component of new initiatives will be on deeper monetization of general, jobs and services verticals, with further expansion beyond high-frequency verticals into higher average check ones.

This will require further investment in 2020, with the target to deliver a near doubling of revenues again to between RUB 3.7 billion to RUB 4 billion in revenue for the full year, with a proportional loss similar to 2019 level or better. Profitability of overall new initiatives segment, which accounts for less than 10% of group's revenue will depend on traction of our ongoing experiments on which we target to update the market as the year progresses. We will remain dynamic in our investment plans in the new investments.

Taking the maximum potential investments into account, EBITDA for 2020 will be in the low 30s. We will maximize investment only if we see solid traction, and the case for such investments, resulting in revenue upside versus our base case. We believe that such a strategic approach will significantly enhance our market position and allow us to exceed current market expectations for midterm revenues and EBITDA. The profitability of our group will remain H2 and especially Q4 weighted, driven by games. Q1 will be the low point of the year in terms of profitability and growth with significant sequential acceleration expected in both advertising and gains in Q2.

Finally, one quick comment to preempt any questions about the potential secondary listing. We've already had questions on this. I wish to be very clear. This is a secondary listing. It is not a fundraising. There will be no new stock delivered. The aim of any secondary listing is to increase liquidity and to take advantage of indexation issues. There is no new stock, just so there's no confusion about that.

With that, I'd like to thank you for your attention and turn it over to Q&A.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And we'll take our first question today from Miriam Adisa with Morgan Stanley.

--------------------------------------------------------------------------------

Miriam Anuoluwapo Adisa, Morgan Stanley, Research Division - Equity Analyst [2]

--------------------------------------------------------------------------------

Just 3 questions from me. Firstly, on VK. Great to see the acceleration in that business. And I know you spoke about a lot of different things that is driving the acceleration. But is there anything in particular that you would call out as being sort of the biggest contributing factor to that acceleration?

And then I know on the last call, you mentioned that there would be some benefit in Q4 from the integration with AER. So just wondering if that was also a factor in the acceleration.

And then secondly, on Citymobil. So just seeing the target to triple rise this year. Just wondering if that is being mainly driven by the expansion into new cities? Or are you also targeting market share growth as well in your existing geographies?

And then finally, just on the unified video platform. So you've mentioned that you're now investing more into music content. Just wondering how your thoughts around paid video content might be changing or evolving as well.

--------------------------------------------------------------------------------

Boris Dobrodeev, Mail.ru Group Limited - CEO [3]

--------------------------------------------------------------------------------

Yes, Miriam, thank you. It's Boris Dobrodeev. I will take probably all the 3 questions. So in VK, we actually saw good tailwinds from a couple of components. So these were both -- we think that Q4 macro according to our observation was much better and friendly than the start of the year across the board for the whole company. And VK, of course, is one of the better exposed assets here. As well as a lot of product improvements and a lot of ad tech improvements, which also gave some fruit.

So we do not think that there was any material impact from AliExpress Russia product integrations, e-commerce integrations at this stage. Although we remain very bullish about this opportunity and on delivering all the commitments in this field. So in terms of your Citymobil question, we see a very good growth across the board. So firstly, the team did fantastic job in expanding in more than 10 cities in like record short time. So going forward, we see very strong growth, both in the current cities as well as in new cities. So we expect very strong growth across the board.

Talking to the third question was on -- yes, on unified video. So yes, what we wanted to do is we want to actually unify the tech platform for our video as well as parts of the products such as video player so we also want to unify recommendation system steps and [triple win] for the -- well, content creators. We think that, that would significantly increase the efficiency of the platform for the advertisers, for the bloggers and make us much more attractive. And we're also committed this year to invest into creating much more entry points for video. So if you're talking about content and our focus, so definitely, this year is a year of video for us. So we will be also making a lot of other experiments in this field, exploring new services in this field.

