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Edited Transcript of MAIL.L earnings conference call or presentation 22-Feb-17 9:00am GMT

Thomson Reuters StreetEvents

Full Year 2016 Mail.ru Group Ltd Earnings Call (Unaudited)

Moscow Feb 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Mail.Ru Group Ltd earnings conference call or presentation Wednesday, February 22, 2017 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Matthew Hammond

Mail.ru Group Ltd. - CFO, MD, IR

* Boris Dobrodeev

Mail.ru Group Ltd. - CEO (Russia)

* Fedor Rubstov

Mail.ru Group Ltd. - CFO Russia

* Dmitry Sergeev

Mail.ru Group Ltd. - Deputy CEO (Russia)

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Conference Call Participants

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* David Ferguson

Renaissance Capital - Analyst

* Brady Martin

Citibank - Analyst

* Cesar Tiron

Bank of America Merrill Lynch - Analyst

* Miriam Adisa

Morgan Stanley Smith Barney - Analyst

* Vladimir Bespalov

VTB Capital - Analyst

* Alexey Krivoshapko

Prosperity Capital Management - Analyst

* Mitch Mitchell

BCS - Analyst

* Svetlana Sukhanova

Sberbank - Analyst

* Robert Prokop

CLC - Analyst

* Alexander Vengranovich

Otkritie Capital - Analyst

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Presentation

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Operator [1]

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Good day and welcome to the Mail.Ru Group Limited preliminary statement for full year 2016. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Matthew Hammond. Please go ahead, sir.

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Matthew Hammond, Mail.ru Group Ltd. - CFO, MD, IR [2]

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Thank you very much and good morning to everyone. I am joined here by the entire management group. We'll be having some Q&A. As ever, I need to read the Safe Harbor statement before we start and then we're going to make some opening comments, but we'll leave as much time as we possibly can for questions.

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. 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, including those referenced under 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 accounts.

I now have some opening comments. We're very pleased to announce the unaudited strong results for full year 2016 and outlook for 2017. In 2016, including Pixonic and Delivery Club on a pro-forma basis, the Company achieved revenue growth of 14.8% to RUB42.7 billion. Q4 revenues including Pixonic and Delivery Club on a pro forma basis grew 19.2% to RUB13.2 billion.

Q4 2016 results included a RUB342 million from the exception of Russian VAT on our Russian online games revenues. This exemption and hence the benefit will now continue going forward.

In 2016 there is an unrelated non-cash one-time tax charge of RUB768 million above the EBITDA line and RUB254 million below the line. This will not be repeated in 2017 or going forward.

In 2016 the combined effect of Delivery Club and Pixonic was EBITDA neutral. As a result, overall EBITDA margins were 41.9% giving group EBITDA of RUB17.9 billion. Excluding the non-cash one-time tax charge full year 2016 EBITDA margins were 43.7% and hence EBITDA RUB18.7 million.

Excluding Delivery Club, Pixonic, the VAT benefit and non-cash one-time tax charge, EBITDA margins would have been 46.9%.

Advertising revenue growth remained strong throughout the entire of 2016 with 26.1% Y-o-Y growth to RUB18.4 billion and Q4 growth of 26.3%. The trends we experienced in the first nine months of 2016 were unchanged in Q4. We continue to focus on the growth of mobile advertising and the roll out of new ad technology. Engagement continues to rise across all platforms and our unique position allows us to continue to take advantage as advertising budgets continue to shift to digital, and especially mobile.

While Q4 search revenues saw some improvement from Q3 they remained under some pressure. However, this was more than compensated for by continued strong growth in targeted advertising across the social networks and in mobile, which again showed fast growth.

In 2017 we expect to see a broad continuation of the trends seen in 2016, with further shifts of ad budgets online, further growth in mobile and continued growth in native advertising. With the continued rollout of further ad products, especially those around mobile and video, we believe we remain well positioned, and as such, expect to see solid growth in 2017 advertising revenues.

Through 2016 VK continued to perform very well with engagement and audience increasing through the year. In full year 2016, revenues grew 43.4% with Q4 growth of 49.9%. The redesign of the desktop and the addition of new features, especially the smart newsfeed, were well received by users and led to increased engagement.

