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Edited Transcript of MAIL.L earnings conference call or presentation 24-Oct-19 11:00am GMT

Q3 2019 Mail.ru Group Ltd Earnings Call

LIMASSOL Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Mail.Ru Group Ltd earnings conference call or presentation Thursday, October 24, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Boris Dobrodeev

Mail.ru Group Limited - CEO

* 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

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Conference Call Participants

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* Anna Kurbatova

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

* Cesar Adrian Tiron

BofA Merrill Lynch, Research Division - Research Analyst

* Maria Sukhanova

BCS Financial Group, Research Division - Research Analyst

* Maria Leonidovna Kahn

HSBC, Research Division - Senior Analyst of TMT

* Miriam Anuoluwapo Adisa

Morgan Stanley, Research Division - Equity Analyst

* Sebastian Cristian Patulea

Jefferies LLC, Research Division - Equity 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

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Presentation

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Operator [1]

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Greetings and welcome to Mail.ru Group's Third Quarter Results Conference Call.

(Operator Instructions) As a reminder, this conference call 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, you may begin.

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

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Hi. Thank you all for joining us today for Mail.ru Group's Third Quarter 2019 Unaudited Financial Results Conference Call and Webcast. I'm joined here today by Boris Dobrodeev, Matthew Hammond and Fedor Rubstov.

Before I pass it on to Matthew for 3Q summary, 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 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.

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

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Thank you. Good morning and good afternoon. It's Matthew Hammond here. I hope you've had a chance to look through our Q3 statement, which, in order to ensure maximum transparency, runs through almost all the areas of our business in great detail. As a result, here I'd like to focus on a number of key points, which we think are the most important.

First of all, Q3 delivery. We're very pleased with our Q3 performance despite the somewhat challenging macro backdrop and significant base effects for the core advertising in games business and especially given no new games launched during the quarter, we've delivered strong growth in all areas.

Advertising revenue grew around 22%. And despite no new launches, games segment revenue grew by 25%, and new initiatives expanded by over 140%, with Q3 revenues in total growing 25% year-over-year and delivering improvements in underlying profitability, with margins increasing 2 points year-over-year.

Secondly, VK market and outlook. We've seen some commentary questioning the competitive position of our core VK business. We'd really like to address this head on. The first thing to say is that we've always operated in a competitive environment, but VK's position remains unchanged.

To illustrate the underlying strength of VK, I want to draw your attention to some operating metrics. Having quadrupled revenues in the past 4 years and despite the base effect this creates, VK revenues have grown 25% in Q3, and we remain on track to meet our guidance of doubling revenues again over the next 3 to 4 years.

VK user numbers continued to grow despite the social network already covering around 77% of the Russian online population monthly, its 70 million Russian MAU is up 2.4% year-over-year in the third quarter.

According to MediaScope, VK offers the highest user sticky factor across all social networks and video platforms present in Russia, at 55% versus 44% for Instagram, 41% for YouTube or 25% for TikTok.

Time spent on VK also continues to rise, up 9.3% year-over-year to around 35 minutes a day on mobile. This compares to around 25 minutes for Instagram, 21 minutes for TikTok or Yandex Zen.

Total daily time spent for VK stands at 800 minutes -- 800 million minutes, which is 2x more than Instagram and 70x more than TikTok. Additionally, share in time spent has been stable in the 10% to 12% range of cross-device online time spent since the beginning of 2017, and we see no changes in that going forward.

Engagement metrics also continue to rise. And I really want to give you some concrete examples of this. In Q3, daily messages delivered increased by 26% to 10 billion; live stream views grew 39%; posted streams, 219%; and video views, 45%. We give you these stats to illustrate the highly engaged and growing nature of our user base.

CTR also continues to increase, and we further reduced CPL by 32% year-to-date, which continues to improve return on investment for advertisers. Q3 advertiser number was up 16.5% year-over-year, driven mainly by SMEs, and we think VK is in a strong position to continue to benefit from ongoing shift of advertising to digital and within that social networks.

To summarize, VK user numbers continue to grow, engagement is rising with results in rising time spent and VK ad revenues, despite a high base, are growing faster than the market.

We stopped reporting separate VK revenues at the beginning of this year, simply in order to better reflect our strategy and the way the business is managed and the group's -- and the units into connection within our ecosystem, where advertisers increasingly source ads from all mails platforms through myTarget. And hence, VK has shown within social and communications segment. However, we have listened to feedback. And hence, we've given Q3 revenue growth in order to confirm continued progress and to address any misplaced concerns head on.

