Edited Transcript of MAIL.L earnings conference call or presentation 23-Apr-20 12:00pm GMT

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

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Thank you. Good morning or good afternoon, and thank you all for joining us. We’re kicking off the Q1 earnings season in Russia as we’re one of the first companies to report and hence, one of the first to comment on the current situation locally. As such, we’ll try to give as much transparency as we can.

The COVID-19 situation and the related oil shock into 2020 started with some significant challenges for the local population and local businesses, including ours. However, as a result of our well-diversified revenue streams as well as the recent deconsolidation of some of the loss-making businesses, which now sit outside the scope of the group and are well funded, we feel relatively well positioned given our profitability and free cash flow generation.

This adds a significant level of comfort as we navigate through the ongoing pressures while also being able to take advantage of the opportunities the current environment brings. We believe this crisis will lead to a permanent shift in consumer and business behavior with increasing digitalization across a broader set of industries and a wider share of the population. And this will now happen faster than we were envisaging when heading into 2020.

With the current situation, I want to focus on a few key areas, which we believe are the most interest: advertising, games, engagement, joint ventures and outlook, and I’ll deal with each of them in turn. First, on advertising. Advertising, which accounted for 42% of group’s revenue in 2019 was a clear correlation with local business performance and outlook, with correlation arguably higher than in previous macro downturns since digital became the dominant advertising channel in 2018. The ongoing crisis is having an obvious impact on ad budgets, which we started to see in March, with digital advertising revenue growth slowing from nearly 20% growth in January to 9.3% year-on-year growth for the quarter.

We expect this adverse impact to be even more pronounced in the second quarter with negative advertising revenue growth in our current base case for Q2. Advertising visibility is tied to the potential length of the lockdown as well as oil price dynamics and the ultimate level of state support, all of which, at this point, we have limited visibility on. However, we expect the structural shift to digital to remain intact in 2020 with digital holding up better than all other advertising channels, including TV. We also continue to expect a further shift into social within digital in the coming years, and our ongoing investments into AdTech makes us well positioned. Here, we would flag that VK revenues grew at more than 20% in the first quarter, which is a reflection of our ongoing investments into this area.

Furthermore, we note that our advertiser base is well diversified and the largest verticals are FMCG and e-commerce, both of which are doing relatively well at this point. While none of the other verticals account for more than 10% of advertising revenues. Additionally, our ads have a deep skew to performance with more than 70% related ad revenue share, and we have a relatively low SME exposure at less than 1/4 of our ad revenues, which is the most adversely impacted segment at the moment. Also, although some of the — our verticals have been hit, notably travel, airlines, events, sports, apparel and autos, others continue to see growth, notably health and medicine, telco, e-commerce, games and FMCG.

Visibility, however, remains limited and predicting near-term budgets and budget moves is somewhat challenging. Secondly, gains. While we had expected Q1 to be the low point in growth for the game segment this year, with projected single-digit growth, we actually saw a 13.4% year-over-year growth, RUB 7.9 billion. We saw rising engagement starting from the back end of March, especially across traditional home PC and console platforms, although there is normally a lag between engagement and conversion for revenues.

As engagement in FX trends have carried into the second quarter, we expect the Games segment to continue to at least partially offset the impact of advertising declines. We saw more than 20% growth for games in March, supported by both new and existing titles. Games margins were 8% in the first quarter, which was a function of launches and therefore, marketing spend requirements versus the first quarter of 2019, where margins were negative.

Given the pipeline for the second quarter, especially the upcoming launch of the console game within the Warface franchise, Q2 margins should be similar to Q1 in our base case. As always, the ultimate level of profitability will be subject to traction of new launches and therefore, related marketing spend. As a reminder, some of the latest releases also include Dino Squad and new mobile game from Pixonic, which went live this week and World Above, which was rolled out during the second half of March. Overall, our pipeline remains unchanged versus the initial budget and it forms the basis for incremental growth versus the Q1 level.

Third, engagement. The ongoing lockdowns result in more engagement and time spent across our platforms. One of the latest surveys done across 5,500 people globally suggests that social networks, games and online shopping are among the top activities where people spend more time. Clearly, all of these play to our core strengths.

I’d like to give you some examples of the latest engagement stats. The PC version of Warface grew from current users by 33% and daily active users by 23% month-over-month as of April 15. Skyforge saw the same metrics rise by 55% and 49%, Conqueror’s Blade by 76% and 29%. During the first 9 days of April, VK saw daily pools rise by 35% versus the pre-lockdown period, with 20% growth in messages sent, 33% rise in video views, 48% increase in watched streams and 17% rise for stories.

VK Mini Apps, monthly active users continues to grow, up from 27.5 million in March to 31 million so far in April, with the number of mini apps surpassing 16,000. The number of group calls on OK grew by 70% during the second half of March. The number of sent messages on OK increased by 37% year-over-year during the first week of April, with the number of confirmed friend requests, up by nearly 40% and video views up by 28%. OK’s mobile games audience growing by 27% year-over-year.

GeekBrains saw a 648% increase in portal registrations and 89% growth in new paying students month-over-month during the first 2 weeks of the lockdown. Overall, following the consolidation of Skillbox, our educational products are now the largest component of the new initiatives reporting segment, growing at triple-digit rate in Q1.