Total monthly active users set a new record of 95 million in December with the embedded VK messaging on mobile and desktop reaching 82 million monthly active users. Mobile usage also continued to see strong growth with a new record of over 78 million mobile monthly users in December.

In 2017 the focus in VK will remain on native, and especially mobile and video advertising in the newsfeed. As previously commented, we expect the ad load and pricing to continue to increase from the current levels. At the time of the acquisition of the final 48.01% of VK in September 2014, we said we'd at least double the revenues in three years. We're pleased to announce, this has been achieved in two years. We continue to see significant further opportunities for VK with both an expanding user base and an increasing number of features, and as such, we expect to be able to double the VK revenues again over the next three to four years.

In 2016 on a pro forma basis, our games revenue grew 21.2% with Q4 growth of 36.5%. Warface remains our largest game, followed by War Robots. The pipeline of major releases for 2017 based around the key franchises is very full with amongst others, the international release of Revelation and the console version of Skyforge all planned for H1 2017. In addition to this, there will be a number of mobile titles. As such we expect to see good growth from games in 2017.

IVAS revenues for the full year 2016 declined 5.2% as mobile monetization remained challenging. In 2017 we plan a number of new mobile products and an increased focus on the mobile UX, and hence increasing paying user penetration. As such, we expect 2017 IVAS revenues will be broadly in line with 2016. In 2017 however, we expect the main mobile monetization will remain in advertising.

In October 2016, we announced the acquisitions of Pixonic and in November of Delivery Club. Both acquisitions have subsequently been fully integrated into the Group. For clarity, we have given results in both Q3 2016 and in full-year 2016 statements with the results both including and excluding the acquisitions.

Pixonic, with its key game War Robots, continues to see very strong growth in users which have more than doubled since the acquisition. We expect to see continued strong growth through 2017. Since the acquisition of Delivery Club in November 2016, we have seen orders rise over 60%. We already see that leveraging our mobile marketing resources intensifies new user acquisition and compared to other markets, penetration of food delivery services in Russia remains low. As such, we expect to see significant further growth in Delivery Club through the year.

Through Q4 and into 2017 our location-based marketplace Youla continues to see very strong user growth and has now reached 9.6 million monthly active users and 2 million daily active users. This is a near doubling of the user base from the 5 million monthly and 1 million daily that we reported with the Q3 revenue update in October. The app remains consistently in the top five overall in Russia in both the App Store and Google Play. While we may start some limited monetization experiments in 2017, the main focus will be on further driving of user numbers and engagement and the ongoing expansion of new features across all platforms as we extend the reach of the product over the widest possible number of users. User feedback remains very positive and hence we anticipate strong further user growth through 2017.

As previously mentioned, in January 2017 we received formal confirmation from the Russian tax authorities that starting from Q4 2016 our Russian online games revenue should be exempt from Russian VAT going forward. Given there is no change to the pricing of games and this VAT change is now ongoing, this will give an ongoing increase to revenues. In Q4 2016 this gave a benefit of around RUB342 million. In 2017 the revenue benefit from the VAT exemption is expected to be in the order of RUB1 billion.

In 2016, MegaFon announced that they intended to acquire the 15.2% equity stake owned by USM. This was then approved by MegaFon shareholders in January 2017. Statements from both companies have made clear that both businesses will continue to operate separately and there is no change to Mail.Ru governance, culture, operating procedures or management. Any cooperation between the companies will be on an arms-length basis and on fully commercial terms. However, as a result of the 63.8% voting weight attached to these shares, MegaFon will now consolidate Mail.Ru into its accounts. As such, starting from Q1 2017, Mail.Ru will move from being a half-year reporting business with quarterly revenue updates to a full quarterly reporting business.

Throughout 2016 the cash generating capacity of the business remained unchanged and cash conversion was expected. As a result, net cash at the end of 2016 was RUB5.4 billion. This is prior to the final payment of $10 million for Delivery Club which is due in Q1 2017.

We are very pleased with the two acquisitions we announced in Q4 2016. They fit well within the core strategy and mobile assets of the Group and present significant opportunities for the future. With a strong balance sheet and unchanged cash generative capabilities, we will continue to examine further similar-sized acquisition opportunities.

