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Annual report2012
Mail.Ru Group Annual report 2012ContentsSection 1 Overview03 	 Who we are04 	 Mail.Ru Group in brief06 	 How we work07 	 C...
Mail.Ru Group Annual report 2012 3Mail.Ru Group is a leading company in the high-growth Russian-speaking internetmarket. I...
Mail.Ru Group Annual report 2012 4Mail.Ru Group in brief* as of the date hereof, unchanged from December 31, 2012Email & p...
Mail.Ru Group Annual report 2012 5Mail.Ru Group in brief continuedMail.Ru is the leading emailservice in Russia and the fi...
Mail.Ru Group Annual report 2012 6Our business modelWe are operating an integrated communications and entertainment platfo...
Mail.Ru Group Annual report 2012 7Corporate historyPre-2001Feb 2001Oct 2001May 2003May 2003Jun 2003Jan 2004Oct 2004Feb 200...
Mail.Ru Group Annual report 2012 8May 2007Jun 2007Dec 2007May 2008Dec 2008Jun 2009Feb 2009Mar 2009Aug 2009Seb 2009Oct 2009...
Mail.Ru Group Annual report 2012 9Corporate history continuedJul 2010Aug-Sep 2010Nov 2010Nov 2010Apr 2011Apr 2011May 2011J...
Mail.Ru Group Annual report 2012 102012 key highlightsJanuarySearch.Mail.Ru reworks search interface and results page:new ...
Mail.Ru Group Annual report 2012 11Tovary.Mail.Ru launches mobile application for iOS andupdates Clothes sectionMail.Ru Ag...
Mail.Ru Group Annual report 2012 12Financial highlights** The data is presented in conformity with 2012 segments reporting...
Mail.Ru Group Annual report 2012 13While 2012 was a year with a number of global macroeconomic challenges and uncertaintie...
Mail.Ru Group Annual report 2012 14increase in the number of paying users, especially in virtual giftsand services, as wel...
Mail.Ru Group Annual report 2012 152013 outlook2013 will be another important year in our development. Mobileinternet is b...
Mail.Ru Group Annual report 2012 16Key audience statisticsMail.Ru Agent, millions of active usersDec 2012Jun 2012Dec 2011J...
Mail.Ru Group Annual report 2012 17Our services attract millions of Russian speakers each day. Whether they are using emai...
Mail.Ru Group Annual report 2012 18conversation list facilitating the work with large amount ofincoming messages. We also ...
Mail.Ru Group Annual report 2012 19Instant MessagingOur instant messaging (IM) services are an integral part ofour communi...
Mail.Ru Group Annual report 2012 20DesktopOur desktop IM clients are presented by Mail.Ru Agentapplications for Windows an...
Mail.Ru Group Annual report 2012 21Social networksWe operate two of Russia’s three leading online socialnetworks – Odnokla...
Mail.Ru Group Annual report 2012 22improved the newsfeed algorithm, including on-line updates.Now users can seamlessly pos...
Mail.Ru Group Annual report 2012 23Online GamesWe operate the largest online games business in Russia.Our portfolio titles...
Mail.Ru Group Annual report 2012 24at Russian Game Developers Conference 2012. Our Warfacefestival “Warfest” was very well...
Mail.Ru Group Annual report 2012 25Search and e-commerceSearchOur internet search services allow users to find web pages,p...
Mail.Ru Group Annual report 2012 26Other activitiesIT InfrastructureOur network infrastructure is designed to meet therequ...
Mail.Ru Group Annual report 2012 27This review reflects highlights of our financial performance for 2012. Full details can...
Mail.Ru Group Annual report 2012 28GoodwillWe account for business combinations by applying theacquisition method under IF...
Mail.Ru Group Annual report 2012 29based payment expense incurred in a tax-free jurisdiction,it was not commensurate to gr...
Mail.Ru Group Annual report 2012 30SeasonalityThe majority of our revenues are affected by seasonalityand as a result reve...
Mail.Ru Group Annual report 2012 31Analysis of 2012 results compared with 2011The discussion that follows is based on the ...
Mail.Ru Group Annual report 2012 32Operating segments performance – 2012Email, Portaland IMSocialNetworksOnlineGamesE-comm...
Mail.Ru Group Annual report 2012 33Display advertisingDisplay advertising revenue is generated from banner, andsimilar, ad...
Mail.Ru Group Annual report 2012 34Other revenueOther revenue is primarily generated through subscriptionsto the résumé da...
Mail.ru group 2012 FY results
Mail.ru group 2012 FY results
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Mail.ru group 2012 FY results
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Mail.ru group 2012 FY results
Mail.ru group 2012 FY results
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Mail.ru group 2012 FY results
Mail.ru group 2012 FY results
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Mail.ru group 2012 FY results

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Mail.ru group 2012 FY results

  1. 1. Annual report2012
  2. 2. Mail.Ru Group Annual report 2012ContentsSection 1 Overview03 Who we are04 Mail.Ru Group in brief06 How we work07 Corporate history10 Highlights13 Chief Executive Officer’s reportSection 2 Business review16 Key audience statistics17 Operating review27 Financial reviewSection 3 Management38 Management40 Corporate governance45 Risk management48 Board and Management remuneration49 Responsibility statementSection 4 Financial statements52 Independent auditors’ report53 Consolidated Statement of Financial Position54 Consolidated Statement of Comprehensive Income55 Consolidated Statement of Cash Flows57 Consolidated Statement of Changes in Equity59 Notes to Consolidated Financial StatementsSection 5 Additional information104 Cautionary statements
  3. 3. Mail.Ru Group Annual report 2012 3Mail.Ru Group is a leading company in the high-growth Russian-speaking internetmarket. In terms of number of users, Russia is the largest internet market in Europe1.The Company’s sites reach approximately 85% of Russian internet users on a monthlybasis2. Based on total pages viewed, we operate the world’s fourth largest internetbusiness, according to comScore3.In November 2010, Mail.Ru Group shares started trading, in the form of GDRs, on the London Stock Exchange after beingadmitted to the Official List of the UK Listing Authority.Our product portfolioIn line with its ‘communitainment’ (communication plus entertainment) strategy, our Company is moving rapidly to build anintegrated communications and entertainment platform. We own Russia’s leading email service and Russia’s largest internetportal, Mail.Ru4. We operate two of the three largest Russian language social networks, Odnoklassniki (OK) and Moi Mir (MyWorld)5. We lead the interactive entertainment market with Russia’s largest online games business. Our portfolio also includesMail.Ru Agent and ICQ – two instant messaging services popular in Russia and CIS.Leveraging our user baseOur significant user base provides a strong foundation for the launch of new services. It also allows us to generate revenuefrom display and contextual advertising as well as a range of internet value-added services (IVAS). These include online games,virtual gifts and other features.This strong position will help us achieve our goal of remaining the leading integrated communications and entertainmentplatform in the Russian-speaking internet market.Who we are1 Source: comScore, Dec 20122 Source: comScore, Dec 20123 Source: comScore, Dec 20124 Source: TNS, Russia 12-64, Dec 20125 Source: TNS, Russia 12-64, Dec 2012
  4. 4. Mail.Ru Group Annual report 2012 4Mail.Ru Group in brief* as of the date hereof, unchanged from December 31, 2012Email & portalVKontakteVK.com LimitedSocial network39.99% equity interestQIWIQIWI PLCPayment processing company21.35% equity interestFacebookFacebook Inc.The world’s largest social network14.2 mln sharesEmailMain PageContent ProjectsOdnoklassnikiMy WorldMMO gamesSocial gamesMobile gamesSearchHeadhunterPrice comparisonAgentICQSocial networksMinority investments*Online games Search & e-commerceInstant messagingMail.Ru Group offers a variety of online communication products and entertainment services for Russianspeakers all over the world.
  5. 5. Mail.Ru Group Annual report 2012 5Mail.Ru Group in brief continuedMail.Ru is the leading emailservice in Russia and the fifthlargest in the worldOur search is currently the third mostpopular and Headhunter is the largestonline recruitment business in theRussian-speaking internetMail.Ru Agent and ICQ – twoinstant messaging (IM) servicespopular in Russia and CISOdnoklassniki and My World –two of Russia’s three largestsocial networksRussia’s leading provider ofonline gamesEmail & portalSearch & e-commerceInstant messagingSocial networksOnline games
  6. 6. Mail.Ru Group Annual report 2012 6Our business modelWe are operating an integrated communications and entertainment platform that aims to serve the 250–300 million Russianspeakers worldwide1. Of our target audience, approximately 143 million live in Russia2. The rest are primarily based in theformer Soviet Union, while others are located around the world.There are currently 64 million internet users in Russia3. By the end of 2014, this is projected to increase to 80 million4.Our audience Monetisation Our peopleWe will achieve growth by:Consolidating our leading position inthe rapidly expandingRussian-speaking internet marketOffering our users a comprehensiverange of online communication andentertainment productsFocusing on mobile products andmobile user experienceIncreasing our users’ loyalty bycontinually improving theirexperience of our products andservicesEnsuring we remain at the forefrontof technological and productinnovationRegularly introducing newentertainment services to our users,including MMO and social games andother innovative featuresPursuing international expansionMost of the core members of ourmanagement team have:Been involved with our businesses formore than eight yearsDeveloped alongside the Russian-speaking internetStrong industry relationships andproven track recordsExperience of successfully integratingacquisitionsWe will increase the monetisation ofour products and services by:Utilizing our leading sales force andcapitalizing on the growth in onlineadvertisingProviding flexible and targetedservices for advertisersIncreasing paying users’ take-up ofexisting and new productsCross-promoting products betweenour social networks and otherservicesStrategyTo remain the leadingcommunications and entertainmentplatform in the Russian-speakinginternet market while pursuinggrowth opportunities in internationalmarketsEnsure the best user experience on mobileAttract and retain the best engineering talentFocus on serving Russian-speaking internet usersExpand in international markets under my.com brandHow we work1 Source: Lewis, M. Paul (ed.), 2009. Ethnologue: Languages of the world, 16th ed2 Source: Russian Federal State Statistics Service3 Source: Public Opinion Foundation (FOM), winter 2012-20134 Source: Public Opinion Foundation (FOM), March 2011, October 2012