Youla saw a 54% increase in transactions in the fitness category, 41% in board games, 30% in computers and 27% in consoles during the same period, despite some pressure on overall listings.

Delivery Club saw a 60% increase in downloads and a 22% increase in restaurant orders, with the share of orders from first-time users rising from sub-10% to over 15%. Our e-mail service moved into the top 5 most downloaded apps in Russia in both AppStore and Google Play in March and remains amongst top 10 today.

We use these stats as examples of the increase we’ve seen engagement in user behavior at present. Visibility of the level at which these will continue remains unclear at this point, and elevated engagement does not always lead to incremental revenues across certain segments, but the trends remain encouraging so far as the basis for future monetization of the rosing audience base.

Fourth, joint ventures. Food delivery is currently the largest net beneficiary from COVID-19, especially the e-grocery side, where we’re also present. It is followed by e-commerce and then ride-hailing and car-sharing verticals, the latter of which are clearly under the most pressure given the ongoing lockdowns. Delivery Club revenues rose 2.1x year-over-year to RUB 1.8 billion in Q1.

Platform saw a new record of 3.78 million restaurant orders in March, up 88% year-over-year. Given supportive seasonality and some effects from COVID-19, with March revenues doubling year-over-year to RUB 663 million. In April, Delivery Club completed 1 million orders per week for the first time despite April normally being weaker than March due to seasonality. In Q1, Citymobil grew rides 3.7x year-over-year to 39.5 million, including 14.1 million rides in March, up 3.8x year-over-year and 4.4% month-over-month despite the initial negative effects from COVID-19.

Moscow has subsequently been seeing the weakest performances given the severity of the local lockdowns with rides down 50% from pre-COVID levels. The regional performance is generally much better, at least for now, with ride volumes across the group now down around 20% versus pre-COVID-19 levels so far. We’re monitoring the situation with near-term ride volumes subject to duration and spread of lockdowns. In the meantime, both services are actively working on ways to diversify the businesses and improve unit economics.

In Q1, unit economics were positive in Moscow and the Moscow region for Citymobil. The contribution per trip increased by 30% Q-o-Q across the entire platform. The Delivery Club, due to continuous improvements in logistics tech, the application of algorithmic zones and further rollout of IA-based (sic) [AI-based] scheduling system, seen a gradual improvement of delivery times, now down to the low 30s in terms of minutes and cost reduction to record low levels, while improving customer satisfaction.

For AliExpress Russia, COVID-19 has had a temporary adverse impact on logistics in China with orders made after January 20 and in February experienced liver delivering — delivery delays. However, logistics have now been fully normalized with AliExpress having service in excess of 13 million packages in March, with all delayed orders having been serviced. In the meantime, local marketplace continues hto expand, ranked among the top 6 in Russia despite accounting for only around 15% of JV for AER in the fourth quarter of last year.

The top 3 strategic priorities for AER remain unchanged: first, enhancement of the cross-border AliExpress platform, with a focus on service improvement, particularly around delivery time; second, scaling of the domestic marketplace; third, development of social commerce, primarily by the social networks in Mail. Plan is to be integrated into Mail’s group combo loyalty program in 2020. Our intention is also to continue to reduce the gap between management and IFRS accounts, which means that we aim to include losses from significant associates like AliExpress Russia and O2O joint venture in net income under management accounts. However, this is likely to happen only in 2021 when we have a year of historic financials for both entities from pro forma accounting purposes.

In the meantime, we will explicitly show net results for associates and joint ventures as part of our quarterly disclosure for the market to be able to make the relevant adjustments.

Finally, outlook. Well, the challenges local companies are facing are significant we have a well-diversified business with a robust balance sheet and solid free cash flow generation capabilities. We remain highly focused on the welfare of our employees and customers, their families, local communities and local businesses.

With us having launched more than 70 COVID-19-related initiatives and continue to look for other ways in which we can help. Given the continued uncertainty and alongside most other businesses globally, we do not believe it is practical to retain the group’s 2020 guidance as communicated with our full year results in February. Given the lack of visibility over the potential length of lockdown and the ultimate magnitude of the economic disruption, it is very challenging for us to provide explicit updated guidance for the group at this moment. However, we have undertaken a significant stress test, where, in the base case, we assume no return to growth in digital advertising this year with recovery only in 2021.

Even in this most conservative of scenarios, we would still expect 2020 to see solid growth for the full year 2020, driven by games and good growth in IVAS. Albeit that this will be at the expense of lower profitability, given the shift in revenue mix to more structurally lower margin gains and IVAS versus higher-margin advertising.

As part of the stress test, we also decided to take a conservative stance and use our stress-test scenario to evaluate all of our assets. This resulted in an impairment in the region and impairment of goodwill in the amount of RUB 6.4 billion in relation to search, e-mail, portal and instant messages, despite our confidence in the long-term prospects for these businesses. All other assets have passed the stress test, and hence, no further write-downs are expected under these assumptions.