We had a strong finish to 2016 with good contributions from advertising and games. We continue to believe we are well positioned to benefit from the ongoing structural trends in advertising. As forecast in the Q3 statement, games returned to growth in Q4 and with both War Robots and a full release schedule we expect games to see good growth in 2017. We are very excited by the potential for Youla and Delivery Club and continue to expect strong engagement and user growth.

2017 has also had a strong start and as such on a pro-forma basis, and based on current visibility, we expect to see 2017 revenue growth of between 16% to 19% leading to revenues of between RUB49.6 billion to RUB50.9 billion.

In the near term, the combined effect of Pixonic and Delivery Club is expected to be broadly EBITDA neutral as we continue to invest in these businesses. We also continue to invest in Youla. This investment, along with other spending will be H1 weighted. As a result, we would expect to see EBITDA margin of around 42% for full year 2017.

With that, I'll close my comments and open it up for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions). We can take our first question from David Ferguson from Renaissance Capital. Please go ahead.

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David Ferguson, Renaissance Capital - Analyst [2]

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Hi, good morning, everyone. So, congratulations on the results. A couple of questions please. Firstly, War Robots, can you talk a little bit about the trends and user behavior that you observed and what gives you confidence or for that matter cause for concern about the sustainability of the game as we go through the year and into next year? So, that's question one.

And then secondly, you talked about planning to double VK's revenues over the next three to four years. In your sort of mind or plan, are you thinking about that remaining still an ad-driven or an almost ad-driven model or are you building in O2O initiatives, games or something else? That's it. Thank you.

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Matthew Hammond, Mail.ru Group Ltd. - CFO, MD, IR [3]

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Good morning, David. I'll deal with the VK question first and then Boris will talk a little bit about War Robots.

I think that VK will remain mainly ad driven, but you must look at this as part of the overall network. Obviously, we've got a number of new initiatives and Delivery Club being a great example, we set up the time of the Delivery Club acquisition, that this would be fully integrated into the social networks and we would use those social networks to drive traffic and hence to expand those businesses.

So, for VK, yes, the ads remains the main focus, but also VK obviously, the users support the wider network. Obviously also, the main focus on the ads would be in the newsfeed where we've seen significant ongoing success.

Boris will say a few words about War Robots.

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Boris Dobrodeev, Mail.ru Group Ltd. - CEO (Russia) [4]

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Yes, in terms of War Robots, we have seen and we see very strong trends in the acquisition you can see in the user numbers, almost double since acquisition, strong user engagement. So, we expect this trend to continue based on first, very strong team, great marketing strategy, good product and very strong international presence.

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David Ferguson, Renaissance Capital - Analyst [5]

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Okay, great. Thanks a lot.

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Operator [6]

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Thank you. We can now take our next question from Brady Martin from Citibank. Please go ahead.

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Brady Martin, Citibank - Analyst [7]

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Yes, Good afternoon. Also, congratulations on the strong results. Two questions. First is on the one-off tax charge, if you could just maybe explain what was the nature of this charge? What was it above the EBITDA line?

The other question is just on the Pixonic acquisition and whether -- how this integration has gone and whether there were any kind of learnings that you could share from integrating this Pixonic team that helps you think will -- potentially help the organic games business. Thanks.

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Matthew Hammond, Mail.ru Group Ltd. - CFO, MD, IR [8]

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Thank you. I'll deal with the one-off tax charge. I think -- the tax charge, the background to this is that as you know the Russian tax code does remain extremely complex. And over the last couple of years, we have essentially been overpaying on a cash basis some of the taxes. Our expectation I think had been that we would get some of that back, but then in discussions with the tax authorities they said actually we have paid the right amount. So, essentially, we took the most conservative approach we could from a tax perspective and that proved to be the right one. The flip side of that is that we then needed to recognize that through the P&L by taking a charge. It is non-cash, because we've already paid the cash in prior periods and it is one-time and will not recur.

And with that, I'll hand over to Boris to talk a little bit about Pixonic.

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Boris Dobrodeev, Mail.ru Group Ltd. - CEO (Russia) [9]

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Yes, thank you for this question. So, as you know Mail.Ru Group has a very big experience in terms of integrating other companies, the latest example is VK. So, we can say that the integration process went very smoothly, all the operational parts have been mostly integrated.

