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Edited Transcript of MAIL.L earnings conference call or presentation 25-Jul-19 11:00am GMT

Half Year 2019 Mail.ru Group Ltd Earnings Call

LIMASSOL Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Mail.Ru Group Ltd earnings conference call or presentation Thursday, July 25, 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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* Catherine T O'Neill

Citigroup Inc, Research Division - Director, VP and Analyst

* Cesar Adrian Tiron

BofA Merrill Lynch, Research Division - Research Analyst

* David Ferguson

Renaissance Capital, Research Division - Deputy Head of Research & Equity Research Analyst

* Maria Sukhanova

Sberbank CIB Investment Research - Former Analyst

* Maria Leonidovna Kahn

HSBC, Research Division - Senior Analyst of TMT

* Miriam Anuoluwapo Adisa

Morgan Stanley, Research Division - Equity Analyst

* Svetlana Sukhanova

Sberbank CIB Investment Research - Senior Analyst

* Ulyana Lenvalskaya

UBS Investment Bank, Research Division - Director and Analyst of Media & Technology

* Vladimir Bespalov

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

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Presentation

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Operator [1]

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Greetings and welcome to Mail.ru Group's Second Quarter 2019 Results Conference Call. At this time, all participants are in a listen-only mode. After the conclusion of today's conference call, instructions will be given for the question-and-answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Tatiana Volochkovich, Head of Investor Relations at Mail.ru.

Ms. Volochkovich, you may begin.

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

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

At the beginning, Matthew will make a summary statement focused on the key issue to them and then we would like to leave as much time as possible for Q&A, especially considering today's [O'Toole] announcements. Before I pass it on to Matthew, I will read the Safe Harbor statements and would also like to point out that during the Q&A, we will focus on questions on the line, but we welcome audience to submit webcast questions, which we will aim to also address in full as a follow-up to this call.

Please note that this press release contains statements of expectations and other forward-looking statements regarding future events or future financial performance of the Group. The forward-looking statements in this release are based upon various assumptions that are inherently subject to significant uncertainties and contingencies, which are difficult or impossible to predict and may be beyond the Group's control.

Many factors could cause actual results to differ materially from those discussed in the forward-looking statements, including herein, 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.

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

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Thank you very much Tatiana. It's Matthew Hammond here. I'd like to take the opportunity to make 6 points, which we think are the most important. #1, Q2 2019 delivery on all targets. With the Q1 results, we made a number of statements about what we intended to deliver. Specifically, we said that Q2 games and ad revenues will grow at a higher rate than in Q1, and then the games margin would see significant improvement.

We also said that we would give an update and show progression on both AER and the O2O fundraising and related partnerships. I'm pleased to say that all of these have been delivered. In Q1, you saw significant progress across the board, with extremely strong results. In terms of the partnerships, in June, you saw the definitive documents signed to AER and further progress has been made since we've also created a new partnership around our eSports business with Modern Pick and today we also announced our O2O JV with Sberbank.

#2, our new O2O partnership with Sberbank. At the end of last year, we said that we would examine the potential of bringing in a strategic partner for all or for parts of our O2O business, we're very pleased to announce Sberbank as our co-investor into an O2O company, formed on the basis of Delivery Club and Citymobil. The full synergies, it will have a post money valuation of up to USD 1.7 billion and the new company -- the new O2O company will retain its market leadership position in food delivery and continue to grow its market share and ride hailing with up to USD 1 billion in cash on its balance sheet, it will be the best funded player in the market.

Mail and Sberbank will work together on distribution and further operational synergies to drive the business and advance the local digital economy. We believe that this transaction and related fundraising places the business in an unrivaled position. Mail will hold a 50% stake in the new JV, and given that there is no single controlling shareholder, we moved Delivery Club to an asset held for sale and expect the deal to close later in 2019.

#3, Youla to remain consolidated. While we examine strategic options for O2O in combination with Youla, given the very strong growth and synergies with the advertising network, the decision has been taken to retain 100% of Youla inside the Group. In Q2, Youla saw a near doubling increase in revenues and is well on track to reaching around RUB 2 billion in revenues in full year 2019.

We see significant potential for the business and for a number of operating synergies with our advertising network and the broader Mail ecosystem. As Youla is expected to remain within the Group, we think it's prudent and transparent to incorporate it into our guidance for the rest of the year. And before ad market and outlook.

