26 Apr 2011 16:31
Mail.ru Group Limited
Full Year 2010 Results Announcement & Publication of Annual Report
Mail.ru Group Limited (LSE: MAIL, hereinafter referred to as "the Company" or "the Group"), the largest Internet company in the Russian-speaking world, today announces its financial and operational results for the year ended 31 December 2010 and provides an update on the revenue performance for the first three months in 2011. The segment financial information presented in this press-release excludes certain IFRS adjustments and differs significantly from the Group's consolidated financial data presented in accordance with IFRS. Please refer to Note 5 to Consolidated Financial Statements for further details.
Release of FY 2010 audited results, strong Q1 2011 performance
·; Group aggregate segment revenue was $324.7m for FY 2010 (up 64%)
·; 58% organic revenue growth YoY, excluding the effect of ICQ acquisition completed in July 2010
·; Group aggregate segment EBITDA was $119.4m for FY 2010 (up 77%)
·; Group aggregate segment Net Income was $77.3m for FY 2010 (up 66%)
·; Net Cash position at the end of the year was $118.4m
·; Monthly audience (TNS Russia) of Mail.Ru portal in December 2010 increased by 22%
·; Group aggregate segment revenue in the first quarter 2011 was$110.6m (up 69% YoY, or 61% excluding the ICQ acquisition effect)
Key Recent Developments
·; My World introduced revenue sharing with third-party applications on its API platform in February (30% share to My World)
·; Odnoklassniki move to Mail.ru Group headquarters in Moscow completed in February 2011
·; 5 MMO games and 4 social games launched since the end of 2010
·; Launched Russian Code Cup, a competition for programmers
·; Committee for Foreign Investment in the US (CFIUS) approved the acquisition of ICQ
·; Sang Hun Kim (CEO of NHN Corporation from South Korea) was appointed as the second Independent Non-Executive Director
·; Ivan Tavrin was appointed as a Director on the Board, replacing Ardavan Moshiri
Key Events in 2010
·; $1 billion raised by selling shareholders and the company from an IPO on the LSE
·; Stock-option programme introduced - more than 200 employees received options over Mail.Ru Group shares
·; Integration further advanced, including online advertising sales teams fully integrated across businesses, and technical and product integration advancing expeditiously
·; Odnoklassniki opened API platform to third-party developers, discontinued its registration fee and stepped up product development effort
·; Launched a social email service, Open Mail Format (OMF)
·; Launched 12 MMO games, including "Cross Fire"
·; Completed construction of own data centre, increased ownership to 100%
·; Marcos Galperin, CEO of Mercadolibre, joined Mail.Ru Group as an independent non-executive director
·; Naspers and Tencent became shareholders of Mail.Ru Group
·; Mail.Ru Group acquired:
o additional equity stake in Vkontakte, bringing our total stake from 24.99% to 32.55%, together with an option to increase our stake to 39.99% before the end of October 2011
o instant messaging network ICQ from AOL Inc.
o all the remaining non-controlling interests in Mail.Ru bringing our ownership to 100%
o operational control of Odnoklassniki, Russia's second largest social network, and increased our ownership to 100%
o stakes in Groupon, a social commerce company, and Zynga, the world's largest social games business
Dmitry Grishin, Mail.ru Group's Co-Founder and Chief Executive Officer, commented:
"Our business continued to perform strongly in 2010 and in the first quarter of 2011 across all of our products. In the Group's online advertising business we continued to benefit from a strong cyclical recovery combined with an ongoing shift to online advertising, which helped us achieve 64% growth (48% organic, i.e. excluding the effect of ICQ acquisition) in Group aggregate segment online advertising revenues compared to 2009. Group aggregate segment Community IVAS revenues in 2010 increased by 67% and aggregate segment MMO revenues increased by 63% compared to 2009, reflecting the strength of our monetization model and our ability to benefit from growing penetration and engagement in the Russian Internet market.
In the first quarter of 2011 the Group continued to follow a strong growth trajectory with Group aggregate segment revenue increasing by 69% when compared to Q1 2010 (61% organic). Group aggregate segment online advertising revenues grew by 99% (74% organic) and Group aggregate segment community IVAS revenues increased by 69%. Group aggregate segment MMO games revenue increased by 39% and other aggregate segment revenue (primarily consisting of other IVAS and online recruitment services) increased by 83% (80% organic)."