So talking about the models. We really believe much more in an ad model for video, which fits us much better. We think that video, especially mid-term video and short video probably is the king for us. We think that this video gives us a very broad exposure to audience, very high-frequency as well as it's very synergetic to our core advertising business.

In terms of the -- like paid or maybe I can call it Netflix type of model. I think we're still exploring this model. Because it's -- we see a lot of contradictory signals in the market. I think the market is overcrowded. Now I think the -- recently, we and our team will try to calculate. I think they are almost up to 10 players competing in the market. And actually, we expect a lot of newcomers. And looking even at some international, both American and Chinese peers, I would say, economic of this business remain challenging. Whereas the potential reach that this business could give us is also questionable.

So currently, we're more bullish on ad supported video models, at least it is for now. We are quite bullish on our music offering. As you know, where we have a quite unique competitive advantage in our UGC, and we will continue to invest a lot in our -- basically in our product offering. So -- and I think that all the time now talking about is obviously, as Matthew rightly points out, is included into our guidance. I hope I addressed the question.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

And we will move on to our next question from Cesar Tiron with Bank of America.

--------------------------------------------------------------------------------

Cesar Adrian Tiron, BofA Merrill Lynch, Research Division - Research Analyst [5]

--------------------------------------------------------------------------------

I have 3 actually. Just on the expected deceleration of VK revenue into Q1. Can you please confirm that this is just driven by ad tech and not by a more cautious view on the market and just explain it again, if you don't mind?

Second question, you've given a lot more guidance than in the past, business by business, but move away from giving you guidance for the EBITDA consolidated, can you please explain why? And then the third question is on the listing in Russia. Is it something that you consider or that you already have decided? And can you please just give a little bit more guidance on how long do you expect this to take or at least if this is H1 event or to which event?

--------------------------------------------------------------------------------

Boris Dobrodeev, Mail.ru Group Limited - CEO [6]

--------------------------------------------------------------------------------

Thank you, Cesar. I will quickly address the first question. Actually, in the last half year, our ad tech team did like really, really fantastic job in including the efficiency of our ad platform. And we probably see it. I recently looked at the graph, we see probably for most of our advertisers, we see the effects. So probably, we're now seeing -- being like conservative. We see a rapid increase in effectiveness that might potentially affect our -- make our CPMs temporary go lower. But at the same time, I think we do not see any like material mid-term effect. And we think that this effectiveness will be substituted by the interest of new advertisers.

--------------------------------------------------------------------------------

Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [7]

--------------------------------------------------------------------------------

Thank you. And this is Matthew. On your 2 other questions. First of all, EBITDA guidance. Obviously, we've given you guidance on the S&C margins and on the games margin but I also did just comment just now. I'll repeat exactly what I said in terms of the group EBITDA margin. If you assume that all of the investments go ahead, and I made the point in some of those investments we were taking a slightly more dynamic approach to.

But even if you assume that all of the investments took place, then you would have 2020 EBITDA in the low 30s. I just repeated exactly what I've just said.

And then your final question on the listing in Russia. As we say, the board is actively considering this. We don't have final board approvals. We will update the market when and if we do. I think this is something that you should expect, if we go ahead us to do in the relative near term, I mean, it's clearly a 2020 event. And it is a secondary listing, as I said, to take advantage of indexation and also to increase the liquidity. Does that answer the question?

--------------------------------------------------------------------------------

Cesar Adrian Tiron, BofA Merrill Lynch, Research Division - Research Analyst [8]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

We'll take our next question from Slava Degtyarev from Goldman Sachs.

--------------------------------------------------------------------------------

Vyacheslav Degtyarev, Goldman Sachs Group Inc., Research Division - Equity Analyst [10]

--------------------------------------------------------------------------------

How do you internally think about the group leverage progression throughout 2020? Do you expect 2020 year-end net debt to improve versus the current RUB 13.7 billion?

And secondly, can you somehow assess your expectations from the local apps per installation legislation? Would you expect some market share gains or cost savings, if the law is adopted in certain form?

