Mail.Ru Group limited preliminary trading statement for FY 2014

Mail.Ru Group Limited (LSE: MAIL, hereinafter referred as “the Company” or “the Group”), one of the largest companies in the Russian-speaking Internet market, today provides the following preliminary unaudited segment financial information and key operating highlights for the full year ended 31 December 2014.

FY 2014 Performance Highlights

• FY 2014 Group aggregate segment revenue grew 14.8% Y-o-Y to RUR 35,778 million
• FY 2014Group aggregate segment EBITDA grew 13.5% Y-o-Y to RUR 18,297 million
• FY 2014 Group aggregate net profit grew 11.4% Y-o-Y to RUR 12,518 million

(The above revenue and growth rates are based on a full pro-forma consolidation of VK from the beginning of 2013.)

• VK FY 2014 revenue growth was 12.9% to RUR 4,319 million and EBITDA growth of 54.9% to RUR 1,603 million. VK Q4 2014 revenue growth was 22.6% to RUR 1,348 million
• Net debt position as of 31 December 2014 was RUR 16,987 million (excluding interest payable of RUR 147 million)

Key recent developments

• Acquisition of MAPS.ME, a popular OpenStreetMap-based offline mobile maps and navigation service. Shortly after the acquisition the app became free
• New versions of myMail apps optimized for iOS 8 and Android 5 with support for offline actions with messages
• Two-factor authentication (password + SMS code) across most of Mail.Ru projects and mobile apps
• Conversation view (threads) as an opt-in feature in Mail.Ru email service
• “Clean up your mailbox” – a handy tool to sort incoming messages into folders “Promotions”, “Social Networks” and “Newsletters”
• Ability to unpack and view archived files attached to emails directly in web and mobile web
• Cloud.Mail.Ru moves from beta to production, introduces shared folders and updates apps for iOS and Android with additional security features
• New photo editor in VK: new engine, increased number of photo filters, advanced tools for editing photos
• New backend and new design of the video section in VK
• New VK apps optimized for iOS 8 and Android 5 multiple UX and UI updates
• Gifts are now available in Android application and on mobile web version of VK; amendments to stickers section on all platforms
• Launch of mobile advertising in VK
• Updates of video service in OK: new viewing mode and autoplay feature
• Updates in messaging system in OK: chat redesign, gift recommendations in birthday reminder, free and paid stickers
• OK apps for Android, iOS and Windows Phone updated with audio and video messages in the chat
• ICQ for iOS and Android updated with advanced search, new push notifications, new UI of audio and video calls, faster photosharing
• Mail.Ru Agent for iOS and Android updated with completely new design and significantly improved performance, synchronization of chat history, ability to send multiple photos and videos at once
• SkyForge closed beta test launched
• Evolution listed among Best of 2014 in Google Play and Apple App Store annual ratings; new update, Legacy of Dominion, launched on Android and iOS
• Release of a major update for Warface – Operation Cold Peak
• Horoscope app listed among the Best Android Apps of 2014 (by Google) and among the best new apps on the App Store (by Apple)
• HTTPS access to all content projects by default
• Sale of Money.Mail.Ru project to QIWI

Motivation programme

• The board has approved a new long-term incentive plan based around restricted stock units; up to 5% of total shares outstanding to be issued subject to a members resolution

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

“In 2014, the Company achieved aggregate segment revenue growth of 14.8% Y-o-Y to RUR 35,778 million with H2 2014 Y-o-Y revenue growth of 10.2%. This revenue and growth rates are based on a full pro-forma consolidation of VK from the beginning of 2013. VK generated revenue of RUR 4,319 for the full year and RUR 2,315 million in H2. Ex-VK like-for-like revenue growth for FY 2014 would have been 15.0%. Through the year our MMO games and community IVAS revenues remained broadly on budget, but advertising revenues and our Headhunter business continued to face challenging conditions as a result of the ongoing economic and geo-political environment. As in H1 this continued to have a negative effect on our advertising revenues, and in particular the display advertising revenues which during Q4 saw similar declines to the previous two quarters. Our other revenue stream also remains sensitive to the underlying economic environment and hence grew at 5.4% in H2. Including VK from the beginning of the year EBITDA margins were 51.1% in FY 2014 and 51.5% in H2 2014. Ex-VK FY 2014 margins would have been 53.0%.

“Following the acquisition of the remaining 48.01% of VK in late Q3 we have successfully started the integration process. As we commented at the time of the acquisition, the first priority for us is the retention of the talented programmers and engineers, and we are pleased that the team remains largely intact and continues their focus on the product and the user experience. The focus for 2015 will be the continued expansion of video and mobile advertising. This was started in Q4 2014 and the initial signs are very promising. In November 2014 we completed the acquisition of MAPS.ME and have subsequently made the product free. We are very encouraged with user growth, making MAPS.ME an important element in our international expansion under the my.com brand.

“In H2 2014 we continued to execute on our MMO games strategy which proved successful over the last years. Warface remains our largest revenue generating game with continued strong performance and also benefited from major update in Q4 2014. In Q4 Skyforge went into closed beta release and will go into full release in H1 2015. Initial feedback has been encouraging. The pipeline remains strong with Armored Warfare due to go into closed beta in H1. World of Speed is slightly delayed and hence will potentially go into closed beta in H2. As previously commented, we will also continue to internationalize our most successful titles under the my.com brand. As such we expect the MMO games revenues to show solid growth through 2015.

“We continued to be encouraged by the traction of myMail which was launched in November 2013 as part of the wider my.com launch. In Q4 this remained the most downloaded alternative email client on both iOS and Android globally. The US is the largest market followed by UK, France, Germany and Brazil and in January 2015 we had over 2.5m MAU and over 1.0m DAU. In 2015 we have begun some monetization experiments inside of the myMail product.

“As of today the sale of Headhunter has not been closed and there is no certainty that it will close. As a result we are continuing to operate HeadHunter as a part of the Company.

“At the end of 2014 our long-term incentive programme, based around options authorised at the time of the Company’s IPO in 2010 substantially came to an end. Our team remains our most valuable asset. The retention of engineering talent is key to the long term success of the Company. As such, the board has approved a new long-term incentive plan based around restricted stock units equivalent to up to 5% of total shares outstanding. The RSU’s have a 4-year vesting and the programme will expire at the end of 2022. Additionally we have extended the expiration date of the existing unexercised options for current employees to 2022 from 2018. These actions will help us both recruit and retain the highest quality staff.

“Our engagement with users remains very strong, and user behavior remains unchanged. International initiatives under the my.com brand are going well and VK presents a number of opportunities. However there is no change in the underlying environment from what we said previously, and hence forecasting remains problematic. As such we do not anticipate any near or medium term improvement in the display revenues, or in the Headhunter business. Notwithstanding this, we see a number of opportunities in mobile and video advertising, and in our games business. Based on current visibility and current market conditions, we expect FY 2015 revenue growth, including both VK and Headhunter on a pro-forma basis, to be between 7%-12%. We continue to maintain tight cost control, however we are somewhat impacted by FX headwinds as some of our costs are USD denominated. While we have managed to offset some of the FX impact on USD based costs there is still some impact, and hence we anticipate full year EBITDA margins at between 46-47%,” concluded the CEO.