As we commented in the Q2 statement, the macro backdrop is somewhat more challenging than in 2017 and 2018. However, the investments we've made over the last few years in ad tech and in our network continue to yield significant returns. Additionally, our focus on expanding our services and focus on SMEs also continues to deliver dividends.

The result is that, although the backdrop is less supportive and the hurdle rates continue to be high, we are very pleased with the 22.5% ad growth in Q2, and we aim to continue to outgrow the market and gain digital ad share in the future. Despite the high H2 hurdle rate, and it's worth noting that in H2 2018, ad saw 38% growth, we would anticipate that H2 2019 ad growth will be at least in line with H1.

Games also have a high hurdle rate with H2 2018 growth of 34%. But given the release schedule and the ongoing success of existing titles, we expect to see continued solid performance in that area too. #5 2019 guidance and shape of the year. At the beginning of the year, we gave guidance of 18% to 22% revenue growth and EBITDA of RUB 32 billion to RUB 34 billion on an IRFS 16 basis, excluding Delivery Club and Youla.

As a result of the formation of our new partnerships ESf, which in 2018 had revenues of RUB 2.7 billion an EBITDA of RUB 0.7 billion and Delivery Club fundraising with Swedbank, both in our assets held for sale and excluded from guidance. We will retain Youla and hence now give guidance, including Youla, but excluding ESf and DC. As such, we now forecast full year 2019 pro forma revenue growth of 22% to 24% or RUB 86 billion to RUB 88 billion. Given the ongoing investments into Youla, we expect the full year 2019 EBITDA of around RUB 30 billion. This now includes RUB 2 billion of Youla losses, which have previously been excluded and also, we lack the ESf contribution, which we had last year.

We expect that we will be giving guidance on this basis going forward, and I would also note that this guidance does not assume any impact from AER or our new O2O partnerships. #6, ongoing overall strategy and shareholder structure. We've spoken in the past about our ongoing strategy, and over the last 6 months, this has really come together, very clearly.

We continue to see the social networks and the communications tools at the heart of the ecosystem, where we'll hold users for significant and rising periods of time. At the same time, there will be a number of businesses which sit around the core, being parts of the ecosystem -- sorry, which sit around the core. Some of these units we will own 100% of those with partners, such partnerships will combine the resources and expertise while providing investment capabilities to lead the digital transformation in various markets.

These partnerships will benefit from synergies with Mail.ru, and will also allow us to offer the widest possible number of products for the user. Post the closing of AER, our shareholder register will be some of the largest and most successful Internet companies in the world with Naspers, Tencent and Alibaba as our three largest shareholders. Free float is expected to remain at the current 50% and we do not anticipate any further changes to the shareholder structure.

Separately on AER, since the signing of the definitive agreements in June, further progress has been made and we continue to expect the new JV to be up and running within the next few months with Dmitry Sergeev as its Co-CEO.

In closing, H1, 2019 has been another successful period for us. The core business has delivered solid and accelerating growth across all the key business segments, and we have now announced 3 JV partnerships in AER, ESf and O2O. While the macro backdrop remains somewhat challenging, we expect that social networks and games will continue to show healthy growth in H2, 2019 and hence are happy with our strategy, outlook and the guidance that we've given.

With that, we'll open up to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Cesar Tiron from Bank of America.

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Cesar Adrian Tiron, BofA Merrill Lynch, Research Division - Research Analyst [2]

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Yes, hi good afternoon everyone and thanks for the call, and the opportunity to ask questions and congrats on the numbers. I have a couple of questions, apologies for that. The first one, can you please make some comments on the ad load versus pricing growth on your social networks? The second question is the RUB 30 billion EBITDA guidance comparable to the mid-range of the prior guidance. So, about RUB 33 billion, third question, the earnings statements suggest that you will be open -- that you would open the JV to other partners.

So, should we expect that there would be further capital commitments to that JV? And then, the last question, could you please give us some sense on the capital required for the buyout of the 50% stake in Citymobil? Is that going to be a significant percentage of the RUB 65 billion in cash, which would be at the other JV? Thank you so much.

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

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Lots of question Cesar. I'll do with 2 of them to begin with. First of all, the guidance. Yes, the RUB 30 billion new guidance for EBITDA absolutely corresponds to the middle of the range. You have to obviously add the losses from Youla, which we now consolidate, we said around RUB 2 billion and then obviously the effect from ESf which last year had RUB 0.7 billion of EBITDA profit.