Conference call
An analyst conference call will be held today at 18.30 UK time, including a Question and Answer session.
To participate in this conference call, please use the following access details:
Confirmation Code: |
6341233 |
Participant Toll Free Telephone Numbers: | |
From Russia | 810 800 2503 1012 |
From the UK | 0800 279 9640 |
From the US | 1866 850 2201 |
Mail.Ru also announces that the Company has today issued its 2010 Annual Report, which includes its audited financial statements for its fiscal year ended December 31, 2010. The Annual Report has also been filed on the National Storage Mechanism appointed by the Financial Services Authority and can be accessed at http://corp.mail.ru/files/Mail.Ru_Group_AR_2010.pdf
For further information please contact:
Matthew Hammond
Managing Director
Phone: +971 443 484 22
E-mail: ir@corp.mail.ru
Financial Dynamics
London | +44 (0)20 7831 3113 | Moscow | +7 495 795 06 23 |
James Melville-Ross | Oleg Leonov | ||
Charles Palmer | |||
Matt Dixon | |||
Emma Appleton |
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 Group. 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 Group'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 Group's success in identifying and responding to these and other risks involved in its business, including those referenced under "Risk Factors" in the Group's public filings. The forward-looking statements contained herein speak only as of the date they were made, and the Group 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
Mail.ru Group is the largest Internet company in the high-growth Russian-speaking Internet markets. Mail.ru Group's sites reach approximately 80 per cent of Russian Internet users on a monthly basis and the Company is the world's seventh largest Internet business, based on page viewsi. Russia is today Europe's second largest Internet market measured by number of usersii.
The origins of the Company date back to 1998 and since its formation as a group in 2005, and particularly since the end of 2008, the Company has moved rapidly to build an integrated communication and entertainment platform that allows it to attract and monetise one of the largest daily Internet audiences in the Russian speaking world. The Company, which is incorporated in the British Virgin Islands, operates two of the threeiii largest Russian language online social networking sites (Odnoklassniki and Moi Mir (or "My World")). The Company also operates the two largest Instant Messaging ("IM") networks in Russia (Mail.Ru Agent and ICQ), Russia's leading email service and Russia's second largest Internet portal based on daily and monthly unique users (Mail.ru), and the Company operates Russia's largest online games platform.
The Company holds strategic minority equity stakes in Vkontakte and Qiwi (formerly OE Investments). It holds a 32.55 per cent stake in Vkontakte, Russia's largest social networking site measured by daily unique users, and it holds a 21.35 per cent interest in Qiwi, one of Russia's leading payment processing companies. The Company also holds small minority stakes in international Internet companies including Facebook, Zynga and Groupon as well as a number of small venture capital investments in various Internet companies in Russia and Ukraine.
i Source: comScore
ii J'Son & Partners (September 2010)
iii Based on monthly unique users. Source: TNS Gallup
2010 results summary
Overview of Group results
2010 was characterised by a drive in Internet market development together with the fact that the Group either maintained or gained market share in several areas which translated into considerable growth in the Group's revenues, accompanied by an increase in margins as a consequence of a scale effect.
Structure
The Group comprises three major operating segments - Mail, Odnoklassniki and HeadHunter. With the exception of the HeadHunter segment, in which we have a 91.3% equity interest on a non-diluted basis, these segments are 100% owned. Mail includes the My World social network, Mail.Ru Agent and ICQ instant messaging services, e-mail, games and the Mail.Ru portal; Odnoklassniki, comprising the OK social network; and HeadHunter, a leading online recruitment service. In addition, we hold strategic minority investments: 32.55% in Russia's largest social network, VK.COM Limited ("VK"); and 21.35% in QIWI Limited ("QIWI"), one of Russia's leading payment-processing companies. We also have strategic investments in international businesses (all stakes on a fully-diluted basis as of 31 December 2010): 2.33% of Facebook Inc., the world's largest social network; 1.41% of Zynga Game Network Inc., the world's largest social gaming business; and 4.63% of Groupon Inc., a leading provider of online group discounts.