  7. 7. Mail.Ru Group Annual report 2012 7Corporate historyPre-2001Feb 2001Oct 2001May 2003May 2003Jun 2003Jan 2004Oct 2004Feb 2005May 2005Jun 2005Nov 2005Nov 2005Mar 2006May 2006Aug 2006Sep 2006Oct 2006Webmail service launched in 1998Headhunter founded in 2000Search partnershipestablished with GoogleLady.Mail.Ru – women’slifestyle service – launchedMail.Ru Group founded asDigital Sky Technologies Ltd. (DST)Mail.Ru portal launchedVoice calls added to Mail.Ru AgentAuto.Mail.Ru launchedMail.Ru Games portal introducedVideo calls added to Mail.Ru AgentOdnoklassniki (OK) socialnetwork launchedMMO game, “Legend: Legacyof the Dragons” launchedBlogging service launchedNaspers Ltd, a South African mediacompany acquired stake in Mail.RuVideo service introducedMail.Ru formed from Port.ruand netBridge mergerTravel.Mail.Ru – travel portal – launchedMobile email service introducedMail.Ru Agent launched
  8. 8. Mail.Ru Group Annual report 2012 8May 2007Jun 2007Dec 2007May 2008Dec 2008Jun 2009Feb 2009Mar 2009Aug 2009Seb 2009Oct 2009Oct 2009Nov 2009Jan-Apr 2010Feb 2010Apr 2010Apr 2010Apr-May 2010My World social networkstarted operationMail.Ru Group acquiredcontrol of Mail.RuPayment systemMoney.Mail.Ru launchedMy World’s API opened tothird-party developersMobile versions of OK and My World releasedMail.Ru Group acquiredstake in Facebook“Allods online” game launchedMail.Ru completed acquisitionof its in-house data centerHealth.Mail.Ru – healthproject – launchedMail.Ru Group acquiredstake in ZyngaOK opened its API platformto third-party developersAstrum merged with Mail.RuMail.Ru Group acquiredstake in GrouponTencent Holdings acquireda stake in Mail.Ru GroupMail.Ru in-house searchtechnology (beta) launchedWeb version of Mail.Ru Agent introducedMail.Ru Group acquiredcontrol of Headhunter“Perfect world” online gamelaunched under licenseCorporate history continued
  9. 9. Mail.Ru Group Annual report 2012 9Corporate history continuedJul 2010Aug-Sep 2010Nov 2010Nov 2010Apr 2011Apr 2011May 2011Jun 2011Jul 2011Aug 2011Aug 2011Sep 2011Sep 2011Nov 2011Mail.Ru Group acquiredIM service ICQMail.Ru Group completed an IPOin the form of Global depositary receipts(GDRs) on the London Stock Exchange (LSE)Mail.Ru Group increased ownershipof Mail.Ru and Odnoklassniki to 100%Stake in VKontakte increased to 32.55%Mail.Ru Group launches the All-Russianprogramming contest – Russian Code CupMail.Ru Group launches Target.Mail.Ru,a self-service advertising platformMail.Ru Group exercises the optionto acquire an additional 7.44% in VKontakte,increasing its total stake to 39.99%Mail.Ru Group opens Technopark in cooperationwith Bauman Moscow State Technical University (MSTU)Launch of active cross-product navigation2011 Mail.Ru Agent launchesinstant-messaging supportfor OdnoklassnikiLaunch of server-based interoperabilitybetween Mail.Ru Agent and ICQMail.Ru email service introducesa new modern design and fullAJAX interfaceOdnoklassniki introducesvideo-chat and music serviceOdnoklassniki launches a videoservice in partnership with Rutube
  10. 10. Mail.Ru Group Annual report 2012 102012 key highlightsJanuarySearch.Mail.Ru reworks search interface and results page:new design, new images output layout, extended relevantimages and video blocksOdnoklassniki introduces messaging tool on iOS applicationFebruarySearch.Mail.Ru tests machine learning algorithms for searchresults ranking, improving relevanceSearch.Mail.Ru releases iOS application featuring voicesearchMail.Ru Group opens new office in VolgogradMarchMail.Ru Group introduces new main page – modern,lightweight and fastMail.Ru email service launches first mobile application foriOSOdnoklassniki introduces video chat and messaging tool onAndroid applicationMail.Ru Agent releases app for Windows Phone and ICQreleases apps for Windows Phone and BadaSearch.Mail.Ru releases Android application featuring voicesearchAprilAAA MMO shooter Warface is releasedNew Mail.Ru Agent for Android featuring voice calls andnew ICQ for iOS and Android featuring photo and locationsharing are releasedMail.Ru email service launches tools for working with emailattachments: “files” menu section and convenient file viewerOdnoklassniki introduces music service on iOS applicationMail.Ru Group holds Technology Forum in MoscowMayWorldwide launch of mobile game Juggernaut: Revenge ofSovering on iOS platformLaunch of completely redesigned Mail.Ru Agent 6.0 forWindows with in-house voice and video engine supportingHD callsMail.Ru Group launches All-Russian programming contestRussian Code Cup 2012Warface and Juggernaut: Revenge of Sovering win “bestgame” and “best mobile game” awards at Russian GameDevelopers Conference 2012JuneiOS and Android ICQ users are enabled to link theirOdnoklassnki accounts to the messengersMail.Ru email service introduces IMAP supportJulyMail.Ru email service launches mobile application forAndroidMy World updates profile page design, adds cover photosAllods Online update, Summer Breeze, is releasedWarface festival, Warfest, takes place in Moscow with over3,000 participantsTovary.Mail.Ru introduces new design and improvedusabilityLady.Mail.Ru introduces new, modern and magazine-likedesignAugustMail.Ru main page and email service release mobile web-versions tailored for touch phonesMy World updates notification system: includes a quicksearch and the ability to unsubscribe from eventsAndroid version of mobile game Juggernaut: Revenge ofSovering is releasedTarget.Mail.Ru introduces social geotargeting solution andautomated bid management and opens API to third partydevelopersMail.Ru Group pays a special dividend of USD 795 million*(USD 3.8 per GDR) on 28 August 2012SeptemberHTTPS access is set as a default for all Mail.Ru email usersMail.Ru email service expands its presence on mobile byreleasing first apps for Windows Phone and Samsung BadaMy World introduces personalized game catalogAAA MMORPG Dragon Nest is releasedNews.Mail.Ru is redesigned with focus on informationvisualizationHighlights* including USD 4 million paid to Mail.Ru Employee Benefit Trustees Limited
  11. 11. Mail.Ru Group Annual report 2012 11Tovary.Mail.Ru launches mobile application for iOS andupdates Clothes sectionMail.Ru Agent updates client for Mac OS bringing in voiceand video calls and support of Mac OS Notification CenterMoney.Mail.Ru obtains license of a non-banking creditorganizationOctoberMail.Ru Group announces its plans for internationalexpansion under my.com brandOdnoklassniki introduces photo filters (iOS) and multi uploadphotos (Android)Mail.Ru email service adds user profile pictures toconversation list, introduces multiple accounts sign-in, webversion for iPad, and Windows 8 appMail.Ru Agent for iOS and ICQ for Android enable voice callswithin corresponding IM services, while web client of Mail.RuAgent enables mobile and fixed line callsICQ releases first Windows 8 app featuring voice and video callsTovary.Mail.Ru launches mobile application for AndroidMoney.Mail.Ru releases first Android application and majorupdate for iOS applicationLaunch of web browser Amigo (beta) integrated with mainsocial networks (OK, My World, VK, Facebook)Mail.Ru Group holds Technology Forum in MoscowNovemberCalendar.Mail.Ru, an extensive time-management web-based tool, is introducedOdnoklassniki releases recommendation service for videoand music and enables customization of personal profilesand groups with different skinsMy World introduces photo filtersICQ releases new version of iOS app featuring voice callsNews.Mail.Ru mobile applications are available on all majorplatforms: iOS, Android, Windows Phone, Symbian, MeeGoand Windows 8Target.Mail.Ru introduces retargeting, the feature thatallows clients to serve relevant ad to users who havepreviously visited their websitesWarface wins Runet Award 2012 in the Game of RunetcategoryMail.ru Group completes disposal of stakes in Groupon andZynga and reduces stake in Facebook (down to 0.6%)DecemberOdnoklassniki launches multichat for conversation withseveral friends at the same time and updates welcome pagefor new usersMy World launches new messaging system with inline photoand videoLicense for AAA MMORPG ArcheAge is purchased fromXLGamesSearch.Mail.Ru introduces geo-location based searchSport.Mail.Ru launches mobile application for AndroidAfisha.Mail.Ru launches new TV Series section and web-version tailored for touch phonesMail.Ru Agent releases new version of Web Agent featuringvoice calls among Mail.Ru Agent users (in addition to alreadyavailable mobile and fixed line calls) and new version of Javaclient featuring photo sharingHighlights continued
  12. 12. Mail.Ru Group Annual report 2012 12Financial highlights** The data is presented in conformity with 2012 segments reporting principles and as such differs from IFRS. Please refer to Note 5 of the financial statements for further detailThe RUR numbers for FY 2010 represent a convenience translation. The USD amounts have been translated into RUR using the FY 2010 average exchange rate of RUR 30.37 to USD 1.0015,2159,86221,151+39%+54%Revenue, RUR mn2012201120106,2152,4258,552+38%+156%Net profit, RUR mn2012201120103,8073,0304,732+24%+26%MMO revenue, RUR mn2012201120103,7711,9516,739+79%+93%Community IVASrevenue, RUR mn2012201120106,0423,8687,437+23%+56%Online advertisingrevenue, RUR mn2012201120108,3813,62811,535+38%+131%EBITDA, RUR mn201220112010