Our revenues and OpEx are largely maxed when it comes to FX exposure, while the majority of our CapEx is in foreign currency. This means that ruble weakness is marginally positive when it comes to EBITDA and broadly negative for free cash flow on an all-else-being-equal basis. Our net debt position, post M&A costs at the end of Q1 stood at RUB 11.4 billion. We have another $82 million contribution to make towards AER in October 2020 and a potential RUB 4.6 billion payment due to the O2O JV in November, subject to KPIs.

All of the current borrowing is in rubles. The only significant USD liability we have is the future payment under the AER JV and even in this stress-test scenario, our leverage remains below 1x net debt-to-EBITDA, with reported EBITDA, including an elevated bad debt provision to account for risks related to our business counterparties.

Finally, we maintain our intention for a secondary listing on the Moscow Exchange as part of our commitments to public markets and liquidity improvement. We also plan to publish our first sustainability report in 2020 as a sign of our ongoing internal focus on ESG.

With that, I thank you, and I’d like to turn to Q&A. (Operator Instructions) I’ll remind you of our request for 1 question at the time, we will answer all questions. This is simply to manage the logistics better. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of 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, I have one. So I’ll ask only one then. Can you please disclose the pace of the trajectory of your advertising revenue either in the past [3] weeks of March or maybe the couple of weeks in April that you’ve seen so far?

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [3]

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Yes. Cesar, this is Boris Dobrodeev. So I will take this question. So I think we had a pretty good start of the year with advertising being on budget. So on February, we started to see like very little decline with growth of 13% year-on-year — I mean, decline in the growth rate. So March, we saw a sharper decline in the growth rates. So our ads were plus 1% year-on-year growth.

So I think in April, we saw quite a sharp hit in the end market. So now I think the situation is pretty dynamic. So our current projections [align] between 10% to 15% decline of revenue year-on-year. But I must say that situation remains pretty nontransparent and pretty chaotic so probably if you look at that market, we’ll see 3 groups of advertisers. These are first advertisers who are most severely keep so these are usually advertisers like travel and car sales. So of course, they are — their ad budgets are significantly hit. We also see advertisers who are generally cautious and who take and — take wait-and-see approach. So they reduce partially or kind of stronger user budget. And actually, they are advertisers who increase their budget and use this time as an opportunity to gain market share.

So this is the kind of dynamics that we see. At the same time, we remain pretty well diversified. SMB is actually less than 1/4 of our ad business. And also, interestingly enough, we checked VK steps today. Actually, VK, which is the biggest part of Mail.ru Group SMB budget is either flat or depending on the day, slightly positive year-on-year that is mainly thanks to our efforts to boost SMB products like new mobile interface and there were measures of support of SMB giving fruit, and also our less SMB exposure to areas like travel, and restaurants, which were initially under presented in our SMB segment. So I hope I answered your question.

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Cesar Adrian Tiron, BofA Merrill Lynch, Research Division – Research Analyst [4]

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Yes. Boris, that was very clear. Just if you would allow me one more, please. I just wanted to check if you were planning any cost-saving initiatives in these difficult times? Or if you’re planning to use the available cash in the business to strengthen your market positions across the board.

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [5]

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Thank you for this question. So I think, first, I want to stress that situation is pretty dynamic. And I think even within like the certain add segments, we see either increases or decreases every week. So we are closely monitoring the situation. So I think our answer to this — well, the general answer will be that we will act also more dynamically looking at how the market is trending.

At the same time, as of now, I think we took the following approach. We do not, of course, plan any cuts in the Mail.ru Group personnel. And also, we do not plan any group-wide hire freezes. This is #1. #2, we are — what we’re doing is generally, we are doing the rationalizing and reprioritizing of projects. So obviously, we are cutting some marketing costs for the products that we think that are either now nonessential or do not have enough of high demand now.

At the same time, we over prioritize products that have very big use during the COVID crisis because obviously, the crisis it’s — on one hand, it’s a very big risk. At the same time, it’s also a very big opportunity. And given that Mail is — has probably most of Mail.ru Group assets actually help people during the crisis, help to solve their problems, to communicate, to entertain, to indicate. Of course, we might — we also might invest in the — some strategic areas. But of course, as we said before, our investments will be ROI positive, depending on their financial results and also on the incremental user engagement and user acquisition.

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Operator [6]

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(Operator Instructions) And your next question comes from the line of Miriam Adisa from Morgan Stanley.

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Miriam Anuoluwapo Adisa, Morgan Stanley, Research Division – Equity Analyst [7]

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Your strategy towards use of retention given the higher engagement that you’re seeing right now?

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [8]

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Sorry, Miriam. I’m sorry to interrupt you. Can you start again? You weren’t on the line to begin with. Can you just start the question?

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Miriam Anuoluwapo Adisa, Morgan Stanley, Research Division – Equity Analyst [9]

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Okay. Sure. Yes. So the question again, just wondering what your strategy is around user retention. Obviously, you’re seeing higher engagement. So just wondering if you’re more willing to sacrifice margin in order to increase huge retention? And just linked to that, if you could just share what gaming growth would have been on a constant currency basis.

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [10]

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So Miriam, generally, I will answer — for the second part of the question, I will pass it on to Matthew. So obviously, we see very strong tailwinds in the gaming business, which is probably not a surprise, both in terms of the ForEx effect as well as in terms of user engagement. So generally, if you look at the gaming, we do see some kind of decrease for the customer acquisition costs in some of the games. We see higher engagement, and we do see increase in the monetization.