Third, year-end outlook. While we see no change in the macro backdrop and the H2 base for advertising revenues remains high, we're happy to reiterate the comments made with the H1 results that we expect H2 advertising revenues -- revenue growth will be at least in line with H1.

As far as games is concerned, in our 2019 budget, we've assumed the launches of Aftermath and 2 versions of Warface mobile in the second half. Given the large franchise launches of Lost Ark and American Dad! as well as the scheduled launch of our international PC games platform, we decided to shift the Warface launches into 2020 to allow them to benefit from cheaper advertising versus the peak Q4 season, while maintaining a focus on existing pipeline into year-end. Aftermath will no longer be launched given initial retention results.

While this will, of course, affect Q4 games revenue, we are nevertheless happy to reiterate our full year 2019 guidance.

Fourth, progress across partnerships. Over the last 12 months, we've announced a number of partnerships, and I want to give you a brief update on each of these. First, AER. AER is now closed and operational. Dmitry Sergeev, Deputy CEO of Mail, is now serving as Co-CEO; and Boris Dobrodeev, CEO of our company, is the Chairman. We'll see the ongoing and deepening integration over the next few months, and we'll see some benefits in Q4 before the wider benefits are seen in 2020 onwards.

Second, in October, we announced that we now plan to enhance our customer value proposition for our payments JV signed with Alipay, which is expected to be concluded next year.

Third, the O2O JV with Sber continues to make strong progress towards closing, with binding documents expected to be signed prior to year-end.

In the meantime, both Delivery Club and Citymobil continue to accelerate and gain market share with the former growing revenues over 190% in the third quarter and reaching 3 million orders a month. And the latter, reaching over 300,000 daily rides.

As previously stated, the JV will focus on maintaining its strong leadership in food delivery and be a strong #2 player in its selected markets for mobility. The JV will have sufficient resources that both businesses are expected to be fully funded to reach breakeven.

Finally, the Modern Pick transaction documents have now also been signed and the deal is expected to formally close shortly.

Five, strategy. Our strategy remains unchanged, and we continue to put the user at the heart of everything we do. Throughout our history, we've built an unparalleled platform, and our product range now covers almost all of the online needs of the user. We will now further consolidate our position through loyalty programs, payment systems, shared ID, and hence, there will be less near-term focus on M&A, while we move back to a net cash position, which should be a relatively short path for us, given the healthy cash conversion of the business.

The company's objective is to support the seamless operation of all divisions and achieve synergies between projects, connecting them through a unified infrastructure and service offering.

We will also continue our efforts around ad tech in order to continue to gain advertisers' market share, with special focus on expanding the SME offering, along with the reductions in internal competition and duplication of development work.

The goal is to eliminate internal competition in ad tech, unify the SME customer base and focus purely on the best and most balanced solutions to advertisers.

Six, new initiatives. We've seen very strong growth in excess of 140% in the third quarter in the new initiatives segment, which generated over RUB 1.3 billion in revenues. Here, we're seeing strong growth in cloud, online education and Youla amongst others. Youla continues to perform well, with revenues growing 1.7% year -- sorry, 1.7x, not 1.7%, forgive me, year-over-year, and we're happy to reiterate the guidance of revenues for that business of around RUB 2 billion this year.

I would also like to draw your attention to Pulse, which is our recommendation and news management system, which now has around 35 million monthly active users and continues to see further strong growth. We'll be talking more about this over the next few quarters.

Seven, and the final point, regulation. Our shares have seen some pressure on the back of some of the latest regulatory initiatives, especially the foreign ownership limit discussions. We will continue to consult and cooperate in related discussions, but as we've said before, and are happy to reiterate again today, we continue to believe that the latest proposals around the foreign ownership limits should not impact Mail or our shareholders in any way. I would also draw your attention to our Articles of Association, where it has always been the case that a majority of votes must be controlled by an approved Russian party. This continues to be the case. And along with our largest shareholders, Naspers, Tencent and Alibaba, we do not expect any change in this.

In closing, the third quarter for 2019 has been another successful period for us. The business has delivered strong top line growth and improving profitability. We've made significant progress in our JV partnerships, along with our strong partners, including Alibaba and financial and Sberbank, and we expect further progress prior to year-end.

Notwithstanding some games launched slippage in Q4, we're happy to reiterate our full year 2019 guidance.

And with that, we'll open up to Q&A. Operator, we'll now take questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll now take our first question from Miriam Adisa from Morgan Stanley.