So, if you add them both in, yes, basically what we're doing is reaffirming the middle of the range of the previous EBITDA guidance. In terms of the capital commitment for Citymobil, obviously we can't disclose that. It's subject to commercial negotiations, and obviously we have some options in place already on that front. But, you know, it's important to note that obviously we are putting in cash into the JV. The JV will then acquire that stake. But, no, we can't give you a sense of the size of that, that's covered by commercial confidentiality, but it's relatively small, and then I'll hand over to Dmitry and Boris on your other questions.

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Unidentified Company Representative, [4]

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Thank you for the questions. In terms of the ad load versus pricing I think that as always, it's pretty much a factor of both. However, I would say that, as we comment that we are doing a lot of new initiatives and launch a lot of new products on the ad front, and we constantly work on our advertising technology. The effective price, I mean, the CPMs again definitely even go down, which means that our ad technology works well because ultimately the results that we are giving to our advertisers, and basically most of them now play for the results in CPA form, CPI form or various other forms of buying results and [controlling] pair wise.

Basically, I think that from our results and from the fact that we are above the market, you can see that we are developing very good in this direction. So, on other potential partners my answer is that this term sheet assumes that there can be another potential partner. But currently, there are no other negotiations, as well as, there is no immediate priority to add another partner, it's just that both sides can potentially consider other partner, other investor, if they see -- if both parties see him fit good enough for this partnership.

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Operator [5]

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We will now move to our next question. This is from Miriam Adisa from Morgan Stanley.

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Miriam Anuoluwapo Adisa, Morgan Stanley, Research Division - Equity Analyst [6]

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Hi everyone, congratulations on the strong results and on this partnership. Three questions from me. Firstly, if you could just outline the investment priorities for Delivery Club and Citymobil and specifically for Citymobil, given they're still significantly smaller than the #1 taxi ride hailing company in the market, what is their ambition in the market? Is it to be the #1, or are you happy to just scale the business without necessarily reaching that position?

And then secondly, if you could just comment on the advertising market, as it pertains to the online market. How that is faring versus the offline market and what sort of trend you're still seeing within social, search, video et cetera. And then thirdly, if you could just comment on the potential for future areas of co-operation with Sberbank in other areas of your businesses VK Pay. Thank you.

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

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Miriam. Thanks for the question. I'll do with your last question first, other areas of co-operation. Look, I mean, one thing at a time, I would say. This is obviously the first co-operation we have with Sberbank. I think we're very excited.

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Unidentified Company Representative, [8]

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We just do not comment on any other directions. So, I'll take the second or it was the first question on the investment priorities. So look, I would say that, of course, our immediate priority is to create the best product and the best service for the end user in both areas in food and in taxi. So #2 as you can assume, looking at both parties being strategic parties. If you look at how capitalized the JVs, you can assume that both parties are long term oriented versus short-term goal oriented. So, another statement on Citymobil, Citymobil already started regional expansion. So, now for Citymobil, the priority is to continue and quickly ramp up its regional expansion.

So, in other investment point is that we think that both services, Citymobil and Delivery Club, they are very good entry points towards broad mobility and food delivery areas, and I think both parties consider this as entry points and there is strong potential to broaden food and mobility ecosystems within these JVs. And that's we think that, well, as we commented, we see somehow the market challenging the overall end market, but we still see the trends of our first shift from offline into online, and inside the phone line into social because again with a lot of various new advertising products, and a lot of new technology that advice that we are delivering to our clients and our push into new segments like SMBs, we think is working and again, as a result, you can see that we are -- as we think outperform the market.

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Operator [9]

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We will now move to our next question from Ulyana Lenvalskaya from UBS.

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Ulyana Lenvalskaya, UBS Investment Bank, Research Division - Director and Analyst of Media & Technology [10]

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Hi, everyone and congratulations on strong numbers in the deal. My first question will be just a follow-up on Miriam's question about the ad market. Would you say that the ad market is sort of accelerating or is it just Mail gaining share in the market? And how do you think about the overall ad market outlook into the rest of the year?

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Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [11]

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Thank you. Ulyana, it's Matthew, I'll deal with your question. I mean, look, I can really only repeat literally what I just said that, obviously the backdrop is not as supportive as it was in 2017 and 2018. I think, not giving away any great trade secrets by saying that. On the other hand, we think the Mail is extremely well positioned. There are obviously a number of hurdle rate contributors such as holidays and World Cups, et cetera, et cetera, which obviously have an effect. Nevertheless, we think that the MAIL is well positioned. We have invested heavily over the number over the last number of years, in both ad tech and expanding the network and really engaging with our customers. The result is that, while the underlying market is not as supportive and despite the fact that we have very high hurdle rates, and I mentioned H2 growth of 38% last year for us in ads, we still expect that in H2 we will continue to show very solid results, at least, in line with H1 in terms of growth rates.