At the same time, obviously, you need to understand that the increase in unitization ratios is not absolutely symmetric to the engagement growth because the engagement growth is always much, much kind of higher than the ramp-up in monetization. So I think that generally, what we are doing, we are not changing any of our principles. So we always separate games given that games — well, not all, but some of the games have shorter life cycle.

We always operate them on ROI-positive nature. So there are no major shifts in the marketing strategy. The probably only difference that we have is that we — for some of our social gaming platforms as VK and OK as well as for international MY. GAMES platforms for some of our games and for some of our partner games. We launched quite massive, quite massive special promise where we came — we, together with our partner games. We gave iPhones, so like free iPhones for certain gaming contests and actions and our partners gave some some discounts on IVAS.

So actually, that seems to work really, really well. So for example, in our Russian social networks, we manage to capture extra — and to return extra 3 million gaming users to the games and social networks. So I think it was a pretty good result. And monetization ramp up also happened. It was not as strong as usage, but we obviously think that the net financial increment of this game promo was also positive. And probably, for the time being, we continue to do such promos. And maybe on the ForEx effect, I will pass it on to Matthew.

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

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Thank you, Boris. The ForEx effect in Q1 is very limited. As you can imagine, the ForEx only begins to move significantly in late March. So you’ve got to take the average for the entire quarter, not just the end result. So the effect in Q1 is relatively limited. In Q2, it is clearly going to be much more significant. But please don’t ask me to quantify that at this point because I have no idea where FX will be at the end of the quarter or indeed through the quarter. So — but it is clearly going to be much more significant in the second quarter.

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [12]

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Yes. Thank you, Matthew. And I will just add. So as for the gaming plans, I think generally, you know that game is both a mixture of science and art. It’s a very difficult product. So I think we do not like have any major differences in our gaming schedule. So in May, we are launching a new version of console Warface. We plan to launch a new schedule, a new version of console Warface as well as we will start to promote our new game called Dino Squad, which is kind of a sequel of War Robots. So everything goes within our schedule.

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Operator [13]

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And your next question comes from the line of Ulyana Lenvalskaya from UBS.

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

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My question would be on the headcount. I was surprised to see quite a big addition in this quarter. So it’s up by around 500 people and up 25% year-on-year. Is there any particular reason for that, like the business unit which hires the most? Or is it the availability of personnel now?

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [15]

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So, yes, Ulyana, thank you for the question. So as I said before, we do not plan any cut in — and the major company-wide hire freezes in connection to the higher freeze because we — a lot of the projects that we developed are strategic. And obviously, we should not sacrifice them because then we just lose in time and actually, a lot of projects that we — a lot of projects that we develop are also helped to monetize and sometimes even help to cut costs. So if you ask for the projects that add at most, actually, a big part of them is M&A related.

So generally, it’s a new M&A, which came with kind of new headcount, which increased the total headcount. Also, some of them are related to our ecosystem projects to the strategy that we announced during Q1, like single ID, like media program, like Combo and group-wide projects. And also some of them are related to the video — the single video platform that we plan to create. So generally, M&A and some relate to social networks and social networks and some ecosystem projects. So if you ask on M&A, so it’s Skillbox and in-game that add some more people to the total headcount. But if you ask about the proportion, the majority is M&A.

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Ulyana Lenvalskaya, UBS Investment Bank, Research Division – Director and Analyst of Media & Technology [16]

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Okay. Makes sense. And in terms of the personnel expense, it’s all denominated in rubles, right?

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [17]

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Yes.

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Operator [18]

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And your next question comes from the line of 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 [19]

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Congratulations on the number. I would like to ask you on the timing of your listing in Moscow. Yes. previously, you mentioned it’s going to be the first half of this year, thus the current situation with the log-down effect, those plans in one way or another? And what is the time line now if you could update us on that?

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

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Yes, Vladimir, it’s Matthew. We absolutely maintain our intention to list in Moscow as a secondary listing. And as I said, this is really about our commitments to public markets and liquidity. I think that we still aim for H1, but this is subject to lockdown requirements.

If there is still an ongoing lockdown, it clearly makes this significantly more challenging. So I’m afraid we have to be slightly flexible in this respect. The intention is absolutely unchanged, but we need to be flexible in terms of the timing. We are still aiming for H1, but it’s unclear whether that’s going to be possible or not at this point [in time].

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Operator [21]

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And your next question comes from the line of Slava Degtyarev from Goldman Sachs.

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Vyacheslav Degtyarev, Goldman Sachs Group Inc., Research Division – Equity Analyst [22]

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You mentioned group margins will decline on the mix effect between different subsegments. Can you talk a little bit more on margins for the largest subsegment themselves, especially on advertising segments and basically the breakdown, of course, between fixed and variable in the advertising segment in [particularly, H1].

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [23]

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So I will pass the question on to Matthew.

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Matthew Charles Perrins Hammond, Mail.ru Group Limited – MD & CFO [24]

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Yes, thank you. It’s — I’m afraid I’m going to be — it’s going to be a challenge to answer your question. You must understand that at this point, there are a huge amount of moving parts, most of them out of our control. I think that you know our comments on Games margins, these are absolutely unchanged as a result of the current situation. The Games margin remains a function of mix and timing. But our medium-term targets are absolutely unchanged in terms of gains.