Consolidated results in accordance with IFRS
USD in Millions | 2010 | 2009 |
Revenues | 275.3 | 148.3 |
Cost of revenues | (64.7) | (33.1) |
Gross profit | 210.6 | 115.2 |
Operating Loss | (10.0) | (14.0) |
Profit/(loss) before income tax expense | 180 | 183 |
Income tax expense | (23.7) | (17.3) |
Net profit/(loss) | 156.3 | 165.7 |
Attributable to: | ||
Equity holders of the parent | 152.8 | 168.6 |
Non-controlling interest | 3.5 | (2.9) |
In 2010 Mail.Ru's consolidated revenue from continuing operations increased by 85.6% to US$275.3 million (2009: US$148.3 million) primarily due to acquisitions of subsidiaries and through organic growth. The increase in consolidated revenue as a result of acquisitions amounted to US$40.2 million in 2010 (27.1% of 2009 revenues).
Gross profit from continuing operations increased by 82.9% to US$210.6 million (2009:US$115.2 million) and gross margin decreased to 76.5% in 2010 (2009:77.7%) primarily as a consequence of cost of revenues growing at a higher pace compared to revenues. The total increase in cost of revenues of 95.1% is due to acquisition of subsidiaries and organic growth. The increased cost of revenues resulting from acquisitions totalled US$9.4 million (28.5% of 2009 cost of revenues).
Operating loss from continuing operations amounted to US$10.0 million as compared to an operating loss of US$14.0 million in 2009. The principal items affecting the operating loss aside from the gross profit are SG&A expenses and D&A. SG&A expenses increased by 65.7% primarily due to an increase in compensation expenses of US$13.8 million (33.8% vs 2009), advisory fees of US$25.8 million (99.2% vs 2009) and advertising and related expenses of US$8.9 million (93.4% vs 2009). D&A expenses increased as a result of acquisition of subsidiaries (including the effects of purchase price allocations in the past years) and organic growth. The total D&A resulting from the amortisation of fair value adjustments to intangible assets recognised in business combinations amounted to US$39.8 million (US$21.5 million in 2009).
The share in net losses of associates amounted to US$9.1 million (share in net profit of US$18.0 million in 2009). The losses primarily arose in Forticom Group Limited in the amount of US$16.5 million in our share due to losses on financial instruments, which were partially offset by profits of Haslop Limited, QIWI and VK of US$11.8 million in our share.
Accounting impact of acquisitions and disposals
The acquisitions and disposals had a significant effect on our 2010 consolidated financial statements as summarised below:
USD in Millions | 2010 | 2009 |
Net gain on acquisition of control in equity method investments and available-for-sale investments | 186.2 | 14.8 |
Net gain on disposal of shares in strategic associates | 16.5 | 113.1 |
(Impairment losses)/reversal of impairment losses related to strategic associates | (11.2) | 46.7 |
Net loss resulting from loss of control over subsidiaries | (0.8) | (7.1) |
In addition to the effects presented in the table above, there are several other effects on the Group's earnings which result from acquisitions and disposals both in 2010 and in prior periods. These effects obscure the operational results of the Group and make it difficult to evaluate trends in our underlying business. As a result, management evaluates and manages our business and strategic associates on the basis of management accounts that do not reflect certain adjustments required under IFRS. The management accounts data is discussed in the section "Operating segments performance" below (see also Note 5 to the financial statements for further details).
Profit before income tax expense decreased by 1.7% to US$180.0 million (2009:US$183.0 million) primarily affected by M&A activities and related gains and charges described above.
Net profit for the year decreased by 5.7% to US$156.3 million as a result of the decrease in profit before tax and an increase in income tax expense. Income tax expense increased due to an increase in current tax expense by 65.7% vs 2009, of which 15.1% were due to acquisitions of subsidiaries with the remaining part driven by organic growth of profit before tax.
Operating segments performance
Basis of preparation
In reviewing the operational performance of the Group and allocating resources the Group's Chief Operating Decision Maker ("CODM") reviews selected items of each segment's statement of comprehensive income attributable to the Group, assuming 100% ownership in all of the Group's key operating subsidiaries, based on management reporting.
Management reporting is different from IFRS, because it does not include certain IFRS adjustments that, in management's view, obscure the core operating performance of the business. Such adjustments affect such major areas as revenue recognition, certain accruals, deferred taxation, share-based payments, business combinations, fair value adjustments and amortisation thereof, impairment and irregular items.