In terms of synergies, I think we see two big synergies, two big points of cooperation, it's sharing expertise and marketing and operating games and game design, so that's what we do on a regular basis.

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Brady Martin, Citibank - Analyst [10]

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Okay, that's clear. Just to follow up on the tax charge. So, basically for modelling purposes on future years on your tax charge what you're reporting on the P&L you think it will essentially be the same. So, no impact, just catch up something you had as reserves or something, or is this going to impact expected taxes going forward.

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Fedor Rubstov, Mail.ru Group Ltd. - CFO Russia [11]

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It's Fedor here, just to clarify the big tax charges is really a one-off charge, it's not going to be recurring going forward. Does that answer your question?

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Brady Martin, Citibank - Analyst [12]

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Okay. Thank you. That's clear enough. Thanks.

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Operator [13]

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Thank you. We can now take our next question from Cesar Tiron from Bank of America. Please go ahead.

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Cesar Tiron, Bank of America Merrill Lynch - Analyst [14]

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Yes, hi, everyone. I have two questions, please. The first one, it seems that the advertising revenues were a little bit stronger than what you expected in Q4. Is it mainly driven by VK and if that's the case, can you please share if it's mainly -- if the key driver is pricing or if it's more inventory?

And also, would you please provide us the MMO growth rate excluding Pixonic, please? Thank you.

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Matthew Hammond, Mail.ru Group Ltd. - CFO, MD, IR [15]

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I'll deal with the MMO question. Look, we gave -- we always try to be as clear as possible, we gave the Q3 results both inc and ex Pixonic, but now Pixonic is integrated into Mail. If we were start to give the results of Pixonic standalone, essentially, we're giving the revenues on War Robots because that is obviously the main revenue stream. We've always shied away from giving individual game revenue lines. Pixonic is part of the wider games division. In the first period, we obviously gave inc and ex numbers; going forward, it is integrated into the games division. So, the answer is, that's not something we're disclosing.

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Boris Dobrodeev, Mail.ru Group Ltd. - CEO (Russia) [16]

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So, in terms of adult performance, we saw very strong performance across the board, across all the Mail.Ru destinations, but of course the key driver was VK and in-feed native formats which performed really strongly. And we expect this trend to continue.

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Matthew Hammond, Mail.ru Group Ltd. - CFO, MD, IR [17]

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Yes, but if you were to share what was surprising, obviously, the growth rate was better at VK, it accelerated. Can you please share little bit why you think that is? Is that mainly price driven?

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Boris Dobrodeev, Mail.ru Group Ltd. - CEO (Russia) [18]

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It's a series of launches mostly regarding the smart news feed, the in-feed ad format which on cumulative basis gave lot of extra ad money. We made a lot of launches here like call to actions in promo post like video formats in news feeds, so they all gave extra ad money which resulted in adult performance. And at the same time, we think the ad market overall performed better in Q4.

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Cesar Tiron, Bank of America Merrill Lynch - Analyst [19]

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Got it. Thank you so much.

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Operator [20]

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Thank you. We can now take our next question from Miriam Adisa from MSSB. Please go ahead.

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Miriam Adisa, Morgan Stanley Smith Barney - Analyst [21]

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Hi everyone, good morning. I have a few questions for me. The first one just on IVAS, I noticed that the revenue decline did accelerate in the fourth quarter. Just wondering what gives you confidence that revenues would be broadly in line with the 2016 level this year?

And then secondly on the M&A that you're planning for this year, can we expect this to be in new vertical services or should we be thinking more bolt-on acquisitions in existing divisions?

And then finally on Delivery Club as well, have you seen any change in the competitive dynamics since the launch in Cuba? And then also just how should we think about the revenue growth trajectory given the acceleration you've obviously seen and how should we think about monetization? Thank you.