So, I don't think the market is brilliant, but I think we're very well positioned. I can't really comment on behalf of anyone else.

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Ulyana Lenvalskaya, UBS Investment Bank, Research Division - Director and Analyst of Media & Technology [12]

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Okay, thank you. The second question will be on e-commerce. What is the current -- kind of level of or state of integration or -- or potential integration with Aliexpress and what kind of synergies you see between social and e-commerce in Russia?

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Unidentified Company Representative, [13]

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Well, as we and our partners from Alibaba commented many times, and by the way I can refer you to a very interesting interview of Daniel Zhang recently in the Russian press, I think it was [commercial]. We were many times commenting that the blend is to deeply integrate social and e-commerce by creating what we call social commerce, because we think that people more and more consume various goods and services in the social context through messaging, through their news feeds, friends, opinion leaders and so on.

So, we are doing a lot of integrations on this front. Some of them, you will see very soon. As you know, on the product side we never comment on the launch date, but, you can expect that this will be rolled out shortly. In terms of the transaction, we are not commenting other than what we already said in the statement that we are now working on closing the deal. Obviously, there is a lot of legal work to be done and you can expect this also to happen within the next few months.

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Ulyana Lenvalskaya, UBS Investment Bank, Research Division - Director and Analyst of Media & Technology [14]

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Thanks. And another one, if I may on Citymobil. So, the partnership announcement is overall kind of expected but inclusion of Citymobil to me was a bit surprising. What was the logic behind, was it Mail's intention to kind of try to dispose this sort of non-core asset, or was it the synergies you see between food delivery and taxi, or was it just Sberbank who wanted to invest into taxi, what was the rationale for conclusion?

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Unidentified Company Representative, [15]

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Yes, thank you for the question. So look, I think, when we announced, I think it was autumn of last year, that we can see the fund-raising for our e-commerce assets. You know, it was actually start of the journey, which presumed not only fundraising, but also strategic analysis and consideration. So, as a result of feedback and analysis, which we did, we discovered and we also found ourselves that actually, first, there are a lot of synergies between taxi and food delivery businesses, which are both called, online to offline businesses.

It's world strength, you see platforms like Uber Eats, like (inaudible) like Yandex combining together this high frequency services, mixing audience between each other. By the way, you can find a lot of Uber staffs in their prospectus, so on how the crossing over this audience and reaches the retention and frequency rate.

So, we found out that this makes a lot of strategic sense to combine the services. At the same time, we actually came to conclusion, that Youla which is a classified service, is not that fit for these two assets, it's just different -- a bit different profile of business. At the same time, Youla also showed brilliant results, and actually Youla showed a lot of synergies with Mail.ru Group core business such as myTarget VK and now we're actively working on extracting the synergies and these synergies give a lot of fruit, both in terms of monetization and significantly improving the profitability of this business.

So, we think that, from operational standpoint, it makes sense to leave Youla within Mail.ru Group ecosystem at this stage, while combining food delivery and auto business, which is a worldwide trend.

At the same time, we also saw very good results of Citymobil's fast growth. We think that in -- like absolute financial numbers, this business is pretty much comparable to Delivery Club. In the scale of this business , so we think that it's a pretty logical combination. Thank you.

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Operator [16]

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We will now take our next question from David Ferguson from Renaissance Capital.

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David Ferguson, Renaissance Capital, Research Division - Deputy Head of Research & Equity Research Analyst [17]

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Hi, Good afternoon, everyone. So two questions please. Games, can you talk about what drove the acceleration in revenue growth during the quarter? And its sustainability going forward, to what extent was it driven by legacy titles versus new releases like Conqueror's Blade? That's the first question. And then the second question, on Youla, what are your thoughts there going forward? It's up against its very strong competitor in the form of a veto. Are you more or less optimistic about that business than you were 12 months ago or when you started it, and how long before this becomes a profitable contributor for the business? That's it, thanks.

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

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David, I'll deal with the first question on games, and Boris will talk about Youla. In terms of games, the answer is the same as it is always is. Ad as we said in the statement, given the size of the games business, it's simply not possible to deliver the sort of growth rates, unless it is a combination of both new titles and ongoing success in existing portfolio.