The segment financial data is presented on a combined basis for all key subsidiaries representing each segment added together forming the segment revenue and profit. The financial information of the key subsidiaries acquired during the reporting period is included into the segment disclosure starting from the later of:
• the beginning of the earliest comparative period included in the financial statements; or
• the date of the Group's acquisition of its first interest in the respective key subsidiary.
Accordingly, the operating segment information presented below includes ICQ starting from 7 July 2010, while OK and Data Center M100 LLC ("Data Center") are included starting from 1 January 2009.
The financial information of subsidiaries disposed of prior to the end of the reporting period is excluded from the segment presentation starting from the beginning of the earliest period presented.
The Group has identified the following reportable segments:
• Mail.Ru Internet NV and ICQ and their subsidiaries and associates (collectively representing "Mail.Ru" reportable segment), a portal, social network, instant messaging and online games business;
• Forticom Group Limited, Odnoklassniki Limited and their subsidiaries (collectively representing "OK" reportable segment), a social network business;
• HeadHunter Group Limited and its subsidiaries and associates (collectively representing "HeadHunter" reportable segment), an online recruitment and job search business.
Change in composition of segments in 2010
In 2010, due to the acquisitions of new businesses and non-controlling interests, integration of acquired businesses and the shift in strategic focus towards consolidated operations with less focus on equity associates, resulting in changes to management structure and, accordingly, related management reporting, the Group reconsidered its segment presentation.
As a result, key associates (VK and QIWI) are no longer considered operating segments as management does not review their performance for resource allocation decisions. The performance of the Data Center (an associate of the Group in 2009 excluded from segment presentation as not considered a key strategic associate) and ICQ subsidiaries, both acquired in 2010, is now reviewed by the CODM together with the performance of the core operations of Mail.Ru. Nasza Klasa, Forticom's Polish subsidiary, is no longer a part of the Group and Forticom's Baltic operations, being insignificant, are managed by OK. As a result, in 2010 the Group's consolidated operations comprise the segments as presented above.
Additionally, as opposed to the presentation of operating segments in 2009, intra- and intersegment revenues are eliminated in full, as CODM reviews the performance of each segment and the combined operations of the Group on a post elimination basis in view of a significant degree of inter- and intra-segment integration.
The respective comparative information for 2009 was presented accordingly to conform to the current year segment presentation.
Group aggregate segment financial information 2010
USD in Millions | OK | HH | Total segments | Corporate eliminations and other | Combined | % of revenue | |
Revenue | |||||||
Display advertising | 70.8 | 21.4 | 2.3 | 94.5 | - | 94.5 | 29.1% |
Context advertising | 31.0 | 1.9 | - | 32.9 | - | 32.9 | 10.1% |
Total online advertising | 101.8 | 23.3 | 2.3 | 127.4 | - | 127.4 | 39.2% |
MMO games | 99.8 | - | - | 99.8 | - | 99.8 | 30.7% |
Community IVAS | 18.6 | 45.7 | - | 64.3 | - | 64.3 | 19.8% |
Other IVAS | 5.9 | - | - | 5.9 | - | 5.9 | 1.8% |
Total IVAS | 124.3 | 45.7 | - | 169.9 | - | 169.9 | 52.3% |
Intersegment revenue | 0.4 | - | 0.3 | 0.7 | (0.7) | - | - |
Other revenue | 1.3 | 0.0 | 26.2 | 27.5 | - | 27.5 | 8.5% |
Total revenue | 227.7 | 68.9 | 28.7 | 325.4 | (0.7) | 324.7 | 100% |