--------------------------------------------------------------------------------

Fedor Rubtsov, Mail.ru Group Limited - CFO of Russia [11]

--------------------------------------------------------------------------------

It's Fedor here. I'll take the first question on the leverage. So we said that our current net debt position is around RUB 13 billion. And as you know, we have some plan to follow-on investments into our key joint ventures, including AER and O2O, and we are expecting those to meet their KPIs. So even though our cash generation capacity remains robust and will even further normalize in 2020 compared to 2019 as we would not be -- would not have to finance some of our investments beyond the commitments that we have already made, we expect the net debt position to probably go a little bit lower compared to the current position.

So we expect to basically slowly deleverage by the end of the -- of 2020. We've continued to leverage throughout 2021.

--------------------------------------------------------------------------------

Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [12]

--------------------------------------------------------------------------------

Slava, it's Matthew. I'll deal with your local apps question. We've obviously been watching the legislation very carefully. It clearly represents an exciting opportunity for the entire sector. I would say that at this point, as you know, with Russian legislation, there are distinct phases, proposal, legislation, and then most importantly, implementation. At this point, it's not entirely clear what the implementation environment will look like.

As a result, I think that we see great potential if it is implemented as written, but that's not clear at this point. So I think we're taking a slightly more conservative approach in that we definitely see upside from this but we're not budgeting any sort of positive effects in the near-term because we're not clear what implementation will look like.

So I guess, for us, it represents upside if it comes through in its current form, but we'll have to wait and see.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

And we'll take our next question from Maria Sukhanova with BCS.

--------------------------------------------------------------------------------

Maria Sukhanova, BCS Financial Group, Research Division - Research Analyst [14]

--------------------------------------------------------------------------------

I have 2 questions. So first, you named multiple areas of investments. So when it comes to your ecosystem strategy and specifically to communications and social. So I wonder if you could identify, like 2, 3 of them, which you think will absorb the most -- like the biggest amount of investments for 2020. So that's one.

And second, just wanted to clarify 2 things about your EBITDA guidance. With games margins, I thought the message used was that 2019 will be the -- we'll see the highest cost in games in 2019 and then there will be improvement in margins in 2020. So I wonder if there is a change in your view. And what is this -- it is related to?

And also on Youla, did I -- just wanted to confirm that you expect with doubling of revenues, doubling of losses in absolute term? That's it.

--------------------------------------------------------------------------------

Fedor Rubtsov, Mail.ru Group Limited - CFO of Russia [15]

--------------------------------------------------------------------------------

I'll deal with the second and third. With Youla, yes, the proportional loss, that's exactly what we said. So your understanding is correct. That does represent, I think, the maximum investment, it may well be less than that, but we'll have to see. As I said, we're remaining somewhat dynamic in that respect. In terms of the games EBITDA. Games EBITDA, as you know, is very much a function of both mix and timing. I think we expect another very strong year of top line growth from games so the games margin of the low to mid-20s is through the cycle. And so we're giving guidance for 2020, which is very much a reflection of mix more than anything else. And I'm looking at my colleagues from games who are nodding vigorously at me for that.

And I'll hand over to Boris for the investment question.

--------------------------------------------------------------------------------

Boris Dobrodeev, Mail.ru Group Limited - CEO [16]

--------------------------------------------------------------------------------

So yes. So in terms of ecosystem -- if I -- if you ask about the ecosystem investments. So I think it will be distributed among -- actually a couple of products that we think could seriously bolster the engagement. And I think that when we think how we spread this investment, we look at not just as a user of specific service. We are starting to look at this as the user of an ecosystem, who would potentially be a multiple user of different -- at least like 2 or 3 services over the group when we acquire the user.

So we will invest this year in Mini Apps. We also have investments planned, of course, from Marusia as a smart speaker and as a device. We also plan certain investments in Combo as well as single video product and VK music product, where both were bullish on the service itself as well as on its potential to significantly broaden the user base of the group as well as time spent on engagement.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

And we'll go to our next question from Vladimir Bespalov with VTB Capital.