It's not possible for one title to simply [pow] the entire portfolio. As you know, with games, it's always a sort of 80/20 type model 20% of your titles do 80% of the business, but the portfolio is still very broad. We have a number of titles that we're very happy with, and a number of titles that are at different stages in their life. As we commented in the statement, you see -- you continued to see great growth from Hustle Castle, at the same time War Robots which is now north of 130 million downloads is reaching the more mature phase of its life, where we don't think will drive the revenue so much, but it still has great earnings potential, so it's a combination of the both.

Looking at the second half, I'm not going to give you line-by-line guidance, I know that's what you're asking. But, we've got a full release schedule, we've got a very good existing portfolio, we would certainly expect to see continued solid growth in games and there are a number of really great headline titles. I mean, if I look at American Dad, Bombastic Brothers, Lost Ark, Wolf Eyed (inaudible) mobile et cetera, et cetera in the second half.

So, I think we're pretty excited by both the pipeline and what we've already got, and we would expect the games will continue to grow at good rates, and we would reiterate our full year guidance of doubling EBITDA in that division.

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Boris Dobrodeev, Mail.ru Group Limited - CEO [19]

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Yes. I just would like to estimate to you that we always positioned our games segment and our game strategy, not as Hollywood wonder, but as a platform. There's a big portfolio of games, so we would continue with this strategy. So, you should always treat it as mix of portfolio of games with different level and stage of development. So, coming to Youla, we're extremely pleased with Youla current result. I think, the team and its CEO Egor Abramets in the last two quarters did a fantastic job in actually significantly improving monetization, profitability of this business.

They continue to develop the product, and I would say that our stance towards is actually as optimistic as ever. So, now part of our strategy towards Youla, we see very strong synergies between Youla and core Mail platform. So, we're finally discovering this synergy. So, now Youla team, together with Mail is working on actually joint products between Youla and Mail.ru Group for small and medium-sized businesses including jobs and including services market.

So, generally we want to leverage both, Youla's strong user base, Youla product offering and very good specific product (inaudible) as well as the distributors of our social network and our targeting capabilities. So, I think we are building quite a unique model, which is [baked] into this e-commerce, which we're doing with Aliexpress. Again commenting on the profitability numbers, I think we see a strong improvement in the numbers.

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Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [20]

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It's a bit too early to give the break-even point on Youla at this point.

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Operator [21]

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Our next question comes from (inaudible) from Goldman Sachs.

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Unidentified Analyst, [22]

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Yes, thank you very much for the call. A couple of questions, firstly, your liquidity position has weakened in Q2 despite quite good EBITDA numbers. Can you decompose that somehow and where you see largest M&A deals that resulted in the cash outflow? And secondly, last week, you mentioned that you have a veto right over Yandex and Vezet acquisition. Can you confirm that and if so, do you aim to exercise that? Thank you.

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

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Sorry, in terms of (inaudible), it's entirely M&A related costs. We highlighted this with the Q1 results that there would be cash outflows in this period, and that we have bank loans ready to cover this, there will obviously be further outflows in Q3 as we close the transactions, although they're obviously not all upfront. The cash generative capability of the business is absolutely unchanged, so we would expect to have a slightly larger net debt position in Q3 before it then improves after that.

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Fedor Rubtsov, Mail.ru Group Limited - CFO of Russia [24]

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Yeah. It's Fedor here. I would also like to add that please take into consideration that although we have excluded Delivery Club from the management accounts EBITDA, it's still in the cash flow. So, we have still financed the losses of Delivery Club, so we need to take that into account and well to a lesser extent Pandao has also been excluded (***EOF Part14 ***) from the management account, but it's still in the cash flow. So, I think you take those into consideration as well when you do your -- the cash flow reconciliation.

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Boris Dobrodeev, Mail.ru Group Limited - CEO [25]

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So, as for the business transaction. I would refer you to the statement that we made last week, it's 100% accurate, and we 100% stick to it. We do have certain veto rights, and we have not still made up our mind on how we would exercise it, whether we would exercise them or not.

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Operator [26]

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We will now 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 [27]

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Hello. Congratulations on the number and on the deal with Sberbank. I have a number of follow-up questions on the deal. First of all, based on the amount of cash, which will be injected in the JV, it looks like most investments will go into the development of the taxi business versus the food delivery, just can't absorb that amount of money.