Operating expenses | |||||||
Personnel expenses | 60.2 | 8.7 | 13.1 | 82.0 | 1.8 | 83.8 | 25.8% |
Office rent and maintenance | 8.2 | 0.9 | 1.3 | 10.4 | 0.1 | 10.4 | 3.2% |
Agent/partner fees | 20.6 | 1.3 | - | 22.0 | (0.7) | 21.3 | 6.5% |
Marketing expenses | 13.1 | 0.7 | 3.8 | 17.6 | - | 17.6 | 5.4% |
Server hosting expenses | 7.1 | 8.1 | 0.7 | 15.9 | - | 15.9 | 4.9% |
Professional services | 4.1 | 1.3 | 0.4 | 5.8 | 37.4 | 43.2 | 13.3% |
Other operating (income)/expenses, excluding amortisation and depreciation | 7.4 | 2.5 | 2.7 | 12.6 | 0.4 | 13.0 | 4.0% |
Total operating expenses | 120.8 | 23.5 | 22.0 | 166.3 | 39.0 | 205.3 | 63.2% |
EBITDA | 107.0 | 45.4 | 6.8 | 159.2 | (39.7) | 119.4 | 36.8% |
Depreciation and amortisation | 16.5 | 5.4 | 1.6 | 23.5 | - | 23.5 | 7.2% |
Share of profit (loss) of key strategic associates | - | - | - | - | 10.3 | 10.3 | 3.2% |
Other non-operating income (expense), net | 1.0 | (0.4) | 0.2 | 0.8 | (0.1) | 0.7 | 0.2% |
Profit before income tax | 91.5 | 39.5 | 5.4 | 136.4 | (29.5) | 106.9 | 32.9% |
Income tax expense | 19.9 | 7.9 | 1.7 | 29.5 | 0.1 | 29.6 | 9.1% |
Net profit | 71.6 | 31.6 | 3.7 | 106.9 | (29.6) | 77.3 | 23.8% |
Group aggregate segment financial information 2009
USD in Millions | OK | HH | Total segments | Corporate eliminations and other | Combined | % of revenue | |
Revenue | |||||||
Display advertising | 44.4 | 13.9 | 2.0 | 60.3 | - | 60.3 | 30.5% |
Context advertising | 16.0 | 1.6 | - | 17.6 | - | 17.6 | 8.9% |
Total online advertising | 60.5 | 15.4 | 2.0 | 77.9 | - | 77.9 | 39.4% |
MMO games | 61.4 | - | - | 61.4 | - | 61.4 | 31.1% |
Community IVAS | 7.1 | 31.3 | - | 38.4 | - | 38.4 | 19.4% |
Other IVAS | 5.8 | - | - | 5.8 | - | 5.8 | 2.9% |
Total IVAS | 74.3 | 31.3 | - | 105.6 | - | 105.6 | 53.4% |
Intersegment revenue | - | - | - | - | - | - | |
Other revenue | 0.0 | - | 14.2 | 14.2 | - | 14.2 | 7.2% |
Total revenue | 134.8 | 46.7 | 16.2 | 197.7 | - | 197.7 | 100.0% |
Operating expenses | |||||||
Personnel expenses | 37.2 | 5.8 | 8.4 | 51.4 | - | 51.4 | 26.0% |
Office rent and maintenance | 6.7 | 0.9 | 0.8 | 8.5 | - | 8.5 | 4.3% |
Agent/partner fees | 11.2 | 0.9 | - | 12.1 | - | 12.1 | 6.1% |
Marketing expenses | 6.1 | 0.2 | 1.9 | 8.2 | - | 8.2 | 4.1% |
Server hosting expenses | 6.5 | 6.4 | 0.3 | 13.2 | - | 13.2 | 6.7% |
Professional services | 5.7 | 0.1 | 0.5 | 6.3 | 23.7 | 29.9 | 15.1% |
Other operating (income)/expenses, excluding amortisation and depreciation | 3.5 | 2.7 | 0.8 | 6.9 | - | 6.9 | 3.5% |
Total operating expenses | 76.9 | 17.0 | 12.7 | 106.6 | 23.7 | 130.3 | 65.9% |
EBITDA | 58.0 | 29.6 | 3.4 | 91.0 | (23.7) | 67.4 | 34.1% |
Depreciation and amortisation | 6.9 | 2.9 | 1.5 | 11.3 | - | 11.3 | 5.7% |
Share of profit (loss) of key strategic associates | - | - | - | - | 7.2 | 7.2 | 3.7% |
Other non-operating income (expense), net | 4.1 | (0.2) | - | 3.9 | - | 3.9 | 2.0% |
Profit before income tax | 55.2 | 26.5 | 1.9 | 83.6 | (16.4) | 67.2 | 34.0% |
Income tax expense | 12.1 | 5.5 | 0.4 | 18.0 | 2.7 | 20.7 | 10.5% |
Net profit | 43.1 | 21.0 | 1.5 | 65.6 | (19.1) | 46.5 | 23.5% |
KPIs
Millions | Mar-2010 | Dec-2010 | Mar-2011 |
| |||
Mail.ru portal, monthly unique users, TNS | 24.1 | 27.2 | 27.8 |
| |||
Mail.ru portal, daily unique users, TNS | 12.0 | 13.9 | 14.5 |
| |||
Social Networks |
| ||||||
MyWorld monthly unique users, TNS | 18.6 | 19.5 | 20.0 |
| |||
MyWorld daily unique users, TNS | 5.1 | 5.3 | 5.5 |
| |||
Odnoklassniki monthly unique users, TNS | 15.6 | 17.4 | 18.3 |
| |||
Odnoklassniki daily unique users, TNS | 5.8 | 7.1 | 8.1 |
| |||
| |||||||
Email monthly unique users, TNS | 20.5 | 22.7 | 23.2 |
| |||
Email daily unique users, TNS | 9.6 | 10.9 | 11.2 |
| |||
Instant Messaging |
| ||||||
Mail.ru Agent global monthly users | 15.3 | 18.7 | 21.2 |
| |||
ICQ global monthly users | 44.1 | 33.5 | 34.2 |
| |||