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

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Three questions for me. Firstly, just on the AER and JV now that, that has closed. If you could just give a bit more color on what you're seeing on the first integration test between VK and AliExpress? And then also perhaps quantify the contribution to revenues next year, looking into 2020? And then secondly, on Delivery Club, as you shifted the business to first party, could you talk about the impact this is having on the marketplace business? Are you seeing any cannibalization? Or do you believe that the growth there is all additive? And then finally, just -- could you talk a bit more about the ambitions of the payments JV? And potentially, if you feel that there are any conflicts with -- another one of your partners, Sperbank, given their dominance in the premium space.

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

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Thank you for the questions, Miriam. I'll start on the quantifying on AER, and then I'll hand over to Boris. Obviously, we can't break out a separate AER line. I think that I can really only refer to the statements we made a few moments ago that we will see some benefit in Q4 before that increases in 2020. But AER is obviously now just another third-party advertiser to us. It gets treated exactly the same as all other advertisers. And I can't quantify an individual advertising line from AER anymore than I could from Colgate or Nissan.

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Boris Dobrodeev, Mail.ru Group Limited - CEO [4]

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Yes. Thank you. So I will address the Delivery Club question. So we are very positive about Delivery Club growth and what even positively surprises us that 1P growth comes not at cost for our marketplace business. Actually, we see the opposite. We see that it boosts a lot our marketplace business, even we don't have any special promo activities for it. So I think for us, it's a big competitive advantage of having a big developed leading marketplace business, as we have all flexed and each one contributing to another. Long term, it would also support and make our business very stable because we think that 1P business brings a lot of high-quality user experience and very high user retention and bring in new supply. Whereas marketplace business is a much more profitable business. So I think they very well balance each other.

So again, to reiterate, we see good growth in our marketplace business standalone. So in terms of payment JV, I think that we have ambitions to build one of the best digital payment systems, both on the -- for the business as well as for the end user. So we want to become easing e-wallet. So as you know, VK Pay has about 13 million users, so our goal is to significantly, first, multiply the amount of these users as well as significantly increase their engagement. And also, on the other hand, these days, we're starting to talk -- and not only to talk but also to act much more as an ecosystem. And we think that to have a VK Pay solution in our ecosystem is incredibly strong. If you look at us, we now have exposure to e-commerce, we have exposure to communications. We have our mini-app ecosystem, which is developing very fast. And if you put payments on top of it, I think we have quite a robust base for the leading ecosystem in Russia, which we want to become in the next couple of years.

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Miriam Anuoluwapo Adisa, Morgan Stanley, Research Division - Equity Analyst [5]

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And on that point, do you feel that there could potentially be any conflict with Sberbank as you integrate VK Pay into some of your apps, such as Delivery Club and Citymobil?

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

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Yes. I think we can always work with multiple partners, and we will find a solution.

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Operator [7]

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And now we'll take our next question from Slava Degtyarev from Goldman Sachs.

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Vyacheslav Degtyarev, Goldman Sachs Group Inc., Research Division - Equity Analyst [8]

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Firstly, how do you generally think about the medium-term growth and profitability trajectory for your new initiatives, in particular, cloud and education? And secondly, can you help to reconcile your EBITDA number with a leverage increase? So what were the major drivers leading to the growth in your leverage throughout the quarter?

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Boris Dobrodeev, Mail.ru Group Limited - CEO [9]

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So I'll answer the first one. So actually, we see a very good growth, triple-digit growth in our cloud business. Yes, it's still not very big, but the growth is very promising. And I think out of the new-generation players, we're one of the most successful one. So we see a very good traction there, and we'll look at our cloud business as a part of our big B2B offering, including our interbase and our communication tool. So we are starting to develop our B2B industrial internet narrative here.

So in terms of online education, we've always been bullish on online education, and we see our online education asset performing pretty well, also showing pretty high-growth as well as pretty decent profitability. So we think that this sector still is not a major driver of our business, but we think that it's a very good growth driver for the future, and we remain constructive on this as well as Youla. So these are the key 3 pillars of growth behind our other section. And probably we are equally positive from them to grow well in the future and to contribute even more to our business.

And, Fedor Rubtsov, our CFO, will address another question.

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Fedor Rubtsov, Mail.ru Group Limited - CFO of Russia [10]

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Yes. So with respect to leverage, as we have said, we just contributed $100 million into our AER JV, which basically accounts for the increase in leverage. But I guess your question was more about how our dynamics in EBITDA that compares to the dynamics in, say, the operating cash flow like you would see in the statement of cash flows because there is some difference there. And the key reason for that is basically the financing of the assets, which are now classified as held for sale or which are already part of our JVs, particularly Panda (sic) [Foodpanda] and Delivery Club. So basically, if you if you exclude the financing of those verticals, then the dynamics of operating cash flow would be roughly the same as the dynamics of EBIDTA year-on-year.