  13. 13. Mail.Ru Group Annual report 2012 13While 2012 was a year with a number of global macroeconomic challenges and uncertainties, for Mail.RuGroup it was another exciting and successful year. Theunderlying drivers of business remained unchanged, andwith continued focus on execution we were pleased todeliver another year of strong growth combined with robustmargins. With continued integration and upgrades of ourkey products across both desktop and mobile platformswe made further significant steps in improving our emailservice, social networks (OK and My World) and instantmessengers (Mail.Ru Agent and ICQ). Our newly launchedAAA shooter Warface has become a hit in Russian and CISgaming markets.We continue to significantly invest in the development ofmobile versions across all our core products and as userbehavior continues to move towards the mobile environmentwe remain excited by the opportunities this presents ourcompany with.Company highlights for 2012Continued growth in the underlying marketOver the last 5 years the Russian internet market has seensignificant growth with Russia becoming the largest internetmarket in Europe in 2011. Solid growth has continued in2012 and by the end of the year the number of internetusers in the country had risen to 64 mln. However, overallinternet penetration is still only 55%1and as such thereis still significant scope for expansion. Additionally, theCIS countries which form much of the wider Russian-speaking market have even lower internet penetration.With a combined population of 100 mln+ they offer furthersignificant potential for user growth. We continue to expandour presence in these markets and now have over 40% ofusers outside of Russia2.Driven by the continued investment of telecom operators theamount of time that the Russian internet users spends onlinecontinues to grow and the ways through which Internetpenetrates into users’ daily lives expanded further. During2012, time spent online rose by 4%3driven by increasedinternet penetration and better desktop and mobilebroadband access.We continue to invest in our brand and hence our coreproducts enjoy high brand awareness. As a result theyare often the first services used by those new to theinternet. This puts us in a great position to capitalize onthe growth of the Russian-speaking internet. Our goalremains unchanged for both the new and the existing users:to provide the best communications and entertainmentplatform and experience.Continually evolving our businessAs for the last few years our primary focus has remained onenhancing the user experience and hence driving engagement.We are striving to create an integrated online environmentfor our users. We want to offer a place where they cancommunicate, store and exchange memorable events in theirlives – all while having fun playing games. To achieve this goalwe need to continually improve our products.2012 was a year when we continued to focus on mobileproducts and mobile user experience. As an example our emailapps for iOS and Android released in 2012 have seen significantsuccess and now are most popular email apps in RussianApp Store and Google Play respectively. Our IM apps for iOSand Android have been significantly redesigned and receivedphoto and video sharing and voice calls support. At presentwe remain primarily focused on growing the mobile user baseand engagement, and we remain very excited about the futurepotential for further mobile growth and monetisation.Strong 2012 financial performanceWith the drivers of our business remaining strong and ourcontinued innovation of the product and notwithstandinga tougher underlying market in display in H2 we continuedto execute strongly in all other segments of the business.Compared to FY 2011, Group revenue increased by 39% toRUR 21.1 bn and Group EBITDA rose 38% to RUR 11.5 bn.Community IVAS has become a key contributor to our revenuesas well as a material driver of revenue growth, delivering 79%growth y-o-y in FY 2012. The main driver of this growth is theChief Executive Officer’s report1 Source: Public Opinion Foundation (FOM), winter 2012-20132 Source: comScore3 Source: comScoreDmitry Grishin. Co-founder, CEO and Chairman of the Board
  14. 14. Mail.Ru Group Annual report 2012 14increase in the number of paying users, especially in virtual giftsand services, as well as in our API platform.While context advertising continued to grow in line withthe market for the full year, we saw a slowdown of growthin display revenue in H2 2012. This was driven by acombination of a planned reduction in advertising inventoryon some of our properties, the ban on alcohol advertisingand the inventory adjustments for TV. While these impactedH2 2012 we do not expect these effects to continue through2013 and as a result we forecast a recovery in display growthrates through the year.Throughout 2012 we continued to execute on the MMOgames strategy which we laid out at the end of 2011: tofocus on a small number of high quality releases and to focusthe marketing effort, support and resource where they aremost likely to make a difference. We were pleased with theresults of this strategy and with 24% growth in the year theMMO division performed strongly.Product reviewEmail & portal2012 saw our portal maintain its market leading positionwith TNS recording over 33.3 mln users in Decemberreaching almost 93% of the Russian internet population on amonthly basis.During the year, we continued to innovate with a numberof improvements and updates: email mobile apps for allmajor platforms (iOS, Android, Windows Phone, Windows8), HTTPS support for email and main page and a newversion of Mail.Ru main page which is significantly lessresource intensive allowing it to run materially faster.We also added “social” email list design with user profilepictures and launched Calendar.Mail.Ru which is a planningtool synchronized with mobile phones.Social networksIn 2012, we continued the development of our social networks,OK and My World. OK experienced substantial growth in userengagement. Daily active users grew 31% y-o-y, reaching 34.9mln (December 2012 average, LiveInternet).We added several new, important features to OK as partof our ongoing program of innovation such as multichatallowing conversations with several friends at the sametime. Additionally we improved the newsfeed allowingusers to seamlessly post multimedia attachments (links,multiple photos, user generated video) and enabledcustomization of personal profiles and groups withdifferent skins.Mobile development remains a major priority for us. Last yearwe made a number of improvements to mobile version andapps for major platforms (iOS, Android), including: music, videochat, photo filters, native messaging, credit card payments. InDec 2012 mobile users comprised 40% of total OK users.Instant messaging (IM)During 2012 we focused on mobile product development: wereleased new Mail.Ru Agent and ICQ apps for iOS and Androidsupporting photo & video sharing and voice calls. Additionallywe upgraded desktop versions of Mail.Ru Agent and ICQ andmerged them to the same technological platform. Finally wemoved ICQ development to Moscow and both messengersare developed by the same team to allow better integration.Online gamesOur “less quantity, more quality” strategy has been successfulthrough 2012. Warface has been an important component ofthis and has seen strongly increased traction in terms of bothuser and revenue. We are pleased to report that the game wona number of awards in 2012, and was the winner of the Russiangaming industries “best games 2012”. Our Warface festival waswell attended with over 3,000 participants. This popularity ofthe game has been reflected in the growth of peak concurrentusers which in January 2013 hit 145 thousand. As a result thegame has become a Top 3 revenue generating game by the endof the year, and we expect it to move further up the rankingsinto 2013. Additionally we have a full release pipeline into 2013and will continue to go abroad with our most successful titles.Search & e‑commerceThrough 2012 our Russian search market share remainedbroadly constant at around 8.5% (Liveinternet). We continueto focus on improvements to our own search technology andwe launched a new mobile version of the search product. Wecontinue to use a hybrid of in-house developed and Googlesearch technology, all monetized by the AdWords product.Corporate and outlookOur peopleOur main asset is our people and the technology-drivenculture they are carrying. This continues to remain oneof our guiding principles. The Company’s success is verydependent on our ability to attract, retain and motivate thebest engineers in the market. 2012 saw the start of the fit outfor our new state-of-the-art headquarters. It will provide asignificantly larger and more attractive workspace to allow usto continue to lead in the competitive Russian market. We lookforward to moving into our new offices in the end of H1 2013.Through the year, we continued to attract new talent,especially core engineering expertise with over 80% of ournew hires in these areas. In the year our total headcount roseby 15% (394 full-time employees) and reached 3,059 as ofthe end of 2012. Into 2013 we will continue to attract talentat a reasonable pace with our focus remaining on the coreprogramming and engineering skills.DividendWith the sale of some of the non-core assets we werepleased to make significant returns to shareholders in theform of the $3.80 per share August 2012 special dividend,and the further $4.30 per share March 2013 special dividendannounced with our full year 2012 results. In total thereforewe have returned around $1.7bn to shareholders.Chief Executive Officer’s report continued
  15. 15. Mail.Ru Group Annual report 2012 152013 outlook2013 will be another important year in our development. Mobileinternet is becoming increasingly important and the competitionin the Russian-speaking internet remains fierce. The underlyingstructural drivers of our business however remain strong andunchanged. We expect that community IVAS and MMO gamingwill be our key revenue streams, and with the events whichhave impacted display growth in H2 2012 dropping off we lookinto 2013 with confidence. As a result, and even taking intoaccount the increased costs associated with our new offices, theoperating leverage in our business remains unchanged, and wewould therefore expect margins to remain robust.AppreciationIt is important to recognize the contribution of our people toour continued success. Over the past year our employeesand management have continued to show dedication and skilland their efforts have allowed the company to have anothersuccessful year. On behalf of the board I want to extendour congratulations on their achievements and thanks fortheir hard work. Additionally the board wishes to express itsthanks for the continuous support from our shareholders whocontinue to believe in us and support us as the company goesfrom strength to strength in 2013.Chief Executive Officer’s report continuedDmitry GrishinCo-founder, CEO and Chairman of the Board
  16. 16. Mail.Ru Group Annual report 2012 16Key audience statisticsMail.Ru Agent, millions of active usersDec 2012Jun 2012Dec 2011Jun 2011Dec 2010Jun 2010Source: Company dataDaily Monthly7.315.618.721.022.921.923.29.410.411.7 11.312.1Mail.Ru email, millions of active usersDec 2012Jun 2012Dec 2011Jun 2011Dec 2010Jun 2010Source: TNS, Russia, cities with 100k+ population, age 12-54, desktop onlyDaily Monthly9.020.722.7 22.924.525.726.910.9 10.311.5 11.3 12.0Mail.Ru portal, millions of active usersDec 2012Jun 2012Dec 2011Jun 2011Dec 2010Jun 2010Source: TNS, Russia, cities with 100k+ population, age 12-54, desktop onlyDaily Monthly11.324.027.2 27.530.031.833.313.9 13.615.7 15.617.2Odnoklassniki, millions of active usersDaily MonthlyDec 2012Jun 2012Dec 2011Jun 2011Dec 2010Jun 2010Source: TNS, Russia, cities with 100k+ population, age 12-54, desktop only5.415.317.4 18.020.822.2 23.27.2 7.89.4 9.610.3Community IVAS, thousands of averagemonthly paying users1H2 2012H1 2012H2 2011H1 2011H2 2010H1 2010Source: Company data1,6041,8362,9753,7655,4215,631MMO games, thousands of average monthlypaying users2H2 2012H1 2012H2 2011H1 2011H2 2010H1 2010Source: Company data167192227241263 2591 The numbers combine paying users of Odnoklassniki, My World, Love.Mail.Ru and our own social games on third-party networks and may include overlap.2 The numbers combine paying users of individual MMO games and may include overlap.