ICQ Russia monthly users | 18.5 | 16.4 | 16.5 |
| |||
Thousands | 1H 2009 | 2H 2009 | 1H 2010 | 2H 2010 | |||
MMO Games | |||||||
Average monthly paying users | 96 | 127 | 167 | 192 | |||
Mail.ru: Community IVAS monthly paying users | 249 | 403 | 604 | 628 | |||
OK: Community IVAS monthly paying users | 698 | 790 | 1,000 | 1,208 | |||
Note: All TNS data is Russia only. Mail.ru portal includes 30 projects. Mail.ru Agent, ICQ and MMO Games is internal Company data. ICQ users include unaffiliated.
Display advertising
Display advertising revenue is generated from banner and similar advertisements on our websites. Advertisements are sold either by the time that they last, or on the number of page views. Our standard rates depend on a number of factors, including the page on which the banner appears, the length of the contract, the season, and the advertisement's format, size and position. In 2010, the Group earned aggregate segment revenue of US$94.5 million (2009:US$60.3 million) from display advertising. Mail's display advertising revenue increased by 59.3% vs 2009, OK - 54.5% both primarily as a consequence of growth of the market size (with part of the Mail's revenue growth due to acquisition of ICQ) due to a shift of advertising budgets to the Internet space and the gaining of market share as large advertisers tend to allocate their advertising budgets to large properties with significant reach: like the majority of our projects. The increase in Mail's display revenues net of ICQ acquisition effect was 47.9%.
Context advertising
Revenue was earned through partnerships with third parties - principally Google. When a user carries out a search on our search engine, results - together with advertisement links - are displayed based on certain parameters, including relevance to the topic. When users click on advertisements they are directed to the advertisers' websites; we receive a portion of the subsequent fee earned by the third party. In 2010, the Group earned aggregate segment revenue of US$32.9 million (2009:US$17.6 million) from context advertising whereby Mail's context advertising revenue grew by 93.1%, OK's by 18.7%. This significant increase in Mail's context advertising revenue is due to consolidation of ICQ and organic growth. Organic growth only resulted in a 49.0% increase in Mail's context advertising revenue vs 2009 and is primarily a consequence of an increase in the context size of the advertising market.
IVASs
The Group generates a significant portion of its revenue from IVASs. These include MMO games, community and other IVASs.
MMO games
Most of our IVAS revenue is generated by MMO games. Players have the opportunity to buy in-game enhancements for these free-to-play games; income is recognised net of any commissions to distributors or SMS operators. In 2010, the Group earned aggregate segment revenue of US$99.8 million (2009:US$61.4 million) from MMO games as per operating segment note. The MMO revenue is attributed to the Mail segment only. The increase in MMO revenues of 62.5% vs 2009 is due to increase in annual average monthly MMO paying users of ca. 60.5% vs 2009.
Community IVAS
Revenue is driven through payments for paid features and virtual items sold on our social networks and other services, such as dating services and social games. These are usually paid for by SMS, and revenue is recognised net of commission paid to distributors or SMS operators. Until September 2010, OK additionally generated revenue from one-off subscriptions to join the network. The discontinuation of these fees, which generated US$3.5 million in the first half of the year (2009:full year US$5.6 million), is expected to have a short-term effect on OK's IVAS revenue but will, we believe, help to increase its user base and consequently revenue and profitability in the long term.