In terms of ads, there is clearly some variability in the cost base. But it’s not the majority by any means. The majority of costs in ads are fixed because, of course, they’re mainly personnel. Ads is obviously the highest-margin business in the group.

But at this point, it’s very difficult for us to know exactly where ads are going to be for the full year. Because, as Boris said, it changes on a week-by-week basis. And at this point, it would be, I think, unwise of us to make margin predictions for the full year in terms of ads because we just don’t know where the revenue base is going to be. So I’m sorry, at this point, we simply can’t answer that question.

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Operator [25]

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And your next question comes from the line of Sebastian Patulea from Jefferies.

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Sebastian Cristian Patulea, Jefferies LLC, Research Division – Equity Analyst [26]

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My question is regarding Citymobil. The high growth can also be a result of the ride-hailing service being launched in new markets. Can you please give us the like-for-like ride growth between the first quarter 2019 and the first quarter this year based on the 3 cities Citymobil operated initially? And also the like-for-like growth between the fourth quarter 2019 and the first quarter 2020 based on the 19 cities Citymobil operated then.

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [27]

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So thank you for the question. We continue to see very strong growth in Citymobil. So it is triple-digit growth, including the COVID effect. So generally, we see that the COVID effect initially in the peak, reduced the number of trips by 30% since the start of the COVID. Now we see some gradual recovery. So at the same time, if you ask about geography, we see strong growth along most of the geography, probably except for Moscow, which probably was the most hit from the quarantine regime. But at the same time, I think we see — already see a good recovery, and we are quite optimistic about this business growth even within this year.

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Sebastian Cristian Patulea, Jefferies LLC, Research Division – Equity Analyst [28]

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And if I may follow-up, please, because I was more interested in the possibility of the numbers between the like-for-like growth of, let’s say, the last quarter of last year, so the fourth quarter 2019, you are in 19 cities and how — yes?

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [29]

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So we do not give the regional and segmental breakdown, but I think that most of the regions continued good and strong growth heading into this year. With probably just Moscow, I cannot remember from the top of my head whether Moscow is growing sequentially or not. But just to be on the safe side, I want to make a disclaimer that Moscow is the most severely hit city. So I probably would not be comfortable enough to saying that it is growing sequentially month-on-month and quarter-on-quarter.

And at the same time, at the same time, the reduction in cost growth, of course, come with the improvement in unit economics, which is also very important to note due to the variable nature of the cost of the business. Yes. Thank you for your question.

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Operator [30]

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And your next question comes from the line of Cesar Tiron from Bank of America.

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Cesar Adrian Tiron, BofA Merrill Lynch, Research Division – Research Analyst [31]

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Yes. I just wanted to follow up on this positive unit economic in Citymobil in Moscow. Is it at the EBITDA level?

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [32]

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No. It’s on trip contribution level. It’s ex headquarter and ex federal marketing.

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Cesar Adrian Tiron, BofA Merrill Lynch, Research Division – Research Analyst [33]

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Sorry, can you repeat one more time? Apologies.

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [34]

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It’s contribution margin. It’s not EBITDA level, it’s ex HQ cost and ex federal marketing.

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Operator [35]

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And your next question comes from the line of Anna Kupriyanova from Gazprombank.

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Anna Kupriyanova, [36]

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My question is regarding your leverage. So as of now, your net debt stands at about RUB 11 billion. And given that you need to pay about RUB 10 billion by third, fourth quarter of this year, how do you expect this position to change? I mean your cash is needed to pay for your JVs with Sberbank and AliExpress. I count, it’s about RUB 10 billion. Yes.

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [37]

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Thank you for your question. I pass it on to Fedor.

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Fedor Rubtsov, Mail.ru Group Limited – CFO of Russia [38]

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This is Fedor here. Thank you for the question. So yes, as we have stated multiple times today, there is a lot of fluctuation of variability on what’s going on. So obviously, different scenarios may have different results in numbers in terms of free cash flow and as a result of net debt. However, under our current stress test, we’re not expecting to go above 1 net debt-to-EBITDA. So we’re planning to say below 1 net debt-to-EBITDA as of the year-end.

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Operator [39]

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And your next question comes from the line of Ulyana Lenvalskaya from UBS.

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Ulyana Lenvalskaya, UBS Investment Bank, Research Division – Director and Analyst of Media & Technology [40]

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There was this a bit surprising relaunch of ICQ recently. Can you please speak a bit about the strategy in terms of messengers and like why you try and revive ICQ?

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [41]

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Yes, of course. Thank you for the question. So as we always stated, we always — we’ve made and will always make and will always make experiments around communication products. As it’s generally from one standpoint, it’s the area of our core expertise. At the same time, it’s an area where it’s largely a low-cost business and low-cost experiment business. So we made a new design and a lot of new cool feature.

And first, we thought that it would be good to present this opportunity for a new messenger with enhanced — also enhanced group video calls and public chats during the coronavirus, and we actually saw that this launch saw quite good PR and the public response.