So, from this perspective. First of all, why didn't you buy, if you ever try Vezet taxi, which was acquired by Yandex recently? Then, how do you plan to develop this business organically or are you looking at some potential acquisitions, just to gain the market share.

And the last question on this deal is that you have certain KPIs, which are not disclosed, but what if these KPIs are not met, what's going to happen, just no additional investment in the joint venture or maybe if you can sign a new deal at whatever change to terms and so on and so forth.

And the second question, I have is basically on games, maybe you could provide some color. Given your marketing budgets on things like this, how should we be watching to the trajectory of margins in this third and in the fourth quarter? Thank you.

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Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [28]

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Vladamir, thanks for the questions. I'll do with two of them, and then hand over to Boris. In terms of games; we've always said games tends to be Q4 weighted, in terms of the EBITDA, a large part of this is the traffic is very expensive -- sorry, much more expensive in the fourth quarter, and hence games tends to spend less on marketing in the fourth quarter and more in the first three. So, as you saw last year, you should expect to see a Q4 waiting for the games margin.

In terms of the KPIs, the first thing I would say is that we fully anticipate that all the KPIs will be met. If the KPIs are not met, simply the second stage of the payments is not made into the JV by both sides. But, as I said, our working assumption and we would certainly encourage you to work on the assumption that all the KPIs will be met. So, in terms of Vezet, I would just refer you to my previous answer, so there is nothing to add to that. So, in terms of budget allocation we currently with our partners, do not disclose both the exact location and the situation on potential M&A. This would be subject to both parties' decision. But, in terms of your estimation of current allocation of budget, I would just politely say that it's significantly inaccurate and wrong. Sorry to say that…

Does that answer your question Vladimir?

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Vladimir Bespalov, VTB Capital, Research Division - Analyst of Industrials, Transportation, Infrastructure, Chemicals & Equities and Internet Analyst [29]

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Thank you.

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Operator [30]

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We will now move to our next question. This one is from Maria Kahn, HSBC.

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Maria Leonidovna Kahn, HSBC, Research Division - Senior Analyst of TMT [31]

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Hello everybody. Thanks for the opportunity to ask questions. I've got two. Can you please comment about the margin trend in the core business? I mean, the social communications and the social networks. What's the outlook for the margins there? And the second question kind of going back to Ulyana's original around synergies on taxi and food delivery. I will understand that Citymobil is mostly in Moscow and is mostly pedestrian delivery.

Can you talk about the synergies in the regions? And can you elaborate more about customer acquisition costs between the two businesses?

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Fedor Rubtsov, Mail.ru Group Limited - CFO of Russia [32]

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Yeah. This is Fedor, I can address the first question on the margins of the social and communication segment. Well, broadly I would say that those margins should stay stable. However, I would encourage you not to focus too much on the percentage margin, but rather on the absolute EBITDA growth, because as you know, over the last few years, we've seen quite significant growth in the number of businesses, which have an inherent lower EBITDA profile, but which are still profitable and growing such is for example, the music business, which is an integral part of our social networks. So, yeah, I think those will be my comments with respect to that.

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Boris Dobrodeev, Mail.ru Group Limited - CEO [33]

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Yes. So, on the Citymobil and delivery co-op synergies, so there are a lot of synergy lines. So, I would first refer you to marketing where you see both strong marketing synergies in terms of new user acquisition, by crossing the traffic as well as loyalty programs and user retention programs, and the game here, we both see, inside of our services, as well as we see strong proof of this thesis in the numbers that Uber shows to the market. Second, it's data, third it's potential logistics and last mile synergies that we see between the services, as for the second question on the Moscow. So, now Citymobil is in 4 cities, but we actually now fulfilling our original expansion and we see that the results far exceed our internal KPIs, and we think that before we have been seriously overstating the complexity of regional expansion. So, actually it grows -- we see that now it goes very easy and smooth, and I think would be in 12 months we will be able to significantly increase the coverage of Citymobil zone, especially if you consider 1 million plus cities in Russia.

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Maria Leonidovna Kahn, HSBC, Research Division - Senior Analyst of TMT [34]

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And regionally you plan to deliver food by cars?

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Boris Dobrodeev, Mail.ru Group Limited - CEO [35]

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We do not comment on our operational plans, and know-hows at this stage. Thank you.

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Operator [36]

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We will now move to our next question from Svetlana Sukhanova from Sberbank.