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Matthew Hammond, Mail.ru Group Ltd. - CFO, MD, IR [22]

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Yes, thank you. I'll deal with a couple of these and Boris will deal with a couple too. In terms of M&A, I think along with pretty much every other company on the planet, we're not going to start giving out a list of potential targets. I think we have been very clear about the size. I think if you look at the acquisitions we did last year, they play to the core areas of games for us and also what we might describe as e-commerce 2.0, which is obviously the CapEx light end of e-commerce, essentially the agency model which obviously is something that very much appeals to us because it allows us to utilize our traffic. Those are clearly areas of real interest. In the past, we've also mentioned ad tech as an area of interest and education as areas of interest.

I think if the question is are we about to start going out and buying warehouses and things like that or very CapEx heavy and working capital heavy businesses, I think you know the answer as being no consistently from us and I don't think there is any change in that area.

In terms of Delivery Club, we don't guide line by line. We've seen a 60% increase in orders since November. This is largely about us utilizing our network better, it's also about us using -- allowing them to do smaller advertising. I think you can expect that Delivery Club will continue to show extremely strong growth through this year, but I'm not going to give line by line guidance on that. And I think Boris will then talk a little bit about new IVAS products.

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Boris Dobrodeev, Mail.ru Group Ltd. - CEO (Russia) [23]

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Yes, and I will add a little bit on Uber, so we haven't seen any influence of Uber on Delivery Club financials and operational metrics so far. And what also we need to notice is that Uber operates mostly just in delivery model, while Delivery Club has the biggest share like more than 90% of marketplace model, which does not imply own delivery. So, we mostly operate in different models. So, we plan to operate the Uber model as well, but again, we see limited potential impact of Uber business on Delivery Club business here.

So, going to IVAS, so what makes us sure that we'll stabilize IVAS revenue 2017, so we need to go back to the reasons of the IVAS decline in 2016. We think it was rapid migration of user base to mobile, where the formats of IVAS weren't still not well adapted, so we were caught a little bit off guard. So since then we worked in the following directions.

First, we introduced a number of new IVAS products which are also better suited for mobile platform which are more cross platform. I can give you a couple of examples, so we recently launched VIP status product. We launched in-messenger gaming which are cross platform. So, both VK and OK launched VK and OK live products and live streaming products, which also give users ability to donate gifts and money and potentially this is also a cross-platform revenue source. There is also a big list of smaller tweaks such as new types of gifts, gifts allowing to personalize them to the person you sent. I would not name them all. So, this is the first line of action.

The second one we're leveraging our big data expertise which we have in our search and My Target departments to better target gifts and better deal with the tariffs that we sell to users.

We also work on more on subscription models which can potentially give us more revenue here. And actually, the fourth line of defense here is we are working -- we are experimenting with our bonus and discount actions we take. So, we also use big data there, so we are trying to adjust and experiment in this field as well.

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Miriam Adisa, Morgan Stanley Smith Barney - Analyst [24]

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Actually helpful. Thank you.

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Operator [25]

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Thank you. We can take our next question from Vladimir Bespalov from VTB Capital. Please go ahead.

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Vladimir Bespalov, VTB Capital - Analyst [26]

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Hello and congratulations on the very good numbers. I have a couple of questions. One is on your cost side. The biggest increase came from agent and partner fees as well as marketing expenses. So, could you provide a little bit more color what was behind this and especially how we should look at these expenses going forward?

And the other question is on your games. Again, it looks like if we exclude the effect of the tax changes, the VAT tax changes as well as the War Robots, there was some acceleration of your games revenues in the fourth quarter. If this is the case, what was behind this and how do you see the revenues excluding Pixonic going forward? Do you expect the growth in 2017 in games to be driven mostly by Pixonic or there is some notable in your other games segment?

And on the games again, you report an increase in average monthly players in the second half of the year. If this is the result of the acquisition or there is some improved monetization of this? Thank you.

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Matthew Hammond, Mail.ru Group Ltd. - CFO, MD, IR [27]

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Thank you for the question. I'll deal with the games ones and Fedor will talk on the costs. I would say, obviously Pixonic has been -- and War Robots has been a very successful game for us. We've seen big increases in the user numbers. But we've also seen improvements in the rest of the business. Warface continues to perform very well. We've had a very solid release in Q4 with Revelation. We've got a very full release schedule based around our key franchises for both H1 and H2 this year. So, there is a lot of new product coming and at the same time we continue to execute very well.