Also, we continue to develop ICQ technology for our B2B messenger, which is called Myteam. So generally, the same products and pay technology. So currently, we look at it as opportunistic and experimental project. We will continue to experiment with some minor marketing around it and see how it goes, because the communication market and communication world is actually moving rapidly.

So now I think since the COVID crisis, you will see a ramp-up in remote work and in the video communications. So situation is pretty dynamic. And I think it obviously pays off to continue constant experiment. So this is what we do.

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Operator [42]

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And your next question comes from the line of 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 [43]

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I would like to ask you about the auto joint venture with Sberbank. You have certain KPIs which have to be met, I think, in November, closer to the end of the year. But the deal was concluded when the situation was absolutely different.

So are you going to discuss those KPIs with Sberbank? Do you see those still achievable? And is it possible that you would revise the contributions that the partners will have to make to this invention by the end of the year? How do you see this decision developing?

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [44]

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Yes. So thank you for the question. So now we — what we see is, of course, Citymobil on the GMV level is affected by the decline in trips. At the same time, it has positive effect on the EBITDA level. At the same time, we see that Delivery Club is having a lot of tailwinds. So generally, what we observe is they — that they stay within the burn target. At the same time, they significantly overperform market, thanks to the COVID, which actually has become a tailwind for the company. So generally, there is an element of balancing.

And now the way we look at the auto JV is that we will — the KPIs will be met and will be achieved. So both of the teams doing a great job. Innovating a lot and reacting very fast to the challenges, launching a lot products like Delivery Club was the first to launch takeaway contactless delivery.

So Citymobil is now working also in a lot of integrations and also new products on top of its current ride-hailing business. And its current ride-hailing business is also, as I said, gradually recovering. And it seems to be less hit than most of the world comparable peers. So our aim is, of course, to achieve the KPIs.

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Operator [45]

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And your next question comes from the line of Kirill Panarin from Renaissance Capital.

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Kirill Panarin, Renaissance Capital, Research Division – Equity Analyst [46]

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I got 2 questions, please. So firstly, just coming back to advertising. Could you elaborate on the difference in the performance of VK and the overall advertising segment in Q1? If VK was so strong relative to the whole segment, what parts of ad business were the most vulnerable to the headwinds and why? And maybe also, what trends do you currently see in terms of different ad formats? That’s the first question.

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [47]

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So we would not give like probably line-by-line and segment-by-segment explanation. But obviously, I will give probably an answer to your first question. So of course, social networks, especially VK, are growing much faster because of the so-called mobile, social and native format. Also, they have a big element of performance-based gaming as insight. So they performed very well.

So the formats are very well, and they convert very well and work very well in any environment. So we think that broadly, search underperformed. We saw quite a big — the performance in search. Also generally, e-mail and portal saw some headwinds. So usually, during the crisis, they are kind of more severely hit because the — some of the formats are working not as good as the social networks.

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Kirill Panarin, Renaissance Capital, Research Division – Equity Analyst [48]

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Okay. Great. And secondly, just to follow up on Games. Given your comments about the second quarter margins, do you still aim for broadly stable profitability in Games in 2020? And if not, what has changed versus February? That’s it.

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [49]

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So probably I’ll give broad — yes, Matthew, please go ahead.

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

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Boris, you can make some comments, and I can make — I can follow-up after you.

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [51]

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No, no, please, Matthew, go ahead, go ahead. Okay. I will continue.

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

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I would simply got to say on Games, the answer is, yes, the profitability targets remain broadly unchanged.

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [53]

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Thank you, Matthew. And I just wanted to add that we always — also as I was addressing Miriam’s question, we always — the key expense for gaming is marketing, and we always require marketing, which is ROI positive. So we do not see any like strong shifts within the gaming strategy. We just pursue our usual strategy in our euro tactics. So yes, also no changes expected from my side. And I also wanted to add — to answer due to the previous question on although there is also very good development in auto. So we have announced that we acquired Samokat, which is very fast-growing O2O grocery delivery company using dark stores. So it’s growing very well. I think it is approaching — going to attack 1 million monthly orders this month during to the quality, the experience, it’s experiencing very rapid growth in orders, exponential growth in orders, if not to say, explosive.

And obviously, there are also a lot of interlinks, and there will be a lot of growth in interlinks between this product and Delivery Club and Citymobil. So for example, Delivery Club already comprises 20%, and in some regions, more than 30% of orders for Samokat. We also plan to integrate it into Citymobil, and we expect it to have — we expect both Citymobil and Delivery Club help Samokat’s traffic. And also, we expect Delivery Club and Samokat and Delivery Club already experiencing it, to have a lot of positive incremental effect from having groceries inside as it significantly increases the — first, the loyalty of the users and the frequency of usage. Just small correction, of course, auto required Samokat.

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Operator [54]

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And your next question comes from the line of Sebastian Patulea from Jefferies. We will move on now to our next question comes from the line…

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Sebastian Cristian Patulea, Jefferies LLC, Research Division – Equity Analyst [55]

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Sorry? Can you hear me now?

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [56]

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Yes, we can hear you. Please go ahead.