  17. 17. Mail.Ru Group Annual report 2012 17Our services attract millions of Russian speakers each day. Whether they are using email, instant messaging (IM),our social networks or our games, we aim to increase the time they spend on our sites by continuously offering newfeatures and internet value-added services (IVAS) – including online games and virtual gifts – and providing contentthrough our online recruiting, dating and listing services.Email & portalEmailMail.Ru Group provides the largest email service in theRussian-speaking internet. In December 2012, our servicehad 26.9 million monthly active users and 12.0 million dailyactive users in Russia alone (TNS, Russia, desktop only).Worldwide, our email service is the fifth largest by monthlyactive users (49.1 mln, comScore). We only trail Hotmail,Yahoo!, Gmail and QQ Mail.Our email service is integrated with many of the Group’sother communications services. These include Mail.Ru Agent,My World and several others. Currently our email servicedelivers approximately 300 million messages a day and has adata storage capacity exceeding twelve petabytes.Revenue is generated through display and contextadvertising.Over the year we’ve been increasingly focused on transitioningour email service to mobile. We released email applications foralmost all mobile platforms – from more popular in Russia iOS,Android and Symbian to less common Windows Phone, Badaand MeeGo. In October 2012 we also introduced applicationfor newly released operating system Windows 8.With access to email history and contacts stored on our servers,our native applications offer users a wider range of featuresand superior emailing experience compared to third-party orplatform default email clients. Among the key features of ourmobile apps are: push-notification configurable by sender, time,folder, social network and newsletter; full synchronization;access to address book; quick search within entire mailbox;seamless work with attachments; data compression andencryption; and cashing of the latest emails.By the end of 2012 combined monthly audience of ouremail applications reached near 1.5 mln users. Android andiOS applications accounted for the majority of them. Sincelaunch, active users of both applications had been growingsteadily: at 45% average monthly rate on Android and 35%average monthly rate on iOS.For those mobile users who don’t want to install applicationswe launched mobile web version of email service tailored fortouch phones. Its interface to the large extent resembles theinterface of mobile applications. In addition, we developeda separate mobile web version for iPad that exploits theadvantages of wider screen.The total number of mobile daily users (including applicationsand web) has more than doubled during the year. At the endof 2012 about 12% of email daily users accessed the servicethrough mobile devices.In 2012 we continued to work on desktop email serviceinterface making it cleaner, simpler and easier to use.In particular, we introduced a new form for composingemails, redesigned address book to simplify adding new andediting existing contacts and added user profile pictures toOperating reviewWe redesigned our main page andreleased email applications for allmajor mobile platforms includingiOS, Android, Symbian andWindows Phone
  18. 18. Mail.Ru Group Annual report 2012 18conversation list facilitating the work with large amount ofincoming messages. We also rearranged email settings sectionand updated email search tool furnishing it with a new designof advanced search, extended instant suggestions while typingand support of operands in search queries. And finally wemade our email service interface available in English, Spanish,Ukrainian, Belarusian, Armenian, Kazakh and Uzbek languages.Given a large portion of our users having more than oneMail.Ru account, in October 2012 we launched multipleaccounts authorization (“multi-authorization”) whichenables users to sign in to several Mail.Ru accounts andwork with them simultaneously. In addition, we updatedemail collector which allows users to gather messages fromall their mailboxes on other email services in one Mail.Ruaccount. This tool received new intuitive interface, becamesignificantly faster and more stable.For users who remotely access their Mail.Ru accounts viathird-party email client, we introduced the support of IMAP(Internet Message Access Protocol). This protocol ensuresthe synchronization of mailbox contents (including foldersstructure, messages statuses) as well as any actions with them(reading, deleting or moving message to another folder).To enhance users’ productivity we offered them useful toolsfor working with email attachments: “files” menu section andconvenient file viewer. The former allows users to searchand filter attachments in the entire mailbox, the latter – toview images, pdf files as well as Microsoft Office documents.Additionally, users may attach already existing in mailboxattachments to newly composed messages.In November 2012, we released a new productcomplementary to our email service – Calendar.Mail.Ru. It is aconvenient tool for planning and sharing events, creating tasklists, keeping personal and shared calendars. It has flexiblesettings and slick design with customizable themes. Calendarsynchronizes with mobile phones and desktop applicationsvia CalDav protocol.As a provider of email services to millions of users, werecognize how important it is to protect privacy and security:secure services are instrumental in maintaining trust. In Q42012 we rolled out and set as a default HTTPS access forour email service. HTTPS encrypts user’s data as it travelsbetween the web browser and our servers protecting itfrom being accessed by third parties, especially in insecurenetworks such as public WiFi spots. Additionally, weimplemented new algorithms protecting from XSS attacksand blocking suspicious content.Along with improved security features we continue toimprove our antispam system. To identify and combat spammore effectively, we’ve launched reverse index that movessender’s emails to spambox after identifying such sender asunwanted; user’s reputation that is considered while movinge-mail to spambox; new shingles that are used in detectingsimilar emails; and feedback loop (FBL) technology – afeedback system for legit mass senders.Main PageIn 2012 we introduced a new main page – modern,lightweight and significantly faster. On the one hand, newmain page fully reflects “communitainment” strategy of theGroup, focusing on main communication and entertainmentservices. On the other hand, its new design is user-orientedand easy-to-use – the page has adaptive layout adjusting todisplay resolution and browser window size.In addition, we released new mobile version of main pagetailored for touch phones and added the ability to access thesite, both web and mobile, via HTTPS connection.Content projectsThe majority of our content projects hold leading positionsin their respective categories. We maintain this leadership byfocusing on the quality of their content and regularly offeringspecial projects covering major cultural, entertainmentand sport events. Our editorial staff successfully competeswith the print media by attracting a large number of newadvertisers, who were previously skeptical about onlinepublishing. We also systematically launch localized versionsof our content projects, primarily in the CIS countries.Content projects generate revenue primarily through displayadvertising.In November 2012 we introduced completely redesignedproject News.Mail.Ru. The accent has been made on datavisualization. It lets users be up-to-date on latest world andlocal news with a quick look at the main page. The articlesare now supplemented with high-quality photos, videos andinfographics. We also relaunched projects Lady.Mail.Ru andKids.Mail.Ru – with modern design and adaptive layout.Along with improving web versions of the content projects,we’ve been focusing on development of their mobileapplications. During the last year, we launchedNews.Mail.Ru app for iOS, Android, Windows Phone andWindows 8; Sport.Mail.Ru app for iOS and Android; andMail.Ru Hub for Windows Phone. In addition to mobile apps,we introduced new mobile web versions of News.Mail.Ru andAfisha.Mail.Ru tailored for touch-phones.Operating review continuedMail.Ru email, millions of active usersDec 2012Jun 2012Dec 2011Jun 2011Dec 2010Jun 2010Source: TNS, Russia, cities with 100k+ population, age 12-54, desktop onlyDaily Monthly9.020.722.7 22.924.525.726.910.9 10.311.5 11.3 12.0
  19. 19. Mail.Ru Group Annual report 2012 19Instant MessagingOur instant messaging (IM) services are an integral part ofour communication ecosystem. We operate two IM networks:Mail.Ru Agent, our original internally developed product, andICQ, which we acquired from AOL in July 2010.Users can access both networks from applicationsavailable on a range of popular operating systems,including Windows, Mac OS, iOS, Android, Symbian andWindows Phone. They provide all the “must-have” featuresof a modern messenger: chat in real time, voice and videocalls1, file sharing, notifications from email services andsocial networks and so on.Since the acquisition of ICQ we’ve made significant stepsin integrating both messengers. In 2011 we introducedserver-based interoperability that enabled users of Mail.Ru Agent to add ICQ users, and vice versa, without creatingan extra account. In 2012 instead of relying on third-partysolutions we moved both messengers to our in-housevoice and video engine, based on a considerably reworkedopen source of WebRTC project. Finally, we relocated ICQdevelopment to Moscow and now both instant messengersare developed by the same team.As we moved to our own voice and video engine, we’ve beenincreasingly focused on the improvement and developmentof this technology. During the last year, we˙ added high definition video support and on the flyadjustment to most suitable video resolution andrendering based on the user’s connection speed;˙ brought our VoIP technology to all platforms thatcurrently support it, i.e. Windows, Mac OS, iOS,Android, Windows 8 and Web-Agent;˙ signed an agreement with new a partner, IPtelephony operator MTT. It allowed us to significantlyreduce rates for mobile and fixed line calls andintroduce unlimited plans. Mobile and fixed line callsare currently supported by Mail.Ru Agent and ICQfor Windows and Mail.Ru Web Agent only.Our strategic goal is to create the most convenient tool forcommunication with friends and acquaintances regardlessof where the user is: at home, in the street, in the shoppingcenter, or somewhere else. Therefore we continue tointroduce and enhance features for our instant messengersacross all platforms: desktop, mobile and web.Mail.Ru Agent and ICQ PC clientswere merged to the sametechnological platform. iOS andAndroid apps of both messengersreceived voice calls based on ourown VoIP engineOperating review continued1 As of December 2012 video calls were supported by Mail.Ru Agent and ICQ desktop clients onlyMail.Ru Agent, millions of active usersDec 2012Jun 2012Dec 2011Jun 2011Dec 2010Jun 2010Source: Company dataDaily Monthly7.315.618.721.022.921.923.29.410.411.7 11.312.1Mail.Ru Agent, percentage of monthly activeusers accessing via mobile devicesDec 2012Jun 2012Dec 2011Jun 2011Dec 2010Jun 201024%32%38%43%49%48%Source: Company data