--------------------------------------------------------------------------------

Vladimir Bespalov, VTB Capital, Research Division - Analyst of Industrials, Transportation, Infrastructure, Chemicals & Equities and Internet Analyst [18]

--------------------------------------------------------------------------------

So I want to go down a little bit on the game segment. First of all, could you comment how sensitive are games margins to FX given that you have, on the revenue side, a lot of revenues coming from foreign markets, but the cost base is probably in rubles.

And then again, on the margins, to achieve your target of 20% plus margins, probably which is going to happen in 2021, '22, what should change? Are you going to slow down the development of games? I mean, how are you going to achieve this, given that this year the margins will be probably below 20% based on your guidance?

And the third thing is, maybe you could comment a little bit on the difference between IFRS and management accounts. Given that you changed the approach in the third quarter, how should we look at this difference going forward in games?

And my second question is on ESforce. If I got Matthew correctly, this asset is currently reflected as assets held for sale. But as I look at the numbers, it's USD 35 million, USD 36 million now in your balance sheet. So this is well below what you paid for this asset and how it was valued during the year with modern tech, maybe you could comment on this a little bit. Was there a write-off or I'm missing something?

--------------------------------------------------------------------------------

Fedor Rubtsov, Mail.ru Group Limited - CFO of Russia [19]

--------------------------------------------------------------------------------

Yes, so -- I guess, yes, it's Fedor here. So I'll probably take first 3 questions on the games, and then we move to the other questions. So on the FX, as we have said, the share of international revenues in the gaming division isn't very significant -- is growing. However, so is the related costs, which is primarily the agent partner fees, basically the App Store cut of the revenue and the marketing, which is also predominantly international. However, you're right, the cost, particularly, the salaries are predominantly in rubles.

So overall, a weaker ruble would be somewhat positive for the games EBITDA and a strong ruble would be somewhat negative. However, considering that the games margin is somewhat lower than the group margin, you could calculate that the effect for the gaming business, will probably not show that pronounced. And also considering that actually the largest expenses of this business represent the App Store cut and the -- international marketing.

On the IFRS versus management accounts, I think you're referring to the gaming revenue deferral. So yes, indeed, we changed our approach in Q3, and that resulted in a quite significant change in estimate, which we booked as a one-off basically in Q3. I think going forward, what you should look at is the amount of revenue deferral that you could calculate for Q4. So that will probably be more representative of what it's going to look like in the coming year. But again, as with the margin, the revenue deferral too is a function of the mix of the games because for different games, the revenue deferral percentage is deeper -- differ because they're basically a function of 2 things: first, the expected lifetime of the user in the games; and second, the effective distribution of the virtual in-game items between durable items, consumable items or in-game items that leave for a certain period in time. So that's for the IFRS versus management accounts.

Then moving on to the ESforce question. Yes. So basically, indeed, we took our measurement on that asset. So basically, IFRS requires us, in this case, to take quite a conservative approach since we actually decided to break this partnership to use our right to break the partnerships. So not taking into account any potential synergies that ESforce could have -- if it were a part of the partnership.

So basically, we had to fair value the asset on a stand-alone basis without any synergies, which are obviously and using quite conservative assumptions led to a quite significant decrease in the calculated fair value.

--------------------------------------------------------------------------------

Boris Dobrodeev, Mail.ru Group Limited - CEO [20]

--------------------------------------------------------------------------------

Yes. Obviously, as you know, sports business is pretty volatile and the first has a very sharp macro dependence. More than most of the ad businesses and media ad businesses. So it's always very badly hurt by any change in ad macro environment. And it's also very dependent on sports performance. So there was some -- there are some deterioration in some of their financials.

And also answering your questions -- your question on the games profitability. How do we build up? It will be a mixture of both, scale and improved effectiveness of the operations, which we continue to play with. But as there are a lot of moving parts, you can never say which proportion would dominate, but generally, it's a mixture of both.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

And we'll take our next question from Anna Kurbatova with Alfa-Bank.

