Mail Ru : Unaudited IFRS Results for H1 2014

22.08.2014

22 August 2014. Mail.Ru Group Limited (LSE: MAIL, hereinafter referred as "the Company" or "the Group"), one of the largest Internet companies in the high-growth Russian-speaking Internet markets, today releases unaudited interim condensed consolidated IFRS financial statements reviewed by an independent auditor and provides the following unaudited segment financial information and key operating highlights for the six months ended 30 June 2014.

H1 2014 Performance Highlights

• H1 2014 Group aggregate segment revenue grew 21.7% Y-o-Y to RUR 15,143 million. Q2 2014 Group aggregate segment revenue demonstrated 18.8% Y-o-Y growth
• H1 2014 Group aggregate segment EBITDA grew 20.0% Y-o-Y to RUR 8,047 million
• H1 2014 Group aggregate net profit grew 26.2% Y-o-Y to RUR 6,276 million
• Net cash position as of 30 June 2014 was RUR 26,331 million
• Monthly audienceof Mail.Ru portal in June 2014 reached 58.4 million Russian users (TNS, all Russia, age 12-64, desktop)

Key Recent Developments

• myMail app became the most downloaded alternative email client on Android (in addition to iOS)
• Multiple updates of myMail and Mail.Ru email apps for iOS and Android: ability to edit user's data and avatar, manage filters and folders, choose sender's account and change phone number (myMail only), as well as improved overall speed and performance of the apps
• Localization of myMail apps for iOS and Android for 15 languages (Spanish, French, Italian, German, Chinese, etc.)
• New branding of Mail.Ru portal - new color scheme, new flat design, unified experience across device sizes
• Default HTTPS access to Mail.Ru main page
• Mail.Ru for Education, a free service for schools and universities that allows to set up Mail.Ru-powered email service on their own domains
• uInternally developed online document editor (.docx) in Cloud.Mail.Ru
• Automatic virus scanning of files in Cloud.Mail.Ru (powered by Kaspersky Anti-Virus)
• ICQ for iOS and Android updated with new lightweight interface and improved performance, customizable chat wallpapers, enhanced notifications and ability to link phone number to existing UIN
• Encouraging initial progress of ICQ mobile apps in Latin America
• OK video service updated with UGC video channels, new content in online cinema and support for Ultra HD resolution videos
• New builder of custom gifts, as well as photosharing and new smileys in chat in OK
• Mobile game Evolution: Battle for Utopia - release on Android and major update Black Legion on iOS
• Closed beta launch of MOBA Strife
• Launch of browser-based game Sparta: War of Empires
• 2nd Warface Open Cup with over 3,300 participants
• Skyforge and Armored Warfare received Best of Show and Best Multiplayer awards respectively according to Ten Ton Hammer's Best of E3 2014 Awards

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

In H1 2014, the Company achieved Group aggregate revenue Y-o-Y growth of 21.7% with a continued solid contribution from games and Community IVAS which both remain on budget. However through H1, and in particular through Q2, the underlying economic and geo-political environment has continued to become materially more challenging. This has had a negative effect on our advertising revenues, and in particular the display advertising revenues which declined by around 10% in Q2. Additionally our Headhunter business, which makes up the bulk of the other revenue line, has been affected by the macro economic situation and hence has underperformed.

In H1 we continued to execute on our MMO games strategy which proved successful over the last 3 years. Warface remains our largest revenue generating game. Q2 games revenues were however affected by an issue with Archage where we lost revenues as a result of an attack on the game which allowed users to access paid features for free. We have also released a number of other titles and the pipeline remains strong over the next 12 months with World of Speed, Skyforge and Armored Warfare, amongst others, all scheduled for release. We will also continue to internationalize our most successful titles under the my.com brand. As such we expect the MMO games revenues to continue to show solid growth through the year.

Community IVAS revenues continued to show solid growth in H1, as we continue to focus on increasing paying user penetration - especially in virtual gifts and services, as well as in our API platform. We remain focused on increasing user engagement and improving our product and as such would expect Community IVAS to continue to show solid growth in H2.