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Svetlana Sukhanova, Sberbank CIB Investment Research - Senior Analyst [37]

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Sincere congratulations that once you have proved your skills, you make excellent deals. So two questions from me. My first question would be on Youla, you're guiding about RUB 2 billion loss at EBITDA level for 2019. Can you tell us what was Youla EBITDA loss for the first half of this year? And at least if you cannot tell us, can you guide us is this RUB 2 billion loss for this year is it front-loaded or second-half loaded? That would be my first question.

And my second question would be on your run rate for a Delivery Club. You have a tradition of -- your run rate for the Delivery Club would be much appreciated.

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Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [38]

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So, Svetlana thank you for the questions. I'll do with the first one. We don't give line by line a P&L on every division. We've given a loss for the full year, there will be some seasonality in that, but it will be broadly shared through the year, broadly equally I would say, but there is some seasonality in that. But the waiting differentials are not enormous. And your second question was on Delivery Club?

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Unidentified Company Representative, [39]

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Delivery Club. At this stage, we do not disclose, I would probably would not disclose the exact run rate, but we just would reiterate our guidance that we are on track to double our revenue year-on-year. So every month we see the proof of this guidance.

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Operator [40]

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We will now take our next question. This question is from (inaudible) from Ria Novosti.

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Unidentified Analyst, [41]

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Yes, hi, I have a question from [HQ]. Actually, I'm interested in how the establishment of joint venture of Sberbank will affect the dividend policy, I mean dividend amount?

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

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I'm sorry, you were very faint there. But, if I understood, the question was, does the JV with the impact our long term -- what we said about our dividend policy, was that the question?

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Unidentified Analyst, [43]

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Yes, exactly. Will the establishment of the joint venture have any effect on the dividends?

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Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [44]

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Do you know what, I'm going to be able to keep this on to very, very short, no.

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Operator [45]

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We will move to our next question. This is from [Igor Goncharov] from Gazprombank.

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Unidentified Analyst, [46]

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Yes, thank you very much. Just a brief technical question on your intention to consolidate 75% of Citymobil into JV. Is it possible to provide some color of details on the structure of the other shareholders of the Citymobil at this point in time? Thank you very much

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Unidentified Company Representative, [47]

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I would refer you to the press release and our official statements that were part of the deal. We're committed to generate 75% of Citymobil for the JV. But probably, the rest of the picture would remain black and white. At current stage, as we agreed not to disclose -- now at this stage

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Operator [48]

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(Operator Instructions) We'll now move to our question from Maria Sukhanova from BCS.

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Maria Sukhanova, Sberbank CIB Investment Research - Former Analyst [49]

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I have three questions. The first one on the JV with Sberbank, is it decided at this point who is going to run the JV? Is it going to be like, one, you've had for the whole JV or you've got to have someone in charge of Delivery Club, someone in-charge of Citymobil, that's one. Second, I wonder if you could share with us some Citymobil any data points like gross bookings run rate or number of orders.

Like, for instance, you mentioned that it's a similar size of businesses as Delivery Club, in the sense of revenue or is it something else? And probably, thirdly, you mentioned -- you saying in press release that the structure of (inaudible) is now clear, so does it mean that like in the coming 6 months to 12 months, we shouldn't expect any big M&As? That's all from me.

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Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [50]

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Thank you for the question. I'll deal with the third one.

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Unidentified Company Representative, [51]

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I start maybe at third. I start with the management question. So, both parties agree that the current stage Delivery Club and Citymobil continue to run their respective services. As for the CEO and management of the holdco, of the JV currently, the parties have not discussed this question, yet.

So as for Citymobil size, again, I will refer to my previous statement. So, they're probably the size of the GMV and net revenue is more or less comparable to Delivery Club

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Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [52]

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And in terms of future M&A plans, look. I would say like everybody else, we don't comment on future M&A. Nevertheless, it is clear that we've had a number of very large transactions over the last -- over the last few months and we obviously need to settle all of those, so they're all hugely value accretive, obviously and show great returns for Mail's shareholders.

It's not to say that, that there will be no further JVs or no further moves, but I think our immediate focus is on bedding down the three that we have right now.

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Operator [53]

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We will now take a follow-on 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 [54]

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Thank you for taking my follow-up question. It's on advertising revenue, with these joint ventures in e-commerce in taxi and food delivery business, once you deconsolidate these assets, they will be buying advertising on your resources at an arm length. So, maybe could you give us a rough estimate how this might impact your revenue trend probably in the fourth quarter of this year? Is this a favorable part of potential advertising revenues that you are going to get? Thank you.