--------------------------------------------------------------------------------

Anna Kurbatova, Joint Stock Company Alfa-Bank, Research Division - Senior Analyst [22]

--------------------------------------------------------------------------------

Just I wonder whether you have any, like, budget or vision or understanding how much in advertising revenue your cooperation with AliExpress Russia could bring you this year or maybe in the medium-term. Because when you created the joint venture, you generally guided that you might see an upside from additional advertising money coming from IR as your, let's say, partner. So -- and -- well, the 2020 targets for IR development that you disclosed, as far as I understand, you don't give any metrics in terms of additional advertising revenue.

My -- and my second question is on your advertising market guidance or forecast that you presented in your strategy -- medium-term strategy presentation, so it seems that the -- your outlook is quite conservative because like you forecast that the advertising growth or digital advertising will decelerate to below 10% in 3 years. So would you confirm that still you are using conservative guidance? And the question is also whether your medium-term expectations are also based on general conservative approach to Russian advertising market?

--------------------------------------------------------------------------------

Boris Dobrodeev, Mail.ru Group Limited - CEO [23]

--------------------------------------------------------------------------------

So maybe I will quickly answer about the ad effects from AliExpress Russia cooperation. So we obviously do not disclose the exact size of the revenue stream. I think I can just reiterate what we said before. We think that it is very promising due to a couple of reasons. For us, it's the incremental cash flow that it would bring. Second, it's actually the extra advertisers that it would bring, both it can be big e-commerce advertisers, big brands as well as SMEs, which AliExpress Russia would help to enable to use our platform for e-commerce purposes and hence, promote their goods on VK, OK and Mail.ru Group destination. And number 3, it's data enrichment, which is critical these days. So we think that AliExpress Russia product would give us critical data about user shopping aspirations, which in Internet is most available, as you know.

So here, I pass it on to Matthew to answer your next question.

--------------------------------------------------------------------------------

Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [24]

--------------------------------------------------------------------------------

Yes, in terms of ad guidance, as you know, we don't generally give line-by-line guidance. But we did say in the commentary at the beginning that we would expect to grow better than market. And as far as the longer-term outlook, it's obviously very difficult to have multiyear forecast with any great accuracy. People don't set budgets in that way, not least the advertisers themselves. I think that we've generally used AKAR as a benchmark for an overall sort of view of the ad market.

I think it's worth noting that there's not a single year in the last 10 years that we haven't both outgrown AKAR's digital number and also that AKAR has improved to be a little bit conservative in terms of the shift from all other mediums towards digital. So I don't think we see any great change in that. But it's -- it makes a lot of sense for us to use those relatively conservative numbers as a basis for forecasting. And as Boris said, we very much have the potential to double this business over the next 3 years. So I think if you put all of that into the mix, you can see that our -- we're pretty ambitious about what we think we can achieve with the advertising.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

Svetlana Sukhanova from Sberbank.

--------------------------------------------------------------------------------

Svetlana Sukhanova, Sberbank CIB Investment Research - Senior Analyst [26]

--------------------------------------------------------------------------------

I have 2 questions. One would be on ESforce, if I may come back to Vladimir's question. I noticed an impairment or what you call it the classification loss RUB 4.5 billion. And in your answer, you said because it's not taken into account any potential synergies. So is the loss -- with a measurement loss of RUB 4.5 billion for ESforce is because you're not taking into account any synergies with Mail.ru Group or what? I completely misunderstood it. If you can elaborate, please.

And second question, and follow-up question on ESforce would be, I understand that you lost your 3-year contract for broadcasting of the eSports events. How critical was it for the business? It -- was it considered in the loss and what cities to ESforce revenues and EBITDA because of loss of this contract.

That's the first part of my question. And my second question would be very brief.