  20. 20. Mail.Ru Group Annual report 2012 20DesktopOur desktop IM clients are presented by Mail.Ru Agentapplications for Windows and Mac OS and ICQ application forMac OS.Windows remains the most popular platform among ourusers. In Dec 2012 it accounted for over 60% of both instantmessengers total monthly audience.In May 2012 we launched a completely reworked Mail.RuAgent 6.0 for Windows. It received a modern lightweightlook, single window for conversations and contact list,customizable interface themes and improved in-house voiceand video engine with support of HD video calls and on thefly adjustments of call bit rate based on user’s connectionspeed. In October 2012 we released ICQ 8 for Windows, whichshares with Mail.Ru Agent 6.0 the technological platform andhas a similar interface design. It was the first time ICQ usersgot the opportunity to make mobile and fixed line calls.We also released a new version of Mail.Ru Agent for MacOS. We introduced single window interface and full-screenregime, added support of multiple Mail.Ru Agent and ICQaccounts and built into Mac OS Notification Center. But thekey feature was enabling our users to make free voice andvideo calls, including high definition calls, within Mail.RuAgent messaging service.MobileIn 2012 mobile was the only growing audience for both instantmessengers. Between December 2011 and December 2012,monthly mobile users increased by 13% and 14% for Mail.RuAgent and ICQ respectively. By the end of the last year theirshare in total audience reached 48% and 40% respectively.Our mobile clients are presented by Mail.Ru Agentapplications for iOS, Android, Windows Phone, Symbianand Java, and ICQ applications for iOS, Android, WindowsPhone, Symbian, Java, Blackberry and Bada. Both apps forWindows Phone and ICQ app for Bada were first introducedin the last year.Android remains the most popular and fastest-growingmobile platform among our users. In 2012 we updatedAndroid applications of both messengers. We addedcustomizable background themes, file, photo and videosharing and voice calls within the corresponding IM service.Additionally, Mail.Ru Agent application received completelyredesigned easy-to-use interface.Similar new features were introduced on Mail.Ru Agent andICQ applications for iOS. Both now offer voice calls, file, photoand video sharing and customizable background themes. ICQapplication was also optimized for iPad.Next, we released first mobile applications of bothmessengers for Windows Phone featuring instant messagingwith Mail.Ru Agent, ICQ, Odnoklassniki, Vkontakte, Facebookand Gtalk; photo sharing; easy login via mobile phonenumber; and customizable background themes.In October 2012 we introduced ICQ application for newlyreleased operating system Windows 8. It has slick touchinterface and supports voice and video calls based on ourin-house VoIP technology.WebWeb client of Mail.Ru Agent (Web Agent) is available allaround Mail.Ru portal. Anytime while checking the email,reading news or visiting other content projects, user can signin to Web Agent and start conversation with friends.In line with our strategy of making conversations more realand convenient, we added to Web Agent voice calls withinMail.Ru Agent service, as well as calls to mobile and fixed linephones. Now when user receives email with a phone number,he may call directly from the browser.In addition, Web Agent received new user interface andintegration with server-based message storage. Users wereenabled to search for contact, send and receive SMS andpost updates to and get notifications from My World socialnetwork.Operating review continuedICQ, millions of active users, Russia*Dec 2012Jun 2012Dec 2011Jun 2011Dec 2010Jun 2010Source: Company data* includes unaffiliated clientsSource: Company data* includes unaffiliated clientsDaily Montly Daily Montly8.915.116.4 15.6 15.710.89.89.07.6 7.15.2 4.9ICQ, millions of active users, worldwide*Dec 2012Jun 2012Dec 2011Jun 2011Dec 2010Jun 201017.942.033.530.827.020.515.917.213.811.58.77.5ICQ, percentage of monthly active usersaccessing via mobile devices*Dec 2012Jun 2012Dec 2011Jun 2011Dec 2010Jun 20104%6%12%21%26%40%Source: Company data* within audience of ICQ authorized clients only
  21. 21. Mail.Ru Group Annual report 2012 21Social networksWe operate two of Russia’s three leading online socialnetworks – Odnoklassniki and My World. They enable usersto find and communicate with friends, family and colleagues.Our sites include messaging services, status updates, photo-and user generated video-sharing. Users can play gamestogether, send each other online gifts, recommend websitesand keep track of events, such as birthdays. We frequentlyadd new products and services to maintain and increaseusers’ engagement. Mobile applications and web versions ofour sites, which are optimized for use on smartphones andother mobile devices, have also been developed. Revenue isgenerated principally through online advertising and internetvalue-added services.OdnoklassnikiOver the last year, Odnoklassniki experienced substantialgrowth in user engagement. Daily active users grew 31%year-on-year, reaching 34.9 million (December 2012 average,LiveInternet). The gap between OK and the market leader,VK.com, was 17% in December 2012 (as a percentage ofVK.com daily audience)1. In 2012, approximately 36% ofOdnoklassniki users were from outside Russia, primarily fromthe countries of the former Soviet Union.We continued to add new services in line with ourstrategic goal to create the best tools for communication.We significantly redesigned Groups service featuringgroup themes, new posting form, video, photo collages,recommendations based on user interests. Group owners cantrack enhanced statistics allowing better user engagementand work with brands. We launched multichat allowingconversations with several friends at the same time andlaunched a tool for undertaking polls. Also we significantlyWe improved the newsfeed, introducedmultimedia attachments to statusupdates and continued to add newfeatures on mobileOperating review continuedOdnoklassniki, millions of active usersDaily MonthlyDec 2012Jun 2012Dec 2011Jun 2011Dec 2010Jun 2010Source: TNS, Russia, cities with 100k+ population, age 12-54, desktop only5.415.317.4 18.020.822.2 23.27.2 7.89.4 9.610.3Odnoklassniki, percentage of monthly activeusers accessing via mobile devicesDec 2012Jun 2012Dec 2011Jun 2011Dec 2010Jun 201015%24%29%34%37%40%Source: Company data1 Source: LiveInternet
  22. 22. Mail.Ru Group Annual report 2012 22improved the newsfeed algorithm, including on-line updates.Now users can seamlessly post multimedia attachments likelinks, multiple photos, user generated video and text.We believe users perceive Odnoklassniki as a place to sharepersonal content with their close friends and relatives. Tosupport this we introduced customized profile themes for usersand a sophisticated system of personalized recommendations.Mobile continues to be one of our primary focuses and 2012was an outstanding year in terms of mobile. In the last yearwe released new versions of Odnoklassniki applicationsand mobile versions for the major platforms (iOS, Android,Windows Phone, Symbian). We upgraded basic features andservices with multiple photo upload, photo filters, paymentsvia credit cards, video platform, improved groups, likesand comments. These steps, together with a global trendof increasing internet usage via mobile devices, supportedcontinuing growth of the share of mobile users amongOdnoklassniki audience. In December 2012, it reached 40%,compared with 34% a year ago.My WorldLaunched in May 2007, My World is now Russia’s third-largest social network, based on daily active users.Approximately 40% of the network’s user base is outsideRussia. The network benefits from its association withMail.Ru’s portal, Mail.Ru Agent, and email service. As partof the registration process for an email account withMail.Ru, there is an option to activate a My World account.Furthermore, users of our IM Mail.Ru Agent can publishtheir My World status updates directly from the IM clientand can receive alerts regarding their friends’ status andcontent updates.In 2012 we introduced new messaging system with inlinephotos and video, reworked news feed, improved notificationsystem and user suggestions.In line with strategy of focusing on mobile, we introduced MyWorld application for iOS and released a number of updatesof mobile version.Operating review continuedMy World, millions of active usersDec 2012Jun 2012Dec 2011Jun 2011Dec 2010Jun 2010Source: TNS, Russia, cities with 100k+ population, age 12-54, desktop onlyDaily Monthly4.517.619.5 18.6 20.2 19.3 19.45.34.7 4.94.1 3.8My World, percentage of monthly activeusers accessing via mobile devicesDec 2012Jun 2012Dec 2011Jun 2011Dec 2010Jun 20104%8%10%13%14%15%Source: Company data
  23. 23. Mail.Ru Group Annual report 2012 23Online GamesWe operate the largest online games business in Russia.Our portfolio titles include the leading Russian internetMMO games such as Perfect World, Allods Online, Legend:Legacy of the Dragons and new hit Warface. In 2012 theaverage number of monthly paying users reached 261,000demonstrating 11.5% y-o-y growth.We use a ‘‘free-to-play’’ model for our games, with usershaving the option to buy certain virtual in-game items as theybecome available. Players can usually get these items freeof charge – by, for example, spending more time playing thegame. But if they want them immediately, in the majority ofcases they can pay for them.Historically, the bulk of our online games revenue has beengenerated by MMO games. These are played in “virtualworlds”, hosted by networked games servers that allowthousands of players to connect and play simultaneously. Ourportfolio currently includes internally-developed games, suchas Allods Online and Legend: Legacy of the Dragons. It alsoincludes Russian versions of games, such as Perfect World,Warface and Crossfire, licensed from third parties. Some ofthe MMO games we offer require players to install softwareon their computers (client-based), while others can be playedwithout downloading any software (browser-based).We distribute MMO games through our gaming portal Games.Mail.Ru and games downloader GameCenter.Mail.Ru. Thelatter once installed serves as a single channel for our gamesdistribution and allows user to seamlessly download andupdate games even with unstable internet connection. By theend of 2012, GameCenter.Mail.Ru reached over 1.4 mln peakconcurrent users.The games we offer on social networks are either developedinternally or by third-party developers through APIs onthe networks. Generally quicker and easier to play thanMMO games, they are also usually cheaper to develop andmaintain. They are all browser-based. We develop gamesfor VKontakte and Facebook, but our principal strategy is tofocus on developing games for My World and Odnoklassniki.In 2012 we started to execute on MMO strategy we hadannounced at the end of 2011: to focus on a quality ratherthan a quantity of the games.In April 2012 we launched free-to-play MMO first-personshooter Warface. The game was created by German developerCryTek, known for Crysis, a series of top-quality first-personshooters for PC and consoles. In 2012 Warface receivedseveral notable gaming awards, including “best game”Our newly launched AAA shooterWarface has gained traction in terms ofboth user and revenue – hitting 145,000PCU and becoming Top 3 revenuegenerating gameOperating review continued
  24. 24. Mail.Ru Group Annual report 2012 24at Russian Game Developers Conference 2012. Our Warfacefestival “Warfest” was very well attended with over 3,000participants. This popularity of the game has been reflected inthe growth of peak concurrent users which in January 2013hit 145,000. As a result the game has become a Top 3 revenuegenerating game by the end of the year, and we expect it tomove further up the rankings into 2013.In September 2012 we launched another AAA title –Dragon Nest. It is a MMORPG developed by South Koreancompany Eyedentity Games. Dragon Nest on Russianlaunch had already been successful in Asia and NorthAmerica with over 200 mln players around the world. Thegame has unique gameplay: a combination of slasher andadventure MMO.In 2012 we discontinued advertising our MMO games onthird-party websites and put a greater focus on attractingusers from the Group’s own services and projects. Releasedfunds were allocated to wide reach ad campaigns on TV. As aresult, about 15% of new players were engaged through TVcampaigns and remaining 85% through advertising on theGroup’s own projects.Given the rising popularity of mobile games, we developedour own mobile role-playing game Juggernaut: Revenge ofSovering. The game was initially released on iOS (May 2012)and few months later on Android (Aug 2012) platform. Thegame was well received by gaming community and wasawarded “best game for mobile platforms” at Russian GameDevelopers Conference 2012.We continued to go abroad with our internally developedgames. We launched RIOT in Germany and UK throughour European subsidiary and licensed out Allods Online toChinese and MENA markets. In results Allods Online is nowavailable in 13 countries on 5 continents.At the end of 2012 we purchased CIS license for triple-Agame ArcheAge from South Korean developer XLGames. Itis one of the most anticipated MMORPG in Russia and theworld. Its beta-testing is scheduled for late 2013.In addition, we continue to work on our own triple-A MMORPGSkyforge. The game is being developed by the team thatcreated one of the most successful Russian MMO gameAllods Online. The game is expected to be released in 2014.Operating review continuedGame Business model Type Launch dateWarface Licensed MMO (client-based) April 2012Juggernaut: Revenge of Sovering In-house Mobile (iOS, Android) May 2012Dragon Nest Licensed MMO (client-based) September 2012Major online games launched in 2012MMO games, thousands of average monthlypaying users1H2 2012H1 2012H2 2011H1 2011H2 2010H1 2010Source: Company data167192227241263 2591 The numbers combine paying users of individual MMO games and may include overlap.