I think we were very clear that Q3 had a number of exceptional factors in. We weren't happy with obviously the games revenue in Q3, but there were a number of exceptional factors driving that. We said the games would return to growth in the fourth quarter and that's exactly what's happened. Again, we don't give line-by-line guidance, but we are point clearly expecting games to show very good growth, very solid growth again in 2017, and that is driven by both Pixonic and the underlying business.

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Fedor Rubstov, Mail.ru Group Ltd. - CFO Russia [28]

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Yes, Fedor here now. I'll deal with the cost question. So, as you rightly noticed, the fastest growing lines in the cost side were agent partner fees and marketing expenses. A lot of that is actually driven by the new acquisitions as we said that those are EBITDA neutral between them. So, obviously, a lot of that comes by marketing and a lot of that also comes by agent partner fees. I'll give the example of the largest item here is Pixonic's commission to the app stores, which is a share of their mobile revenue from War Robots.

However, there were also a number of organic items here like for example in marketing of our new products including Youla. However, most of the impact actually comes from the (technical difficulty).

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Vladimir Bespalov, VTB Capital - Analyst [29]

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Okay. And could you also comment on the increase in average monthly players, the question which as, was it driven by acquisitions or there is some improvement in monetization as well in the second half of the year.

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Matthew Hammond, Mail.ru Group Ltd. - CFO, MD, IR [30]

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It's both from Pixonic and also from the other games.

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Vladimir Bespalov, VTB Capital - Analyst [31]

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Okay. Thank you.

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Operator [32]

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(Operator Instructions). We can take our next question from Alex Krivoshapko from Prosperity Capital Management. Please go ahead.

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Alexey Krivoshapko, Prosperity Capital Management - Analyst [33]

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Yes, Boris, Matthew, hello. Thank you very much for the call. I have two questions, if I may. The first one, am I thinking that both Pixonic and Delivery Club were slight EBITDA negative for kind of the years -- for the period which you consolidated down into your accounts.

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Matthew Hammond, Mail.ru Group Ltd. - CFO, MD, IR [34]

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As the statement says, the Delivery Club and Pixonic as an overall effect are broadly EBITDA neutral.

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Alexey Krivoshapko, Prosperity Capital Management - Analyst [35]

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Okay, fair enough. I thought it relates to 2017.

Second question, can you explain please this VAT thing with games? I was under the impression that, if there is a tax change, it goes like Russia from the start of January of each year. What actually happens with the VAT in mobile games?

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Matthew Hammond, Mail.ru Group Ltd. - CFO, MD, IR [36]

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Yes, thanks for the question. This has been an ongoing issue which we've been looking out for quite some time to essentially align ourselves with various aspects of the Russian tax code. This was then achieved in Q4 and as a result, we got the confirmation from the tax authorities that games were no longer subject to VAT in Russia. It's not a change to the VAT laws, it's about us bringing ourselves into line with aspects of the tax code.

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Alexey Krivoshapko, Prosperity Capital Management - Analyst [37]

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So, as results of this, am I right in thinking that you basically put one-off gains in Q4, which related for the previous periods or am I guessing it wrong?

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Matthew Hammond, Mail.ru Group Ltd. - CFO, MD, IR [38]

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No, it's not a one-off gain. Essentially, we got the confirmation from the tax authorities in the fourth quarter that Russian games would no longer be subject to Russian VAT. The user pricing does not change. We obviously used to recognize net revenues and obviously now we get the incremental uplift, but this isn't exceptional, this is ongoing now and as we say, the benefit to us in 2017 is of the order of RUB1 billion in revenue.

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Alexey Krivoshapko, Prosperity Capital Management - Analyst [39]

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I understand, but was there -- you had mentioned in your press release that there was a positive impact in the P&L in the year as a result of this. Am I thinking about this right or --

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Matthew Hammond, Mail.ru Group Ltd. - CFO, MD, IR [40]

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(multiple speakers) in 2016, as the statement says in 2016, in 2016 our statement says we recorded a benefit of RUB342 million as it says in the statement.

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Alexey Krivoshapko, Prosperity Capital Management - Analyst [41]

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And what's the (multiple speakers).