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Sebastian Cristian Patulea, Jefferies LLC, Research Division – Equity Analyst [57]

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Sorry about that. So I’ve got a follow-up question on the marketing budget for Games, please. I realize this might be the third one. So a number of global peers noticed that the increasing online traffic is causing the price deflation on online marketing, and therefore, it’s cheaper to acquire new users. At the same time, your games engagement is up. And thus, customer lifetime value is higher. Therefore, if you’re acquiring new users at a discount, while these users are worth more, why wouldn’t it make sense to actually increase your marketing budget for Games this year? And I realize you have unusual strategy in place, but isn’t this environment — isn’t this an environment that allows you to be more opportunistic here?

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [58]

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Well, as I said, we will be opportunistic, but we do see, first, a lot of organic growth for Games. We do indeed, and I also said that the traffic is cheaper. So if the traffic is cheaper, generally, it will mean that we will buy more ROI-positive ads, and it will be a very big tailwind for us. But yes, the situation is very, very dynamic.

I just want to be on the conservative side in forecasting our Games revenue. And also we know we want to still keep some financial discipline in the way we push our games and market our games. As I said, it is already experiencing growth, and we, of course, plan to market the games. And I think the budgets that are already in place, they are pretty big and efficient.

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Operator [59]

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And your next question comes from the line of Anna Kurbatova from Alfa-Bank.

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Anna Kurbatova, Joint Stock Company Alfa-Bank, Research Division – Senior Analyst [60]

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Congratulations with the good quarter. The question is about new initiatives. For the first time disclosed revenue number of your education technologies. I wonder whether these businesses, Skillbox, GeekBrains, they operate at a breakeven or they are still a bit negative for positive. So any comments on profitability would be great.

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [61]

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Yes. Thank you. So yes, you are — indeed, you’re right. These are Skillbox and GeekBrains. So most of these businesses — well, again, it’s a pretty dynamic market. And I think now education sector is very well positioned to help people to indicate them remotely during the service crisis. And also, of course, people — there is a very big demand for extra education and new skills with COVID. So the company is introducing a lot of initiatives to boost that, and we see the traffic exploding year-on-year. So generally, if you look at these businesses, the profitability varies month-on-month. But if you look at pre COVID profile, both of the business were either profitable or close to breakeven. So the duty of the business is the fundamentally, they are EBITDA positive. And for example, GeekBrains which is Mail.ru’s business for a longer time. I think for a long time, it has been EBITDA accretive business for Mail.ru Group. So now it’s just a question of how much push in terms of marketing they will make. So I think you should look at them. As either breakeven or EBITDA positive businesses.

And for both, by the way, growing triple-digit rate at the same time. So I think you have a pretty good businesses. Thank you for the question.

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Operator [62]

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And your next question comes from the line of Slava Degtyarev from Goldman Sachs.

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Vyacheslav Degtyarev, Goldman Sachs Group Inc., Research Division – Equity Analyst [63]

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Yes. Do you think this crisis lead you to revise certain elements of your ecosystem? For example, on the previous call, you commented that online cinemas are overly competitive in Russia. But they obviously do see material spike in usage these days. So should we expect certain adjustments to your ecosystem priorities on the back of the recent developments? Basically, can you share some further thoughts on that front?

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [64]

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Yes. Thank you. Thank you. It’s a good question. First, I will answer kind of a broader question. So actually, I think that the COVID is a very big proof of concept for our strategy because I think it shows the value of the ecosystem. It shows the value of super apps. So now I think we’re seeing a very quick, if I can call it, super appization of digital economy. So I think it is very important to quickly react and to act quickly as possible to find a way to introduce new services into your core platforms as during such crises, users strive to consume even new kinds of services within kind of more trusted environment.

So I think this is why VK apps are now on fire, and they are now more than 28 million monthly active users. So I think this is a very big proof of concept. Of course, this is a very big proof of concept for Delivery Club and delivery services. So both of the services are on fire. It’s very good for online education. It’s very good for gaming and entertainment. Extremely good for social, where we see explosive growth actually in entertainment. So the video usage, for example, in VK, I think it is more than [58]% year-on-year, depending on the day. So music is the fire, messaging and communications are also growing very well.

So I think we are already exposed to entertainment. And also talking about entertainment, I think we now — if I’m not mistaken, probably, we hosted like probably up to hundreds of concerts on our platform, which got like tens of millions of views altogether. So we, I think, managed to entertain our audience quite well. So as you talk about the shift of the strategy, in terms of Mail.ru, I still do not think that like we do not completely buy the Netflix model. I think we — in terms of video, we very much believe in more free and AVOD model. So I think we will be looking, as I said before, to boost our efforts to create a single video platform and all the content efforts and entertainment efforts will lie within this single video platform because it would contribute much better and much stronger to our joint ecosystems, right? Because we’re already very strong in advertisement. We’re already very strong in video. We already have a lot of user-generated content and users are very, how to say, are very used to consume content for free within our platforms. So I think if we can provide to a better, higher-quality content on — in AVOD model and increase the total engagement of our platforms, this would be of bigger use for us. Because I think long term, the ARPU and the usage of our social, for example, is much more valuable, it’s much more sticky than the usage of like video subscription services, which have much lower retention rates. So generally, we like the services with a very high retention rate and much more user base. So this is why we go for this model. And for us, I don’t think it makes sense to launch stand-alone video services. So generally, actually, I would take away from the crisis is that we probably will — would try to use much less new apps and that we try to embed as many new services as possible into our current app, and this is what I call the super — super appization of digital economy of Mail.ru Group as well.