Total Community IVAS revenue increased by 67.4% to reach aggregate segment revenues of US$64.3 million (2009:US$38.4 million). The Mail segment was a disproportionate growth driver with its Community IVAS revenues increasing by 160.6% as a consequence of increases in annual average monthly paying users by ca. 90% vs 2009 with the remaining growth concentrated in the increase of Average Revenue per Paying User (ARPPU). The growth of OK Community IVAS primarily resulted from increase in annual average monthly paying users by 48% vs 2009 while ARPPU remained relatively stable.
Other revenue
Other aggregate segment revenue is primarily generated through subscriptions to the résumé database on HeadHunter, the Group's online recruitment site. The increase by 84.4% of HeadHunter revenues is primarily resulting from overall economic recovery and as a consequence revival of the labor and recruiting market.
Costs and margins
The major cost items of the Group as per operating segments note comprise of personnel expenses, agent/partner fees, server hosting expenses and professional services.
Aggregate segment personnel expenses increased by 63.0% to US$83.8 million (2009:US$51.4 million). Part of the increase in personnel expenses is due to corporate reorganisation which resulted in the migration of several DSTA employees to the Group upon IPO when the agreement with DSTA was terminated, and to the consolidation of ICQ. The organic growth of personnel expenses net of the reorganisation effect and net of the effect of the ICQ acquisition was 51.6%, which demonstrates the scale effect as it was outpaced by growth in combined segment revenues of 58.0% net of the effect of the ICQ acquisition. This primarily resulted from an increase in average salaries as market pressure built-up in view of the economic revival, accompanied by an increase in headcount as the Group continued to enhance its production and development team both in the Mail and OK segments. The organic increase in personnel expenses was spread relatively evenly among major segments: Mail - 50.5%, OK - 50.4%, with a slightly higher increase in HeadHunter - 55.4%.
Aggregate segment agent/partner fees increased by 76.0% to US$21.3 million (2009:US$12.1 million) and are mainly concentrated in Mail segment. The agent/partner fees of Mail segment increased by 83.6% primarily driven by an increase in licensing fees for games licensed from other countries; an increase in payment channel costs and charges by distributors in the gaming area as well as the inclusion of ICQ agent/partner fees in 2010 since the consolidation date.
Aggregate segment server hosting expenses increased by 20.4% to US$15.9 million (2009:US$13.2 million) demonstrating a considerable scale effect as compared to the revenue growth rate. The server hosting expenses grew as a consequence of an increase in the number of users, resulting in demand for more servers and storage capacity. However, these expenses were significantly offset due to usage of our own datacentre and negotiation of favourable commercial terms with the service providers.
Aggregate segment professional services fees increased by 44.4% to US$43.2 million (2009:US$29.9 million). The majority of professional services are not allocated to operating segments and primarily concentrated at the headquarter level. They mainly include the advisory fees paid to DSTA, a related party. The increase is due to the increasing value of the equity as stipulated in the relevant agreement which is a driver of the advisory fees. The advisory fees will no longer be a separate line item affecting the Group's financial results as the agreement with DSTA was terminated upon IPO followed by migration of certain DSTA employees and functions and, accordingly, the costs (primarily represented by personnel expenses and costs associated with running the Company as a publicly traded entity) to the Group.
The Group's combined segment EBITDA margin increased to 36.8% (2009:34.1%) as a result of operating leverage primarily derived from office rent and maintenance expenses, server hosting expenses and professional services partially mitigated by increase in marketing expenses and agent/partner fees. All of the Group's segments increased their EBITDA margin with the highest margin of 65.9% achieved in OK segment due to significant operating leverage effect.
The increase in aggregate segment share in net income of key strategic associates by 42.4% to US$10.3 million (2009:US$7.2 million) is due to increase in net income attributable to the equity holders of the parent of QIWI by 56.1% and VK by 31.1%.
The Net Income of VK increased as a result of growth in revenues of 94.0% partially compensated for by a decrease in margins driven by considerable investments in the team and infrastructure.