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Matthew Hammond, Mail.ru Group Ltd. - CFO, MD, IR [42]

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Yes, that's Q4.

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Alexey Krivoshapko, Prosperity Capital Management - Analyst [43]

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All right. I understand. Fair enough. Thank you so much. Clear.

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Operator [44]

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Thank you. We can now take our next question from Mitch Mitchell from BCS. Please go ahead, sir.

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Mitch Mitchell, BCS - Analyst [45]

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Hi, gentlemen, thank you for the call today. Two questions from me. In the statement, you noted that in the My Target network you had 82 million monthly active users from 2,600 third party apps in the network and I just note that in comparison with VK, which has about 95 million monthly active users. I'm just wondering, can you give me a sense, is the percentage of your ad revenues coming from these third-party partners is it significant? I imagine you might not want me to give me a number, but I'm just curious how important that is.

And also, if it is at all significant, if we looked at your segment reporting where you have email, social networks, games, VK, search, e-commerce, where would that revenue fall in the segments? Obviously, it's advertising, but where there?

And the second question, I just wonder if you could comment a little bit about the decision to take back the development of Armored Warfare from Obsidian? I know we don't have a specific number on revenues or costs from the game. I'm just wondering any impact on financials from that decision? Thank you.

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Dmitry Sergeev, Mail.ru Group Ltd. - Deputy CEO (Russia) [46]

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It's Dmitry Sergeev here. On the ad network, yes, you're right. It's third party apps and this number of users is an addition to our own projects. So, it's not including our audience, it's an extra audience in these third-party apps. And as for the numbers, we include them in the social networks, and we obviously do not disclose the revenue line-by-line. It's not a big part of that revenue, but it's growing very fast.

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Boris Dobrodeev, Mail.ru Group Ltd. - CEO (Russia) [47]

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Yes, in terms of Armored Warfare development, so, we do not see any material impact on our financials because of this action. So, it's purely operational question. So, you know it's hard to keep two development officers with such a big distance from each other. So, we decided to consolidate operations here in the Russian office. So, it's a question of operational efficiency.

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Mitch Mitchell, BCS - Analyst [48]

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Great. Thank you very much.

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Operator [49]

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(Operator Instructions). We can now take our next question from Svetlana Sukhanova from Sberbank. Please go ahead.

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Svetlana Sukhanova, Sberbank - Analyst [50]

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Yes, Good afternoon, gentlemen. I have a number of questions on your games segment. Let me please start with Pixonic. In the press release you mention that number of players or number of users in Pixonic and War games have doubled since the acquisition. Can we extrapolate this doubling of users since acquisition time onto your revenue growth rates? Do these correlate strongly, I mean number of users and your revenue growth?

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Matthew Hammond, Mail.ru Group Ltd. - CFO, MD, IR [51]

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The straight answer is no, because you acquire users in different geographies with different paying power and the different retention rates too. So, no, I would not -- I don't want to do a straight-line correlation there.

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Svetlana Sukhanova, Sberbank - Analyst [52]

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Okay, fair enough. My next question would be on again on Pixonic. You mentioned that you had some revenue sharing for Pixonic and you do give out some share of War Robot's revenues to third party. I missed the name of the third party and never before came across this. Could you please kindly elaborate?

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Fedor Rubstov, Mail.ru Group Ltd. - CFO Russia [53]

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Yes, Fedor here. It's just the App Store commission like all mobile games which operate on Apple's App Store and Google Play, they pay a certain share of their revenue, about 30% to the stores. So, that's kind of the case with Pixonic in this mobile game.

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Svetlana Sukhanova, Sberbank - Analyst [54]

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Okay, fair enough, yes, of course, fair enough. My another question would be about Delivery Club. What line of your financial statements are you going to consolidate Delivery Club? Is it going to be IVAS or what?

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Matthew Hammond, Mail.ru Group Ltd. - CFO, MD, IR [55]

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No, it goes into the other line.

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Svetlana Sukhanova, Sberbank - Analyst [56]

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It's other line. Okay. Fair enough. Any my last question would be regarding negative EBITDA of your storage and e-commerce segments. Is it due to this one-off tax thing or is it any other reasons for this negative EBITDA in the storage, e-commerce and other?