  25. 25. Mail.Ru Group Annual report 2012 25Search and e-commerceSearchOur internet search services allow users to find web pages,photos, videos, products and services based on Russian andEnglish search terms. Through 2012 our Russian searchmarket share remained broadly constant at around 8.5%1.To provide the best service possible, we use a combination ofGoogle’s search technology and our in-house search engine.Revenues are generated through context advertising viaGoogle’s AdWords product. In this auction-based program,advertisers bid to have their sponsored advertisementsappear when specified search queries are entered. When acustomer clicks on a sponsored ad, Google receives a feefrom the advertiser and shares part of that with us.Our strategy is to make our search results more sociallyand locally relevant. Sociability is achieved by using publiclyavailable information on gender, age, friends and results offriends’ searches gained from social networks. In 2012 welaunched geo-location based search.In 2012 we introduced further improvements in our searchtechnology introducing machine learning algorithms forsearch results ranking, aggregation of news search results bystoryline, extended fact search and other performance andrelevance improvements.In 2012 we released beta-version of own web-browser Amigointegrated with main social networks (Odnoklassniki, My World,Vkontakte, Facebook).We continue our focus on mobile strategy, updating searchapplications for all major platforms and mobile version of oursearch product.E-commerceWe develop a number of online platforms for e-commerce andrespective infrastructure. Revenues from these businesses aregenerated through a combination of online advertising andlisting fees. In 2012 we revamped design, improved servicesand usability of all our e-commerce products.Jobs. Our online recruitment business is the largestin Russia and the former Soviet Union countries. Theprimary platforms for this business are Headhunter.Ru andRabota.Mail.Ru – two integrated services under commonmanagement. Online recruitment generates the majority ofits revenue from subscriptions to a database of resumes, paidjob postings and online advertising.Price comparison. Our price comparison site, Torg.Mail.Ru,contains offers from e-retailers. The service is integratedwith our search engine, Poisk.Mail.Ru, and monetized on aprice-per-click basis. In 2012 we introduced price comparisonfor clothes and launched Torg.Mail.Ru mobile applicationavailable on iOS and Android smartphones.Travel. Travel.Mail.Ru provides offers from travel agencieson a listing fee basis. Partner sites market tickets andhotel bookings for a commission. In 2012 we introducednew design with improved usability and launched a serviceto buy air tickets, travel tours and book hotels directly onTravel.Mail.Ru.Money. Money.Mail.Ru is an internet payment system whichis used to pay for online and offline products and services.Its main advantages are its common authorization processwith Mail.Ru and its large number of connected shops andservices – including mobile communications and utilities.In 2012 Money.Mail.Ru obtained license of a non-bankingcredit organization. We launched Money.Mail.Ru debit cardtied to users balance at Money.Mail.Ru Wallet. On mobile,we launched Money.Mail.Ru appliations for iOS and Android.We introduced machine learning to ourown search engine, fully redesigned allour e-commerce products and launchedmobile applications for Money.Mail.Ruand Tovary.Mail.ruOperating review continued1 Source: LiveInternet
  26. 26. Mail.Ru Group Annual report 2012 26Other activitiesIT InfrastructureOur network infrastructure is designed to meet therequirements of our operations and to support the growth ofour business. This infrastructure includes services suppliedinternally as well as by third parties.We have a number of relationships with third-party IToutsourcers. They provide us with telecommunications services– including internet access – and with data center services inMoscow, which provide space and power to host our servers. TheCompany owns over 17,000 servers, with a total storage capacityof 20.0 petabytes. In 2012 their peak network traffic increased to460 gigabit per second – up from 210 gigabit per second in 2011.Our ability to provide products and services depends on thecontinuous operation of our network and IT infrastructure. Italso relies on the provision of network facilities by third-partyIT providers and on the performance and reliability of theinternet, power and telecommunications infrastructure inMoscow and the rest of Russia.We protect ourselves against the loss of data caused bynetwork or power failures by hosting our servers in fiveindependent data centers in different districts of Moscow. Wealso back them up on a regular basis.We believe that our current access to network facilitiesand broadband capacity is sufficient to support our currentoperations and can meet the planned growth of our businessfor at least the next 12 months.Our network infrastructure is administered by a staff of full-time engineers. They handle the day-to-day system as well ashardware operations and maintenance.We place high priority on providing our users withconsistently high-quality service and support through ourtechnical support staff. It is their job to handle generalproduct and service enquiries and technical support issues.EmployeesAt the end of 2012, the Company had a total of 3,059 full-time employees. We also work with sub-contractors fromtime to time. We value our employees and believe that ourculture encourages individuality, creativity and commitmentto providing excellent service to our users.A significant proportion of our employees possess a strongproduct and technical background, allowing them to contributeto our research and development effort. These activitieshelp the Company to develop new products and enhanceexisting ones. During the 2012 financial year, our researchand development activities have been primarily focused oncommunication products, online games and search.2012 saw the start of the fit out for our new state-of-the-artheadquarters. It will provide a significantly larger and moreattractive workspace to allow us to continue to lead in thecompetitive Russian market. We look forward to moving intoour new offices in H1 2013.In 2012, we continued to invest in our people and theirdevelopment. Our regular Russian Code Cup programmingcontest and Technology Forum have become prominentevents in Russian-speaking internet attracting a wide rangeof participants: from students and novice programmers toleading experts in various information technology fields. Ourstudent development center Technopark.Mail.Ru, founded in2011 in collaboration with Bauman Moscow State TechnicalUniversity, is gaining popularity. Over 110 students nowparticipate in 2-year learning program and there are already6 applicants per place for 2013 enrollment.Sales and marketingWe sell display and contextual advertising through our ownsales force as well as through third parties, such as onlineadvertising agencies. As of December 2012, we had aninternal sales force for display and context advertising of 134people working from the Moscow HQ and the ten regionaloffices throughout Russia. We have established regionalsales offices to enable us to broaden our base of advertisersto regions outside the Moscow area, which have historicallyrepresented a smaller share of overall internet advertising inRussia.We also have offices in Kiev, Ukraine, and work throughpartners in Europe and CIS countries.Our largest advertising clients are generally majorFMCG companies, automobile manufacturers, mobiletelecommunications operators and financial firms.In 2012 we continued to develop our self-service advertisingplatform, Target.Mail.Ru. We introduced new ad formats, newtarget parameters (user’s interests and behavior), API for third-party developers and retargeting solution, which allows clientsto serve ad to people who already visited their websites. At theend of 2012 Target.Mail.Ru had near 1,850 active clients.Intellectual propertyThe Company relies on a combination of trademark,copyright and other IP-related laws and contractualrestrictions to establish and protect its IP rights – includingthose related to its websites, software and online games.We have registered trademarks – or trademarks for whichregistration is pending – for all our principal brands. We alsoown a broad portfolio of registered domain names for ourvarious websites.Operating review continuedEmployees by function as at the end of 2012IT & Product2 207 Other852
  27. 27. Mail.Ru Group Annual report 2012 27This review reflects highlights of our financial performance for 2012. Full details can be found in the annual financialstatements presented on pages 50 to 103 of this annual report.Overview of consolidated results2012 was a year of continued growth in our corebusiness. Despite tougher underlying market conditionsin display advertising in the second half of the year, wecontinued to execute strongly across all other lines of ourbusiness. As a result, we saw significant growth in ourrevenues, with community IVAS and context advertisingbeing the key drivers. While we continued to dedicatesubstantial resources to driving user engagement andproduct development, we were able to maintain strongmargins due to the operating leverage characteristics ofour business.StructureOur core business operates in four major reportablesegments: (1) Email, Portal and IM, (2) Social Networks,(3) Online Games and (4) Search, E-Commerce and Other.The Email, Portal and IM segment includes email, Mail.ruAgent and ICQ instant messaging services and the Mail.ru portal; the Social Networks segment includes OK andMy World social networks; the Online Games segmentcomprises our browser-based, client-based, mobileand social games. The Search, E-Commerce and Otherinclude search services, e-commerce projects includingHeadhunter and certain other projects. The otherprojects are considered insignificant for the purposesof performance review and resource allocation. Pleaserefer to “Operating segments performance – Basisof preparation” below for more details on operatingsegments presentation.In addition to our core business operations, we hold minorityinvestments: 39.99% in Russia’s largest social networkVK.com (“VK”); and 21.35% in Qiwi Limited (”Qiwi”), one ofRussia’s leading payment-processing companies. We alsohold a stake of 0.60%1in Facebook Inc. (“Facebook”), theworld’s largest social network and a number of small venturecapital investments in various Internet companies in Russiaand Ukraine.Acquisitions and disposalsIn 2012, we disposed of our minority investments inGroupon, Zynga and OJSC Center of Economic Development(“CED”) and reduced our stake in Facebook from 3.00%1to0.60%1. We also increased our shareholding in Headhunterto 100% as a result of exercise of put options by theminority shareholders. In addition, we made several smalleracquisitions and disposals of minority investments in variousInternet companies in Russia as part of our venture capitaloperations.Accounting impact of acquisitions and disposals,impairment of investmentsThe acquisitions and disposals of 2012 and prior years andimpairment of investments had a significant effect on our2012 consolidated financial statements as summarised below::2012mRUR2011mRURNet loss on financial assetsand liabilities at fair valuethrough profit or loss overthe equity of strategicassociates and subsidiaries(27) (664)Net gain on disposal ofshares in available-for-sale investments33,948 –Impairment lossesrelated to strategicassociates and availablefor sales investments(718) (173)The net gain on disposal of shares in available-for-saleinvestments in 2012 resulted from sales of investmentsin Groupon, Zynga, Facebook and CED. The impairmentlosses related to strategic associates and available for salesinvestments in 2012 are entirely related to our investment inZynga. The impairment analysis for 2011 was entirely relatedto our investment in Molotok.In addition to the effects presented in the table above, thereare several other effects on our 2012 earnings resultingfrom acquisitions and disposals in prior periods. These effectsobscure our operational results and make it difficult to evaluatetrends in our underlying business. As a result, we evaluate andmanage our business and strategic associates on the basis ofmanagement accounts that do not reflect certain adjustmentsrequired under IFRS. The management accounts data isdiscussed under “Operating segments performance” below (seealso Note 5 to the financial statements for further details).Changes in presentation of our consolidated financialstatementsStarting from 2012, we have presented items in the statementof comprehensive income based on their classification by nature,rather than by function. The corresponding information for2011 has also been presented by nature in order to achievecomparability. We also changed the presentation currency of ourfinancial statements to RUR, which is the functional currency ofthe majority of our operations.Financial review1 Share calculated excluding the potential dilutive effect of options and other instruments convertible into shares of Facebook