We are also encouraged by the continued success of myMail which was launched in November 2013 as part of the wider my.com launch. The US is the largest market followed by UK, France, Germany and Brazil. With very limited advertising expenditure this is now the most downloaded mail client tool on both iOS and Android globally. Additionally we are pleased by the encouraging initial progress of ICQ mobile apps in Latin America.

Our engagement with users remains very strong, and user behavior remains unchanged and as a result the games and Community IVAS revenues remain solid. However, as we commented with the Q1 results in April, the more challenging underlying environment continues to make forecasting very problematic, and as such we do not anticipate any near term improvement in the demand for display, or the Headhunter business. As a result, we now anticipate that full year 2014 revenues will grow between 14-18%. We have however maintained tight cost control in H1 and anticipate being able to continue this in H2. Accordingly, we expect full year EBITDA margins at around 53%.

Conference Call

The Mail.ru Group management team will host an analyst and investor conference call at 10.00 UK time (13.00 Moscow time), on Friday 22nd August 2014, to discuss details of the Company's performance and certain forward-looking information. The conference call will include a Question and Answer session.

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

Confirmation Code: 84172653

Participant Toll Free Telephone Numbers:

Russia Free Phone 810 800 2097 2044

UK Free Phone 0800 694 0257

USA Free Phone 1866 966 9439

Investor Relations Contacts:

Matthew Hammond

E-mail: hammond@corp.mail.ru

Press Contacts:

Ksenia Chabanenko

E-mail: ks@corp.mail.ru

Cautionary Statement regarding Forward Looking Statements

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

About Mail.Ru Group

Mail.Ru Group (LSE:MAIL, listed since November 5, 2010) is a leading Internet company in the high-growth Russian-speaking Internet markets (Russia is Europe's largest Internet market measured by the number of users, comScore). Mail.Ru Group's sites reach approximately 96% of Russian Internet users on a monthly basis (comScore, June 2014) and the Company is the sixth largest Internet business globally, based on the total time spent (comScore, June 2014).

In line with the 'communitainment' (communication plus entertainment) strategy, the Company is moving rapidly to build an integrated communications and entertainment platform. The Company owns Russia's leading email service and one of Russia's largest internet portals, Mail.Ru (TNS, all Russia, age 12-64, June 2014). The Company operates two of the three largest Russian language social networks, Odnoklassniki (OK) and Moi Mir (My World), and Russia's largest online games business. The Company's portfolio also includes Mail.Ru Agent and ICQ - two instant messaging services popular in Russia and CIS.

The Company holds non-controlling equity stakes in VK.com (51.99%) and Qiwi (5.28%). The Company also holds a number of small venture capital investments in various Internet companies in Russia, Ukraine and Israel.

Group Aggregate Segment Financial Information*

(*) The numbers in this table and further in the document may not exactly foot or cross-foot due to rounding

(**) The USD numbers for H1 2013 and H1 2014 represent a convenience translation. The RUR amounts have been translated into USD using average exchange rates for H1 2013 (31.0169 RUR/USD) and H1 2014 (34.9796 RUR/USD) respectively

(***) Including Other IVAS revenues

(1) Group aggregate segment revenue is calculated by aggregating the segment revenue of the Group's operating segments and eliminating intra-segment and inter-segment revenues. This measure differs in significant respects from IFRS consolidated net revenue. A reconciliation of Group aggregate segment revenue to IFRS consolidated revenue is available under "Presentation of Aggregate Segment Financial Information" below.

(2) Group aggregate segment EBITDA is calculated by subtracting Group aggregate segment operating expenses from Group aggregate segment revenue. Group aggregate segment operating expenses are calculated by aggregating the segment operating expenses (excluding the depreciation and amortisation) of the Group's operating segments including allocated Group corporate expenses, and eliminating intra-segment and inter-segment expenses. A reconciliation of Group aggregate segment EBITDA to IFRS consolidated profit before income tax expense is available under "Presentation of Aggregate Segment Financial Information" below.

(3) Group aggregate depreciation and amortisation expense is calculated by aggregating the depreciation and amortisation expense of the subsidiaries consolidated as of the date hereof, excluding amortisation and impairment of fair value adjustments to intangible assets acquired in business combinations.