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Fedor Rubstov, Mail.ru Group Ltd. - CFO Russia [57]

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Yes, Fedor again, actually part of that is due to the charge, because that charge is actually allocated across the segments, using certain allocation formula that we use for all the corporate expenses. But that's not the only reason for that, there is also some marketing in there for Delivery Club, for Youla and certain other products.

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Svetlana Sukhanova, Sberbank - Analyst [58]

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Okay, so Delivery Club and Youla are here, very clear. Thank you so much. That's all my questions.

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Operator [59]

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Thank you. We can now take our next question from [Robert Prokop from CCL]. Please go ahead, your line is open.

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Robert Prokop, CLC - Analyst [60]

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Hello there. Yes, I have two questions. When you move to quarterly reporting, will that be on an IFRS basis and all the expectations that you are sort of discussing today, are they on an IFRS basis? I've always been a little bit confused by the differences between the management accounting and IFRS reporting.

And secondly -- okay, go ahead, sorry, Matthew.

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Matthew Hammond, Mail.ru Group Ltd. - CFO, MD, IR [61]

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Yes, first question Robert, we will report both IFRS and management accounts. The guidance as ever is on the management account basis, simply because that is the best reflection of the actual business. We essentially in the management account, cash account in the business, so if you want to see the closest correlation to cash flow, i.e. the real operating performance of the business, then management account is the place to go. IFRS includes a number of items which we can go through offline if you want, which simply don't reflect the real nature of the business. But for total clarity, we will report both.

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Robert Prokop, CLC - Analyst [62]

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And secondly, can you comment or maybe describe what sort of benefit, if any, you expect to see from this closer collaboration relationship with MegaFon? Is that -- it would start to see reflected in 2017?

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Matthew Hammond, Mail.ru Group Ltd. - CFO, MD, IR [63]

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So, obviously, you've seen the acquisition of an equity stake by MegaFon. I think that both companies have made a number of very clear statements. Quite clearly, we're starting our cooperation in the areas of the MVNO, the VK MVNO and in terms of big data collaboration. I think we see a lot of potential for both parties in both of those projects. Obviously, we're still at the planning and execution phase, but I can say that the main launch of the VK MVNO will be at VK first. And we see some potential from that, but we'll see how things go but, we're obviously not giving guidance on a line-by-line basis at this point.

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Operator [64]

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Thank you. We can now take our next question from Alexander Vengranovich from Otkritie Capital. Please go ahead.

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Alexander Vengranovich, Otkritie Capital - Analyst [65]

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Yes, hi. My question is on the future for the newly launched services BeepCar and Boom. Can you give us your overview of these two projects? Whether do you think they will generate any substantial revenues going forward, not in 2017, but maybe should we plan for some significant P&L from these two in 2018 or how we should basically look at them and how we should incorporate them in the model. Thank you.

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Unidentified Company Representative [66]

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Talking about I can address BeepCar, talking about BeepCar, you should it treat it more currently as an experiment, so we see it as potentially a very big market, a market of long distance rides in Russia. As you know, it's pretty big given the distances. We see it as a very attractive niche and an area of experiment where we can leverage our tech and marketing expertise. In 2017 and 2018 I wouldn't see any material impact on our financial base.

And in terms of the second service you mentioned, I did not completely understand, which service you were referring to?

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Alexander Vengranovich, Otkritie Capital - Analyst [67]

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The music service. The music.

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Unidentified Company Representative [68]

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Yes, it's launched by our partner UMA, so I wouldn't refer it as Mail.Ru service. So, Mail.Ru will do our own experiments regarding music monetization, but its again preliminary document on this impact.

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Alexander Vengranovich, Otkritie Capital - Analyst [69]

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Okay. Fair enough. Thank you.

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Operator [70]

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Thank you. We have no more questions in this queue at the time. I'd like to turn the call over to you for any additional comments.

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Matthew Hammond, Mail.ru Group Ltd. - CFO, MD, IR [71]

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Thank you very much all for joining us. We'll obviously be available analysts or investors for questions and we'll speak to you all again after the 4Q1 results in April. Thank you very much.

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Operator [72]

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Thank you. That will conclude todays conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.