Growth of QIWI Net Income was primarily driven by growth of new products and services and earnings received from one-off effect of sale of payment processing equipment in the first half of the year
Depreciation and amortisation, income tax and net income
Aggregate segment depreciation and amortisation expense increased by 108.4% to US$23.5 million (2009:US$11.3 million) primarily driven by further investment in gaming licenses and hardware, acceleration of amortisation of certain slower performing games, which totalled to US$1.8 million in 2010, and consolidation of ICQ. The increase in depreciation and amortisation was mainly concentrated in the Mail segment (increase of 140.1%).
Aggregate segment Income tax expense increased by 43.0% to US$29.6 million (2009:US$20.7 million) primarily driven by an increase in taxable profits by 59.1% to US$106.9 million (2009:US$67.2 million) and slight decrease in effective tax rate to 27.7% (2009:30.8%) as a consequence of higher withholding tax charges on dividends payments within the Group in 2009 as compared to 2010.
The increase in aggregate segment profit before tax was driven mainly by the increase in EBITDA described above and was primarily concentrated in the Mail segment.
Aggregate segment net income increased by 66.3% to US$77.3 million (2009:US$46.5 million) driven by increase in profit before tax partially compensated for by an increase in income tax expense.
Reconciliation to IFRS
USD in Millions | 2009 | 2010 |
Combined revenue per operating segment note | 197.7 | 324.7 |
Effect of operations disposed of and difference in dates of acquisition of control in subsidiaries | (52.3) | (40.3) |
Other differences | 2.9 | (9.1) |
Consolidated revenue per IFRS | 148.3 | 275.3 |
Combined net income per operating segment note | 46.5 | 77.3 |
Fair value adjustments on acquisitions and disposals, PPA effects and (impairment)/reversal of impairments effects | 143.0 | 146.8 |
Share-based payments | (20.6) | (30.2) |
Difference in shareholding percentages and acquisition dates of subsidiaries and associates | (10.6) | 3.1 |
Gain/(loss) on financial instruments at fair value through profit or loss | 6.4 | (27.3) |
Other | 1.0 | (13.4) |
Consolidated net income per IFRS | 165.7 | 156.3 |
Other revenue reconciling items primarily include dividends from venture capital investments, timing differences in revenue recognition and barter revenues.
Other Net Income reconciling items primarily include financial gains and losses, deferred income tax effects, effects on Net Income of timing differences in revenue recognition and other non-cash and/or irregular items.
Liquidity
Throughout the year the financial position of the Group remained healthy as the total cash balance as at December 31, 2010 amounted to US$118.4 million (2009:US$147.9 million).
Mail.Ru has historically principally relied on its own cash flow and the issue of equity as sources of funding. It has generally not used debt finance for acquisitions or for operations and, at the end of the year, had no outstanding debt. Consolidated operations have been cash flow positive since 2009. In 2010, net cash provided by operating activities amounted to US$73.8 million (2009:US$23.6 million).
Net cash provided by operating activities more than tripled in 2010 vs 2009 as consequence of organic growth, acquisition of subsidiaries and higher cash conversion: ratio of net cash provided by operating activities to consolidated revenues grew to 26.8% in 2010 (2009:15.9%).
Capital expenditure increased by 72.0% as a consequence of the acquisition of subsidiaries and organic growth driven primarily by expansion of Group's infrastructure.
USD in Millions | 2010 | 2009 |
Net cash provided by/(used in) operating activities | 73.8 | 23.6 |
Net cash used in investing activities | (513.5) | (301.5) |
I.e. capital expenditure | (29.4) | (17.1) |
Net cash provided by financing activities | 409.0 | 324.6 |
Effect of exchange differences on cash balances | 1.2 | 2.6 |
Current trading update
Revenue, USD Millions* | Q1 2011 | Q1 2010 | Total Growth, % | Organic Growth, % |
Display advertising | 25.4 | 13.4 | 89.8% | 77.0% |
Context advertising | 12.6 | 5.7 | 120.5% | 66.7% |
MMO games | 32.0 | 23.0 | 39.4% | 39.4% |
Community IVAS | 28.4 | 16.8 | 68.9% | 68.9% |
Other** | 12.1 | 6.6 | 83.4% | 80.0% |
Total | 110.6 | 65.5 | 68.8% | 61.2% |
\* The operating segment data is presented based on principles used for presentation of operating segments results, i.e. excluding certain IFRS adjustments (see Note 5 of the Financial Statements for further details).
**Includes other IVAS