(4) Group share of net profit from associates includes the Group's share of net profit from VK.com and Qiwi as calculated based on the ownership percentage as of the date hereof (i.e. 51.99% and 5.28%, respectively; Qiwi stake reflects the decrease by 4.50% of economic interest during Qiwi's SPO in June 2014 and additional decrease by 0.64% of economic interest under over-allotment option in July 2014). Group share of net profit from associates as presented herein differs in significant respects from Group share of net profit from associates as would be recorded under IFRS due to: (i) difference in the ownership percentages as under IFRS the actual ownership would be used for each reporting period and (ii) differences in net profit of associates as the numbers presented herein are prepared based on principles used for the segment financial information of the Group's consolidated operations, i.e. do not include certain adjustments which would be required under IFRS. See "Presentation of Aggregate Segment Financial Information."

(5) Profit before tax is calculated by deducting from Group aggregate segment EBITDA Group aggregate depreciation and amortisation and adding (i) Group share of net profit from associates and adding/deducting (ii) Group aggregate other non-operating incomes/expenses primarily consisting of interest income on cash deposits, dividends from financial investments, release of certain accruals and other non-operating items.

(6) Group aggregate income tax expense is calculated by aggregating the income tax expense of the subsidiaries consolidated as of the date hereof. Group aggregate income tax expense is different from income tax as would be recorded under IFRS, as (i) it excludes deferred tax on unremitted earnings of the Group's subsidiaries and associates and (ii) it is adjusted for the tax effect of differences in profit before tax between Group aggregate segment financial information and IFRS.

(7) Group aggregate net profit is the (i) Group aggregate segment EBITDA; less (ii) Group aggregate depreciation and amortisation expense; plus (iii) Group share of net profit from associates; less (iv) Group aggregate other non-operating expense; plus (v) Group aggregate other non-operating income; less (vi) Group aggregate income tax expense. Group segment net profit differs in significant respects from IFRS consolidated net profit. A reconciliation of Group aggregate net profit to IFRS consolidated net profit is available under "Presentation of Aggregate Segment Financial Information" below.

Operating Segments

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

• Email, Portal and IM;
• Social Networks;
• Online Games;
• E-Commerce, Search and Other Services

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

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

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

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

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

Operating Segments Performance - H1 2014

(*) The USD numbers represent a convenience translation. The RUR amounts have been translated into USD using H1 2014 average exchange rate of 34.9796 RUR/USD

Liquidity

As of 30 June 2014, the Group's net cash balance (including term deposits) was RUR 26,331 million, or USD 783 million[1], and the Group had no debt outstanding.

Filing of the Report

The Group's interim condensed consolidated financial statements for the six months ended 30 June 2013 prepared in accordance with IFRS and accompanied by an independent auditor's review report have been filed on the National Storage Mechanism appointed by the Financial Services Authority and can be accessed at http://corp.mail.ru/media/files/mail.rugroupifrsh12014.pdf

Presentation of Aggregate Segment Financial Information

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

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

A reconciliation of Group aggregate segment revenue to IFRS consolidated revenue for the six months ended 30 June 2014 and 2013 is presented below: 

A reconciliation of Group aggregate segment EBITDA to IFRS consolidated profit before income tax expense for the six months ended 30 June 2014 and 2013 is presented below:

A reconciliation of Group aggregate net profit to IFRS consolidated net profit for the six months ended 30 June 2014 and 2013 is presented below:

Selected Operating Statistics

• Monthly audience of Mail.Ru portal in June 2014 reached 58.4 million Russian users (TNS, all Russia, age 12-64, desktop)
• MMO average monthly payers amounted to 674 thousand users in H1 2014 (the numbers combine paying users of individual MMO games and may include overlap)
• Community IVAS average monthly payers amounted to 7,399 thousand users in H1 2014 (the numbers combine paying users of Odnoklassniki, My World, love.mail.ru and our own social games on third-party networks and may include overlap)

[1] The USD number represents a convenience translation. The RUR amounts have been translated into USD using an exchange rate of RUR 33.6306 to USD 1.00, the official exchange rate quoted as of June 30, 2014 by the Central Bank of the Russian Federation