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Vyacheslav Degtyarev, Goldman Sachs Group Inc., Research Division - Equity Analyst [11]

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Can you tell me fill me and sort of confess. So basically, you are trying to mention that AER JV contribution already happened in Q3. Is that the case?

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Fedor Rubtsov, Mail.ru Group Limited - CFO of Russia [12]

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I mean we've been financing Panda (sic) [Foodpanda] all this time, right? The hardware does not come into our management accounts. EBITDA has been into assets held for sale for a while. And the same for this quarter for Delivery Club. So it does not come into the management accounts. EBITDA, however, it does come into the -- it does affect the cash flow from operations in IFRS. So we are basically financing -- we've been financing those verticals and the effect of the financing is the key difference between IFRS operating cash flow dynamics and the management accounts EBITDA.

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Operator [13]

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And now we'll take our next question from Vladimir Bespalov from VTB Capital.

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Vladimir Bespalov, VTB Capital, Research Division - Analyst of Industrials, Transportation, Infrastructure, Chemicals & Equities and Internet Analyst [14]

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Congratulations on very good numbers. I have a couple of pre-technical questions. First, when I look at your revenues reporting on the IFRS and there is a big revenue gain from time differences this time. It was absolutely different in the previous accounting. So maybe, I understand, but that you changed your approach to revenue recognition gains. So maybe you could provide more color on this? First, have you discussed this with auditors? And are we going to see this going forward when you publish audited numbers? And then how should we see this going forward? Should we be -- like I understand this is probably a one-off in the third quarter. And then maybe the difference will be much smaller in subsequent quarters. And the other technical question on the numbers is on your marketing spending. The growth in the third quarter was pretty small. So was it a one-off? Or this is a kind of, well, longer-term change and the growth of marketing spending is not that required, given the assets which are currently consolidated by Mail.ru?

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

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Yes. Thank you for the questions. So I'll first address the deferred revenue question. So as you know, we have always said and looked at the gaming revenue, EBITDA management accounts, which is essentially a cash accounting for the gaming revenues, and that's the way we're continuing to look at it, as shown in our segment reporting. However, in IFRS, there is this deferral of revenue adjustment, which is subject to very significant judgments and is based basically on the expected lifetime of the games users and individual in-game items. So basically, we draw a lot of assumptions from that calculations, and that's kind of the key reason why we have always excluded that from management accounts.

Then second, this adjustment is actually not legally based. I mean we don't owe the users anything legally as soon as the users have paid for the games. So these are the 2 key reasons we have always excluded it.

However, recently based on the feedback, particularly from our shareholders or from our investors, we have worked to try and bridge the gap between management and IFRS accounts. So basically, we've implemented some more detailed statistics into the product gaming systems to try and calculate -- try and make the assumptions more accurate with respect to the expected lifetime of the in-game items. So now basically, we've been able to implement those in the systems and to discuss those with the auditors, of course, because, well, as you know, the quarterly results, even though those are not audited, they are reviewed by the auditors. So obviously, the auditors did have a look at those. And now we are able to, kind of, come up with more detail and more kind of well-calculated adjustments for the remainder. However, it still does not affect either the way we report the management accounts or the way we manage the business.

And addressing your question about what is going to happen to this adjustment going forward. Yes, indeed, you are right. This is a kind of a one-off effect right now. And going forward, since it's now a more detailed calculation and the overall deferred revenue balance is now reduced due to this calculation, we do expect the difference to become smaller in the prior periods compared to what we have seen in revenue deferral in the past.

And then addressing your marketing question. Well, basically, if you look at our marketing dynamics on the same consolidation basis that we're using for for our financials, post the disposal -- or showing assets held for sale, Delivery Club and Panda (sic) [Foodpanda]. So basically now, yes, the growth rates have come down, and that is largely a function of 2 things. First of all, it's a function of our gaming division, where marketing is, in its turn, a function of new launches and the product cycles of the respective games. And then second, it also shows the improvement in the profitability of Youla. And -- so basically, those are the 2 key factors that have contributed to the dynamics in marketing expense this quarter.

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Vladimir Bespalov, VTB Capital, Research Division - Analyst of Industrials, Transportation, Infrastructure, Chemicals & Equities and Internet Analyst [16]

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But for this marketing expenses going forward, should we expect similar dynamics? Or it will return to growth similar, let's say, to the revenue growth going forward? How should we...