  28. 28. Mail.Ru Group Annual report 2012 28GoodwillWe account for business combinations by applying theacquisition method under IFRS 3R. As a result, we recordgoodwill as the fair value of the consideration transferredincluding the recognised amount of any non-controllinginterest in the acquiree, less the net recognised amount(generally fair value) of the identifiable assets acquired andliabilities assumed, all measured as of the acquisition date.The significant goodwill recorded in connection with ouracquisitions may lead to charges in future periods if thegoodwill is impaired. The total goodwill amounted to RUR32,969 million as at December 31, 2012, unchanged fromDecember 31, 2011.The goodwill is allocated to groups of cash-generating units(CGUs) – “Email, Portal and IM”, “Search”, “Online Games”, “SocialNetworks” and “E-Commerce and Other” – in accordance with theoperating segment structure of our business. Please see Note 11to our consolidated financial statements for further details.Consolidated results of operations in accordance with IFRSThe following table summarises the principal line items fromour consolidated income statements under IFRS:2012RURm2011RURmTotal revenue 20,905 14,935Net gain on venture capitalinvestments and associatedderivative financialassets and liabilities590 34Total operatingexpenses (excludingdepreciation, amortisationand impairment)(11,889) (8,768)Earnings before interest,tax, depreciation andamortisation (EBITDA)9,606 6,201Profit before incometax expense41,289 2,524Income tax expense (3,013) (1,516)Net profit 38,276 1,008Attributable to:Equity holders of the parent 38,257 977Non-controlling interest 19 31Consolidated revenueIn 2012 our consolidated revenue increased by 40.0% toRUR 20,905 million (2011: RUR 14,935 million). The primarydrivers of the growth are described under “Operatingsegments performance” below. The growth in consolidatedrevenue was also affected by a reduction in the onlinegaming and social network revenue deferral adjustmentfrom RUR 446 million in 2011 to RUR 436 million in 2012primarily due to a decrease in weighted-average useful lifeof virtual in-game items.Earnings before interest, tax, depreciation and amortisation(EBITDA)EBITDA increased by 54.9% to RUR 9,606 million (2011: RUR6,201 million) and EBITDA margin increased to 46.0% in 2012(2011: 41.5%) as a result of operating expenses (excludingdepreciation, amortisation and impairment) growing at aslower pace than revenues, as well as due to a more than 17-fold increase in net gain on venture capital investments andassociated derivative financial assets and liabilities. Operatingexpenses grew 35.6% to RUR 11,889 million, or 56.9% ofrevenue (2011: RUR 8,768 million, or 58.7% of revenue).The key drivers and components of the increase in operatingexpenses are discussed in detail under “Operating segmentsperformance” below.In addition to those drivers, the increase in operatingexpenses was affected by the growth in share-basedpayments expense, which increased by 17.0% to RUR 2,217million in 2012 from RUR 1,895 million in 2011. The increaseis primarily due to (i) the expense recognised with respectto options issued in 2012, mainly to our top managementand key engineering talent, and (ii) the effect of reductionin exercise price of all options by USD 3.8 in August 2012,which was accounted for as a modification. These effectswere partially offset by a decrease in share-based paymentexpense (excluding modification) with respect to optionsissued prior to 2012 due to approximately one-fourth of theoptions vesting on January 2, 2012.The growth in net gain on venture capital investments andassociated derivative financial assets and liabilities reflectsthe performance of our venture capital operations.Equity accounted resultsThe share in net profits of associates amounted to RUR 112million (RUR 14 million in 2011). The aggregate profits inQiwi and Haslop Company Limited (“Mamba”) in the amountof RUR 241 million in our share were partially offset byour share in losses of VK, Molotok and Nikita ManagementLimited (“Nikita”) of RUR 129 million in the aggregate. Forthe operational profitability of key strategic associates referto Section “Operating segments performance” below.Profit before income tax and net profitProfit before income tax expense increased more than 16-foldto RUR 41,289 million (2011: RUR 2,524 million) primarily as aresult of the effects of acquisitions, disposals and impairment ofinvestments (including a RUR 33,948 million net gain on disposalof available-for-sale investments in 2012), as well as reflectingincreased EBITDA and share of net profits of associates and a RUR764 million net foreign exchange gain in 2012 as compared to aRUR 128 million net foreign exchange loss in 2011.Net profit for the year increased almost 38-fold to RUR38,276 million (2011: RUR 1,008 million) as a result of theincrease in profit before tax, which was only partially offset bya 98.7% increase in income tax expense. While the increasein income tax expense is primarily due to an increase intaxable income arising from our operating subsidiariesmainly based in Russia accompanied by an increase in share-Financial review continued
  29. 29. Mail.Ru Group Annual report 2012 29based payment expense incurred in a tax-free jurisdiction,it was not commensurate to growth in profit before incometax because most of M&A-related gains occurred in tax-freejurisdictions. The drivers of organic growth of profit beforetax and income tax expense are further described in Section“Operating segments performance” below.Operating segments performanceBasis of preparationIn reviewing our operational performance and allocatingresources, our Chief Operating Decision Maker (CODM)reviews selected items of each segment’s income statement,assuming 100% ownership in all of our key operatingsubsidiaries, based on management reporting.Management reporting is different from IFRS, becauseit does not include certain IFRS adjustments that, in ourview, obscure the core operating performance of thebusiness. Such adjustments affect such major areas asrevenue recognition, deferred tax on unremitted earnings ofsubsidiaries, share-based payment expense, impairment ofinvestments, business combinations, fair value adjustments,amortisation and impairment thereof, net foreign exchangegains and losses, share in financial results of non-coreassociates, as well as irregular non-recurring items thatoccur from time to time and are evaluated for adjustment asand when they occur. The tax effect of these adjustments isalso excluded from management reporting. See Note 5 to ourconsolidated financial statements for more information.The financial information of the key subsidiaries acquiredduring the reporting period or after the reporting period butprior to the date hereof is included in the segment disclosurestarting from the later of:˙ the beginning of the earliest comparative periodincluded in the financial statements; and˙ the date we acquired our first interest in therespective key subsidiary.The financial information of subsidiaries disposed of prior tothe date hereof is excluded from the segment presentationstarting from the beginning of the earliest period presented.We identify our operating segments based on the typesof products and services we offer. We have identified thefollowing reportable segments on this basis:˙ Email, Portal and IM;˙ Social Networks;˙ Online Games; and˙ E-Commerce, Search and Other Services.The Email, Portal and IM segment includes email, instantmessaging and portal (main page and verticals). It earnsalmost all revenues from display and context advertising. The Social Networks segment includes our two socialnetworks (Odnoklassniki and My World) and earns revenuesfrom (i) user payments for virtual gifts, (ii) revenue sharingwith application developers, and (iii) online advertising,including display and context advertising. The Online Games segment includes online gaming services,including MMO, social and mobile games. It earns almost allrevenues from (i) sale of virtual in-game items to users and (ii)royalties for games licensed to third-party online game operators. The E-Commerce, Search and Other Services segmentprimarily consists of search engine services earning almostall revenues from context advertising, e-commerce andonline recruitment services and related display advertising.This segment also includes a variety of other services, whichare considered insignificant by CODM for the purposes ofperformance review and resource allocation.We measure the performance of our operating segmentsthrough a measure of earnings before interest, tax,depreciation and amortisation (EBITDA). Segment EBITDAis calculated as the respective segment’s revenue lessoperating expenses (excluding depreciation and amortisationand impairment of intangible assets), including our corporateexpenses allocated to the respective segment.EBITDA is not a measure of financial performance underIFRS. The calculation of EBITDA by us may be different fromthe calculations of similarly labeled measures used by othercompanies and it should therefore not be used to compareone company against another or as a substitute for analysisof our operating results as reported under IFRS. EBITDA isnot a direct measure of our liquidity, nor is it an alternative tocash flows from operating activities as a measure of liquidity,and it needs to be considered in the context of the ourfinancial commitments. EBITDA may not be indicative of ourhistorical operating results, nor is it meant to be predictive ofour potential future results. We believe that EBITDA providesuseful information to the users of the consolidated financialstatements because it is an indicator of the strength andperformance of our ongoing business operations, includingour ability to fund discretionary spending such as capitalexpenditure, acquisitions and other investments and ourability to incur and service debt.Principal revenue driversOrganic growth in our revenue, including online advertisingand IVASs, is primarily driven by the audience of ourproperties. Advertising revenues also depend on the pricingof our advertisements and availability and sell-through ratesof our advertising inventory, while IVAS revenue is also drivenby paying user engagement and average revenue per payinguser (“ARPPU”).Financial review continued
  30. 30. Mail.Ru Group Annual report 2012 30SeasonalityThe majority of our revenues are affected by seasonalityand as a result revenues and operating profits are generallyhigher in the second half of the year than in the first sixmonths:˙ Advertising revenues are generally higher inthe second half of each year due the fact thatsignificant amounts of advertising budgets aretypically spent in the last quarters of the year;˙ MMO games revenues are generally higher duringthe second half of the year due to the end of thevacation period because users tend to play ourMMO games more when not on vacation;˙ Community IVAS revenues are generally higherahead of, during and immediately after holidayand festivity periods.Financial review continued
  31. 31. Mail.Ru Group Annual report 2012 31Analysis of 2012 results compared with 2011The discussion that follows is based on the analysis of segment financial information. As discussed under “Basis of Preparation”above, this information differs in certain significant respects from information presented in accordance with IFRS.Group aggregate segment financial information* 2012RURm%of revenue2011RURm%of revenueYoY, %Group aggregate segment revenue (1)Display advertising 5,006 23.7% 4,357 28.6% 14.9%Context advertising 2,431 11.5% 1,685 11.1% 44.3%Total online advertising 7,437 35.2% 6,042 39.7% 23.1%MMO games 4,732 22.4% 3,807 25.0% 24.3%Community IVAS 6,739 31.9% 3,771 24.8% 78.7%Total IVAS 11,471 54.2% 7,578 49.8% 51.4%Other revenue** 2,243 10.6% 1,596 10.5% 40.6%Total Group aggregate segment revenue 21,151 100.0% 15,215 100.0% 39.0%Group aggregate segment operating expensesPersonnel expenses 4,506 21.3% 3,463 22.8% 30.1%Office rent and maintenance 489 2.3% 338 2.2% 45.0%Agent/partner fees 1,971 9.3% 1,273 8.4% 54.7%Marketing expenses 702 3.3% 551 3.6% 27.2%Server hosting expenses 633 3.0% 491 3.2% 29.0%Professional services 257 1.2% 244 1.6% 5.4%Other operating (income)/expenses,excluding depreciation and amortisation1,058 5.0% 474 3.1% 123.3%Total Group aggregate segment operating expenses 9,616 45.5% 6,834 44.9% 40.7%Group aggregate segment EBITDA(2)11,535 54.5% 8,381 55.1% 37.6%Depreciation and amortisation (3)1,133 5.4% 1,160 7.6% -2.2%Share of profit (loss) of key strategic associates (4)291 1.4% 337 2.2% -13.7%Other non-operating income (expense), net 431 2.0% 244 1.6% 76.3%Profit before income tax (5)11,123 52.6% 7,803 51.3% 42.5%Income tax expense (6)2,572 12.2% 1,588 10.4% 61.9%Group aggregate net profit (7)8,552 40.4% 6,215 40.8% 37.6%The numbers in this table and further in the document may not exactly foot or cross-foot due to rounding. Certain reclassifications have been made to 2011 operating expenses toachieve comparability with 2012 presentation.Including Other IVAS revenuesGroup aggregate segment revenue is calculated by aggregating the segment revenue of the Group’s operating segments and eliminating intra-segment and inter-segmentrevenues. This measure differs in significant respects from IFRS consolidated net revenue.Group aggregate segment EBITDA is calculated by subtracting Group aggregate segment operating expenses from Group aggregate segment revenue. Group aggregate segmentoperating expenses are calculated by aggregating the segment operating expenses (excluding the depreciation and amortisation) of the Group’s operating segments includingallocated Group corporate expenses, and eliminating intra-segment and inter-segment expenses.Group aggregate depreciation and amortisation expense is calculated by aggregating the depreciation and amortisation expense of the subsidiaries consolidated as of the datehereof, excluding amortisation and impairment of fair value adjustments to intangible assets acquired in business combinations.Group share of net profit from associates includes the Group’s share of net profit from VK.com and Qiwi as calculated based on the ownership percentage as of the date hereof (i.e.39.99% and 21.35%, respectively). Group share of net profit from associates as presented herein differs in significant respects from Group share of net profit from associates aswould be recorded under IFRS due to: (i) difference in the ownership percentages as under IFRS the actual ownership would be used for each reporting period and (ii) differencesin net profit of associates as the numbers presented herein are prepared based on principles used for the segment financial information of the Group’s consolidated operations,i.e. do not include certain adjustments which would be required under IFRS. Group share of net profit from associates for 2011 has been retrospectively adjusted for operationsdiscontinued by Qiwi in 2012.Profit before tax is calculated by deducting from Group aggregate segment EBITDA Group aggregate depreciation and amortisation and adding (i) Group share of net profit fromassociates and adding/deducting (ii) Group aggregate other non-operating incomes/expenses primarily consisting of interest income on cash deposits, dividends from financial andavailable-for-sale investments and other non-operating items..Group aggregate income tax expense is calculated by aggregating the income tax expense of the subsidiaries consolidated as of the date hereof. Group aggregate income taxexpense is different from income tax as would be recorded under IFRS, as (i) it excludes deferred tax on unremitted earnings of the Group’s subsidiaries and associates and (ii) it isadjusted for the tax effect of differences in profit before tax between Group aggregate segment financial information and IFRS.Group aggregate net profit is the (i) Group aggregate segment EBITDA; less (ii) Group aggregate depreciation and amortisation expense; plus (iii) Group share of net profit fromassociates; less (iv) Group aggregate other non-operating expense; plus (v) Group aggregate other non-operating income; less (vi) Group aggregate income tax expense. Groupaggregate segment net profit differs in significant respects from IFRS consolidated net profit.Financial review continued***1234567