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Unidentified Company Representative, [55]

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So all the transactions will of course be concluded on arm's length basis. So, Matthew would give you...

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Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [56]

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Yes. Vladimir, I know what you're asking me and you know that I'm not going to answer it. I'm not going to give guidance for the impact of transactions, which aren't yet closed on the financials. What we said is that the guidance that we've given is -- does not include assumptions of any impact from AER or O2O.

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Operator [57]

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We will now take a follow-on question from Ulyana Lenvalskaya from UBS.

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Ulyana Lenvalskaya, UBS Investment Bank, Research Division - Director and Analyst of Media & Technology [58]

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Thank you. Just of technical follow-ups. The first one, when I look at Delivery Club's revenue in the second quarter in absolute ruble terms, it was actually smaller than the first quarter, and the growth rate was not provided. Would you say that there was some sort of a slowdown and if so, what were the drivers behind?

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Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [59]

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Ulyana, it's obviously just the seasonality. Q2 revenues are always smaller than Q1 as Q3 is always smaller than Q4. It's the summer and -- sorry not quite the summer, not looking out the window here, but certainly Q1 always has a higher absolute revenue, but I think the revenue growth rates were broadly comparable in Q1 and Q2, they were pretty much the same. So, no, it's absolutely incorrect to say there is any slowdown.

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Ulyana Lenvalskaya, UBS Investment Bank, Research Division - Director and Analyst of Media & Technology [60]

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Okay, thank you. And secondly on music. Can you disclose the number of paying users at the moment, and also comment on the competition? As far as I can see from the press, there was expected Spotify launch in Russia. How would you say, it should impact the market?

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

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So, in terms of subscribers, it's actually in the statement 2.5 million, up from 2.1 million in Q1 and I'll hand over to Boris to make.

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Boris Dobrodeev, Mail.ru Group Limited - CEO [62]

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Yes. So, on competition of course, we cannot comment on behalf of Spotify, but at the same time, we actually feel ourselves quite comfortable in terms of competition, as our product offering is pretty much unique and differs a lot from other players in the market, as we are the only player -- maybe even worldwide providing deep social music experience, which has a big degree of both social discovery feature and as well as [UGC] component in the content that the users listen to.

So, I would say that our product offering is unparalleled, and I just do not see any of the players in the near term, including Spotify to make this functionality. What Spotify offers is just linear streaming services, probably that would be competing with similar type of linear streaming services in the market.

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Operator [63]

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Thank you. (Operator Instructions) We'll now take a question from Catherine O'Neill from Citi.

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Catherine T O'Neill, Citigroup Inc, Research Division - Director, VP and Analyst [64]

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Hi, thank you for taking the question. I know in the last results call, you talked about having quite a lot of interest in Delivery Club when you were going through the strategic review and received a number of offers. So, I just wondered if you could talk about why Sberbank was your chosen partner for this JV, especially given their relationship with Yandex on the e-commerce side. Does that complicate things in anyway?

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Boris Dobrodeev, Mail.ru Group Limited - CEO [65]

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If I understand your question correctly, the question is why we have Sberbank as its partner? So, you know, we always said and we always wanted to have a partner that adds -- initially we also had a lot of guidance from our shareholders and Board members that we want not just a financial investor, but we also want a strategic partner, which adds a lot of value and frankly, if you look at Russian market, Sberbank as a strategic partner is absolutely unparalleled.

It's not only the biggest -- by far biggest our bank in Russia, it's also in IT company, it's also one of the largest ecosystem. It has deep expertise, both in FinTech and consumer products, and what is also very important as Sberbank has a very deep experience in partnerships, and we see that generally we will share with Sberbank, the views on the development of this business.

So I would say out of all the existing and potential partnerships, this is by far the best one.

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Operator [66]

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Thank you. Ladies and gentlemen that now concludes our question-and-answer session. So, I'll turn the conference back to our host for any additional or closing remarks.

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Matthew Charles Perrins Hammond, Mail.ru Group Limited - MD & CFO [67]

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Thank you very much all for joining us. Obviously, you can reach Tatiana or myself at any time on the usual numbers, and we look forward to seeing you all in the coming quarter. Thank you very much.

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Operator [68]

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Thank you, ladies and gentlemen. That's now concludes today's conference call. Thank you for your participation, you may now disconnect.