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Fedor Rubtsov, Mail.ru Group Limited - CFO of Russia [17]

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Oh. Well, as ever, that will be a function of the game launches first and of how successful those game launches are and how marketing support each game requires. So we'll be managing it within the EBITDA of the gaming business unit, which I think we have given a guidance on. And -- well, so basically, that will be the key variable, I think.

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Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [18]

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Vladimir, it's Matthew. To really summarize your answer, it is unlikely that marketing falls as a percentage of sales over the medium term in any dramatic way.

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Operator [19]

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Your next question is from Cesar Tiron from Bank of America.

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Cesar Adrian Tiron, BofA Merrill Lynch, Research Division - Research Analyst [20]

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Congrats on the results. The fifth one was on the food delivery. I mean the quarter was particularly strong on the top line. Can you please talk a little bit about it? Is that mainly market share gains? Is that expansion in new cities? New restaurants? Or do you think it's also related to significant subsidies that you would have implemented ahead of the closing of the JV of Sberbank? And possibly, if you can tell us if the the losses at Delivery Club materially increased in this quarter?

Second question would be on games. Just wanted to better understand the no launch in the quarter. Was it related to a particular game which you have delayed or decided not to launch? And if so, if you could explain why. And as just a follow-up on this IFRS change, I just wanted to be 100% clear. Going forward, are the management accounts going to be almost aligned with IFRS -- sorry, the IFRS is going to be almost aligned with the management account or 100% aligned? And is that both on the revenue and the EBITDA?

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Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [21]

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So thanks for the question. In games, there were never any launches planned in Q3. It was always the plan. As you know, it's always difficult to plan exactly when games come out, you put them out as soon as you have what you consider a good product. As you know, games launches can be a somewhat of a moving feast in terms of the date. But at the beginning of the year, we never expected that there would be any launches in Q3. So nothing has changed in that respect. I think looking forward, I think we're very happy with the pipeline. And we feel confident about the games pipeline going forward.

In terms of IFRS, quite clearly after this adjustment, as you know, the 2 most sizable differences, IFRS management accounts was, one, the pro forma ring of acquisitions and disposals. And the second was the timing of games revenue recognition. Quite clearly, with the adjustment to an IFRS games revenue recognition, it will be much closer to management accounts. This is not to say it will exactly mirror it because you, of course, you'll still have the pro forma adjustments.

And I'll hand over to Boris on Delivery Club.

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Boris Dobrodeev, Mail.ru Group Limited - CEO [22]

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Yes. On Delivery Club, as I said before, I think we have very strong traction across the board, both in marketplace and home delivery. I think we also had a very well -- evenly distributed traction across geographies in Russia. So I think the team did fantastic job in expanding its 1P iin significantly expanding its presence in terms of QSR restaurants, also significant expansion in logistic separation. And in the number of couriers as you see across the street. So overall, it gave a very strong cumulative effect of growth. And I think we do seek continuing strong expansion of Delivery Club business going forward.

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Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [23]

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Cesar, I would just add to that. Clearly, with 190% growth, it's simply not possible to do that with just one factor. Everything needs to be -- especially when we're dealing with 190% growth on already relatively big numbers. What you've seen is that the business has moved from 2 million to 3 million orders over the space of the last 4 to 5 months. So what you've actually seen is an expansion in orders in what is traditionally a weaker quarter, the summer quarter. And it's -- I know that it's easy to say, is it just one thing. It's simply not possible to be delivering those sorts of numbers without expansion in every single area. And without the business firing on all cylinders.

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Boris Dobrodeev, Mail.ru Group Limited - CEO [24]

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Yes. Just as an example, we're already -- even without signing a binding agreement towards Sperbank, we already started to work on synergies with Sperbank. And you see a very nice incremental increase in orders from, Cesar, synergies realized with Sperbank, and we are very grateful to them for being such good partners.

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Cesar Adrian Tiron, BofA Merrill Lynch, Research Division - Research Analyst [25]

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And then, can you say something on the losses of this business? Obviously, I do understand that it's going to be deconsolidated, but just -- yes, just curious, are the losses increasing materially?

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Boris Dobrodeev, Mail.ru Group Limited - CEO [26]

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Yes. The losses have increased, of course, as the business on goes very strong in expansions. So high growth always comes at a cost. And I think both us and our future partners are absolutely fine with current levels of investment. As we see that these investments will definitely pay off. So as you know, as we always said, and we said in our statements, both in terms of Delivery Club and Citymobil, we have enough capital to reach breakeven. And the last couple of months allow us to fully reiterate our view and to be even more optimistic on the future of our businesses because I really think we are building something big here.