You mentioned somewhere in your much awaited presentation that your music subscribers are 3.1 million but -- across all major properties but can you please -- include in VK, OK and BOOM. But can you please confirm if it is unique 3.1 million unique users? Or it's some kind of double count involved in this 3.1 million subscribers?

--------------------------------------------------------------------------------

Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [27]

--------------------------------------------------------------------------------

It's Matthew. I'll deal with the first one. First, 3.1 million is unique. There is no double counting.

--------------------------------------------------------------------------------

Boris Dobrodeev, Mail.ru Group Limited - CEO [28]

--------------------------------------------------------------------------------

So I'll quickly address the second part of your first question. No, this content didn't have any like material effect on the finances. So we think that the terms that we offer, they were not economically viable for us. And we would never buy content at the bad terms for us, but they do not have any material impact, both on eSports, and on its impairment as well.

So we even think that this event was better for the margins. So here, I pass it on to Fedor.

--------------------------------------------------------------------------------

Fedor Rubtsov, Mail.ru Group Limited - CFO of Russia [29]

--------------------------------------------------------------------------------

Yes. So answering the first part of your question. Yes, you're correct. And you assumed so -- basically, assumed since it's an asset held for sale, and we still think that it's -- it will probably the best developed as part of a partnership with a suitable partner. We cannot take into account any synergies either with the group or with like any specific partner because we actually don't have one right now.

So we really have to fair value it as a stand-alone asset. So that's actually the key reason for the remeasurement.

--------------------------------------------------------------------------------

Svetlana Sukhanova, Sberbank CIB Investment Research - Senior Analyst [30]

--------------------------------------------------------------------------------

Okay. And if I may have a quick question, a follow-up question on this. Yota Arena, is it the lease hold right or you own the property?

--------------------------------------------------------------------------------

Boris Dobrodeev, Mail.ru Group Limited - CEO [31]

--------------------------------------------------------------------------------

It's leased. It's leased.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

Next question, Igor Goncharov from Gazprombank.

--------------------------------------------------------------------------------

Igor Goncharov, Gazprombank (Joint Stock Company), Research Division - Senior Analyst [33]

--------------------------------------------------------------------------------

Just a quick follow-up question on the Citymobil business. You mentioned you target to more than people -- number of rights and in 2020. Could you maybe elaborate a bit on your geographical sort of expansion plans? Do you have particular targets as to how many cities? Or what percentage of population you look to target -- you look to cover next year? And how you plan to -- how you choose the cities that you expand to?

--------------------------------------------------------------------------------

Boris Dobrodeev, Mail.ru Group Limited - CEO [34]

--------------------------------------------------------------------------------

So look, I think we would not give you the exact number of cities and especially the names of the cities and the time when we plan to launch because I think it's pretty available information for our competitors. At the same time, I think the peak of expansion in terms of cites was last year. So this year, again, we had a quick chat. We think that most of the growth will come from the cities that are already launched despite us launching new cities and then also contributing to the growth.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

And we have a follow-up question from Vladimir Bespalov from VTB Bank.

--------------------------------------------------------------------------------

Vladimir Bespalov, VTB Capital, Research Division - Analyst of Industrials, Transportation, Infrastructure, Chemicals & Equities and Internet Analyst [36]

--------------------------------------------------------------------------------

It's kind of broad question about fintech, strategic one, I would say. Where do you see the fintech part of your business, let's say, in 3 years from now? Are you going to develop this kind of fintech services within your ecosystem?

Or maybe you're going to offer broader solutions to the market and expand just beyond the ecosystem? And maybe you could provide us more color on this part of your business.

--------------------------------------------------------------------------------

Boris Dobrodeev, Mail.ru Group Limited - CEO [37]

--------------------------------------------------------------------------------

So thank you for your question. It's me who will take the whole answer. So I think that we do not have any changes to our position. We previously announced a potential JV with Alipay in terms of fintech. So nothing changed. We first -- we see VK Pay as the center of our -- Money. Mail.ru and VK Pay is the center of our fintech solution and fintech strategy. So nothing changes here. Nothing changes in our desire to create a JV and create a financial -- and create financial products on the basis of our user base. And base of our partners, who are AliExpress, Alipay -- AliExpress Russia and MegaFon.