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Operator [65]

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And your next question comes from the line of Sergey Libin from Raiffeisen Bank.

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Sergey Libin, Raiffeisen Bank International AG, Research Division – Financial Analyst [66]

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I missed the part of MD&A, so I apologize if this has been said during this discussion. But does the COVID situation in any way impact your longer-term targets of doubling VK revenues and Games EBITDA?

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [67]

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No. No effect. We’re very bullish on both of the assets. Probably, I will like keep the gaming fire there because I think, of course, gaming is benefiting big time from this. As for VK, we think that still the current situation is, yes, indeed, as I said before, it is — it will have impact on advertising market.

But if you look at a longer perspective, I think the trend will absolutely increase and speed up the transformation of end market toward digital. And the [KA] is the biggest beneficiary of the digital market growth in Russia. So of course, we will continue gain share, and we are positive on both questions.

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Operator [68]

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(Operator Instructions) And your next question comes from the line of Stanislav Yudin from ITI Capital.

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Stanislav Yudin, [69]

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Yes. Regarding your new division, which is called Mail Digital Technologies B2B segment. Could you elaborate somewhat what kind of services do you plan to provide? And what sectors do we target and what kind of companies? Do you mean big corporates or midsized businesses or probably state-owned companies? Any color on that? Do you believe it will be a big part of your strategy?

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [70]

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Yes. Thank you for this question. So actually, yes, we kick-started — it’s been for a while since we kick-started this direction. So the ideology of it is the following. So we have created a lot of technology that work in Mail.ru Group core B2C services. And they serve very well tens of millions of users on a very high load. So this is very good, very sophisticated tech. And the idea is to provide this tech to different enterprises because I don’t see any fundamental difference in the tech and the products that they will consume inside of their company different from the B2C.

So the key goal of this division is first to help to adapt our current tech to the B2B enterprise. And second, of course, to help to do better sales and marketing because B2B sales — big B2B sales and marketing is very different from what we do in B2C. So out of the products that we have, there are a lot of products. So for example, there are such products as Mail.ru B2B cloud. So there is [Taranto] database. So there are a lot of communication products such as e-mail for business, such as MyTeam messenger for business. So we — via this is unit, we generally tackle all of the businesses, all the segments of the businesses. So last year, we — last year, we reached more than RUB 1 billion in revenue. We achieved this result quite quickly. So we are actually very glad with the initial work and the success that the management has achieved. It was actually a very kind of big and good work from both the Head of B2B and from the technology, a big part of which was and is created by e-mail Mail.ru, and we plan to continue to develop it a lot.

So given the current COVID crisis, I think a lot of technologies that we create will be even more like such as video calls, will be very well needed by businesses and for the development of digital economy of Russia. So we’re very bullish. So if you ask for the connection, so it has a big technology connection. And also it has — now we are planning it, what we’re already doing. Actually, we are bundling it big time, the sales channel between the Mail.ru apps and Mail.ru B2B products. So we are bundling these products a lot. And this is what some of our international peers do, and we think it makes a lot of sense, and it is already starting to bring some fruits. I hope I answered your question.

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Stanislav Yudin, [71]

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Yes. Yes, it’s very interesting. So you said the revenues from this segment was around RUB 1 billion last year, right? Or…

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [72]

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Yes.

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Stanislav Yudin, [73]

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So it was developed virtually from scratch?

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [74]

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No. There were some products before, and there were some sales before but like the launch and like the big boost happened last year. Before, there was a very big work, for example, for Mail.ru Cloud, so for example, Mail.ru Cloud was developed by Mail.ru e-mail and portal units. The team did a good job and brilliant product and technology. They also managed to gain the initial traction when the market was developing very slowly. So generally, they kind of launched it. And then we united all the B2B tech also from other units in 1 unit, and it also helped to bolster the unit a lot. Because the way the B2B sales work is that you should not come to a customer just with 1 product. You should come with a bunch of products and see what the customer needs because there will open a lot of synergies between them.

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Stanislav Yudin, [75]

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Thank you very much for the answer. It’s very interesting. So there is a chance that with the time being, it will be one of potential milestones of your strategy potentially?

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Boris Dobrodeev, Mail.ru Group Limited – CEO of Russia [76]

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Well, I think we really like, and we are very bullish on it. This is why we kind of developed it. I think it’s still too premature to say what part of revenue and the strategy it will take in the future. Obviously, it’s role will be big. But how significant, important and pivotal, probably it’s still too early to judge.

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Operator [77]

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(Operator Instructions) And there are no further questions that came through. Please continue.

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Matthew Charles Perrins Hammond, Mail.ru Group Limited – MD & CFO [78]

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Thank you very much. I’d just like to say, I know that some of you had difficulty connecting at the beginning. There will be a full replay of the call on the website, and you know where to reach us for questions, and the slide deck is also available on the website. With that, thank you very much all for joining us, and speak to you soon. Bye-bye.

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Operator [79]

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Thank you. And that does conclude the conference for today. Thank you all for participating. You may all disconnect.