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Operator [27]

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And now we'll take our next question from Anna Kurbatova.

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Anna Kurbatova, Joint Stock Company Alfa-Bank, Research Division - Senior Analyst [28]

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Congratulations with good results. I have 2 questions. First, on the community IVAS revenue. There is a very nice acceleration in year-on-year growth to 15%. So I wonder whether this is -- should regard it kind of a one-off as a result of, let's say, you -- your service developments in terms of speakers and other services and goods in Odnoklassniki network? Or we should be expecting going forward, more or less, same pace of growth in this revenue type?

And the second question is on -- generally on advertising market situation. So you say that the market is somewhat more challenging than normally, at the end of the year. So would be great if you elaborate something. So do you see overall softer demand on advertising? Or maybe on advertising categories in your formats and social networks? So any comment would be very helpful.

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Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [29]

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Thank you. I'll deal with your first one on advertising. I want to be clear, we're not saying Q4 is especially challenged or anything like that. We've simply made the comment, we've made it repeatedly during this year that the backdrop to the advertising market in -- for the whole of 2019 has not been as supportive as it was, for example, in 2017 and 2018. The macro backdrop is not as supportive. And you see that across the entire market, not just the digital market. Nevertheless, the trends that we've seen over the last few years. The budgets continuing shift from all other mediums towards digital and then even inside of digital, towards social and away from search. We -- those are trends we continue to see. Q4 is always a big quarter for us. It's always a seasonally very important quarter. There's always the question of where the budgets will be used up by the end of the year. But I think that -- I wouldn't want to misinterpret our comments to say that we're going into Q4 in any way, sort of, more cautious than we went into Q3. We've given explicit guidance about Q4 and about the second half ad budgets. And for the benefit of doubt, I'd reiterate that we would expect H2 ads to be at least in line with H1 in terms of the growth rate.

With that, I'll hand over to Fedor on the IVAS side.

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Fedor Rubtsov, Mail.ru Group Limited - CFO of Russia [30]

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Yes. So just -- so I think on the IVAS side, I think we had a very decent quarter, both in terms of music subscriptions and dial-ups and like all dial-ups, virtual gifts. But I think we'll not give line-by-line guidance for this business.

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Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [31]

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Yes. I think the only other comment I'd add on IVAS, we're very happy that over the last few years, we've managed to stabilize and then return IVAS to growth. We continue to expect that IVAS will grow slower than group, and so will continue to decline as a percentage of sales in terms of the overall number. And, yes, I would obviously caution you, don't just take the Q3 number and run it forward. At the beginning of the year, we said that we would expect IVAS to be in the, sort of, low single-digit growth for the full year. Clearly, Q3 has been very strong. And we would expect it to continue to grow in Q4, but I think it's unlikely to be at the same sorts of rates as Q3.

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Operator [32]

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The next question is from Maria Sukhanova from BCS.

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Maria Sukhanova, BCS Financial Group, Research Division - Research Analyst [33]

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Maria Sukhanova, BCS. I have several questions about (inaudible) mini apps platform. It was -- I was surprised to see that you now have already 16 million monthly users. So first question is, the growth in the third quarter, was it just natural or something that happened? Or you had to, like, run some promise to achieve it? That's first one.

Second, I wonder if there is a difference between platforms, like, you see high penetration of VK mini apps on desktop, for instance, because it's when they show better on mobile or vice versa? Or there is no difference like that?

And third question, on monetization, how do you monetize this vertical now? And what are the plans in this respect?

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

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So I will take your question by part-by-part. So first, there are -- there were no special promise by VK. So it comes at no additional cost for us. I think what we have done is we have significantly first ramp-upped product. And second, we have start to introduce very good use cases for our partners. So I think that now, in terms of VK mini apps, we feel as strong as never before with no such partners as Citymobil, who see really strong contribution to their business. It was up to 30% of rides coming from VK mini apps in certain areas. We see very good results from our collaboration with McDonald's. So McDonald's app on VK mini app platform has more than 4.5 million audience, which is also quite big. AliExpress Russia mini app is also starting to gain traction. So I think our mini app platform is starting to get more and more adoption by our partners. And the more partners adopt it, the more traction our platform has. So I think we are starting to see some network effect here. And we are very pleased about it. And we see -- actually expect much more strong growth coming ahead. So I think we are at the inflection point in terms of the mini apps program. I think that the more real effects our partners see from our platform, the more adoption we'll have.