  32. 32. Mail.Ru Group Annual report 2012 32Operating segments performance – 2012Email, Portaland IMSocialNetworksOnlineGamesE-commerce,Search andotherEliminations GroupRevenueExternal revenue 3,956 7,856 5,329 4,010 - 21,151Intersegment revenue 33 22 - 265 (320) -Total revenue 3,989 7,878 5,329 4,275 (320) 21,151Total operating expenses 1,490 2,192 3,770 2,484 (320) 9,616EBITDA 2,499 5,686 1,559 1,791 - 11,535EBITDA margin 62.6% 72.2% 29.3% 41.9% 54.5%Net profit 8,552Net profit margin 40.4%Operating segments performance – 2011 Email, Portaland IMSocialNetworksOnlineGamesE-commerce,Search andotherEliminations GroupRevenue            External revenue 3,591 4,712 4,216 2,696 - 15,215Intersegment revenue - - - 146 (146) -Total revenue 3,591 4,712 4,216 2,842 (146) 15,215Total operating expenses 1,178 1,300 2,994 1,508 (146) 6,834EBITDA 2,413 3,412 1,222 1,334 - 8,381EBITDA margin 67.2% 72.4% 29.0% 46.9%   55.1%Net profit           6,215Net profit margin           40.8%Financial review continued
  33. 33. Mail.Ru Group Annual report 2012 33Display advertisingDisplay advertising revenue is generated from banner, andsimilar, advertisements on our websites. Advertisementsare sold either on the time that they last, or on the numberof page views. In certain cases, advertisements are sold ona “per action” basis, where our clients pay for each actionperformed by a user, such as an online application for acredit card. Our standard rates depend on a number offactors, including the page on which the banner appears,amount and the length of the contract, the season, andthe advertisement’s format, size and position. In 2012, wegenerated revenue of RUR 5,006 million (2011: RUR 4,357million) from display advertising. Our display advertisingrevenue increased by 14.9% vs 2011, largely in line withoverall display advertising market. The growth in displayadvertising was adversely affected by a number of negativefactors in the second half of 2012, including a plannedreduction in advertising inventory on some of our properties,the ban on alcohol advertising in Russia and inventoryadjustments for TV. The performance in display advertisingwas also negatively affected by trends in ICQ displayadvertising revenue which declined in 2012 as we reducedthe monetisation rate at ICQ in order to improve the userexperience.Context advertisingContext advertising revenue is mainly earned throughpartnerships with third parties – principally Google. Whena user carries out a search on our search page, results –together with advertisement links – are displayed basedon certain parameters, including relevance to the topic.We also sell text links to third-party advertising networks(principally Google and Yandex) which are displayed basedon certain parameters. When users click on advertisementsthey are directed to the advertisers’ websites; we receivea portion of the subsequent fee earned by the third party.From 2011, we launched our own self-service contextadvertising technology, Target.Mail.Ru (“Target”) on anumber of our properties, including My World and OKsocial networks. The advertisements are sold to advertisersthrough an online auction at Target. We generate revenuewhen users click on advertisements and are directed toadvertisers’ websites.In 2012, we earned revenue of RUR 2,431 million (2011: RUR1,685 million) from context advertising representing growthof 44.3%. The significant increase in our context advertisingrevenue is due to an increase in search (particularly due tosuccessful digital distribution, including our toolbar) and othercontext revenue as well as revenues from Target. The strongperformance was partially offset by ICQ context revenuewhich declined in 2012 as part of a planned reduction in ICQmonetisation aimed at improving the user experience. Growthin our search context revenue has been primarily driven bygrowth in the overall context advertising market.IVASsWe generate a significant portion of our revenue from IVASs.These include MMO games, community and other IVASs.MMO gamesApproximately 40% of our IVAS revenue is generated byMMO games. Players have the opportunity to buy in-gameenhancements for these free-to-¬play games; revenue isrecognised net of any commissions to distributors or SMSoperators. In 2012, we generated revenues from MMO gamesof RUR 4,732 million (2011: RUR 3,807 million). The increasein MMO revenues of 24.3% vs 2011 is primarily due to a c.12% growth in annual average monthly MMO paying usersand increased ARPPU. MMO paying users data is presented inthe table below:As part of our strategy of focusing on the quality, ratherthan quantity, of our games, we discontinued the operationof certain slower performing titles in late 2011 and in2012, which negatively affected the number of paying users(including overlap) but resulted in increased ARPPU in 2012.Community IVASsCommunity IVAS revenue is driven by payments for featuresand virtual items sold primarily on our social networks. Suchfeatures and items include virtual gifts, revenue sharing withdevelopers through our Application Programming Interface(“API”), revenue from our own social games and revenuefrom dating services. A significant portion of these paymentsare paid for via SMS, and revenue is recognised net ofcommission paid to distributors or SMS operators.Aggregate segment Community IVAS revenue increasedby 78.7% to reach RUR 6,739 million (2011: RUR 3,771million). The growth was achieved primarily throughincrease in annual average monthly paying users by c. 64%vs 2011, driven by overall growth in user engagement. Inaddition, the 2012 performance was impacted by the factthat our share of revenue from API on My World increasedfrom 30% to 50% effective January 2012. Community IVASmonthly average paying users data is presented in thefollowing table:Financial review continued234261* Source: Company data. The numbers combine paying usersof individual MMO games and include overlapFY 2012FY 2011MMO average monthly paying users,thousands*3,3705,526* Source: Company data. The numbers combine paying users of Odnoklassniki, My World, love.mail.ruand our own social games on third-party networks and include overlapCommunity IVAS, thousands of average monthlypaying users*FY 2012FY 2011
  34. 34. Mail.Ru Group Annual report 2012 34Other revenueOther revenue is primarily generated through subscriptionsto the résumé database on Headhunter, our onlinerecruitment site. The increase by 40.6% in Other revenuewas primarily driven by overall macroeconomic environmentand Headhunter’s leadership on the online jobs market.Costs and marginsOur principal cost items include personnel expenses, officeexpenses, agent/partner fees, marketing expenses, serverhosting expenses, professional services and other operatingexpenses, excluding depreciation and amortisation.Personnel expenses increased by 30.1% to RUR 4,506 million(2011: RUR 3,463 million). The majority of the increase wasdriven by headcount growth, primarily in our core IT andproduct personnel. The increase in average headcount wasc. 20%, with the rest of the personnel expenses increaseattributed to growth in average salaries. Overall, personnelexpenses grew at a rate below that of the revenue growth,demonstrating operating leverage of the business and ourcontrol over the number and quality of people that we hire.Office rent and maintenance expenses increased by 45.0%to RUR 489 million (2011: RUR 338 million) mainly due toincreased average office area as a result of growing headcountand, albeit to a lesser extent, due to inflation in rent per squaremeter for some of our offices. Agent/partner fees increased by54.7% to RUR 1,971 million (2011: RUR 1,273 million).The increase in agent/partner fees was primarily driven bydigital distribution costs, growth in fees for games licensedfrom other developers and increase in revenue collectioncosts. Digital distribution represents arrangements wherebywe pay third-party websites for distributing our toolbar, ourmain page and search service to users. The increase in thesecosts reflects our enhanced digital distribution effort startingfrom the second half of 2011.The increase in fees for games licensed from other gamedevelopers resulted from growing share of online gamesrevenue derived from games developed by third parties.Revenue collection costs represent fees to payment systemsfor processing payments for our IVASs. The increase in thesecosts resulted from growth in our IVAS revenues, as wellas decreased share of cash collection via SMS, where thecollection costs are netted against revenues rather thanrecorded as a cost line.Marketing expenses increased by 27.2% to RUR 702 million(2011: RUR 551 million). The main drivers of the increaseinclude marketing of our games and increased PR activitiesfor our key products. Server hosting expenses grew 29.0%to RUR 633 million (2011: RUR 491 million) as a result of anincrease in the number of servers as we continued to investin infrastructure to support the growth of our operations anduser base. Professional fees increased by only 5.4% to RUR257 million (2011: RUR 244 million). The modest increasewas primarily due to a reduction in consulting services offsetby an increase in training expenses, as we continued to puta strong focus on professional training and developmentof our core engineering employees. Other operatingexpenses, excluding depreciation and amortisation increasedby 123.3% to RUR 1,058 million (2011: RUR 474 million).These expenses include a variety of items not included in theother expense lines. The growth primarily resulted from theimplementation of several not-for-profit corporate projectsin 2012.Our aggregate segment EBITDA margin decreased slightly to54.5% (2011: 55.1%) primarily as a result of increased agent/partner fees and other operating expenses partially mitigated byoperating leverage primarily derived from personnel expenses,professional fees, server hosting and marketing expenses.Key strategic associates1The decrease in share in net income of key strategic associatesby 13.7% to RUR 291 million (2011: RUR 337 million) is due todecrease in net profit attributable to the equity holders of theparent of VK by 94.5%, partially offset by an increase in net profitattributable to the equity holders of the parent of Qiwi by 109.0%.Qiwi’s revenue grew by 9.2%, as growth in processed paymentvolume and advertising revenue was partially offset by a declinein revenue from rent of space for pay kiosks resulting from thetransfer by Qiwi of a significant portion of the respective businessto its associate. Qiwi’s margins significantly improved, however,primarily due to decreased cost of revenue, including transactionfees payable to agents (as a result of lower share of revenuereceived from mobile network operators) and cost of rent ofspace for pay kiosks (as Qiwi transferred a significant portionof the respective business to its associate). VK’s revenues grewby 44.1%, but margins fell significantly driven by considerableinvestment in the team and infrastructure.Depreciation and amortisation, other non-operating income,income tax and net incomeDepreciation and amortisation (including impairment ofintangible assets) decreased by 2.2% to RUR 1,133 million(2011: RUR 1,160 million) primarily as a result of acceleratedamortisation and impairment of certain slower performinggames in the amount of RUR 181 million recognised in 2011as a result of our new strategy in the Online Games segment,as we decided to focus more on the quality of our games,rather than quantity. This effect was partially offset byincreased depreciation primarily due to continued investmentin server equipment and network infrastructure.Other non-operating income increased by 76.3% to RUR 431million (2011: RUR 244 million) primarily driven by increasein interest income on cash deposits and dividend incomefrom venture capital investments.Income tax expense increased by 61.9% to RUR 2,572 million(2011: RUR 1,588 million) primarily driven by an increasein profit before income tax by 42.5% to RUR 11,123 million(2011: RUR 7,803 million) and an increase in effective taxrate to 23.1% (2011: 20.4%) as a consequence of higher taxcharges on dividend payments within the Group and highernon-deductible expenses in 2012 as compared to 2011.Net income increased by 37.6% to RUR 8,552 million (2011:RUR 6,215 million) driven by an increase in profit before taxand partially offset by an increase in effective tax rate.Financial review continued1. The operating segment data in respect of key strategic associates is presented based on principles used for presentation of operating segments results, i.e. excluding certainIFRS adjustments (see “Basis of preparation” above and Note 5 to our consolidated financial statements for further details). The revenue of VK is presented on a gross basis, i.e.including advertising commissions and payment channel costs, consequently neither revenues, nor margins are comparable with other operating segments data. Qiwi revenueand net income for 2011 have been retrospectively adjusted for operations discontinued by Qiwi in 2012.

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