We think, in our view, this transactional user base is critical for that. So in 3 years' time, we hope that this JV will be successful and profitable. Our attitude, we think that it's part of our infrastructure and ecosystem. This is probably what's most important for us and that any agreement that we launch would respect our demands -- our ecosystem demands and all support all the integrations that we have and that we mentioned in our press release, when we're talking about Combo, when we are talking about VK Super App SDK, they will all be implemented.

As for the success of new ventures and the new JVs, time will show. On one hand, I think that Russian fintech market is pretty crowded. And you know Russia specifics as Russia probably is one of the most advanced and most competitive fintech markets in the world. At the same time, we should bear in mind that this strategic setup that we have and the value that all the shareholders potentially bring into this JV, probably with -- will significantly increase the chances for success.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

And we have a question from Kirill Panarin with Renaissance Capital.

--------------------------------------------------------------------------------

Kirill Panarin, Renaissance Capital, Research Division - Equity Analyst [39]

--------------------------------------------------------------------------------

I've got 2, please. First of all, just a follow-up on games. Could you give us some color in mobile games? How do margins and long-term returns compare between more popular games like War Robots, or Hustle Castle and less popular titles like Left To Survive or American Dad! I'm just wondering, in order to reach your medium-term EBITDA target, would it require a certain number of releases per year that are comparable in popularity and revenue potential to your most successful games?

That's the first question. And the second one is just on Delivery Club. Could you give us some color on the trends in unit economics, especially given the growing share of first-party and maybe you could also comment on the economics of the business in mature geographies? That's it.

--------------------------------------------------------------------------------

Boris Dobrodeev, Mail.ru Group Limited - CEO [40]

--------------------------------------------------------------------------------

Yes. I think in terms of gaming, obviously, the most responsive, the more popular or hit type of games have better margin. And the less popular games have usually smaller margin.

It might also depend on the genre. But as you know, we have a very wide portfolio of games. Of course, it changes from season to season from year-to-year. But I think we have managed to have quite stable portfolio, where we have a couple of hits and a couple of maybe not as popular games, but still profitable with their stable user base, and we continue to pursue the strategy. So I think every year, we increased the diversification of our business, and we plan to do that. Of course, given the hit nature of this business, the balance between different games and genres between can vary. But we think, as we said before, we want to be not a hit company, but we want to be more like a factory. And we will -- our goal is to continue stable growth and profitable growth.

In terms of games, so for Delivery Club, as we said before, growth when we can -- deconsolidated the asset, and we -- when we launched our JV with Sberbank, growth was one of the key priorities for us. So I think as our data show, we saw a very good -- a very rapid growth in the last -- last year was very good for us and the last 6 months, we also saw a lot of rapid growth.

So now we see the team doing a very good job on the effectiveness of the business. Especially -- both effectiveness of the marketing has been improving. And also the effectiveness of logistic operations also saw a big rise in the last 2 months so I think we see unit economics improving. Probably this is what I can say about Delivery Club. So of course, talking about the regions and Moscow, Saint Petersburg distribution, Moscow, Saint Petersburg are more profitable. Regions are less profitable, but still it would broadly vary on the city, the mix of own delivery and marketplace and also on the competitive situation.

So probably, you should judge city by city. But overall, we're pretty optimistic about long-term profitability potential. So we probably would continue to improve our economics as well as balancing it with the growth.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

Now we have no further questions at this time. I would like to turn the conference back over to our speakers for any concluding remarks.

--------------------------------------------------------------------------------

Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [42]

--------------------------------------------------------------------------------

Well, thank you very much all for joining us. As ever, you know where to reach us for follow-up questions. And we wish you all a good day. Thank you.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

And once again, ladies and gentlemen, that does conclude today's conference. We appreciate your participation.