So in terms of monetization now, it's not factoring in into any of our models. Now we see very good extra incremental use case for VK in general, for more engagement into our, for example, payment products on VK, which -- where we have huge synergies. I think in the future, we don't have any problem coming up with some monetization product going ahead. But now we just -- expansions is our -- in our heads. This is our primary goal. So I don't know, in the future, it won't be difficult to either get some extra contribution in terms of advertising. And by the way, I think in the coming months, we'll already see some extra ad contribution from VK mini apps. In the future, we will either limit ourselves to advertising or maybe come up with products that, for example, allow us to take some cut of revenue or something like that. But that's not factored in into our models now. Yes, so it's similar to [Telenor] which app type of mini app ecosystem. And I think that's -- we are getting now.

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Operator [35]

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Our next question is from Vladimir Bespalov from VTB Capital.

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

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I want to ask you about probably more color on this draft law for an ownership. Matthew already mentioned that you believe it won't affect much Mail.ru. But maybe you could explain some technicalities. Because my view is that the Mail.ru is [via an] incorporated entity. And from this perspective, the draft law cannot -- the law, if it's passed, cannot be applied to this entity, but rather to your underlying assets. Why are you sure that it won't affect you that much from this perspective because Mail Group will probably have to limit its voting power in underlying assets from this perspective. And the other thing is if -- even if we have like a 20% cap on foreign voting power, with the current beneficiary owners or voting power in the -- in Mail.ru, it's still a pretty low cap for the current shareholder structure to persist and, like, to maintain the current voting power. How do you see this? How are you going to handle this going forward, if this law is passed?

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Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [37]

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Vladimir, thank you for the question. As you know, the Russian legislative process is a long one. And the gap between what is proposed at the beginning and what comes after the end is almost in every case, very, very different. And as you know, there are a number of consultations going on. You've probably seen the latest thoughts and recommendations that the voting limit would not be 20%, but 50% minus 1%. Quite clearly, we continue to consult and we spend a lot of time and effort to be as collaborative as possible with the authorities in this area. So I think that there are a number of different factors here. I'm not going to comment on how we see the law ending up in its final stage, but I think it's very clear that the final version is unlikely to be very close to what was first proposed. And then I would also draw you to the attention of the fact that in our Articles of Association, a majority of votes has always have to be owned by an approved Russian party. In this case, of course, that's MFT, which has a majority of the votes. So I would say that our confidence stems from the fact that we obviously consult and give our opinions very -- and we work very closely with the authorities in the drafting of the laws. And I think that based on those conversations, we see the law changing over time. And as we -- as you've always said, the end result is very rarely close to what is initially proposed. And as such, I think we have a confidence that Mail and its shareholders will be unaffected.

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Boris Dobrodeev, Mail.ru Group Limited - CEO [38]

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Yes. And by the way, if I were -- it's already -- our documents are very, so to say, are very -- already very well written, and we have an article saying that non-Russian shareholders cannot control more than 40% of royalty Mail.ru Group. So I think our documents are already very well -- should very well protect us from similar kind of legislation.

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Operator [39]

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And now we'll take our next question from -- just a moment, please. From Sebastian Patulea from Jefferies.

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Sebastian Cristian Patulea, Jefferies LLC, Research Division - Equity Analyst [40]

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Strong advertising revenue this quarter, and it's likely that you guys continue gaining market share. What are some of the dynamics of these ad market share gains, please?

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Boris Dobrodeev, Mail.ru Group Limited - CEO [41]

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So those are all the usual suspects. It's mobile, video and media advertisement, where we are, by far, the biggest player in Russia. At the same time, I think we're starting to get more traction and more performance in SMB-driven formats as well. And as you know, we previously put much more emphasis behind these growth drivers. So we actually see our context advertisements going very well. And it's already quite a significant part of our advertisement revenue. So these are the key drivers behind our ad growth, and we think they will persist going forward.

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Sebastian Cristian Patulea, Jefferies LLC, Research Division - Equity Analyst [42]

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And if I may follow-up, please. It's -- is that mostly Delivery Club and advertising? What percentage of their ads are on social media platforms? And how do you guys account for this business' advertising spend?

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Boris Dobrodeev, Mail.ru Group Limited - CEO [43]

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Sorry. Could you please just specify your question. I didn't completely understand.

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Sebastian Cristian Patulea, Jefferies LLC, Research Division - Equity Analyst [44]

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Sure. So Delivery Club, which in -- held for sale, what percentage of their ads of the ad spend is used on social media as opposed to search offline advertising? So what percentage of total marketing spend is on social media? And how do you guys account for their advertising spend? How do you account for it?

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Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [45]

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Well, as far as -- Matthew here. It's very simple. We don't account for their advertising spend. It's free. While they're part of the group, of course, they get allocated a percentage of ad inventory to use. But there's no intercompany accounting for that. Obviously, post the closing of the JV, that situation will change.

And as to your first question, obviously, we don't break out the Delivery Club advertising budget between social and search and third parties. Sorry, we give a lot of detail, but we don't go down into that level.

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Sebastian Cristian Patulea, Jefferies LLC, Research Division - Equity Analyst [46]

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And one last follow-up, please. And that means that when the JV will close, there is some -- there's a possibility of the cost base for Delivery Club to increases. As now they will pay for advertising on your platform? And also your advertising to increase. Is that correct?

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Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [47]

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No. That obviously -- we don't know exactly where the JV will advertise. It will have its own management. But clearly, it's -- they're going to be spending some money in social, yes.

But I would -- sorry, just to follow-up on that, I would also, of course, stress that the JV is extremely well funded. And as we've said repeatedly, today, have sufficient resources to see both Delivery Club and Citymobil through to profitability.

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Operator [48]

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We have a question from Masha Kahn from HSBC.

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Boris Dobrodeev, Mail.ru Group Limited - CEO [49]

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Anyone? Masha, you with us?

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Maria Leonidovna Kahn, HSBC, Research Division - Senior Analyst of TMT [50]

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I wanted to ask about what's your view about sustainability of margins in the core social networking business? And what's your approach to online video investment, whether you plan to invest more in online video content? I would appreciate if you'd answer that.

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Fedor Rubtsov, Mail.ru Group Limited - CFO of Russia [51]

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Yes. I think, yes, our margins -- you'll basically assume the dynamics and the margins that we have had in the communications and social in the last few quarters. So basically, the margin is the same, relatively stable on a year-on-year basis. So I think we are going to continue the trend going forward in the next quarters.

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Boris Dobrodeev, Mail.ru Group Limited - CEO [52]

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So on online video, we are, well, already one of the leading platforms in online video in Russia, with both Odnoklassniki and VK showing very solid growth in terms of total views. So VK is actually growing 45% year-on-year in terms of total video views. So now we treat each other more as a platform, communication platform for video. So we like UGC content, be professional UGC content. We are not really in to very big buying of content like some of our competitors because I don't think it reflects the key values of our platform. Probably in terms of professional video, we might pursue some partnerships going forward in the future. For example, like, we have now in (inaudible) in our subscription product, but we do not envision very hard investments into content on behalf of Mail.ru Group or some of its destinations. Yes, we are definitely not Netflix, and we do not plan to be. We are an IT company, and we are really enjoying the status.

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Operator [53]

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We'll now take our next question from Miriam Adisa from Morgan Stanley.

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Miriam Anuoluwapo Adisa, Morgan Stanley, Research Division - Equity Analyst [54]

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Just one question for me. Could you talk about your expectations from the launch of the international gaming platform in Q4? Have you already done a lot of marketing ahead of this? Or will that fall into the fourth quarter? And then, if you could just talk about, if you're expecting a meaningful revenue contribution from that in the fourth quarter?

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Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [55]

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Thank you. Look, it's part of the wider game strategy. And I wouldn't want to put over emphasis on one -- any one aspect of the wider game strategy. Clearly, I think there is a real opportunity here. The marketing spend, thus far, has been relatively low, and it will take the time to build this up. So I'm not expecting this to be a meaningful item in the first couple of quarters, certainly.

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Operator [56]

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Our next question is from Slava Degtyarev from Goldman Sachs.

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Vyacheslav Degtyarev, Goldman Sachs Group Inc., Research Division - Equity Analyst [57]

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Yes. Can you elaborate whether you were making any investments into Citymobil throughout the third quarter? And also, can you disclose the progress of the music subscribers throughout Q3 as well?

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Fedor Rubtsov, Mail.ru Group Limited - CFO of Russia [58]

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Yes. On CItymobil, we have been financing through loans. And -- whereas on the preliminary deal terms, we expect those loans to be returned to us as soon as the deal closes.

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Boris Dobrodeev, Mail.ru Group Limited - CEO [59]

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So in terms of music, I think the music continues to develop very well. We see very good traction in this business. And we are bullish on it as never before. So we'll plan a couple of very big product releases, both on BOOM and VK products, which will be followed by very big boost of these products. And then we will share with you some interesting numbers.

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Operator [60]

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(Operator Instructions) There are no further phone questions at this time, sir.

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Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [61]

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Thank you very much for your participation. And if you have further questions, you know where to find the team here. Thank you very much and good morning or good afternoon.

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Operator [62]

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This concludes today's call. Thank you for your participation. You may now disconnect.